Chinese Stocks in the Doldrums, but this Stock Market Winner’s Doing All the Right Things

A lot of U.S.-listed Chinese stocks are taking it on the chin in this market. Investor confidence has dwindled for the entire sector, particularly for those companies that listed on U.S. equity markets through reverse takeovers of shell companies. As a group, virtually all Chinese companies listed in U.S. dollars have retrenched, as institutional investors are avoiding the sector. There's one company that’s shone through all the turmoil within the group.A lot of U.S.-listed Chinese stocks are taking it on the chin in this market. Investor confidence has dwindled for the entire sector, particularly for those companies that listed on U.S. equity markets through reverse takeovers of shell companies. As a group, virtually all Chinese companies listed in U.S. dollars have retrenched, as institutional investors are avoiding the sector.

One company that’s shone through all the turmoil within the group is New Oriental Education & Technology Group Inc. (NYSE/EDU). I wrote about this company extensively in this column in 2009 and it remains one of the best recession-resistant businesses that I’ve ever found. Previously a mid-cap company, this stock has appreciated so much that’s its now worth just shy of $5.0 billion, which is definitely large-cap territory.

This Chinese company has honed its business plan to perfection and is reaping the benefits of a customer base that’s yearning to advance itself. The company is in the business of providing primary and middle school education, as well as English language training and a variety of other courses for adults, including test preparation for professional exams.

In its latest fiscal quarter ended February 28, 2011, New Oriental Education generated revenues of $132.5 million, representing impressive growth of 49% over the same quarter in 2010. Earnings grew a substantial 68% to $23.3 million, which, by any measure, is outstanding profitability. Total student enrollments in academic subjects, tutoring and test preparation courses grew 18% to approximately 490,200. Total number of schools and learning centers increased to 456 in the most recent quarter, up from 447. For the company’s current quarter, which is the fiscal fourth quarter of 2011, total revenues are expected to grow by around 35%.

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When I first started writing about this company, I said that I wouldn’t bet against it. The stock has been a real powerhouse over the last two years and it recently spiked strongly higher after reporting its financial results. Pull up a five-year chart on the stock and you’ll see its amazing wealth creation for shareholders.

I consider New Oriental Education to be a special situation kind of business. There aren’t too many large-cap, private education businesses in China that are growing at such fast pace and trade on a U.S. stock exchange. This winner is now expensively priced and the stock never really got caught up with all the shorts in the U.S.-listed Chinese equity universe.

This large-cap company has performed like a fast-growing micro-cap stock and it illustrates that investors don’t need to focus exclusively on smaller companies if they want to find growth and make money. Particularly when dealing with foreign companies, some size doesn’t seem to hurt.