If you haven’t heard about Peter Schiff by now, he’s probably very disappointed. I listen to his podcast every now and then, and read articles that he contributes to websites on occasion, and he is trying so very hard to strike while the iron is hot, and to get new clients when US investors are terrified and most ready to accept his view of a black and white world.
Just to briefly summarize what I hear from his commentary and his broad statements: The number one point is that you MUST get out of the dollar. He predicts that the US dollar must fall, gold and silver must rise up, and that other fiat currencies will also fall, but less than the dollar, and foreign dividend-paying stocks will outperform other investments. He gets a lot of credit from some folks for foreseeing the problem with, well, credit in his “Crash Proof” book, and he’s more than willing to take that credit.
I don’t know whether or not he’s right about the future, of course — he may well be, and I have some sympathy for many of his views, but I’m usually pretty distrustful of anyone who is as certain as Schiff is — about anything. Then again, “on the one hand, on the other hand, this might happen” kind of talk doesn’t get media attention or bring in new clients. That’s not meant to be a criticism of Schiff necessarily, that’s how the business works — he’s a broker, brokers are salespeople, and his product is an opinion and the ability to help you invest in stocks based on that opinion.
His brokerage firm, Euro Pacific Capital, exists primarily to help clients buy and sell recommended stocks on international exchanges — he himself would probably tell you that if you just want to buy ADRs of foreign companies or buy physical gold, there’s probably not much of a reason to pay for his services — the value he or similar brokers might add is in helping you hold your money outside the US dollar or to buy foreign stocks on their home exchanges (you can do that independently, too, though it’s certainly more complex than buying US stocks). The other major investments he typically talks about, aside from foreign dividend-paying stocks, are precious metals, and his firm will also help you buy gold and silver either physically or in certificates (I think they use the Perth Mint).
So that’s the basic rundown on Schiff — I won’t go into the debates about him, or the media efforts to judge his performance (which is pretty tough, since he doesn’t just publish a recommended list, he has a network of brokers who handle client accounts, so I’m sure his clients have had widely varying performance individually over the past couple years). Suffice to say that he is a bit of a lightning rod, attracting both adulation and criticism in large helpings.
I’ve written about some of his “picks for 2009” before … I sniffed out one of his favorites here back in February (turned out to be DUET Group, info is here), and one of them a few months earlier (That was China Skyworth, info is here), and the folks on the forum chatted a little bit about the other three in the list he was teasing back then.
But today, Mr. Schiff has a few more stock ideas to sell you — and he’ll tell you what they are, but first you have to call up and talk to a Euro Pacific Growth broker, and sit through a sales pitch on their services … which you’re welcome to do if you like, but I think I can come up with the three names they’re teasing here for you. We’ll cover at least one of them today …
Here are the clues provided:
These companies are all expected beneficiaries of the big boom in Chinese infrastructure spending — call it a “stimulus” or call it “more of what they were doing anyway,” China is clearly still building like gangbusters on stuff like roads, railroads, water treatment and transport, pipelines, etc. Some of the real estate speculation might have come out of the Chinese market, but the public infrastructure building appears to be accelerating. In Schiff’s words:
“We believe the 3 companies listed below will greatly benefit from the Chinese stimulus plan. They are a sound way to take advantage of these increased government subsidies.”
So … specifics, please?
“Company #1 is a railway infrastructure state-owned enterprise in the People’s Republic of China. It was originally founded in 1948 and is headquartered in Beijing, China. The company offers transportation systems construction services. It builds railroads, roads, tunnels, and bridges and is the largest state-owned construction enterprise in the People’s Republic of China.
“The company operates in five business segments: Infrastructure Construction; Survey, Design, and Consulting Services; Engineering Equipment and Component Manufacturing; Property Development; and Other Businesses. The Infrastructure Construction segment designs and constructs railways, highways, bridges, tunnels, metropolitan railways, buildings, irrigation works, hydroelectricity projects, ports, docks, airports, and other municipal works.”
There are two reasonably close matches for this, the two biggest state-owned contracting firms in China, China Railway Construction Corporation (often referred to with the abbreviation CRCC), and China Railway Engineering (often referred to as China Railway Group or CREC). They are quite similar in many ways, both huge state-controlled firms that have huge contracts to build and maintain railroads and have branched out into almost every other kind of public construction both in China and in other countries, particularly in neighboring countries and in the Middle East, but the solution to this particular teaser, and the stock that must be Schiff’s pick, is …
China Railway Construction Corporation (ticker 1186 in Hong Kong, unsponsored 10:1 ADR trades at CWYCY on the pink sheets in very low volume).
Neither of these stocks matches the chart provided in the newsletter, but this looks to be as close as we get — if I happen across a better solution, I’ll share it with you. CRCC was indeed born in 1948, though back then (and until about two years ago) it was essentially a state agency tasked with building and planning the Chinese rail network. It was spun out as a partially privatized company a couple years ago, though it’s still controlled by the government and the shares are largely owned by Chinese banks, and they went public in mainland China (A shares) and in Hong Kong (H shares) pretty recently. The shares that US investors can buy, if you like, are the H Shares that trade in Hong Kong, and they’ve only been trading there for about a year.
The reporting is not terribly timely in these shares, which won’t surprise investors in foreign markets — we expect to see the 2008 final earnings release probably in the next week or two, but until then you’re looking at numbers from September of last year. They provide what information is available on their website here.
And yes, if there is to be a beneficiary from the large spending projects that China plans, including high speed rail and other passenger and freight rail improvements, along with all the other transportation construction, CRCC is one very logical beneficiary.
China Railway Construction went public in Hong Kong in March of 2008, and one interesting note is that you can buy the shares today for almost exactly what you would have paid if you were in on the public offering, just above HK$10. The shares closed last night in Hong Kong at HK$10.56, so a fair price for the 10:1 ADR this morning would be US$13.62, but volume is extremely light so the price could easily move dramatically for the ADRs (or it might not trade at all in a given day). I haven’t seen a lot of analyst research on this one, but the most recent reports I’ve seen over the past couple months gave a sell and HK$8.80 price target (Citi) and a buy and HK$11.20 target (Macquarie).
CRCC is a little tough for US investors to research when it comes to the financials, but they do generate a lot of news — they have had a ton of contract bid wins in recent months, from domestic rail and highway projects to a Saudi Arabian rail line. They had about US$60 billion in contracts last year, and the government is certainly projecting much more railway and transportation construction this year.
It looks like, if you can annualize their most recent few reported quarters, the company would be on track to earn .28 Renminbi per share, which would give a trailing PE ratio of about 33 (current Yuan Renminbi value of the HK shares is about 9.30) — that’s from less than a year’s reported earnings since their IPO, and certainly this is a growth story if it’s anything, but it doesn’t look, on the surface, like it’s particularly cheap.
I can’t tell you whether or not this is a good investment, or whether the government will let the company be run for the benefit of external shareholders, but I can tell you that this must be Schiff’s pick. Interestingly, I don’t think it currently pays a dividend, which generally goes against Schiff’s tendencies, but . You can see their fancy “roadshow” presentation of results from last Fall here if you’re interested in digging more deeply.
There is one Chinese railway stock that’s easier for US investors to buy, by the way, is Guangshen Railway — that’s an operator, not a construction or contracting firm, and they do pay a small dividend (2-3% or so). China rail was a hot topic for a while, with lots of folks looking for easy ways to invest in that sector during the real China investment boom of 2007, but it looks like the investment that folks were seeing back then continues. The government knows that they still need a much more robust transport network to the movement handle goods and people (though it’s already far better than India’s or Brazil’s, for comparison), and that rail is often the most efficient transportation … and it doesn’t hurt that building roads and railroads keeps a lot of people employed — and employed people don’t demonstrate in the streets.
The other consideration, for those making an argument that this (or any Hong Kong or Chinese stock) is a good way to get away from the dollar, is that the Hong Kong dollar is pegged to the US dollar and doesn’t really fluctuate, and the Chinese Yuan Renminbi, while it has been floating more against a basket of developed currencies, is also certainly far from being a currency that floats based on the free market — China has routinely kept the value of its currency low to boost exports in the past, and the “revaluation” of the Yuan is probably not a priority for them at the moment, despite continued (albeit pretty tepid) international pressure on that front. So the stocks of these companies might rise or fall, or may perform much better than US stocks, but I wouldn’t assume that you’ll necessarily benefit from appreciation of their currency.
I’ve got to wrap it up here so I can send this out to y’all in a timely manner today, but I’ll get to the others, an agriculture company and a wind power company, as soon as I can — probably tomorrow morning.
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