The One Hard-To-Reach Industry Where Penny Stocks Rule

Apr 10th, 2008 | By Jim Nelson | Category: International, Penny stocks

China’s growth is no longer breaking news. It becomes exceedingly clear that China is going through a period very similar to what the Western world saw at the turn of the 20th century.

Sure, we could give you the typical facts. You know China will be the largest economy in so many years. The Chinese middle class is growing at such and such a rate. We could fill hundreds of pages with this information. But you don’t need us to go through that.

No, instead of spewing out these facts, we are going to let you in on one very overlooked aspect that Wall Street has been dying to get in on, but can’t. Today, you can beat Wall Street to it… And it can’t do anything about it…

Sometimes Wall Street Does Get It Right

As you know, China is growing in every way. Investors have been jumping into just about every industry they can think of.

Just look at the Chinese steel industry. At the beginning of 1996, monthly steel production in China was around eight million tons. By the start of last year, the country was producing over 38 million tons. China expects to turn out 36% of the world’s steel this year:

It’s pretty obvious that with the mass growth of cities in the country, steel is a great investment. Many investors have made plenty of money on that growth, and many more are still doing so. But now it has become a bit too mainstream for our tastes.

Another industry that has done quite well in China is automobile manufacturing. As more and more people travel between home and work in China, the demand for personal transportation is going through the roof. China is now producing over eight million cars per year:

Even though the steel and automobile industries should continue to grow, it’s too late to get in now. Wall Street already knows about these industries. Sure, you may find a couple of 50% winners. But we are looking for the huge gains that only penny stocks can deliver.

Today, we have one growing opportunity that, so far, isn’t exploited…health care.

The Health Care Revolution in China

Chances are you have taken an antibiotic, swallowed a vitamin or popped an Advil sometime in your life. We take them for granted. We’ve been exposed to simple health care like this our whole lives. But for hundreds of millions in rural China, this is foreign.

That’s starting to change…

Recently, the Chinese government is finally starting to require better education on modern medicines in many small farming towns in the far-off areas of China. It’s already having an effect.

Over the past decade, the Chinese pharmaceutical industry has grown, on average, 20% per year, to $97.8 billion…the nutraceutical industry is valued at $12.5 billion and growing…even the health beverages market is up to $5 billion per year.

So the question remains: Why hasn’t Wall Street already exploited this? The answer is twofold.

First, the Western world cannot break down the wall surrounding the Chinese health care industry…meaning Pfizer and company are willing to front millions upon millions of dollars to get their chances at this lucrative market, but the Chinese government won’t allow it.

Even though China entered the World Trade Organization in 2001, the country just isn’t playing fair with foreign companies.

You have probably heard this story many times over the past decade. A large U.S. pharmaceutical company tries to set up shop in China. China says no. Instead, a Chinese company rips off its large Western counterpart and manufactures the drug both cheaper and with approval from its government.

After several years of intense battles, U.S. pharmaceuticals make up only 10–20% of the Chinese market.

The second reason is size. Many investors — realizing that China is still many years away from treating foreign companies fairly — have tried to invest in China-based companies. Unfortunately, there aren’t any large Chinese pharmaceutical companies for Wall Street to invest in. The average annual revenue for the top-tier domestic drug makers is about $100 million, which is nothing compared with Pfizer’s $48 billion per year.

This gives us penny stock investors a niche way to exploit the mass growth of China’s pharmaceutical industry. With between 3,000–6,000 small Chinese companies, the pickings are plentiful.

Sincerely,

Jim Nelson
April 10, 2008

P.S.: As I was researching this industry, I found one company that is absolutely amazing. It’s a small Chinese drug maker that has seen its revenue grow 15-fold over the past six years. The next few years should be even better.

Jim Nelson

Jim Nelson is the managing editor of Penny Sleuth. He has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach. Like Greg Guenthner, Jim also contributes to Penny Stock Fortunes on top of bringing you the Penny Sleuth every weekday.

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