October 18, 2011 (Chinavestor) In a recent letter to Chinavestor Premium Members, we articulated a need to seek stocks that are safe during turbulent market times. We said "Stay vigilant in bumpy markets. The European debt /euro crisis is going to stick around for some time. We'll have some great updays - time to lock in profits - and some big downdays when the bottom falls out.
Here is my advice. Get stocks that are defensive - stocks that are either of low beta (low risk) and/or stocks that have outstanding fundamentals."
The following table sorts Chinese stocks we regard investment grade, companies with market cap of over $250 million and with sufficient trading volumes, by beta. Chinese telecoms, energy, and some technology stocks are best when market volatility index is high. Low beta stocks of interest from the chart include China Mobile (NYSE:CHL), Huaneng Power (NYSE:HNP), NetEase.com Inc. (NASDAQ:NTES), Simcere Pharma (NYSE:SCR), Sinopec (SNP) and Petrochina Co. Ltd. (NYSE:PTR). Some of the most risky stocks of these days are solar stocks like Trina Solar (NYSE:TSL) and Yingli Green Energy (NYSE:YGE), and along with China Eastern Airlines (NYSE:CEA) and Aluminum Corp. of China (NYSE:ACH).
By definition, beta is a widely used measure to assess a volatility of a stock relative to the market. When beta is 1, the stock moves perfectly in-line with the market. When beta is above 1, the stock is move volatile than the market. Conversely, when beta is less than 1, the stock is less volatile than the market.
Investors know that diversification is key in stabilising portfolio performance. For this reason low beta stocks are a MUST. Chinese telecoms, China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU) are a good way to hedge against the market. While their upside is limited, they can provide a cushion at a time when investors need it most.
China's largest independent power generator, Huaneng Power (NYSE:HNP), is another low beta stock. This is in sharp contrast to Harbin Electric (NASDAQ:HRBN), another utility. Another plus is that Huaneng Power (NYSE:HNP) looks good on valuation as well.
Technology stocks are volatile with some exception. NetEase.com Inc. (NASDAQ:NTES) has been relatively stable lately and may offer upside like the rest but at a most manageable risk level. Shanda Interactive (NASDAQ:SNDA) and 51job Inc. (NASDAQ:JOBS) are in the same category. But to achieve high upside potential, investors have to get to risky territory. Sina Corp. (NASDAQ:SINA) and Sohu.com (NASDAQ:SOHU), not to mention Baidu,.com Inc. (NASDAQ:BIDU) offer huge upside potential, but at a cost.
Large integrated oil companies are raltively safe on the list, stocks like Sinopec (SNP) and Petrochina Co. Ltd. (NYSE:PTR).
Venturing over to the most risky assets, solar stocks are clearly on the top. Except for China Eastern Airlines (NYSE:CEA), a Chinese airliner that is extremely on the move. This company is China's second largest airliner with a hub in Shanghai. The company controls over 50% of the sky above China's financial capital. Outlook is great but again, it comes at a price.
Solar stocks lost 80% of their value in just one year. Trina Solar (NYSE:TSL) and Yingli Green Energy (NYSE:YGE) are on top of the risky list but the rest of the sector is just as volatile. Again, high risk comes along with high return... Investors should not write off these stocks.
Resource stocks have suffered dearly since 2008 and it's clearly reflected in the stock price of Aluminum Corp. of China (NYSE:ACH). But this is the third largest aluminum maker in the world and as such will not go anywhere. The stock is a cyclical stock that's at the low end of its cycle. Value investors should pay attention to this!