Catch the Wave in Chinese Micro-Caps

NEW YORK ( TheStreet) -- So I tried to catch the Chinese uplisting wave but the closest I got was Hawaii.

Although I only caught two seconds of wave and experienced over an hour of what might as well have been fighting for my life trying to surf Hawaii, I've come away with four key insights that I believe would help even the savviest of investors. I also have four Chinese companies that are selling at remarkable discounts to my calculated intrinsic value.

1. Understand the currents and don't get swept away.

The first thing I did upon entering the water was to get swept out to sea. Markets boom and bust in cycles much like waves come in sets. Right now China Armco ( CNAM.OB) is a great way to play inflation, liquidity and China. The company imports, distributes and refines metals into and around China, a natural hedge against inflation. The company just got backed by two lines of credit totaling $25 million, which is a little less than its current market capitalization, and has access to new liquidity for expansion.

A market cap of about $30 million is sinful given the conditions. A couple years back guidance put earnings around $15 million, not to mention the company just put down a huge second quarter with the assistance of a one-time transaction affecting revenue by $10.6 million. Not to mention that the metals market in China is turning up the heat faster than celebrity chef Gordon Ramsay.

2. Don't start with the short board.

There are tons of fancy investing strategies that don't get you anywhere. Get a good undervalued company and go long and strong in a bull market as I said 2009 would be in January and I caught nothing but criticism. Skystar Bio-Pharmaceutical ( SKBI) is priced to shrink at $14 and is far from it. Fancy investment strategists might suggest you run a covered call strategy on Skystar. That's nonsense and is in fact riskier in my opinion as you limit your gains on a company that is ridiculously undervalued in the first place. The only way to play a gem like Skystar is to go long and strong and ride with it through the completion of its vaccine manufacturing facility in the fourth quarter. Skystar is so cheap you are nuts if you don't own it, just as I was nuts to start on a short board.

3. Don't start in an arena surrounded by hard knocks. In some instances, perception is everything. China Dasheng Biotechnology ( CDBT.OB) is a small Chinese company that makes and distributes additives for livestock feed. Although the company is firing on all cylinders, it's priced to shrink 75% when it just pulled triple-digit growth. The school of hard knocks in investment land is the over-the-counter market as many unloved companies inhabit it. In Hawaii, I started surfing the rockiest I've ever seen and proceeded to get beat up on the rocks. But once I was able to escape the rocks, the panic subsided and things got better. That's what I expect for the stockholders of China Dasheng in the coming year.

4. If you can't do it, don't keep trying; go find another spot. In this regard, China Growth Development ( CGDI.OB) might be that spot. China Growth leases units in shopping malls and pulled double-digit growth in the second quarter and is priced to shrink 50%. I learned never to surf a short board, at high tide, in rocky waters. There were definitely safer waters on the big island, as I found out later. China's shopping mall future looks brighter to me than that of the U.S. Why not take advantage of the discrepancy?

The thrill of the chase will get even the most unknowledgeable of investors to launch out and try to make it big. Just look at the parabolic nature of the Shanghai market in the last five months and the Nasdaq in 2001 and you'll see what I call the "wave of ignorance." What people don't realize is that making it big takes practice, persistence, guidance, and a little bit of good fortune. What looks so easy on land or on television is never as easy as it looks as I found out fighting for my life in Hawaii.

-- Written by Glen Bradford in West Lafayette, Ind.

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At the time of publication, Bradford was long China Armco, Skystar, China Dasheng and China Growth Development. 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 roomate. 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."

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