China Growth Stocks: A Witch-Hunt
By Glen Bradford
In modern terminology ‘witch-hunt’ has acquired usage referring to the act of seeking and persecuting any perceived enemy, particularly when the search is conducted using extreme measures and with little regard to actual guilt or innocence. The term is used when a hunt for wrongdoers becomes abused, and a defendant can be convicted merely on an accusation. It’s mostly an investigation carried out ostensibly to uncover subversive activities but actually used to harass and undermine those with differing views. And, there’s one happening as we speak against US Listed Chinese Microcaps. For those who know how to spot fraud and how to price companies — this is an opportunity to score 10-baggers.
For the most part, this entire sector has to be proven innocent as it is presumed guilty — at least for now. In my opinion, it’s not their fault that the Chinese equity markets have a huge wait list and that an infusion of capital even at a low multiple is hugely accreditive to their ability to earn. The return on cash that some of them are able to pull is just ridiculous. Right now, it’s a sellers market. Any sale is a good sale regardless of the price. In the short run the stock market is a voting machine and in the long run prices actually reflect earnings. As such, it is my opinion that institutional investors are afraid of this sector. It is also my belief that this won’t be the case 5 years from now.
CCME
CHBT
ONP
UTA
LPH
CNAM
NEP
Back when I sat down and sorted through 10,000 companies during the last market crash, I mostly was able to remove companies from my list of companies worth owning based on basic metrics. The stocks were usually not nearly cheap enough for me to even consider buying. At this point, I like companies growing at over 30% trading at earnings multiples around 2. To me, this indicates that the market says that the probability of them being fraudulent is over 90%. I figure that if they were trading at a reasonable multiple, they’d trade at a multiple of around their growth rate. Let’s underestimate this at a P/E of 20. At a P/E of 2, they are trading at 10% of where they should be. This suggests that the other 90% is the market saying that the companies are a sham. Essentially the odds are 9 to 1. Are you willing to bet those odds? I am. Most retirement plans forecast 8% return per year. It would take 30 years to get this type of return if you play that way which is subject to paying more and getting less.