Four Favorites for China Focus

04/29/2014 10:00 am EST

Focus: GLOBAL

James Oberweis

President, Oberweis Asset Management, Inc.

Investor sentiment toward China morphed from skepticism in 2005 to giddy glee by 2007 and, these days, is back to nervous loathing, observes Jim Oberweis Jr., fund manager, small-cap expert, and editor of The Oberweis Report.

Admittedly, growth in China is slowing and some of the problems above are real (but not new). Our presumption is that most literate souls have already heard about most of them.

In our experience, it is the unknown problems that wreak sudden market havoc, not the same old woes. As for growth, even a few years back, you didn’t have to be a mathematical genius to recognize that China’s absurdly impressive growth rate couldn’t continue forever.

The other half of the story—the bullish part that isn’t getting due respect—is valuation. The average P/E of the MSCI China Index is hovering around its lowest level since inception (yes, that includes 2008).

In a world in which equity markets almost everywhere are overvalued relative to their historical means, China remains a bastion of cheap stocks. One would think that this disparity would raise eyebrows.

In our experience, low means P/E's have been the single most predictive and correlated variable for subsequent favorable market returns in China. And by that indicator, it may be a far more exciting time to invest in China than many people assume.

Our advice isn’t to buy China broadly, but rather to invest in companies with highly visible growth opportunities that aren’t dependent on GDP.

Our favorites include China Mobile Games (CMGE), 21Vianet (VNET), 500.com Ltd. (WBAI), and Vipshop Holdings (VIPS). No matter what happens in China, ecommerce and smartphone growth will continue.

Goldman Sachs estimates e-commerce growth in China of 24% annually from 2013-2018. Meanwhile, share prices for high growth Chinese tech stocks have crumbled in the last month, creating a real disconnect between fundamentals and market value.

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