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Everyone's Forgotten About China... Huge Gains Start from Here

By Steve Sjuggerud and Brett Eversole, True Wealth Systems
Monday, December 3, 2012

"China has been very much out of favor with international investors," Peter Churchouse writes in the latest issue of the Asia Hard Assets Report.  
Peter, you may recall, is one of the true pioneers of emerging-markets investing. "China stock indexes have been major underperformers...
Ah... now this is what I like to see! Why? Huge gains start from "very much out of favor." 
You might not know the history here... But Chinese stocks are prone to massive booms and busts. They can quickly swing from "very much in favor" to "very much out of favor." And investors who time the moves right can make a lot of money... 
During the last big swing, Chinese stocks soared nearly six-fold in just two years (roughly 2006-2007). The Shanghai Composite Index, which tracks the largest and most important Chinese companies, climbed from about 1,000 to 6,000.  
The index then crashed below 2,000 in less than a year. Today, it's still below that level. Take a look... 
Chinese Stocks Prone to Incredible Booms and Busts  
After a 70% sustained decline, Chinese stocks are once again "very much out of favor" with investors. China is out of the news.
The thing is, Chinese stocks today are much cheaper than they were at their bottoms in 2005 and 2007...  
The Shanghai Composite Index now trades for the cheapest price-to-earnings (P/E) and price-to-book (P/B) ratios we've ever seen. Today, you can buy this index of blue-chip Chinese companies for just 7.4 times forward earnings and 1.1 times forward book value. That's crazy-cheap...
This index traded for over 40 times earnings in 2007. And over the last 15 years, its average P/E ratio has been over 30... nearly three times more expensive than where it trades today.
Take a look: 
 Shanghai Composite Index at All-Time Low Valuations
Remember... Chinese stocks are prone to booms and busts. Based on history, the Shanghai Composite Index can easily return hundreds of percent once it gets going.
Chinese stocks could take off at any moment. And the gains can be huge, as we're starting from the cheapest point in history (based on the P/E and the P/B ratios).
But we aren't buying China today...
The thing is, the trend in the Shanghai Composite Index is down. It is hitting new lows almost daily. China is clearly still in "bust" mode.
Our opportunity in China will be great – someday. But we don't want to try to catch a falling knife. We must wait for the uptrend to begin. When it returns, hundreds of percent gains are possible. Remember... last time around, this index soared six-fold in less than two years.
Today, Chinese stocks are record-cheap. And China is finally out of the news. Our opportunity to buy should be here soon.
For now, keep the Market Vectors China Fund (NYSE: PEK) on your watch list. It's our one-click way to trade the Shanghai Composite Index. As I write, it's making an all-time low. I'll let you know when it's time to jump in.
Good investing, 
Steve Sjuggerud with Brett Eversole

Further Reading:

If you're looking to diversify into foreign markets immediately, there's big opportunity in Japan. Japanese stocks are "ridiculously cheap" right now, according to Steve. And one major factor in the country's coming election could make Japanese businesses – especially exporters – much more competitive. Read more about what's causing the change here: Japanese Stocks Are Up 400 Points in Three Days... More to Come?

Market Notes

The housing sector continues to impress...
Home Depot (HD)... home improvement 
Lowe's (LOW)... home improvement 
Whirlpool (WHR)... appliances 
Haverty Furniture (HVY)... home furnishings 
Masco (MAS)... home improvement supplies 
Redwood Trust (RWT)... mortgage investment 
Stewart Information Services (STC)... title insurance 
Syngenta (SYT)... agriculture 
Time Warner (TWX)... media 
3D Systems (DDD)... 3D printing 
Dillard's (DDS)... department stores 
W.R. Berkley (WRB)... insurance 
Covanta Holding (CVA)... waste disposal 
Domino's Pizza (DPZ)... pizza 
Yum! Brands (YUM)... Taco Bell, Pizza Hut, and KFC 
Vulcan Materials (VMC)... construction materials 
Texas Industries (TXI)... construction materials 

Contango Oil & Gas (MCF)... oil & gas 
Newfield Exploration (NFX)... oil & gas 
Pico Holdings (PICO)... water & land rights 
Walter Energy (WLT)... coal 
Sony (SNE)... electronics

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