Finding the Rare Diamonds in the Rough

chinese stock picksIt doesn’t take a rocket scientist to figure out what businesses might be doing great in China. It would be nice if there were a selection of domestic growth opportunities, but there’s no denying the economic machine that is China. In that country, the entrepreneurial drive and the economies of scale make the whole thing work.

One company that’s been a great success in China is VanceInfo Technologies Inc. (NYSE/VIT). This information technology (IT) firm is a software outsourcing company. We always hear about outsourcing and this company is one of the best at it, developing software for customers in China, Japan, North America, and Europe. Corporations employ VanceInfo to develop enterprise software applications, because they provide a quality service at a lower price. With lower costs for labor and expertise, it’s no surprise that a company like this is growing like mad. It’s the whole economies of scale thing at work and it makes it tough for domestic software firms to compete.

In the third quarter this year, VanceInfo generated record revenues of 55.9 million dollars, up a solid 39% from revenues of 40.2 million dollars generated in the comparable quarter. The company cited an across-the-board improvement in sales at all its service lines and in all geographic markets. Revenues from Greater China (which include mainland China, Hong Kong, and Taiwan) represented about 44% of the total. The rest came from customers in the U.S., Europe and Japan.

Earnings during the third quarter came in at $7.7 million for a gain of 34% over last year. The company finished the quarter with 87.0 million dollars in cash and management increased its 2010 full-year sales guidance to between 208.5 million dollars and 209.5 million dollars, representing a 41% increase over 2009.

Also not surprising with this kind of growth is VanceInfo’s stock price performance. In 2008, this stock didn’t do anything, partially due to a correction in domestic Chinese equities, as well as the financial crisis in the U.S. But, from a low of under $5.00 a share in early 2009, this stock has been on fire and is now trading close to a record-high share price of $41.00. That’s almost a 10-bagger in just under two years.

Not only this, but the company’s been able to sell shares in itself and the stock still stays strong. VanceInfo just sold 2.53 million American Depositary Shares to finance its expansion.

Even if you aren’t a shareholder in VanceInfo, it’s worth your time to review the stock and the wealth it has created. When you get close to a tenfold return on your investment, it’s a fortune-making opportunity. It also reiterates in my mind the attractiveness of surveying the marketplace for stocks trading around their 52-week lows. Among all the failures, there are always diamonds in the rough.