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Top China Stocks: Year-End Review

Some U.S.-listed China stocks have posted positively scorching returns over the past year.

Among the best performers were Gulf Resources (GFRE), China Agritech (CAGC), New Energy Systems ( NEWN.OB), Hong Kong High Power Technology (HPJ - Get Report) and Orient Paper (ONP - Get Report). All have had returns of more than 1,000%. (Yes, that's 1,000%!)

Obviously, not all U.S.-listed China stocks were winners this year. But more than 70% of the 400 such stocks I track had positive 52-week performance. And if you invest in a basket of these stocks, the stellar returns of the winners can more than make up for the dogs.

On any given stock, you can lose only 100% of your initial investment (assuming no leverage), but on the winners, the returns can be several hundred -- even several thousand -- percent.

As a result, the mean return for my investment universe of 378 stocks is an astonishing 130%. If you didn't make money in U.S.-listed china stocks in 2009, you must have been asleep at the switch.

The obvious next question is whether there's more room to run for some of the top names.

The quick answer is that my favorite stock going into the new year is Orient Paper. I see it as a double in the near term. Meanwhile, the stock that needs the most homework is New Energy Systems, which has gone through a series of acquisitions and financings.

Now let's take a detailed look.

It's important to note that with these stocks there has been an unmistakable pattern to their valuation expansion:

  1. An unknown Chinese company with great fundamentals lists in the U.S. on the OTC Bulletin Board at a dirt-cheap valuation (usually about 5 times earnings).
  2. The company delivers several quarters of impressive growth and has a good growth story.
  3. The company undertakes what I call "the big jump": In a short period of time, it conducts a reverse split of its stock, appoints an independent board, selects a well-known investor relations firm and then lists on Nasdaq or the American Stock Exchange.
  4. The valuation trades in line with well-known peers, typically in the midteens (i.e., a tripling of its price from when it was unknown).

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