*** One of the most profitable investment ideas I ever had came about a year and a half ago. In the August 2003 issue of Penny Stock Fortunes, I recommended that my readers buy shares of China Yuchai (CYD:NYSE) — a Chinese diesel engine manufacturer — for under $7.50 a share. Sounded boring at the time. I mean, come on: We live in the age of TiVo, PDAs and robotic surgeons. Who wanted to own a diesel engine company?

Turned out quite a lot of people did. You see…

At the time, the Chinese engine market was growing about 20% a year — right along with the automobile market and tremendous growth in the Chinese middle class. It wasn’t hard to see what was happening. China was morphing from an agrarian country to a modern one. GDP was growing almost 10% year. And “boring” companies like China Yuchai were taking off. It was just a matter of time before CYD did too. And as it turned out, it didn’t take long.

I recommended shares of CYD on July 10, 2003. By Aug. 12 (one month later) the boring engine maker was trading for $16.35. One month after that, on Sept. 8, it was trading for a remarkable $19.87. In just under two months, investors had the chance to make 164.9% on this one stock. And anyone who decided to hold on longer could have made even more.

Before it was all over, shares of CYD reached as high as $37.24 — 396.5% higher than my entry price. Not too shabby.

So why was CYD such a successful investment idea? Two reasons. First, it was a fundamentally sound small-cap company with growing sales and net income. At the time, CYD was trading for less than 10 times earnings. Sales were growing at an incredible 97% annual rate. And net income was up an equally impressive 64.4%. And second, China was an emerging market with tons of room for opportunity and growth.

As I said, GDP was growing double digits a year in China. The amount of paved roads boomed from 38,000 kilometers in 1985 to over 160,000 kilometers in 2003. And with that boom, the demand for automobiles soared as well.

In 1985, there were only 45,000 transportation vehicles in all of China. In other words — there was one vehicle for every 10,000 people. By 2003, that number had increased exponentially. As a result, demand for diesel engines rose, too. From the early 1980s to 2002, demand for China Yuchai’s engines increased at a compounded annual rate of 28%.

China was a booming emerging market. There was a ton of money to be made. And as is the case in any emerging market, fundamentally sound and growing small-cap companies like China Yuchai give you the biggest bang for your buck as an investor.

Of course, the China story is old these days (although it has not run its course, trust me). But there are always emerging markets to make money in – especially as a small-cap investor. For instance…

*** India has been a fantastic place to make money in the last two years. The Sensex (India’s main stock index) is up 84% since the beginning of 2002. And small-cap stocks have been leading the charge — big time.

According to The Times of India, penny stocks have been rising at breathtaking rates. Narayan B. Bhatt, a reporter for the newspaper, noted that…”The share price of Indo Green Projects, a finance company, has shot up by a whopping 1,423%…”

He then said…

“A number of pharmaceutical/biotech penny stocks have risen by leaps and bounds. Zyden Gentec has risen by 1,097%, to 71 rupees, from 5.9 rupees, between July and November. Choksi Laboratories was up 851%, to 55 rupees, from 5.75 rupees…Hester Pharma shot up 707%, to 66 rupees, from 8 rupees, and Ahlcon Parenterals jumped 382%, from 5 rupees to 24 rupees.”

And as many of you know, I ventured to India this past June to see the opportunities for myself. I was both in awe and scared at the same time.

I was in awe of the tremendous “we can do it” attitude that almost all Indians I spoke to had. In fact, I remember the man who made my bed every day told me, “Mr. Boric, you come back in 10 years. You bring the family and any friends you want. You will see a different India. Just you wait.”

I believe him.

Of course, everything wasn’t rosy in India. There was tremendous poverty — evident by the beggars on every street…the trash that piled up on the Arabian Sea, creating the worst stench you could imagine…the rabid dogs roaming the sidewalks in search of any food scraps imaginable…and the little kids knocking on car windows for even the smallest handout. That was hard to take. But over the next few years, I expect the situation will improve. And I will return — to see if I am correct!

Until then, remember two things…

The best-performing emerging market each year ALWAYS outperforms the mature U.S. markets. And when a country takes off, small-cap stocks lead the way — just like we saw in China and in India.

By the way, my colleague Jonathan Kolber has an incredible opportunity for investors looking for emerging market-type gains. He is hot on company trading for LESS than $1. The brains behind this company is a Russian scientist who escaped from Russia about 20 years ago. His story is incredible. In fact there are actually movie rights pending. But his story isn’t as incredible as his track record.

This scientist has NEVER filed a patent that wasn’t brought to market. Everything this guys sets out to do is a success. It’s insane.

Right now, this company’s stock trades on the OTC Bulletin Board  market for under $1. Jonathan thinks it could easily hit $10 before all’s said and done. Find out more. Check out his free report…

www.agora-inc.com/reports/VPI/nuclearC00

*** Finally, our very own Angela Roberts just came back from Latin America — where she was checking out a country that could soon be the next great emerging market.

Angela, take it away…

Nicaragua and the Theory of Emerging Markets

Getting to Nicaragua wasn’t hard. It was a two-and-a-half hour plane ride from Miami to the country’s sole airport: a small breezy building with one airstrip, a handful of duty-free shops and a tropical air that wafts in through the open slatted windows.

As my friends and I exited the airport, a driver met us. In a beat-up Japanese SUV, we drove through Managua, the capital. One-room cinderblock shops, roadside vegetable stands and small open-air cafes lined the streets. The streets were filled with people casually milling around and listlessly leaning against walls, catching the shade of thatched or tin roofs.

I was curious: unemployment in Nicaragua has fallen by more than 15% during the past 19 months, yet at 3:00 p.m. on a Thursday, there were people just milling about everywhere. As we drove along, it also occurred to me that Managua is filled with empty cafes. Ten years ago, inflation was in the thousands. Today, it’s around 5%. Considering that Nicaragua’s economy has been strengthening at such a rapid pace, I wondered why no one seemed to be buying anything.

Our car sped along asphalt, then bumpy gravel and eventually dirt roads. Two hours later, I was gazing at the glimmering Pacific, under a warm sun and clear sky, with the rugged and wild landscape of Nicaragua’s hills and forests behind me.

We stayed on the west coast, at Rancho Santana — a dazzling resort complete with privately owned houses, a main clubhouse, pools, verandas, a horse stable and an exceptionally gracious staff. The resort is perched on the Pacific. It’s the same ocean as the one you see driving on Route 1 in Northern California, but amazingly, here you will never see an airplane or a ship. You will get a one-of-a-kind sunset every evening, replete with brilliant oranges, purples, reds and pinks as the sun drops into the ocean in front of you. You’ll also get fine dinners, lazy hammocks, horseback rides on the beach and swimming pools.

The contrast between the capital and the resort is stunning. Nicaragua doesn’t seem to have any money or business, yet it has luxury resorts all along its coasts. The country has a population of about 5 million, yet it receives over 450,000 visitors each year, which means that for every 11 people in Nicaragua, there is one tourist, making tourism the biggest national product. In fact, including the price of a rented car, it costs an average of $30-$50 a day to travel comfortably around the country. Meals range from $1.50-$4. The potential that represents made me begin to think of emerging markets and the potential they hold for rapid growth and quick returns.

Basically, you can split an emerging market into three stages: There is the accelerated growth market, like in China, which has already seen the largest part of its economic boom. There is the completely undiscovered, investment-starved market stage that hasn’t yet experienced the beginning of an economic boom and doesn’t have much hope to start one anytime soon. And then there is what lies in the middle: a market that is just about to take off, that is cheap now, but in a few years will be soaring. Countries like Nicaragua fall somewhere in that spectrum. The trick is to find one that isn’t as overvalued as China (having just experienced its boom) and to find instead one that is just starting to brew, just about to take off.

There are two things that economically depressed countries need to have in order to develop: government stability and foreign investment. When those two things happen, the result is an emerging market with substantial investment potential. And while investments in emerging economies have a high level of risk, they have an equal possibility of a high return. And that’s the exciting part. The volatility is balanced by the potential to get in on the early stages of a country’s economic growth.

Similar to the concept of small-cap stocks, emerging markets offer the largest growth potential. You can invest in a stock when it’s small and let your profits grow as the company grows. Likewise, you can invest in a country that is underdeveloped and follow the same upward path to profit.

Nicaragua is making major efforts to attract tourists and foreign investors. The government recently enacted the Foreign Investment Law, offering 100% foreign ownership in businesses and tax exemptions for up to 10 years, in some cases covering 100% of income taxes. With so much possible potential for growth and profits, I decided to find out where Nicaragua falls in that evolution of development.

But first, I soaked in some sun and lounged on the clubhouse veranda. That night, I danced the merengue, talked politics with local Nicaraguans and met Americans who have built vacation and retirement homes there. When you realize that the cost of building is approximately $100-$120 per square meter, while in Costa Rica it is between $250-$400 per square meter, you can see why many foreigners prefer Nicaragua over its more popular, and more expensive, neighbors.

All this fun brought me to learn something else about Nicaragua. For a country that is so often overlooked, it has a lot to offer, and the local business owners are promoting tourism, big time. Real estate is experiencing the beginning of a boom, but what about capital markets? I had to ask myself: What are the chances to make any money investing in Nicaragua’s economy?

Bordering Costa Rica and Honduras, Nicaragua is between the Caribbean Sea and the Pacific Ocean. The region is beautiful, but the lack of business and employment, a struggling political landscape and burgeoning economy add up to a heavy burden.

It wasn’t until 1990, in a free election, that a democratic and aggressively pro-business government was implemented. It transformed Nicaragua from a socialist, dirt-poor country to a democratic, aggressively pro-business, dirt-poor country. But at least now it has potential for economic growth.

So far, Nicaragua’s beauty is attracting foreigners as a vacation destination and retirement location. But as far as investment opportunities go, it just isn’t there yet. It is at the infancy of the emerging market evolution that China has already passed. Nicaragua is only in the infancy of that market evolution, but it will be another few years till it really gets going. Most recent statistics show that while Nicaragua’s revenues are $726 million, its expenditures surpass that, at over $900 million, with a total debt of over $5.8 billion. The government has just begun to stabilize, but the general economy has not yet begun to reap the
benefits.

At the moment, foreign investments are in real estate, but they aren’t yet in businesses or capital markets. Americans are buying property, not stocks. While Nicaragua isn’t fit for investors yet, when the economy starts growing and Nicaraguan investments start profiting, I’ll let you know.

Best regards,

Angela Roberts

December 10, 2004

P.S. By the way, I have found another Latin American country that does fit the emerging market profile with an economy that is about to take off. In fact, this country is at the perfect stage for investment — right between Nicaragua and China on the emerging market development timeline. Its market is booming as we speak and is about to further explode.

Its market index has been overshooting the S&P 500 by three times for the past two years. But what’s just around the corner is even better. I’ll have that for you in the January issue of Penny Stock Fortunes (www.psfortunes.com), along with a great small-cap company in that market that you can invest in right now. The company has growing revenues and is in an industry that directly benefits from the growing economy. It also has a stock price that has risen over 50% over the past three months and, as this market emerges, will have an even longer way to go up the chart. I can’t wait to tell you all about it.

Nicaragua and the Theory of Emerging Markets was originally featured in the Penny Sleuth.