Another Chinese Moonshot

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Technically, the Chinese small-cap sector has broken out to the upside, providing some eye-popping returns in the sector over the past few weeks. This week’s Global Bull Market Alert pick targets yet another U.S.-listed Chinese microcap stock, China Yuchai International Limited (CYD). Here’s why I think CYD will move up sharply over the coming weeks.

First, although China Yuchai International Limited, through its subsidiary, Guangxi Yuchai Machinery Company Limited (GYMCL), is primarily involved in the decidedly unsexy sector of manufacturing diesel engines for construction equipment, trucks, buses, and cars in China, its financial results last quarter make it look more like that of a red-hot, high-tech play. Earnings soared 292% last quarter on a 34% jump in revenue in Q3. And CYD is getting better at what it does: its after-tax profit margins jumped to a record 15.3%. 

Second, CYD has just announced a couple of high-profile joint ventures with both Caterpillar (China) and Jirui United Heavy Industry. This news has helped the stock break out of its recent trading range. Nevertheless, the stock remains a bargain in comparison to its U.S. rivals. While the market cap of rival Cummins, a manufacturer of diesel engines and related technology, equals its annual revenue, CYD’s market cap trades at one-fourth that level. Meanwhile, Cummins’ revenue is down 31%, while CYD’s is soaring.

Third, although I am skeptical of the credit bubble that is being blown in China, that’s no reason to stand in the way of a profitable trade. There is a lot of short momentum in China with Asian stock markets jumping this morning as the Chinese government announced that exports jumped nearly 18% in December, after 13 months of declines.

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So, buy China Yuchai International Limited (CYD) at market today, and place your initial stop at $14.50. I expect this to be a quick mover for quick profits, so if you want to play the options, I recommend the February $17.50 calls (CYDBW).

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) jumped 3.7% last week, as it benefited from a broad-based upward push in emerging markets. I am keeping this at a HOLD for now, but raise your stop to $45.50, with the expectation that you’ll be stopped out of this long-held, 75%+ gainer on any modest pullback.

Market Vectors Brazil Small-Cap ETF (BRF) jumped a relatively modest 2%. This leveraged bet on Brazil remains a BUY. Tighten your stop to $45.50.

The iShares MSCI Chile Investable Market Index (ECH) jumped an impressive 8.37% last week, and hit yet another high of $59.38 on Friday. ECH remains a BUY. Tighten your stop to $54.00.

The iShares MSCI Israel Cap Invest Mkt Index (EIS) jumped 6.4% last week, and is now flirting with two-year highs. An extremely steady performer, Israel is one of my favorite global markets and remains a BUY. Tighten your stop to $54.00.

SPDR S&P Emerging Markets Small Cap ETF (EWX) hit a record high last week, rising 4%. With January traditionally a strong month for emerging markets, I am moving EWX back to a BUY. Tighten your stop to $47.50.

India’s ICICI Bank (IBN) dipped slightly during the past week and remains a HOLD. To protect your downside, keep your stop at $34.00.

UltraShort Euro ProShares (EUO) ended the week flat, as the depreciation of the euro abated. This won’t be a fast mover like your recent Chinese microcap picks, but it remains a BUY.

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iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) soared past the $80 mark last week, before pulling back. The Philippines government announced plans to import sugar duty-free in a bid to tame high domestic prices, showing how governments are struggling with the sugar crisis. Uptrend intact, SGG is a BUY. Tighten your stop to $71.50.

Trina Solar Ltd. (TSL) jumped 12.95%, hitting a record high of $60.96 on Friday. You’ve already profited handsomely (and quickly) on the options, but I’ll be looking to buy more on any pullback in the stock. TSL remains a BUY. Raise your stop to $54.50.

Vimpel-Communications (VIP) jumped 9.8% last week, as it successfully tested the lower end of its trading range. With momentum strong in emerging markets, I am moving VIP back to a BUY.

P.S. With the help of global financial stimulus, a number of global markets have rallied from their lows of 2008, providing investors who were invested in the right markets at the right time with healthy returns. Although the question remains — how do you become one of those investors? For an answer, I encourage you to attend The World MoneyShow in Orlando, February 3-6, 2010, at The Gaylord Palms Hotel and Convention Center, to hear more than 60 leading experts. They will be on hand to provide you with insights and recommendations to help you identify emerging opportunities around the globe. I hope that you will join me there! Visit The World MoneyShow Orlando to register FREE today!

P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.

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