Underdogs Emerging 

04/27/2010 11:35 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

China and Brazil trail some surprising overachievers, writes Paul Goodwin in the Cabot China & Emerging Markets Report. Plus: Powering a billion Chinese blenders.

Emerging markets remain in an up trend, but patterns of leadership are not exactly what we’d expect. As of April 14th, with the year about 28% gone, the MSCI Emerging Markets Index [was] up just 4.5% year to date. The three hottest markets thus far have been Egypt (21.3%), Hungary (16.8%) and Indonesia (14.0%)!

China, meanwhile, has managed just a 1.8% gain in 2010, with Brazil advancing just 1.0%. It’s hardly the kind of results you’d expect from a quick survey of the strength of the national economies involved. 

But China has been a dominant theme of global investors since the markets roused themselves in March 2009, and many investors, both individual and institutional, find themselves fully invested in conformity with their current strategy. In mutual fund parlance, China is a mature theme.

Brazil, meanwhile, is still trying to get traction in a challenging interest-rate environment and India continues its slow but steady growth. Russia has thrown up some great numbers, but the political situation there remains daunting to both business people and investors. And the countries that have delivered the leading returns for the year (Egypt, Hungary, and Indonesia) don’t have a single stock that trades on a US exchange as an American Depository Receipt, or ADR.

My stock idea today—China Electric Motor (Nasdaq: CELM)—is appropriate for fans of high-risk, high-potential stocks. The company makes small electric motors of the kind that power automobile windshield wipers, lawn trimmers, hair dryers, and air conditioners. With 31 product lines that include 1,200 different specifications, the company's motors power an enormous range of devices.

Roughly half of sales go to Chinese customers, and sales growth has averaged 78% for the past five years, with earnings increasing every year. The company's fourth-quarter earnings report on March 31st showed a 50% jump in earnings (to 15 cents a share) on a 58% gain in revenue.

The risk in CELM comes from its thin trading volume (just 256,000 shares a day, on average), [which reflects] a potential for high volatility and will probably discourage institutional investors.

But with a product line that will benefit from increasing Chinese sales of consumer goods (like blenders, air conditioners, and autos), the potential is there.

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