Finding penny stocks capable of doubling or tripling in value is not the hard part. It’s finding the ones capable of reaching quadruple digits that’s difficult. To do that, you need to first find an investment climate that can produce such results.

Unfortunately, today’s market isn’t presenting nearly as many of these opportunities as it used to. But we scoured the enormous — and growing — universe of penny stocks and found one with the potential of a blue chip.

Transition from “Developing” to “Developed”

“China” was the buzzword on Wall Street over the past few years. This recession is putting a damper on that, though. No one is jumping in on Chinese stocks quite the same as in 2006 and 2007. That fact alone has forced many of these stocks below their true value. But that alone is only a small fraction of the story.

You see, China is still a mega-growth story. It’s not going to churn out double-digit growth like it has been this year or next. But it’s still a major investment opportunity if you know where to look.

One of the most obvious places to find a solid investment is Chinese education. As any country transitions from “developing” to “developed,” its people inevitably transition from peasant to white-collar jobs. That means there will be a huge stream of students flooding colleges and trade schools.

There are plenty of easy ways to get in on this transition. New Oriental Education & Technology Group Inc. (NYSE: EDU) is probably the most obvious. While it has only a $2.4 billion market cap, it is still one of the largest publicly traded Chinese education plays on the market. The company has 47 schools, 257 learning centers and countless bookstores.

Another cheap, easy way to play China’s educational growth story is ChinaEdu Corp. (NASDAQ: CEDU). This small play (only $134 million market cap) runs 12 universities and is still expanding. This is another way for you to double or even triple your money. But as promised, we want more. The growth potential in this field is astronomical.

Dominating the Recession-Proof Testing Market

We found a backdoor play on this fast-growing market. This company is not a pure education play, which saves us from making a huge mistake in this recession. We’ll get to that in a minute.

Instead, it is the market leader in testing services. It runs computer-based testing operations for the government, corporate industries and, of course, academic institutions. The company’s testing platform consists of everything these customers need.

For instance, 11.4% of the company’s revenue comes from the Securities Association of China, which is the People’s Republic version of the SEC here in the U.S. The Securities Association pays this tiny Chinese play for its employees or potential employees to take regulation tests on the company’s systems. The number of tests and regulations has only gone up over the past several decades as the Far East superpower continues to open up to foreign investors.

In academia, the company is also a huge player. Nearly all students have to take tests like the SATs or ACTs here in the U.S. just to get into school. They also have to take placement tests to determine what level of schooling they are at. This is like when you take a Spanish test during freshman orientation to see at which level you should start.

All these tests add up, and the industry is continuing to blossom. So why are we looking at this backdoor play into education?

While this industry continues to grow at a fast pace during this recession, people are taking a few years off school to work. When that happens, schools don’t get paid. But this company does. You see, it doesn’t matter where these would-be students work: There’s a good chance they’ll have to take a test at some point. This bodes well for the company. It gets paid no matter what: if the person is in school or applying for work.

It’s as simple as that. So why do we think this is such a huge opportunity? Simple: The company is growing at record speed even though the rest of the economy is sinking. Once we hit a recovery, or at least when investors come back into the market, this one will be huge.

As you can see in the accompanying chart, the number of exams delivered took off last year as the rest of the global economy collapsed. Now is the time to buy, before anyone realizes it.

Sincerely,
Jim Nelson

July 7, 2009

Jim Nelson

Jim Nelson began his investing career during the tech boom at age 14 – with purchases of Starbucks and AOL. Early inspiration came from an old Tweedy Brown whitepaper: “What Works in the Market.” He graduated with a degree in Political Science from Pittsburgh University, Nelson focuses on income investing, including dividends, covered calls, and fixed-income. Additionally, he covers MLPs, ADRs, utilities, consumer staples and tobacco. Nelson is the managing editor of Lifetime Income Report.

View articles by Jim Nelson