A Second Act for China Play?

06/29/2010 12:01 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Focus Media shares remain way down from their peak and could be worth a flyer once the market steadies, writes Paul Goodwin of the Cabot China & Emerging Markets Report.

With the global economic recovery showing spotty results and equity markets trying to cough up a fur-ball, it’s a ticklish time for investors. We have to make decisions about what to do with our money based on incomplete and contradictory data and conflicting predictions.

Cabot’s position on the question of what to do when markets are bearish is clear:

  • Reduce or eliminate buying.

  • Purge your portfolio of any weak or losing stocks and hold the cash.

  • Put the stocks that are still performing well on a short leash.

These steps have one huge good effect; they will preserve your capital. And the money you don’t lose in a down market can be put to work when the bull wakes up again.

Obviously any stock recommendation I make today will come with a list of warnings attached. There’s nothing in a good combination of revenue and earnings growth and a strong chart that can reverse the trend of the market. Stocks that resist the downward pull of the market are worth studying and make great additions to watch lists. But a market that’s trending down puts pressure on all stocks, even those that are going up.

So my pick today is a stock for your watch list that’s an old friend of the Cabot China & Emerging Markets Report. We made excellent money on this stock back in 2006, but the company has been through the mill recently and could represent a good value here.

Focus Media Holdings (Nasdaq: FMCN) was a pioneer in the out-of-home advertising business in China, sticking flat-panel video screens in elevator lobbies, malls, buses, chain stores and other high-traffic areas and then selling screen time to advertisers. It was a brilliant strategy, and it spawned a host of imitators in China, most of whom have struck deals with different transportation systems and locations to display content and ads.

The company hasn’t recorded a quarterly loss in years, but experienced four quarters of declining earnings starting in the fourth quarter of 2008. On the good side, there’s no debt and the stock is perfectly liquid.

But the price is a problem. FMCN took an unusually large hit during the Great Recession, plummeting from 66 in late 2007 to five in March 2009. The recovery since then has been substantial, but the stock’s price recovered only to a peak of 19 on March 17th, and [was recently] trading in a tightening wedge at 15.

It may be that Focus Media was a one-trick pony and just reaped the benefits of being the first on the scene in an untapped industry. But I’m keeping FMCN, which has an attractive price/earnings ratio of 15 on my Watch List. I’m especially interested in seeing what happens when that wedge on the stock’s chart makes its move—if the move is to the upside, it could be explosive.

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