Riding China's Potential Uptick

 | Apr 04, 2012 | 6:30 AM EDT
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Ken Fisher is one of the gurus whose approach to investing I have long admired. In fact, I base one of my automated strategies -- I use these to choose investment-grade stocks -- on his thinking.

His was one of the first strategies I included on Validea.com and I have not been sorry. It is up 185.7% since I started following it in 2003, which is more than four times better than the S&P 500's 40.5% gain during the same time period.

Fisher recently wrote a column that caught my attention. In it, he took a very bullish position on China because he believes the Chinese economy is tied to Chinese politics and, therefore, so is the Chinese stock market. The country's Communist Party leadership has a history of trying to depress the economy two years before elections, which occur every five years, then goose the economy as the election approaches, he says.

"Over the last 20 years China's GDP growth has been relatively weakest in the two calendar years prior to the National Congress, or election (and) growth accelerates during an election year (2012) and the year after. So China is priming the pumps of its economy, and the ripple effect will be felt by stocks," Fisher wrote..

Fisher pointed out that the FTSE/Xinhua China 25 Index of blue chips fell nearly 18% last year, while gaining 7.9% this year. This got me looking at Chinese stocks traded on our exchanges. My Fisher-based strategy likes several Chinese stocks at this time, but all have market caps too small for me to report on them here. But three major Chinese companies do earn high grades from two of my other strategies. These companies are doing well in their own right, and with the support of a guru strategy, each is worth considering buying. If Fisher is correct and the Chinese economy is destined for strength this year and next, these companies could truly be stellar performers.

China Petroleum & Chemical (SNP), which has a market cap of $95 billion, is one of China's two major integrated oil and gas companies and the country's largest oil refiner (and the second-largest refiner in the world). My Peter Lynch-based strategy uses the P/E/G ratio (price-to-earnings relative to growth) as an important variable when choosing stocks. And it likes China Petroleum, also called Sinopec, because its yield-adjusted P/E/G is 0.44. To put that in perspective, a P/E/G of 1.0 or less is acceptable and south of 0.5 is very strong. In addition, the company is doing a good job managing inventories.

Another Chinese oil company, PetroChina (PTR), is a favorite of the strategy I modeled on James P. O'Shaughnessy's investment approach. This is China's largest integrated oil and gas company with a market cap of $283 billion. The O'Shaughnessy likes its huge market cap, very strong cash flow per share ($22.08), large number of shares outstanding (1.9 billion) and gushing sales ($301 billion). Its final test is to choose the 50 companies that pass the previous tests and have the highest dividend yield. PetroChina's yield of 3.86% places it in this 50 group.

China Mobile (CHL) has the world's largest mobile phone network and the world's largest mobile phone customer base, with 584 million subscribers. Like PetroChina, this is an O'Shaughnessy-strategy favorite. Factors in its favor: $218 billion market cap, $8.75 positive cash flow per share, 4.1 billion shares outstanding, $20.1 billion in sales and a dividend yield of 3.78%, which places it among the top 50 market leaders.


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