Contrarian Stock Market Investing News - Featuring Bargain Stocks » Wayne Mulligan

Cal-Maine Foods (CALM): The Perfect Downturn Stock

Wayne Mulligan — Thu, 24 Jul 2008 14:51:22 +0000

People still have to eat in a downturn, says Wayne Mulligan in Penny Sleuth. And as household budgets get tighter, shoppers are least likely to get rid of staple foods.

This makes an investment in eggs a great way to play the downturn. That’s because the humble egg is one of the great American food staples.

One of the best ways to invest in Americans’ reliance on eggs is through Cal-Maine Foods, Inc. (CALM). The company produces almost 15% of the eggs eaten in the US. Its market share is growing. And it has a rock-solid set of financials…

Operating Margins are north of 30%, Net Profit Margins are at roughly 20% and the company’s Return on Equity (a metric I love to use) is over 25%!

To put that in perspective, the average company in the S&P 500 has profit margins of 11% and Returns on Equity of 15%, so Cal-Maine is definitely running a tight ship.

But things haven’t always been this great for Cal-Maine and the other egg producers in the U.S. They’ve had a little help from the corn market…

Due to the rising cost of corn, Cal-Maine and other egg companies have seen their feeding costs rise by 30% this year. That may sound like bad news but since eggs are such a customary item on American breakfast tables, Cal-Maine has been able to raise its prices right along with its costs. In fact, the company was able to increase its prices above costs and expand its margins and profits as well.

That’s why this company’s stock has practically doubled over the last 12 months — and many folks, including Barron’s, think it could double again.

I’m not sure about a double, but with a stock that’s trading at a $900 million market cap and paying an 8%-plus yield, I’d still feel comfortable socking Cal-Maine away in my portfolio for a while.

But I’m also going to keep an eye on the corn market. If the price of corn begins to come down in a significant way, you can bet that Cal-Maine’s profits and stock price will drop right along with it.

PS: As well as writing for PennySleuth.com, Wayne Mulligan is the founder of Tickerhoud.com. The site is an open platform for investors to answer other investors’ questions on a wide range of subjects. It’s well worth checking out.

Source: Turning Eggs into Dollars

Slack Spending Means Bear Market Will Roar Some More

Wayne Mulligan — Fri, 18 Jul 2008 19:02:09 +0000

Are we seeing a bottom to the bear market?

US stocks are heading for weekly gains. This despite big quarterly losses results from financials Citigroup (C) and Merrill Lynch (MER) and missed estimates from tech giants Google (GOOG) and Microsoft (MSFT).

Think of it this way, says Penny Sleuth editor Wayne Mulligan: “If you want to know whether or not we’ve reached a bottom, then all you need to do is think about the consumer.”

Consumer spending is 70% of US GDP. And consumer spending is slack right now. So calling a bottom to the bear market would definitely be immature.

It’s pretty clear times are tough right now. With three quarters of the population thinking we’re already in a recession and the market sinking by the day, I don’t think there’s any more debating as to whether or not we’re in bear market territory.

So the question for many folks has become: Are we at the bottom of the market yet?

In fact, that’s what inspired this question on TickerHound (and in turn, inspired today’s article):

“In my humble opinion, if you want to know whether or not we’ve reached a bottom, then all you need to do is think about the consumer. In other words, think about yourself and the millions of other Americans out there who are:

Watching the values of their homes drop

Spending twice as much at the pump than they did a year ago

Watching their net worth shrink by the day

“And then ask yourself, has anything changed over the last couple of months? Have things gotten any better or have they gotten worse?”

Unless you don’t own a home, drive a car or do your own grocery shopping, then you might be tempted to say, “Things ain’t so bad.” But if you can relate to what I’m talking about, then you already know the answer this question.

Calling a bottom right now would definitely be premature. Consumer spending drives 70% of our GDP. You cut the consumers’ ability or desire to spend and you’ll watch this economy slow down pretty darn quick.

For more on this TickerHound question, click here…

Source: Is Calling a Bottom Premature?

These 3 Sectors Should Be Part of Your Downturn Strategy

Wayne Mulligan — Thu, 10 Jul 2008 13:46:32 +0000

We’re standing on the tracks and the train is coming, says Wayne Mulligan. But that’s no reason for investors to not play the market. Wayne says going long on discount retailers is the best way to profit from low consumer confidence. And with fuel prices on an unsustainable uptrend, investors should look to the alternative energy market. Meanwhile, the auto industry is facing ruin. A clear opportunity for shorting, says Wayne.

According to a recent survey, three-quarters of the American public think that we’re currently in a recession. The Dow is trading around the same price it was seven years ago and only seems to be heading lower.

Fuel and food prices are at all time highs and the employment picture is gradually getting worse.

And all of this on top of a housing crisis that has yet to fully take hold.

Depressed enough yet?

Basically, we’re standing on the tracks and the train is coming — I don’t need a PhD in economics to figure that much out — the only question is, do we stand here and let it hit us or do we get out of the way?

I’m voting for getting out of the way, who’s with me!?

But it’s not enough to just “get out of the way.” We’re investors; we should do whatever we can to profit from the current economic and market climate too.

On TickerHound, we’ve been seeing questions on this exact topic for the last couple of months, you can check out what some of the other members have had to say here:

What are the Top Three Investments for a Down Market?

I decided not to weigh in at the time; it was too tough to tell where things were headed. But I think the picture has become much clearer now and today I wanted to share where my trades will be focused for the second half of this year.

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Discount Retailers

Given the fact that the American consumer thinks we’re in a recession, it stands to reason that consumer spending will continue to slow this year. That means luxury goods or purchases that require large lump sum payments are going to get pushed to the back burner for the time being.

So what will consumers be buying?

The usual, of course: Groceries, medicine and maybe even some clothing.

Consumers will certainly continue to buy these items, but they’ll be very picky as to where they buy them. Meaning, I doubt you’ll see long lines at Gap Stores anytime soon, or baby boomers opting to buy brand name drugs as opposed to the generics. People will be extremely cost conscious as we head into the second half of the year.

That’s why it’s important we focus on retailers that cater to the cost conscious consumer.

For me, that means looking at stocks like Wal-Mart (WMT: NYSE) and Dollar Tree (DLTR: NASDAQ), both of which have done very well over the last six months.

So I’ll be looking to go long Discount Retailers.

Alternative Energy

Forget the green movement and all the damage we’re doing to our environment with current forms of energy production, let’s just look at what’s going on at the pumps every day. The price of fuel is rising and it doesn’t look like it’s coming down anytime soon.

What’s a gallon of gas going to cost by the end of the summer: $5.00? $5.50?

The bottom line is, our dependence on crude is killing our economy and many of our industries; everything from transportation to shipping.

It doesn’t take a rocket scientist to know that we’ll need to look for alternative sources of energy in the not-too-distant future.

But it would take a rocket scientist to know which companies will pan out in this emerging sector. So while I won’t be buying any individual companies just yet, I will, however, be looking to go long on some of the ETFs that cover the alternative energy market.

I’ve had my eye on several for a while now — PBW, QLCN and GEX, just to name a few.

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Automakers

This one is a no-brainer for me for the following reasons:

Decreasing consumer spending

Increasing cost of fuel

Increasing cost of steel

A new car will certainly be out of the question for many American consumers for quite some time. I think food, water and medicine will be higher up on the priority list for most folks in this country.

So as this market continues to head south, so too will the Auto stocks.

Luckily for us it won’t be too hard to pick which automakers to short; they’re all performing equally poorly these days. So I’ll probably go ahead and short the Big Three for the near term. I can’t see any of them turning the corner anytime soon.

One of the most important lessons I ever learned in my years in the market is that as investors we can make money regardless of how the economy is doing. As long as we don’t get emotional, lose our cool or make decisions that go against the facts, we can come out of this downturn just fine.

So make sure you play this bear market, don’t let it play you. For more on this, read what my readers have written…

Source: Weighing in on Today’s Bear

Three Easy Steps for Picking Stocks

Wayne Mulligan — Wed, 02 Jul 2008 01:39:07 +0000

Someone just e-mailed me…How exactly do you go about finding stocks to buy? And after I read it, I really began to think about how my investing process works. How do I go about identifying, researching and ultimately buying a stock?

For many investors the process has evolved so much for them that it’s tough to tell what their exact methodology or framework is anymore. So after reading that question, I decided to pull out my yellow legal pad and literally write down my investing methodology…and here it is (the abridged version):

1. Stock Screen & Filter

This part of the process isn’t set in stone but it’s what I find myself doing when I’m searching for stocks that aren’t on my radar yet. But many times I’ll simply find companies due to overall macro trends that I’m following (e.g. wireless, China, etc.) and then I’ll just skip this first step.

But in the event that I am looking for new companies, what I’ll typically do is use one of the free stock screeners out there (Yahoo! Finance has a great Java app for screening stocks). Here are some of the criteria I’ll use:

Market Cap: Depending on which types of stocks I’m looking for (large-cap, small-cap, etc.) I’ll tweak this setting accordingly.

Return on Equity (ROE): This is an extremely important metric in determining the overall health of a business and how competent management is. Anything above 15% is a healthy ROE number.

Earnings Yield: This is a number many people don’t look at but it’s very helpful in quickly screening for potential investments. The Earnings Yield is basically the inverse of the P/E ratio, so it’s Earnings divided by Price.

Think about it this way, if you could get a 5% yield on a government bond (a risk free investment), then wouldn’t you want more out of a company you’re investing in?

I’ll typically look for companies with earnings yields north of 6%, but the higher the better.

Look Out For Debt: While I’d ideally like a company with zero long-term debt, some debt is ok as long as it’s not breaking the company’s back. So make sure the company is able to comfortably meet interest payments (interest coverage ratio) and that long-term debt doesn’t make up the majority of its capital structure.

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2. It’s All Business

After you get your list of stocks, the next step is to filter it down further but this time you’ll need to look a bit deeper than the numbers.

For me, I’ll only invest in a stock if I really understand the business behind it. I’ll want to know exactly how the company makes money and what makes it a better company than its competitors, etc.

So you would never see me invest in a chemical company because I just don’t know enough about the industry to say which company has a real advantage over another.

So make sure the business you’re investing in is one you’re familiar with and understand.

3. What’s It Worth and Is the Price Right?

OK, so now we’re back to the numbers — and here’s where it gets tricky…

Let’s say we’re looking at a stock with a $500 million market cap.

How do we know it’s not really worth $100 million?

How do we know it’s not worth $5 billion?

The answer is tricky in that there is no single “correct” way to determine the value of a business. Everybody uses their own metrics and equations.

But what I can tell you is that nobody will ever come up with the exact value of a company. It’s impossible to be right about something as dynamic as a business. There’s just too many different variables and moving parts.

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So what is an investor to do?

For this topic I’ll default to the kings of value investing: Benjamin Graham and Warren Buffett. To be clear, Graham was the one who came up with the concept I’m about to discuss, but Buffett’s success in applying it makes it worth including his name here as well.

And the concept I’m referring to is, “Margin of Safety.”

For example, if you think a stock is worth $1 billion, then you should only buy it when it’s trading for $500 million. Meaning, you should require a Margin of Safety of 50% or more on every investment you make.

This way you eliminate a lot of the uncertainty and the risk involved in trying to accurately value a company. If you get nothing else out of this article, then I hope that the concept of Margin of Safety really sticks and you use it in all of your investing operations.

Investing in Chinese Real Estate

Wayne Mulligan — Wed, 25 Jun 2008 16:15:27 +0000

Editor’s Note: Wayne Mulligan, founder and CEO of TickerHound.com is traveling in China. Writing for Penny Sleuth, he says that the housing market boom has reached its limits for now. More losses are likely in the near future, making shorting a good option for investors…

China’s housing market has shown signs of cooling this year, as tighter credit conditions limit financing options. Sameer Nayar, head of real estate finance at Credit Suisse Group, told Bloomberg that financing costs have soared 500-700 basis points (5-7%) in China.

Meanwhile, Thomson Reuters reports that residential transactions were down over 50% in April, according to China Index Academy.

Investing in Chinese Real Estate

By Wayne Mulligan

I landed in China about seven days ago and have been completely amazed by how much it’s changed in the last few years. I haven’t set foot in Beijing since late 2005 and the difference between then and now becomes evident as soon as you hit the airport.

But the biggest change I’ve seen is in a sector many thought was invulnerable: China’s real estate market.

So when I saw this question on TickerHound, I thought it was a PERFECT opportunity to share some firsthand experiences with you:

How can U.S. investors profit in the Chinese real estate market?

Now, just to be clear, my analysis isn’t complete yet but I think it’ll be helpful to share some of the observations I’ve made by speaking with local businessmen and homeowners.

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Is a Bubble Popping?

When I was last here people were falling all over themselves to buy a new home and hopefully sell it for a quick profit in a year or two. I saw this trend everywhere from Beijing, to Shanghai and all the way down south in Fujian.

Prices were rising every month and developers couldn’t put up new apartment complexes fast enough.

But things have certainly changed in a few short years.

Whenever I speak to homeowners or prospective homeowners this time around, I keep hearing the same thing: prices are too high.

Many people are content with holding out until the market pulls back a bit before investing in a new home, and the developers are starting to feel it as well.

Not only are they providing discounts and rebates if buyers put more money down (for example: if a buyer were to put up the entire cost of the home upfront, then he’d get a 10% discount on the entire home) but they’re also engaging in some creative marketing campaigns as well. The most interesting one I’ve seen so far is, “Buy a home and we’ll give you a car for free!”

To me, this is like walking into a retailer and seeing that they’re discounting their entire inventory. Meaning, people don’t like the merchandise enough to pay full price and it’ll inevitably be reflected in the company’s bottom line at the end of the year.

I think we’re seeing the same thing in China right now and the summer might mean a serious downturn in the once red-hot real estate market.

But Don’t Take My Word for It

Keep in mind that these are just my general observations after being here and speaking with dozens of people for the last week.

But I think there’s a more telling indicator that we can look at which not only confirms my suspicions, but could also help us profit from this coming downturn.

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In December 2007, Claymore launched a China Real Estate ETF (NYSE: TAO). The fund was setup to capture the upside in one of the world’s hottest real estate markets. And with prices rising by double-digit percentages every month it seemed like a good idea.

But if you take a look at the ETF’s chart since it launched then you’ll see that its performance has been less than stellar.

In fact, it’s down about 25% in the last six months:

My bet is that we’ll see some negative news from this sector over the next quarter and shorting this ETF might be a smart way profit from it.

However, I have to warn you that you need to be careful here. People have been predicting a downturn in China’s real estate market for years now and while there were certainly hiccups along the way, this market has continued to skyrocket.

I have a tremendous amount of faith that the overall real estate sector will continue to do well here over the long term, but for now I think it’s a buyers’ market and profits in the sector will suffer for the time being.

Source: Investing in Chinese Real Estate

A is for Apple, B is for Billions, C is for China

Wayne Mulligan — Tue, 17 Jun 2008 23:21:54 +0000

Apple Enters Chinese Markets. Wayne Mulligan is back to give us an overview of China’s exponential growing market and what that means for wireless investors.

The global wireless industry has been exploding — over 250 million subscribers in the U.S., over 500 million in China, there are more people on this planet that own a mobile phone than those that own a computer — bottom line, this is the place to be for the long haul.

But we can’t talk about wireless without addressing the hottest company in the sector right now: Apple (AAPL: NASDAQ) and its headline-making iPhone…and we can’t talk about the hottest company without discussing the hottest market: China!

So a TickerHound member asked:

Why isn’t the iPhone in China?

Good question! But I think the better question is, why isn’t the iPhone in China YET?

After months of failed negotiations between Apple and China Mobile (CHL: NYSE) — the largest mobile service provider in the world in terms of subscribers — the companies were unable to reach an agreement.

But after Apple’s announcement on Monday, I think it’s clear that while negotiations between the two companies may be at a standstill, they won’t stay that way for long…

The Chinese wireless market is by far, one of the most desired mobile markets on the planet. This is a country with roughly 1.4 billion citizens and not even half of them have a mobile phone…yet…

There’s a tremendous opportunity for growth in China and Apple knows it.

Although a deal hasn’t been reached to bring the (genuine) iPhone to China yet, Apple is definitely gearing up for it.

Apple just recently presented the world with the “iPhone 2.0”.

Aside from the widely covered feature additions like 3G wireless technology, GPS, reduced price point, etc., Apple unveiled a feature that I personally jumped out of my seat for…and it’s geared directly for the Chinese market.

Texting and E-mailing in China

Having lived in China for a period of time, I can attest to the difficulty in sending Chinese text messages and e-mails from a mobile phone. Typically you’ll have to type the message using a spelling system known as pin-yin.

Pin-yin is the transliteration of Chinese words into westernized spelling. So if I wanted to type “hello” in a text message, I’d have to type “ni hao” using a western keyboard and that would then be translated into the appropriate Chinese characters.

Obviously the use of a stylus would make things much easier. In fact, that’s exactly what Motorola (MOT: NYSE) had in mind when they launched the Motorola Ming in China two years ago.

That’s precisely what Apple had in mind when they launched their Chinese character recognition software on Monday.

With the latest version of the iPhone, you can use your finger to write out Chinese characters directly on the screen. This will make writing text messages and e-mails much faster and easier.

So the real question becomes, what would it mean for Apple’s business if it secured a significant share of the Chinese handset market?

Well, let’s look to the Motorola Ming for an indication of what may be in store for Apple…

The Ming and Market Share

Motorola Ming had roughly 1% of the entire Chinese handset market at the beginning of 2007. Given that China has a mobile subscriber base of 583.5 million people now, that would mean 5.8 million phones by today’s numbers.

It would be easy to make the argument that the iPhone has much more hype, demand, functionality, etc. built around it and therefore could reasonably capture more of the market than the Ming. But let’s be conservative here. Let’s assume Apple is able to sell 5.8 million iPhones in China…

If Apple sticks to their $200 price point for the 8 GB model — which is certainly realistic considering the Ming’s price point was in the upper $400’s — that would be roughly $1.16 billion in additional top-line revenue for Apple.

Also, if you consider the “halo” effect Apple’s products tend to have (sell one product, you sell more of the others), then it’s easy to see how substantial adoption of the iPhone could turn China into an increasingly important source of revenue for Apple overall.

Regards,
Wayne Mulligan

P.S.: As hot as China’s market is, there’s another market out there that’s a lot more profitable, a lot more secret, and a lot less risk. We’ll give you a sneak peak to find out how to make easy millions. To find out what his hot market it… Click here…

Source: A is for Apple, B is for Billions, C is for China

Could This Stock Be the Best Pink Sheet Play Ever?

Wayne Mulligan — Wed, 04 Jun 2008 21:04:18 +0000

Typically, when investors hear “pink sheet stocks,” they think of tiny companies, more often bad than good, and for the analysts out there, it means a ton of work lies ahead of them.

It’s infinitely harder to dig up information on small cap, thinly traded companies than it is for stocks that trade on the big board or the NASDAQ.

But what if I told you I was looking at a bulletin board stock that had:

A $76 billion market cap
Was the leader in its industry
Has been breaking new highs all year
AND could be the buy of the year!

Well, that’s EXACTLY what I’m saying to you today.

When many people think about video games they tend to say, “Oh, that’s just kid’s stuff.” But I bet those are the same people who didn’t know that a game released only several short weeks ago — Grand Theft Auto IV — did more sales in one week ($500 million+) than Spider Man 3!

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This Isn’t Kid’s Stuff Anymore

Now please understand, I’m not the biggest gamer in the world. I’ll play some quick computer games once in a while and I’m addicted to Brick Breaker (game on my Black Berry), but I’ve never gotten into some of the bigger gaming trends like World of Warcraft, etc.

That is until I received the Nintendo Wii as a gift last summer.

And that’s why when I saw this question on TickerHound, I just had to write this article:

“Which video game stocks would you buy right now?”

Until I played the Wii I wouldn’t have given this topic a second thought. It just wasn’t an industry I was into, even though it was pretty clear that something big was happening here.

But after seeing the Wii in action and watching how friends and family — many of which have NEVER played video games before — got into playing with the system so much, I knew there was an opportunity here.

So I started to dig deeper into Nintendo’s stock and to my surprise the Japanese company had never done a public offering here in the States. Sure, the stock trades under the symbol: NTDOY, but it’s traded on the OTC bulletin board.

In fact, only five years ago this company was trading under $10 per share — today, it’s over $67! That’s a 635% profit for the patient investors out there who had the savvy to buy and hold Nintendo stock.

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So Where’s the Opportunity Today?

Like I said, Nintendo’s new gaming console, the Nintendo Wii, is blowing the doors off the gaming industry right now.

In April 2008, the company sold more consoles than its top two competitors combined: Sony’s (SNE: NYSE) PlayStation and Microsoft’s (MSFT: NASDAQ) Xbox.

Not only that, but Nintendo is continuing to release games and pursue a strategy that isn’t solely directed at the typical gaming market, boys and young men. This company is going after women and seniors as well which is opening up some major opportunities for growth in the years to come.

The stock is pulling back a bit right now but I’d be a buyer as soon as it starts to move to the upside again.

Regards,
Wayne Mulligan

P.S.: For more on what readers have said about Nintendo and other video game investments, check this out…

Source: Could This Stock Be the Best Pink Sheet Play Ever?

As Buffett Places Bets Abroad, Your Profits May Still Be in the U.S.

Wayne Mulligan — Fri, 30 May 2008 18:05:28 +0000

Today, we have another recession proof way to score big money, while even Buffett is fleeing this country. Wayne even includes a few smaller companies that should do handsomely over the next few months.

As I was doing my usual bout of “marathon weekend reading” I came across an interesting piece on Warren Buffett’s recent trip overseas. For those who don’t keep tabs on the “Oracle,” Buffett has been touring Europe for the last week or so in an effort to promote Berkshire Hathaway on the other side of the pond.

Reason being, Buffett’s looking to start buying up “family owned, privately held” businesses on the cheap overseas.

It’s difficult for him to find “Buffett-sized” deals in the U.S. anymore, so it only makes sense that he’d look for greener pastures elsewhere. However, Buffett also gave another reason for why he might want to start placing his bets in other parts of the world…

My friends and I have been debating the “recession” topic for a while now: Are we currently in one? Will we run into one this year or next? What will the effects be?

But when I read that Buffett thinks the U.S. is already in a recession and it will be “longer” and “deeper” than any we’ve seen for quite some time, I definitely began to think less about “what if we go into a recession” and more along the lines of “What should I do with my money now?”

There are dozens of questions (and even more answers) on TickerHound about which sectors hold up the best during a bear market, but a recent question is what inspired me to write today’s article:

“Will certain retailers do well during a recession?”

Traditionally, retailers don’t do well at all during a downturn — consumers start to curtail their discretionary spending as times get tougher, and items like clothes, cars and all the other little “extras” aren’t ranked very high on the “purchasing priority list.” However, if you really think about it, there are some retailers that “should” do rather well during a protracted downturn.

The fact of the matter is, people aren’t going to completely stop buying the little extras, they’ll just be more selective about where they buy them.

While I’ve come a long way since my childhood, I still remember what it was like when times were tough around my house. We were a blue collar household, three kids, my parents were always hustling at the end of each month to make ends meet — so when one of us needed new clothes, school supplies, etc, we’d take a trip to the closest discount store and bargain hunt.

Without doing a survey of every household in the U.S., I’d bet that when times are tough and a recession is imminent, most of America behaves the same way. In fact, if you take a look at a 10-year chart for some of the discount retailers, you’ll immediately see that their stocks do better when the market is doing worse!

So here are a few discount retailers that I think are worth digging into if you’re looking for some “Retailers for a Recession”:

1. Dollar Tree (DLTR: NASDAQ)

Market Cap: $2.99 Billion

P/E: 15.67

Dividend: N/A

12 Month Price Gain (Loss)%: (19%)

2. Family Dollar Stores (FDO: NYSE)

Market Cap: $2.76 Billion

P/E: 13.5

Dividend: 2.5%

12 Month Price Gain (Loss)%: (40%)

3. Fred’s (FRED: NASDAQ)

Market Cap: $438.65 million

P/E: 41.13

Dividend: 0.7%

12 Month Price Gain (Loss)%: (25%)

4. 99 Cents Only Stores (NDN: NYSE)

Market Cap: $538 million

P/E: 85

Dividend: N/A

12 Month Price Gain (Loss)%: (46%)

How to Pick Small-Caps in China

Wayne Mulligan — Wed, 14 May 2008 20:46:59 +0000

Our friend at TickerHound is back with a sequel to last week’s article on mobile technology in China. This time around, he’s giving us a spectacular penny stock that’s traded in the U.S. Enjoy…Last week, I wrote about a stock that I think is a fabulous addition to any long-term investor’s portfolio (especially one who is looking for some exposure to China). But that obviously isn’t a stock that’s likely to triple this year.

That’s not to say there aren’t stocks with that type of potential residing in China — in fact, someone asked an unrelated, but an interesting, question on picking small-cap stocks in China:

“How would you go about picking small-cap stocks in China?”

So this got me thinking — let’s say I took the analysis I began in my article from last week, and went a step further and tried to identify some small cap plays in China using a similar strategy.

My approach to the market, and this sector in particular, has always been to take a top-down approach. I try to find the strongest companies, in the fastest growing sector of the hottest markets. So let’s apply that thinking here…

The “hot” market is China and one of the fastest growing sectors is wireless technology. And now we’ll add some market capitalization requirements — let’s say that we’ll be examining wireless companies that are trading under a $500 million market cap.

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Immediately, three companies show up on my radar:

China TechFaith Wireless (CNTF: NASDAQ)
Qiao Xing Mobile Communication (QXM: NYSE)
Orsus Xelent Technologies (ORS: AMEX)

China TechFaith designs and manufactures mobile handsets for the Chinese market and abroad. They’ve had a rough go of it for the last two years, but the last 12 months have treated the company well.

Next we have Qiao Xing Mobile, which also produces wireless handsets and has done very well over the last 12 months. However, the company has had a recent hiccup in the stock that has brought prices down a bit.

And finally we have Orsus, which produces more multimedia-oriented phones for the Chinese mobile market.

So now the question is, how do we narrow these down so we can find the strongest company out of the three?

Let’s start by setting up some basic criteria:

Since we don’t want to fish in a pond where the fish might be dirty, we’ll limit ourselves to a market cap of over $100 million.
Because I’m a value-oriented investor, I want to make sure the fundamentals are sound in any company I invest in. So, the next criterion we’ll setup is that the company has to be profitable for the last three years.
And finally we’ll want to make sure we’re investing in a company that has had some solid momentum behind it — so we’ll only look at the best performers for the last 12 months.

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So here goes…

The best performers over the last 12 months, in order are: China TechFaith, Qiao Xing and Orsus. The only two companies that have been profitable for the last three years were Orsus and Qiao Xing. And since Orsus’ market cap is below $100 million, Qiao Xing is the only company that meets all of our criteria:

If you take a look at a chart of QXM you’ll see that the stock is down almost 15% in the last few weeks on a disappointing fourth quarter (even though they beat expectations). To me, it’s a temporary blip on the radar and it might be smart to buy on weakness here for the long term.

Click here to check out some other short-term China plays or to share some of your own.

Until next time,
Wayne Mulligan

P.S.: Penny Stock Fortunes editors Greg Guenthner and Jim Nelson recently recommended a tiny Chinese pharmaceutical company that is set to become the clear industry leader. So far, it’s paid off. In exactly one month, it’s up 45% for their readers. No worries though… If you check out this report today, you still have time to catch their latest two picks, which are due out any minute now…

Source: How to Pick Small-Caps in China