Chinese Stocks Promise Higher Potential Gains?

Three Keys to Profiting from China-Based StocksIf you think Chinese stocks are too speculative to consider and buy, then you need to read what I’m going to say over the next few paragraphs.

Yes, it’s true that China-based companies have subjected U.S. capital markets to erroneous results and reporting in the past and that it is likely continuing to some degree, but that does not mean you should bypass Chinese stocks. You just need to be extra careful.

With the recent moves by the U.S. Securities and Exchange Commission (SEC) to force Chinese companies looking to list in the United States to use approved auditors along with other tighter reporting requirements, we have seen the flow of China-based initial public offerings (IPOs) dry up. There were only about two Chinese IPOs setting up shop on U.S. exchanges in 2013; so far, this year has proven to be no different.

Yet the reality is that Chinese IPOs continue to attract frenzy when they list here, perhaps due to the limited issues. The biggest coup was the recent decision by China-based e-commerce giant Alibaba Group Holding Ltd., which decided to list in the United States and bypass Hong Kong. The IPO is estimated to be at around $15.0 billion and will be the largest IPO listing from a Chinese company. The reason for the decision, I believe, is the currently extremely receptive environment for IPOs in America. It’s likely Alibaba will create so much buzz that its share price will explode out of the gate for those lucky enough to own shares.

The reality is that even if you cannot get your hands on Alibaba, which has Yahoo! Inc. (NASDAQ/YHOO) as a minority shareholder, there are numerous other Chinese stocks you can buy here. Look, the risk is clearly higher, but just consider some of the amazing returns recorded by U.S.-listed Chinese stocks over the past year.

You may have read that Goldman Sachs (NYSE/GS) cut its gross domestic product (GDP) growth target on China to a likely more reasonable 7.3% in 2014 from the prior 7.6%. (Source: Kollmeyer, B., “Goldman Sachs cuts China growth estimates,” MarketWatch, March 20, 2014.) The Chinese government is targeting 7.5% growth for this year. The downgrade doesn’t mean China is in trouble; it’s simply just a more realistic number the stock market can deal with instead of the higher expectations.

My opinion is for you to continue to add some Chinese content to your portfolio in order to try to realize some much higher potential gains.

Recall back in February when I highlighted two small-cap Chinese stocks that I felt had some room to grow. (Read “If You Can Take the Risk: My Top Three Chinese Stocks.”)

I looked at China-based Phoenix New Media Limited (NYSE/FENG) as an interesting Chinese Internet media play. The stock was trading at $10.17 back then and subsequently increased to a 52-week high of $13.58, up 34%. While Phoenix New Media returned a decent gain, my second China-based listing e-commerce play E-Commerce China Dangdang Inc. (NYSE/DANG) has returned a whopping gain of 63% since February.

These are simply two examples of Chinese stocks that have taken off. The key is patience, waiting for weakness to accumulate shares, and selling into strength.