Editor's note: This is the fifth article in a series on investing in China. The previous columns were Four Ways to Play China, China Investing: Like a Kid in a Toy Store, How (Not) to Invest in China and Catching China's Uplisting Wave.
My grandfather is a berry-picking legend where I come from. The rate at which he picked seems to accelerate as the story propagates, but I would like to show how you can apply successful wild berry-picking principles to stock picking.
Right now, the picking is good in Chinese pharmaceuticals. If you know what you're doing I believe you can turn thousands into millions over the next couple years. And that's after taxes.
1. You need to know where to look
If you go looking for berries in the desert, you might be disappointed. If you're looking for pharmaceuticals, you might run across
. Like Jack's magical beanstalk berry, Lotus is my red pill from the "Matrix" and it's only up 78% since I mentioned it in May.
Although Lotus hasn't taken real steps to uplist and the stock price has had a negative correlation with company performance, it is my belief that not picking up this stock is shortsighted to the highest degree. In June it was again awarded Good Supply Practices certification. If you are shortsighted you'll never make ends meet berry picking and you'll never find a company like Lotus that is growing and trading at less than twice earnings.
2. You need to know when to look.
Although China has been running headlines and a lot of people are bubbling with excitement it was only last year when China was the poison berry. When you buy determines the price you pay and, therefore, the risk you undertake as I believe risk comes only from overpaying.
China Pharma Holdings
is another Chinese pharmaceutical company with a falling stock price and improving fundamentals. My grandfather taught me that it doesn't make sense to pick berries in winter and if you want jam at that time you had to have picked the berries six months earlier. The same goes with stocks. Timing is everything. Buy when others are "uncertain" as they appear to be in China Pharma, since the price justifies company shrinkage when it forecasts 20% growth. It's time to buy.
3. You need to know what you're looking for.
Like the aforementioned poison berry, picking the wrong attributes to look for in companies will lead you off the investing cliff. Ben Graham focused on the price-to-book ratio. Warren Buffett expanded this to price to earnings. Ken Fisher emphasized price to sales. Peter Lynch focused on price/earnings to growth. I use all four to evaluate stocks.
would be attractive on the measure of price to cash as well.
With a forward P/E between 2 and 3 and $85M in cash, Jiangbo is priced for bankruptcy at $113 million and it is nowhere close considering it has been growing both top and bottom lines at 50% annually.
4. You need to avoid the beaten path.
The best berries are found in the untouched wilderness where wild animals scare away intruders. Stocks are no different. The best ones to own aren't making headlines and your friends have never heard of them, but soon will.
China Medicine Corp.
is priced to shrink at four times earnings and is growing. Throw in the fact that it's receiving positive results from its new innovative product rADTZ, which is designed to decrease animal mortality rates and save breeder farms some serious cash, and I'll pick this one.
5. When you have the best picking conditions, you need to pick with both hands.
The window of best-picking opportunity is never open very long. In the past year, I have come to prefer speculation when I believe stocks have little downside. In matters financial I'll always pay nothing for something and am willing to work my way up from there. That makes anything close to zero and that is profitable worth looking at. For
China Yongxin Pharmaceuticals
I run my calculations ultra conservatively on 61 million shares. Even still, you have a growing company priced for bankruptcy. Delicious.
There are several other cheap Chinese pharmaceutical plays out there. Remember when investing that diversification is protection against what you don't know and for some people that's quite a lot.
I hope you enjoyed my series on investing in China. I'd like to say that I firmly believe this series will catch more publicity as the stocks mentioned throughout it appreciate in price over the next couple of years. But for now know that these companies are all growing at significantly higher rates than anything you can find in the U.S. and at less than one third the price. Brilliant!
At the time of publication, Bradford was long all the companies mentioned in this article. Glen Bradford is the CEO of ARM Holdings LLC; a hedge fund advisory company. He's pursuing an MBA at Purdue University and is trading his entire tuition in the stock market as well as the tuition of his roommate. His goal is to buy the most undervalued companies that are making money and set to make more money that he can find. In March 2009, he was quoted for saying, "Uncertainty will certainly work for me."