Masters Series: This Little-Known Company Will Soon Be the World's Largest
Editor's note: Billions of dollars are set to flow into China's stock market.
For early investors, this is a once-in-a-lifetime opportunity.
And as Steve Sjuggerud explains in today's Masters Series essay – adapted from the September issue of True Wealth Systems – it's the best "cheap, hated, and in an uptrend" investment Steve has ever come across...
This Little-Known Company Will Soon Be the World's Largest
I have a prediction for you...
A little-known Chinese company will become the world's largest company within the next five years.
The company is already worth more than $250 billion... That makes it the world's 13th-largest company by stock market value. But you ain't seen nuthin' yet...
When a company starts reaching the size of General Electric or Johnson & Johnson, it's easy to assume that the company is getting too big... You might think that its "high growth" era must be coming to an end soon.
But that's not the case with this little-known company. It's still growing as fast as a tiny startup...
For example, the company's quarterly earnings report came out last month. Sales were up 52% over last year, and earnings were up 47%. That kind of growth is unbelievable... and it won't slow down much in the next couple of years.
With a growth rate like that, you can see why I expect this little-known Chinese company will become the world's largest company – moving from 13th place to first.
What's truly amazing to me is that almost nobody in America has even heard of this company. But basically everyone I met on my trip to Beijing and Shanghai over the summer can't live without what it does – you can't do business in China without it.
You might not have heard of it... but I guarantee you that America's biggest names know all about it. Companies like Apple, Google, and Facebook are trying to copy its products as we speak. In the end, I predict this company will come out ahead of them all. It will ultimately be bigger than all of them.
The tech giant is called Tencent. What's interesting to me is, nobody else in the U.S. seems to care about Tencent – or any other China-related investments – these days. And that's actually great for us... That's exactly what we want to see when we enter a trade.
Today, China is one of the world's most unloved markets (as we'll show) – and yet Chinese stocks have been quietly going up lately.
This sets up a nearly perfect opportunity... We have the chance to buy a market that's 1) cheap, 2) hated, and 3) in a strong uptrend. That's exactly what we want to see.
When a truly great opportunity comes around, you've got to go for it. You've got to go "all in" and make the most of it.
Let me explain this opportunity...
Can a Market Be More Hated Than China?
I'm not sure a market can be more hated than the Chinese stock market is today...
I visited China back in June. We had several whirlwind days of meetings with everyone from institutional brokers to retail asset managers.
My goal going in was simple... to figure out what I could be missing... and to make sure the opportunity in China was really as good as I thought.
I went into these meetings sharing my positive thesis on China. I expected folks would be excited to see me – an American enthusiastic about China's prospects.
The reality was different...
I was the most optimistic person in nearly every meeting we had. The folks we met with were generally dejected... They basically "parroted" the American view that China's prospects weren't good. But here's the thing...
None of their objections held up.
They worried about what you would expect them to worry about. They worried about things like global growth and how the Chinese government might handle stock market volatility.
But to me, all of these worries were really just excuses to be pessimistic.
You see, Chinese stocks have lost a lot of money over the past year, and the mood was gloomy.
For example, China's A-share market fell roughly 50% from mid-2015 to mid-2016. (The A-share market is China's "locals only" stock market.) That decline has created incredible opportunity in China. But no one on the ground can see it.
Recommending Chinese stocks after this 50% fall has been like pitching someone on the opportunity in U.S. stocks in 2009 – or real estate in 2011.
Sure, those were the best times to buy... But no one who had just experienced the bust was willing to listen.
That's what I saw on the ground in China... Even the Chinese don't believe in their market.
This is fantastic. It's exactly what I love to see before investing. When everyone expects the worst, it doesn't take great news to turn things around.
And it's not just what I saw on the ground in China.
Just about any measure of sentiment here in the U.S., too, shows that investors hate China right now...
For example, the shares outstanding of the largest China-focused exchange-traded fund (ETF) are near a multiyear low.
Because ETFs create and liquidate shares based on demand, a falling share count shows investors aren't interested.
But today, investors are more than just uninterested... They're fleeing at a rapid pace. The fund's shares outstanding are down 41% since peaking last June. And they've fallen 54% since their 2013 peak.
That is what extreme fear looks like... That is what a market that no one in the world is excited to buy looks like.
And it's not just that no one is buying... No one is even looking...
A unique way to size up general investor interest is to look at Google search results. The chart below shows search results on "Chinese stocks" from Google Trends. Take a look...
Google Trends data show a reading of 100 at the all-time peak for searches. Other dates give a reading relative to that all-time peak in interest.
As you can see, there is NO interest in Chinese stocks today.
I don't think investors hate any investable stock market in the world more than China today. This is perfect. It's exactly what I want to see. But it's only the beginning...
You see, in addition to being hated, Chinese stocks also offer incredible value today. They're dirt-cheap, and they offer major growth potential, too.
Again, this is a combination you don't usually find. But we have it today.
Tencent – the 13th-largest company in the world – can't keep growing like it has been, right?
Or can it?
Tencent is expected to grow revenue 31% in 2017 and another 27% in 2018 (according to Bloomberg's consensus analyst estimates). Profits should roughly keep pace.
While Tencent's growth is extraordinary, it is an example of the growth potential of the overall Chinese market. China is certainly growing faster than the U.S.
What's crazy is that Chinese stocks, in general, are still dirt-cheap. Just take a look at the chart below. It's the price-to-earnings (P/E) ratio for the Hang Seng China Enterprises Index (HSCEI). This is the benchmark index of Chinese stocks trading in Hong Kong.
Chinese stocks have rallied in 2016. And that has sent the P/E ratio up from an insanely low 6 to a still-incredibly low 8.
I don't know of anywhere in the world where the value is this good.
The only time Chinese stocks were cheaper was back in the early 2000s... And great things happened after that. The HSCEI soared nearly 1,000% from the end of 2002 to the peak in 2007.
That's what is possible when Chinese stocks get going from today's dirt-cheap valuations. And importantly, the next crazy move could be starting now.
No one has been paying attention. So the first two of our criteria are in place. Chinese stocks are 1) cheap, and 2) hated.
The last part is in place as well: Chinese stocks are now in a strong uptrend.
Good investing,
Steve Sjuggerud
Editor's note: Tech giant Tencent is just one of more than a dozen examples of Chinese companies that are flying completely under the radar right now. Some of the fastest-growing companies are trading at huge discounts to their American counterparts. Steve is so bullish about this idea that he put together a full presentation detailing this incredible opportunity. Learn more about this coming megatrend – and which companies stand to make early investors a fortune – right here.