5 Top Chinese Pharma Plays
By
Glen Bradford
This is the last of a 5 part series on investing in China
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. I do want to say that I don’t necessarily focus on Chinese stocks, but any potential investment anywhere in the world that I believe to have incredible potential with limited risk. Right now, the picking is good in Chinese Pharmaceuticals and 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 Lotus Pharmaceuticals (OTCBB: LTUS). Like Jack’s magical bean stalk berry, Lotus is my red pill from the Matrix and they are only up 78% since I mentioned them in May. Although they haven’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 for yourself is short sighted to the highest degree. In June they again were awarded GSP certification. If you are short sighted you’ll never make ends meat 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 (OTC: CPHI) is another Chinese Pharmaceutical company with 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 then, you had to have picked them 6 months prior. 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 they forecast 20% growth — it’s time to buy.
3. You need to know what you’re looking for. Like the poison berry from above, picking the wrong attributes to look for in companies will lead you off the investing cliff. Ben Graham focused on P/B. Buffett expanded this to P/E. Ken Fisher emphasized P/S. Peter Lynch focused on PEG. I use all 4. Jiangbo Pharmaceuticals (OTC:JGBO) would be attractive on another measure as well P/C (Price to Cash). With a forward P/E between 2 and 3 and $85M in cash, Jiangbo is priced for bankruptcy at $113M and they are nowhere close considering they have 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 Corporation (OTC:CHME) is priced to shrink at four times earnings and is growing. Throw in the fact that they are receiving positive results from their 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. Lastly, 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 and that makes anything close to $0 that’s profitable worth looking at. For China Yongxin Pharmaceuticals (OTC:CYXN), I run my calculations ultra conservatively on 61M 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 do not know and for some people that is quite a lot. I hope you enjoyed my series on investing in China and I would like to conclude this with a note that I firmly believe that this series will catch more publicity as the stocks mentioned throughout it appreciate in price over the next couple years. But for now, these companies are all growing at significantly higher rates than anything you can find in the USA and at less than one third the price. Brilliant!
Disclosure: Bradford was long all the companies mentioned in this article at the time of publication.