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This Trade Has Triple-Digit Upside Potential… And NOBODY Is BuyingBy
Tuesday, September 10, 2013
In less than two years, the biggest Chinese companies soared 250%.
And right now, I believe these stocks are set for another triple-digit winner.
We all know the negative stories. China is slowing. We've seen on TV that China has built "cities" of apartments and shopping centers – with no people in them! And Chinese companies are heavily leveraged.
But the most hated trades typically have the most upside potential.
I hope you can get over the "ugly" story and make this trade... The reward-versus-risk is incredible here.
Let me explain...
The main way for Americans to own Chinese stocks is to buy shares of the iShares China Large Cap Fund (FXI), which trades on the New York Stock Exchange.
In 2006, FXI was trading around $20 a share. By 2007, it had hit a high around $70 a share. Take a look:
 The thing is, Chinese stocks can move down as fast as they can move up... From late 2007 to late 2008, this fund lost two-thirds of its value!
My point is, Chinese stocks can be volatile – you can make a lot of money or potentially lose a lot of money.
Fortunately, you can control your downside risk... Today, you can trade China with roughly 16% downside risk… and still have triple-digit upside potential. So why do I think it's possible to make triple-digit returns in Chinese stocks?
To me, it's simple... Chinese stocks have the three things I look for in an investment... They are 1) cheap, 2) hated, and 3) just starting an uptrend.
The top holdings in FXI are trading at an average 8.7 times earnings with a dividend yield of 4.3%. Take a look:
Judging by the headlines, China is hated. If you went to a cocktail party and told folks you were buying Chinese stocks, they'd look at you like you were crazy. And the uptrend is clear today... FXI is up from a low around $32 in July to $38 as I write.
Here's one way you could trade it...
Buy FXI, and set a stop loss at $32. This gives you $6 of downside risk (about 16%). But leave your upside unlimited, looking for a triple-digit return.
Is this a speculation? Yes, absolutely... This is not a lifetime investment. Stay in the trade for two years or less.
It's hard to set up trades with risk-to-reward characteristics as good as we have here. This is an incredible opportunity for a trade on Chinese stocks... They're currently in the sweet spot of cheap, hated, and in an uptrend.
That's exactly what we look for in a trade.
Good investing,
Steve
Further Reading:
Steve's favorite deals are low – or even zero – downside, unlimited-upside deals. "They're hard to find – but they do come around," Steve writes. And last month, he discovered one of these rare opportunities in emerging-market currencies. Get all the details here.
If you're not ready to take the plunge into emerging-market stocks, Dan Ferris says there's another way to invest in these high-growth markets, with "the peace of mind of buying safe, blue-chip stocks." Find out how in this classic DailyWealth essay.
Market NotesAFTER A CORRECTION, JAPAN IS POISED TO GO HIGHER After taking a few months off, the uptrend in Japan is resuming...
Back in November, Steve urged readers to buy Japanese stocks. He said the changing of government leaders ensured the country would enact major stimulus programs... and push the value of Japanese stocks much higher.
Shortly after Steve's recommendation, Japanese stocks soared. The country's benchmark stock index, the Nikkei, climbed 70% in just six months. After the huge run peaked around 15,000, the Nikkei corrected to the 12,500 level.
Steve still thinks Japanese stocks have much farther to go. And now that the correction has worked off some of the market's speculative froth, the Nikkei is poised to go higher. Just yesterday, it struck its highest level in a month. If this index tacks on 500 points or so, we say the uptrend in Japan is back on.
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