The 3 U's Approach to Investing in China Stocks

Wednesday, June 2, 2010, 4:04 PM ET -

by Dutch Trader

As a long-term contrarian value investor, I am always looking for growth stocks that are fundamentally mispriced. My 3U approach: Undervalued, Under-owned and Unloved plays an important roll in my investment decisions.

That is why I prefer OTC stocks. The four stocks in this article: China Kangtai Cactus Bio (OTC BB:CKGT), Artificial Life (OTC BB:ALIF), Lotus Pharmaceuticals (OTC BB:LTUS), Skypeople Fruit Juice (NASDAQ:SPU), may be big winners in the future and have the potential to list on a major exchange. One, SPU, has already uplisted.

The first company I like is China Kangtai Cactus Bio (OTC BB:CKGT). The company is a leading grower, developer, producer, and marketer of cactus-derived products. Cactus has been used since ancient times as both a food and as a medicine for its health benefits. A powdered form of Nopal has become popular in modern times as a treatment for a variety of metabolic, digestive and heart problems. I think this company can capture a significant portion of the natural health industry in China and abroad with its cactus products.

Another company that I like, Artificial Life (OTC BB:ALIF), is a survivor from the ashes of the internet bubble. This company is a leading provider of broadband 3G content and technology solutions in the world. The company develops and sells a wide range of mobile applications for 3G, 3.5G and 4G network-enabled mobile (smart) phones. With the strategic investor 3M on board an expansion into other business areas could be in the cards. The company's Mobile game downloads for iPhone and iPad applications have been encouraging which achieved many #1 rankings around the globe. Also, the upcoming launch of various iPhone games in Asian languages should give revenues a boost.

Lotus Pharmaceuticals (OTC BB:LTUS) is a growing developer and producer of drugs and a licensed national seller of pharmaceutical items in China. Because of uncertain dilution issues the stock trades at depressed levels. I feel that dilution can be kept at bay due the structure of a recent financing arrangement (Standby Equity Distribution Agreement). This is basically a type of stock line of credit Lotus can tap in addition to its cash flow when it requires funds. The end result will be a gradual, as opposded to an immediate, increase in the share count.

Finally, I believe Skypeople Fruit Juice (NASDAQ:SPU) has a bright future. Skypeople is a highly integrated producer and distributor of fruit juices, fruit juice concentrates and other fruit and vegetable products. They just did a public offering to speed up their growth initiatives. If they can brand their juices like some famous beverage producers did many years ago we could be looking at the new Coca Cola.

Disclosure

Positions: Long ALIF, CKGT and LTUS at time of this article

About "Dutch Trader"

I am a Dutch contrarian investor that runs a ficticious mutual fund called TarPro Investment Fund (TPIF) on www.marketocracy.com

The fund seeks long-term growth of capital by investing primarily in companies with market capitalization less than $250 million. Due to this sector's size and limited research coverage, there is more opportunity to find pricing inefficiencies. Therefore, the potential for higher returns, commensurate with a higher level of risk, is greater than for any other sector of the equity marketplace (domestic and international). The fund invests in stocks that are trading for less than the estimate of the company’s worth. My philosophy is is to focus on Unloved, Under-owned and Undervalued companies. For more, please visit http://chinainvestorking.blogspot.com/

This blog entry is for information purpose only. All statements and expressions are the opinion of the owner and are not meant to be a solicitation or recommendation to buy, sell, or hold securities.