You’ve Got to Expect Some Volatility

Make no mistake about it, if you want to be in the equity speculation business, you’ve got to expect some volatility in prices. China stocks are hot, but be aware, they soon may not be.

The Shanghai Composite Index just dropped 9% in one day — that’s a lot! Of course, that index has been hitting record after record lately. Just be forewarned that if you’re going to speculate in foreign securities, you’re going to get wacky trading action.

Back in January of last year, I wrote about a great Chinese company that was growing by leaps and bounds. The company is Focus Media Holding Ltd. (NASDAQ/FMCN).

This Chinese company runs the largest advertising network in China, using flat-panel screens in all places from supermarkets to elevators, providing an advertising platform for big corporate customers. Some of the company’s customers include Motorola, P&G, China Telecom, and Toyota.

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In its just-finished fourth quarter, the company generated record revenues of $68.3 million, representing an increase of 177% over revenues of $24.6 million generated in the fourth quarter of 2005 and a 12% increase over revenues of $61.1 million generated in the third quarter of 2006. That’s significant growth!

Net income for the fourth quarter of 2006 grew to $30.1 million, up a whopping 219% over net income of $9.4 million generated in the fourth quarter of 2005.

Not surprisingly, Focus Media has been a hot stock over the last year. In fact, when I first wrote about it in January 2006, the stock was trading at slightly more than $40 per share. Now it’s worth more than $80 per share, and its future prospects continue to be bright. This is particularly impressive considering the company issued a large number of new common stock during this period.

Like most successful China stocks listed on American stock exchanges, Focus Media is now extremely expensive. This kind of high-growth stock is likely to remain expensive because its business is still growing incredibly fast. With this in mind, however, these companies are very susceptible to serious corrections along the way. Keep this in the back of your mind if you’re speculating in these stocks.

Mitchell Clark’s Take on Yesterday’s Meltdown — Finally we have the catalyst that the stock market has been waiting for. It is kind of ironic that China stocks are leading the U.S. market. As mentioned countless times before, the stock market has had such a strong run (particularly in large-cap stocks) that a correction was inevitable. It could have been high inflation numbers, or it could have been the Federal Reserve talking about interest rates… Now, for the first time ever, U.S. market indices are following the pullback in China stocks.

Truly amazing how things have changed! As investors in this market, frankly, we just have to buckle down and ride it out. Anyone who thinks they know how this will all turn out is pulling your leg. Nobody knows.

As I’ve said many times before in this column, anything can happen to China stocks. We’ve had such a strong run with these stocks of late, a pullback is only natural. No need to worry too much about the domestic stock market. American equity markets are more resilient than foreign markets.