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Three 'Probe-Proof' China Stocks for 2011

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. He is a contributing writer to TheStreet whose views on these stocks are independent of TheStreet's news coverage.

BEIJING ( TheStreet) -- Despite the SEC probe and negative press on China stocks, these three may have significant potential in first-half 2011. I don't yet own any of these stocks, but my initial evaluation suggests that they are worth a further look: Subaye (SBAY), China Media Express (CCME) and New Energy Systems (NEWN) are well off of their recent lows of 2010, but in my opinion are not oversold and have the potential to move sideways or higher. While I am not yet a buyer, I will highlight why I am interested in the stocks as well as why I am hesitant.

>>The Shanghai Numbers: A special series by TheStreet on the troubles with Chinese reverse-takeover stocks

The recent announcement by the SEC of its investigation into the U.S.-listed China stock space had minimal effect on share prices. In my opinion, investor sentiment toward the space fell off way ahead of the SEC announcement and therefore the investigation came as not much of a surprise. There has also been a wave of negative media coverage regarding US-listed China stocks, which has also come a bit late, after the selloff in many of these names had already occurred.

I believe that 2011 will be a year of differentiation for U.S.-listed China small caps.

In 2009, it seemed everything went up, including stocks that in retrospect should not have. In 2010, the space mostly moved down following January highs (including some stocks that may have become oversold). But in 2011, I believe that many casual investors may stop investing in US-listed China stocks, while more-focused investors will do a much greater degree of due diligence to separate the good stocks from the bad stocks; and we will see very differentiated returns.

Some oversold stocks may see stellar returns once they are validated and legitimized, while other stocks will either hang in limbo or see significant declines. In short, performance will become much more stock-specific rather than trading up or down as a sector based on China sentiment (positive or negative) alone.

I am currently looking at quite a few stocks that fall into one of three categories:
  • Oversold despite no negative news

  • Stocks that have not risen despite very positive news

  • Stocks rebounding from their recent lows, but which are still well off their recent highs


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