What You Need to Know Before Investing In China

So far, March is starting on a better note than either January or February. The U.S. indices jumped over 2% on welcome news from China.

Today, the People’s Bank of China (PBOC) announced that it is easing reserve requirements for lenders. This is the fifth time in the past year that the PBOC has done so. In a way, this policy theoretically helps to stimulate China’s struggling economy. The less that lenders are required to hold in reserve, the more money that is freed up for other uses.

At first glance, things appear to be looking up for China. Or, at least, that’s the stance taken at the recent G-20 meeting in Shanghai. Last weekend, many of the world’s top finance ministers came to the conclusion that the financial markets worry too much. So instead of openly discussing how major countries, like China, are systematically devaluing their respective currencies, the finance ministers merely agreed to inform one another of all major changes in currency policies to avoid surprises that could shake up global financial markets.

I respectively disagree; it’s going to take more than this to shore up the world’s largest economy. In 2015, China’s economy grew at the slowest pace in a quarter century, with a shrinking manufacturing sector and a tough labor market not helping matters. Separately, China also announced today that it plans to lay off between five and six million state workers over the next few years. All the while, the Chinese yuan continues to slide in value against the dollar.

The bottom line is that China still has its work cut out for it. And when it comes to Chinese stocks, true bargains are few and far between.

Top Stock: TAL Education Group

However, if you know what to look for, there are a few diamonds in the rough. In my Ultimate Growth newsletter, I currently recommend five Chinese ADRs (American Depository Receipts). One of these stocks is TAL Education Group (XRS), which is a major player in China’s booming tutoring and test prep industry.

TAL Education Group is a leading provider of K-12 after-school tutoring services in China. The company offers tutoring in subjects like mathematics, English, Chinese, physics, chemistry, biology, history, political science and geography, as well as preschool classes. It operates 300 learning centers in 19 key Chinese cities, including Beijing, Shanghai, Guangzhou, Shenzhen, Xi’an, Wuhan and Zhengzhou.

In the third quarter, TAL Education Group’s sales rose 43% year-over-year to $142.2 million, while earnings per share increased 11% to $0.20. The consensus estimate was for earnings of $0.15 per share on $136.87 million in sales, so XRS posted a 33.3% earnings surprise and a 4% sales surprise.

Looking forward to the fourth quarter, the company is expecting total revenues between $166.3 million and $168.8 million, or a 35% to 37% year-over-year increase. Given the general slowdown that’s weighing on most industries in China, that growth is especially impressive.

Since I added XRS to the Ultimate Growth Buy List in December, the stock has risen nearly 11%. I see plenty of upside from here, so I recommend XRS as an A-rated Strong Buy in Portfolio Grader.

This wraps up my coverage on China (for now). Tomorrow, I will provide my analysis on another major player on the G-20—Japan, and I’ll feature my top stock recommendation from that country.

Until then,

Louis Navellier

Louis Navellier

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