Chinese Stocks: 1 Simple Reason the China Doubters Are Wrong

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Many investors are highly skeptical of the data that comes out of China, whether it be good or bad. Naturally, given that China's potential for a hard landing has been headline news for the past year, some analysts are still distrustful of the recent data that suggests a soft landing after all.

Still, "soft landing" is the new buzzword. Suddenly those who publicly took a hard-landing approach to the economic future are being taunted with I-told-you-so's from the China optimists.

Refuting China's housing bubble
One such heckler is GSAM's Jim O'Neill. Business Insider reports his "interesting nugget designed to refute the China bubble-istas" as follows:

According to Jim, just over 50% of China is urbanized. That number is expected to grow to 70%, which will involve another 200 million Chinese citizens migrating toward urban centers.

"Quite how there is supposed to be a nationwide house price bubble with this prospect ahead I have no idea, but many don't seem to appreciate this."

As for the price explosions, "In complete contrast to the U.S., Chinese house prices have reversed in the past 18 months because policymakers deliberately stopped them from rising. At some point, when they reverse policy tightening, the house price 'problem' will turn out to be not as big a deal as so many fear."

Business section: Investing ideas
Even though there are many China-doubters, we've found plenty of evidence to suggest Chinese stocks offer great near-term potential.

All of the Chinese stocks mentioned below have recorded statistically significant winning streaks over the last 30 days.

For our purposes, we identify a winning streak as a persistence of days in which a stock recently outperformed the S&P 500 and little persistence in recently underperforming the S&P 500 benchmark.

To use these concepts, we ran a screen on recently "winning" stocks: those that have seen a persistence of days in which the stock beat the S&P 500 benchmark over the last month, and little persistence in underperforming the S&P 500, i.e., long winning streaks and short losing streaks, as measured by a ratio of the longest winning streak to the longest losing streak.

Outperforming the index is considered a powerful signal of the company's strength. Stocks that win out the stock market may also be working off of a strong momentum that can persist for a long time.

Do you think the bullish momentum behind these stocks will continue? Use this list as a starting point for your own analysis, and click here for more interactive tools. (List sorted by market cap.)

1. Aluminum Corporation of China Limited (NYS: ACH) : Engages in the manufacture and distribution of alumina, primary aluminum, and aluminum fabrication products in the People's Republic of China and internationally. The stock's average daily alpha vs. the S&P500 index stands at 0.76% (measured close to close, over the last month). During this period, the longest winning streak lasted 8 days (i.e., the stock's daily returns outperformed the S&P 500 for 8 consecutive days). The longest losing streak lasted 3 days (i.e., a win streak / losing streak ratio of 2.67).

2. VanceInfo Technologies (NYS: VIT) : Engages in the provision of information technology (IT) services. The stock's average daily alpha vs. the S&P500 index stands at 1.97% (measured close to close, over the last month). During this period, the longest winning streak lasted 9 days (i.e., the stock's daily returns outperformed the S&P 500 for 9 consecutive days). The longest losing streak lasted 3 days (i.e., a win streak / losing streak ratio of 3.0).

3. Zhongpin (NAS: HOGS) : Engages in the processing and distribution of meat and food products primarily in the People's Republic of China. The stock's average daily alpha vs. the S&P500 index stands at 1.37% (measured close to close, over the last month). During this period, the longest winning streak lasted 6 days (i.e., the stock's daily returns outperformed the S&P 500 for 6 consecutive days). The longest losing streak lasted 2 days (i.e., a win streak / losing streak ratio of 3.0).

4. China Nepstar Chain Drugstore: Operates retail drugstores in the People's Republic of China. The stock's average daily alpha vs. the S&P500 index stands at 1.85% (measured close to close, over the last month). During this period, the longest winning streak lasted 12 days (i.e., the stock's daily returns outperformed the S&P 500 for 12 consecutive days). The longest losing streak lasted 3 days (i.e., a win streak / losing streak ratio of 4.0).

5. Country Style Cooking Restaurant Chain: Country Style Cooking Restaurant Chain Co., Ltd., together with its subsidiaries, operates a quick service restaurant chain under the CSC brand in the People's Republic of China. The stock's average daily alpha vs. the S&P500 index stands at 1.11% (measured close to close, over the last month). During this period, the longest winning streak lasted 5 days (i.e., the stock's daily returns outperformed the S&P 500 for 5 consecutive days). The longest losing streak lasted 1 day (i.e., a win streak / losing streak ratio of 5.0).

6. Xinyuan Real Estate (NYS: XIN) : Engages in residential real estate development in China. The stock's average daily alpha vs. the S&P500 index stands at 1.21% (measured close to close, over the last month). During this period, the longest winning streak lasted 7 days (i.e., the stock's daily returns outperformed the S&P 500 for 7 consecutive days). The longest losing streak lasted 3 days (i.e., a win streak / losing streak ratio of 2.33).

7. ReneSola (NYS: SOL) : Engages in the manufacture and sale of solar wafers and solar power products. The stock's average daily alpha vs. the S&P500 index stands at 2.21% (measured close to close, over the last month). During this period, the longest winning streak lasted 5 days (i.e., the stock's daily returns outperformed the S&P 500 for 5 consecutive days). The longest losing streak lasted 2 days (i.e., a win streak / losing streak ratio of 2.5).

8. ChinaCache International Holdings: Provides Internet content and application delivery services to businesses, government agencies, and other enterprises in the People's of Republic of China. The stock's average daily alpha vs. the S&P500 index stands at 2.44% (measured close to close, over the last month). During this period, the longest winning streak lasted 8 days (i.e., the stock's daily returns outperformed the S&P 500 for 8 consecutive days). The longest losing streak lasted 2 days (i.e., a win streak / losing streak ratio of 4.0).

9. China Automotive Systems: Engages in the manufacture and sale of power steering systems and other component parts for the automotive industry in the People's Republic of China. The stock's average daily alpha vs. the S&P500 index stands at 1.86% (measured close to close, over the last month). During this period, the longest winning streak lasted 5 days (i.e., the stock's daily returns outperformed the S&P 500 for 5 consecutive days). The longest losing streak lasted 2 days (i.e., a win streak / losing streak ratio of 2.5).

10. China Green Agriculture: Engages in the research, development, manufacture, distribution, and sale of humic acid based compound fertilizers in China. The stock's average daily alpha vs. the S&P500 index stands at 1.15% (measured close to close, over the last month). During this period, the longest winning streak lasted 9 days (i.e., the stock's daily returns outperformed the S&P 500 for 9 consecutive days). The longest losing streak lasted 3 days (i.e., a win streak / losing streak ratio of 3.0).

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above.

At the time this article was published Motley Fool newsletter services have recommended buying shares of Country Style Cooking Restaurant Chain and China Green Agriculture. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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