Recipe for a volatile market — China, cash flow and caution
Canadian investors can expect volatile markets for the foreseeable future, says these experts, so start lining up stocks with lots of cash.
Anxiety is now the norm.
The stock markets are supposed to be flat in summer. But they’ve been anything but the last few months. Volatility, it seems, is here to stay.
It gets unnerving. With every piece of good news, the markets pop their heads up. Then a bit of bad news comes flying over, and they dive back into their shell holes.
This uncertainty is entirely justified, says one group of Canadian experts, “as the strength of the economic recovery seems to be questioned at every turn.”
The independent researchers who publish KeyStone’s Small Cap Stock Report aren’t about to lose any sleep worrying about the turmoil in the markets.
Instead, they seek out companies that have what it takes to handle the rough going. Cash, cash and more cash.
These researchers aren’t advising a lot of buys just now, but they’re not giving up, either. They do have three buys among Chinese stocks. They also review two Canadian stocks they like, and suggest that investors be ready to move on them when the time is right.
China’s domestic demand
If the global recovery is being questioned, these experts say, it’s largely because China’s growth is being questioned. China is the engine that is pulling the recovery.
And one lesser-known fact about China is this. Its largest trading partner is not North America, and it’s not the rest of Asia. It’s Europe.
So as government stimulus money slowly but surely dries up and European governments promise to crack down on spending, the whole process will inevitably slow down China’s exports.
This doesn’t mean that this advisory is giving up on China, an area in which it has invested successfully for some time.
“Beijing is betting on growth in response to domestic demand and exports to the rest of Asia. As a result, we continue to largely steer clear of strict Chinese exporting companies, in favour of those servicing domestic or BRIC [Brazil, Russia, China, India] demand.”
A smashing success
On China’s domestic front, one favourite for these experts is Asia Bio-Chem Group (TSX/V-ABC). It makes cornstarch and is getting a major plant in Daqing up to full capacity. The shares fell off from a high near $1.70 during the market correction and now sit at $1.20.
At this price, the advisory likes the “risk-reward profile” and makes the stock a buy and long-term buy. There is no dividend.
A speculative buy now and a long-term buy as well, Boyuan Construction (TSX-BOY) handles commercial and residential building, municipal infrastructure and engineering. Its last fiscal year was “a smashing success,” says the advisory, but the shares can be volatile as they trade at low volumes.
But with a solid growth rate, strong order backlog and a forward price/earnings ratio of less than 4, the advisory likes the stock. It advises investors to place limit orders in the $2.00 to $2.20 range, but not to chase the share price in the short term. It trades at $2.06, with no dividend.
Not least, there is Zungui Haixi Corp. (TSX-ZUN), which makes athletic footwear, casual leather footwear, apparel and accessories. Its most recent quarter turned up an “unusually strong source of cash.”
While it may take a few quarters for Zungui to grab attention in the broader financial markets, says the advisory, its current valuations are “compelling.” Trading at $2.70, with no dividend, it is a strong focus buy.
Trading in New York
Back on the Canadian domestic scene, the advisory is “happy to report” that one of its focus buys from 2009, The Cash Store Financial Services Inc. (TSX-CSF) have been listed for trading on the New York Stock Exchange this month under the ticker CSFS.
This Edmonton firm is a leading chain in the so-called “alternative financial services market.” In effect, it offers advance payday services, mostly in the form of loans.
The advisory recently recommended that clients take half of their position off the table. But they still see long term value in the stock and are sure that the NYSE listing “will help it gain greater exposure in this critical investing market.”
The shares did very well from 2009 to this spring, rising from $8.00 to over $18. The stock trades at $16.65 and yields 2.4 per cent on its $0.40 dividend. Hold for now, says the advisory, and look for long-term growth.
Intellectual cash flow
Finally, the advisory looks to one of Canada’s more venerable tech firms, 35-year old Mosaid Technologies (TSX-MSD). This is one of the world’s leading intellectual property companies, creating semiconductor memory technology and licensing patented intellectual properties in semiconductor and telecommunications.
Many of the world’s top tech firms are among its clients. And it is delivering on the financial side. Fiscal 2010 has concluded, and the results have beaten expectations. Revenues were up and expenses were down.
Best of all, Mosaid has “consistently shown the ability to generate strong cash flow” from its intellectual property portfolio. The almost 5 per cent yield on the $1.00 dividend looks safe, says the advisory.
The advisory makes no specific recommendation yet, but likes “the company’s near and mid-term prospects.”
Fleeing the market is not an option for these researchers. By cautiously counting cash flow, in China and Canada, they look through the volatility to the opportunities ahead.
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