There is a resurgence taking place at the speculative end of the stock market. U.S.-listed Chinese stocks are on the comeback trail due to improved sentiment in the broader market. As a group, most of these stocks were hit hard this year because of investor apathy. A real lack of enthusiasm for risk-capital shares created a significant valuation gap between this specific group and the broader market.
There’s always been a risk-premium on Chinese stocks and it’s typically been in the form of lower valuations compared to domestic companies. This isn’t surprising given the risk associated in dealing with foreign companies, but the result has been a volatile, rolling bandwagon of investor enthusiasm for the group. In many cases, this enthusiasm, or a lack thereof, had more to do with domestic market sentiment over corporate fundamentals. This in turn creates a situation where stock prices move in extremes and, if you’re on the right side of those extremes, the trading profits are significant.
Consider for a moment a small company like LJ International Inc. (NASDAQ/JADE). Like many smaller companies operating in China, this jewelry company has experienced some ups and downs during its expansion. But, this doesn’t mean that the stock hasn’t offered great trading opportunities.
Last year, LJ struggled in its operations to generate growth. The company does have a good business distributing jewelry in China and Japan, and management recently expanded into the retail side of the business, which helps in the control of prices. This year, the company experienced a resurgence of both top- and bottom-line growth, but the investing marketplace wasn’t interested.
From January to August, the stock traded range-bound between $2.50 and $3.00 per share and all the while business was getting better. Only until sentiment changed in the broader market did the stock experience a breakout. In the last six weeks, this stock appreciated to its current 52-week high of approximately $5.00 per share, up from $3.00 per share. That’s a 67% gain in a very short period of time.
The point of this example is that it really does pay to look for value in a marketplace that isn’t paying attention and isn’t interested. Eventually, corporate success does get recognized in the stock market. It may have taken a while, but a trade like JADE was pretty easy. All the investor had to do was to wait for the bandwagon to come around again.
Speculating in equities is a hundred times easier in a roaring bull market. But when you’re in a bear market, the opportunities for solid gains over short periods of time are very few. I think the bandwagon for U.S.-listed Chinese shares will keep rolling well into next year. We’re still in a bear market for stocks, but some of the valuations in this group are just that attractive.