Look overseas when domestic markets send mixed signals
When the U.S. stock market is flashing mixed messages, like it has been lately, I return my attention to looking for good entry prices. Unless something has changed my fundamental view of the market, these dips are the time to buy more of the companies I like, for less. Remember, buy cheap, sell dear.
That's what I've been doing in my SmallCapInvestor PRO portfolio. So far this year, nine of eleven positions have been closed with a gain, one greater then 140%.
In small-caps, the drop is typically greater than in large-caps, and the recent market action has born this out once again. Last week the Russell shed 2.7% while the S&P 500 only lost 0.7%. But the reverse is also true, and history has shown that small-caps consistently outperform large caps on the upside. Investors who purchased the Russell 2000 small-cap index ten years ago would have enjoyed returns around 40%, versus a 20% loss for investors in the S%P 500.
I often look to overseas markets like China and India in search of attractive small-cap investments. And why not? For its part, China just reported 8.9% Thrid Quarter growth while the U.S. has stalled. India is growing GDP growth at around 6%.
This morning, many Asian indices were trading higher after South Korea reported excellent quarterly GDP growth. We also heard encouraging news from India's Tata Motors (NYSE:TTM). The nation's largest auto maker doubled profits on increasing sales, and the stock is responding with a 6% gain.
My readers know that I've been bullish on China for some time. Lately I've been discussing the growth in the auto industry. As emerging markets like China and India develop, multi-nationals like Tata Motors, Ford (Nasdaq:FORD), and Toyota (NYSE:TM) are increasing their offerings of small and fuel-efficient cars at low entry-prices. With typically short driving distances and no preconceived notion that bigger is better, as per the failed Detroit model, consumers are jumping at the offerings. Tata's Nano debuted in India this past March at just over $2,000. Almost all manufacturers now offer smaller vehicles, or have them in their pipelines.
The growth in the Chinese auto industry has been explosive. The nations GDP growth is fueling a rising standard of living for the nation's 1.3 billion people. As I mentioned last Monday, September auto sales in China rose 78%, to 1.33 million. This makes China the biggest auto market in the world.
I've been following a number of Chinese small-cap stocks that are benefiting from the growth in the auto industry. At the end of September, I recommended a transportation stock to subscribers of my SmallCapInvestor PRO advisory service. That company's stock is now up 25% and is looking to go higher as demand for its vehicle tracking software grows.
Last week, I mentioned AutoChina International (Nasdaq:AUTC), a commercial vehicle leasing company that recently listed. That stock is up around 100% since I mentioned it, just five trading days ago. While I wouldn't recommend buying this stock now (it is extremely illiquid, trading only an average of 5,000 shares a day), it is an excellent example of the growth in the industry. Start-up companies such as this are cropping up all over China.
And some of the big fish are taking note. Warren Buffet's Berkshire controlled MidAmerican Energy invested $230 million for a 10% stake in the Chinese company BYD (Other OTC: BYDDF.PK). The draw here is not financing, but rather batteries. Buffet thinks BYD could be a global leader in electric propulsion auto systems. If electrical grids around the globe are designed and built to transmit the needed capacity, electric car batteries could become as common as the internal combustion engine.
And he may be right. There are a number of companies and investors right now that are betting he is. However, there are plenty that think the potential is overstated. A somewhat cynical article from BusinessWeek suggests that the first mover advantage in electric automobile technology will be lost amid the industry forces that will evolve as competition increases. But the article also indicates that a fifth of auto buyers could be in the seat of electric cars by 2020.
Either way you slice it, that's a huge opportunity. Ten percent of this past September China auto sales is 133,000,000 vehicles.
Many of the Chinese battery stocks have been taking a breather lately. Companies like A123 Systems (Nasdaq:AONE), China Ritar Power (Nasdaq:CRTP), and China BAK Battery (Nasdaq:CBAK) are down greater than 5% today, and as much as 20% in the last few weeks. Some of these companies are doing well. Others, such as China BAK Battery are working to get back to profitability. I have been following another Chinese battery stock in SmallCapInvestor PRO. I'm projecting 50% earning per share growth for that stock next year. The company's history of profitability has made it my favorite battery stock.
When the market is taking a breather, as it is now, take a moment to look around the globe. Countries such as China and India are showing savvy investors there is an emerging auto industry with a different slant. Smaller is better. And shopping when the market is taking a breather is better yet.
About the Author
Ian Wyatt is a co-founder and President of Business Financial Publishing and the Chief Investment Strategist and Publisher of SmallCapInvestor.com and SmallCapInvestor.com PRO.
Read More
(click a star)
Enter comment: