I told you I'd be giving you recommendations of stocks of Chinese companies to consider for "very long-term" holds, and since people are concerned about a growth slowdown, I'll talk about two companies that are likely to be somewhat defensive in a growth-stunted economy.
Again, please remember that while you may be able to make large short-term profits on these ideas, the goal is to be very long-term holders - perhaps decades - with the goal of making several thousand percentage points.
I'll get right to the point...
The first stock idea is based on the fact that the slowing global economy will have minimal impact on education. China places high value on education. Each year, Chinese universities produce over 400,000 engineering graduates (compared to Japan's 200,000/year and Untied States' 60,000).
New Oriental Education & Technology Group, Inc. (EDU) trading currently at about $55.46/share. Headquarters: China
This rapidly growing company provides private educational services to over 1.3 million students via 207 school centers, primarily in the People's Republic of China. They help privately prepare Chinese for admission tests to foreign universities (emphasizing English). It offers its program, service, and products in six areas: language training; test preparation; primary and secondary school; educational content, software, and other technology development and distribution; online education; and other services and products.
Chinese students continue to work their way to ivy-league schools around the globe while the largest companies in the world continue to move research facilities and manufacturing plants to take advantage of low costs. Also, as China builds trade and diplomatic relations around the globe, the desire to learn foreign languages increases. Whether economic growth is fast, slow or non-existent, education will continue to be a commodity in demand.
The company has a quarter of a billion dollars, which is over $7.00/ share, in cash with no debt. (Again, it's at $53.00). The average 5-year earnings growth rate is 69% and the return on equity is 19% with profit margins of 25%. 47% of the stock is owned by management. They've been gaining brand recognition as they have been targeting millions of enrollees.
This is one stock I feel comfortable buying for my kids and forgetting about. Perhaps their education fund will be funded by China's education growth!
Year to Date Daily Chart
On to the next very long-term idea...
American Dairy Inc. (ADY) trading currently at $14.45. Headquarters: China.
Funny name for a company in China. This is a holding company for Feihe Dairy Company (in Heilongjiang province). They are one of the leading producers and distributors of premium infant formula, milk powder and soybean, rice and walnut products in China.
The stock is probably too high at this point so if you want to buy it, you might do so below $13.50. The stock recently doubled from it's low of $7.00 (still off its 2007 high of $20.00) and I'll tell you why in a second...
I know what you're probably thinking. "A dairy company? What about the baby formula contaminated with melamine that was blamed for the deaths of four infants and the sickening of about 55,000 other children in China? Why would I buy a company like that?"
The answer is American Dairy Inc. is the company that everyone went to for dairy products after Chinese government's announcement on September 16, 2008 that 22 other dairy enterprises had products containing melamine.
You see, since the Chinese government's announcement that about 55,000 children became ill (last month 5,800 children were still hospitalized,) over 10 got kidney stones with 6 in serious condition, there was an immediate flight to quality (American Dairy Inc.) by consumers nationwide.
American Dairy, already known for its high quality products and rigorous 25-step quality control process that involves over a hundred points of testing from the feed for the dairy cow, passed all government inspections while the 22 dairy enterprises were implicated in this mess. Now they are working with the government to discuss ways to improve the dairy and overall food industry in China. At record rates, they continue to sell reliable, high quality, premium infant formula products.
In many areas, their Feihe branded products sold out immediately after the announcement. The company's sales orders increased more than sevenfold In Hebei province (where the melamine crisis broke). In other areas, sales orders more than quadrupled. The company proved that they were able to respond quickly to take the competitive advantage in a crisis environment, keeping up with demand by increasing production, and running at full capacity 24 hours a day.
That's why the stock doubled since the date of the announcement. That's why you can probably buy it cheaper on a pullback). But if you are afraid of missing a big advance in the stock, buy half here, and then the other half if the general market tanks again, bringing the stock closer to $10.00. The stock just broke out of a resistance level as you can see in the charts below with favorable price/volume action.
1-Year Daily Chart
American Dairy has a 45% return on equity. It has a sharp management team and management owns 68% of the stock (so its interests are strongly aligned with public shareholders). The 5-year average earnings growth rate is 104% and the PE ratio is only 13. Keep in mind it's still a relatively small company with a $250 million market cap and only 2.71 million shares in the float (in public hands) while 17 million shares are outstanding. Given the size of the company and so few shares in the float, the stock can have massive swings to the upside and downside. Just remember that management has a very long-term outlook and so should you.
Like I said, this, like all the other Chinese stocks I'm talking about, is a stock one can consider for the very long-term.
That's all folks.
Chief Investment Officer
Technical Analysis Millionaire