Two Ways to Play China's Big Boost

03/31/2009 1:00 pm EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts and Strategies, says China’s economic stimulus plan will help some Chinese companies, and he likes two stocks in particular.

Fundamentally, the economy is still in the tank, so what’s driving this rally? One factor is [the recent] radical decision by the Federal Reserve to buy directly $300 billion in Treasury bonds. That announcement sparked a rally in bonds, stocks, and especially commodities. (The last time the Fed bought government securities directly occurred during World War II!)
 
The Fed also said it was buying an additional $750 billion in bad mortgages this year, [and] the Obama administration announced a bold new plan to buy up bad mortgage loans and other toxic assets on the bank’s balance sheets. We are benefiting in the short run with a rally on Wall Street. But in the long run, we are digging a deeper hole of deficits, debt, and depreciation of the currency. We now are living under state capitalism.

The United States isn’t the only nation that is engaged in a massive stimulus package. China also has announced a huge plan to keep the Asian giant growing. China is expected to grow at least 8% this year. It continues to urbanize, invest in infrastructure, and consume more energy and commodities. Each day, China adds 25,000 new cars to its roads.

How to profit? My favorite play right now is PetroChina (NYSE: PTR). The world’s second-largest oil company (behind Exxon Mobil) was selling for more than $200 a share a year ago, and fell under $60 last month. But now it’s making a comeback. Still, it’s trading at eight times last year’s earnings, and sports an 11% profit margin.
 
PetroChina also is benefiting from rising oil prices, which now are over $52 a barrel. Clearly, the Fed's easy money policies and expansionary fiscal policies in both the United States and China are working their magic and [we are] escaping deflation.

Let’s buy PetroChina and set a protective stop of $65 a share here. (It closed at around $79 Monday—Editor.) For those more adventuresome, consider buying the September $115 calls (PTRIC.X).

China Medical Technologies (Nasdaq: CMED) gained 25% last month, and benefited from $2.7 million of insider buying by chief executive officer Xiaodong Wu and two other company officers. It announced another record quarter, with revenues up more than 50% to $33 million over the previous year, and earnings up 95% to 67 cents a share.

Chief executive officer Xiaodong Wu commented that CMED now focuses on recurring sales of its medical diagnostic devices that probe various types of cancer (prenatal, cervical, breast) and recently gained approved by the Chinese government.

“We are confident in our growth prospects despite the current weak economic environment [because] the PRC government has committed to make substantial additional investment in the health care sector to increase medical insurance coverage,” he said. (CMED closed above $14 Monday—Editor.)

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