Chinese Stocks: Down, but Not Out

As stocks plunged to the lowest levels of the recession, about 2 years ago, nobody had any idea what was in store for us. But one thing just about everyone agreed on was that China was our meal ticket out of this global mess.

A booming economy, that we all leaned on to support the worldwide recovery, had a GDP surging even faster than its swelling population.

Could This Be Real?

But, as people began to wonder if this Cinderella story could really be THIS good, midnight struck. Accounting scandals began breaking.

Companies like China Media Express and China Agritech were dropped by major auditors, which gave way to major doubts about the stocks. The concept of a "reverse merger" moved to the forefront and pushed many stocks lower.

But others like Rino International, a pollution control company, flat-out lied about 2 major contracts on its financial statements.

Before we knew it, the golden goose started laying rotten eggs.

They Can't All Be Bad

While I have no doubt that more accounting fraud will emerge from China, the same can be said for any nation. So why avoid such a huge source of economic potential because of a few bad apples?

There are no guarantees in the stock market, but with this additional risk, prices of most Chinese stocks have moved lower. That allows for more potential gains on the reputable companies that operate in a country that arguably saved the world from a longer, deeper recession.

Here are a few that might be worth looking into.

KongZhong Corp (KONG - Snapshot Report) is an internet and mobile gaming company. Additionally, they have news, entertainment and other offerings.

The latest quarterly report came in ahead of expectations thanks to a strong online gaming performance. KongZong went on to offer bullish guidance for 2011.

Analysts think that the transition period for KONG is over and began raising estimates on the earnings release. The consensus for 2011 jumped 13 cents, to $0.47. Next year's estimate is up 8 cents, to $0.60. So, projected growth rates are at 2% and 28%, respectively.

The long-term annual rate is expected to be 21%. With a forward P/E of 21 times, that puts the PEG ratio right in the sweet spot, 1.0.

KONG is currently a Zacks #1 Rank (Strong Buy).

Trina Solar (TSL - Snapshot Report) is a solar modules and wafers company. While the company is headquartered in China, it has international operations.

Credited as one of the cost leaders in the industry, the company also has an extremely nimble supply chain, capable of shifting its focus virtually on the fly.

Estimates saw a slight hiccup a couple months ago. But, the 2011 consensus estimate is up 51 cents, to $4.11 over the past 3 months. Next year's forecasts jumped 59 cents, to $4.26, in that span of time. The growth rates are almost for the next year or 2, but with a 15% long-term growth rate, there is plenty of potential here.

The P/E and PEG are extremely low, but if you look deeper, the price to sales is a solid 1.15. Shares are currently a Zacks #2 Rank (Buy).

Baidu (BIDU - Snapshot Report) is the biggest Chinese language search engine.

Earnings are growing at a breakneck pace. This years forecasts are averaging $2.49, which is a 63% jump from 2010. Next year's projections are averaging $3.65, a 46% growth rate. Analysts are expecting a long-term earnings growth rate just over 70%. That is pretty staggering but when some refer to Baidu as the Google of China, it starts to look more realistic.

Shares are trading with a P/E over 50 times, but those growth rates generate an attractive PEG ratio of 0.8 times.

Don't Let a Few Bad Apples Ruin the Whole Batch

Am I saying to sink a bunch of money into these stocks blindly? Absolutely not, but with the raw potential that is in China, you would be remiss to not at least explore some of the companies that the fastest growing economy has to offer.

Bill Wilton is the Aggressive Growth Stock Strategist for Zacks.com. He is also the Editor in charge of the Home Run Investor service

Read the full analyst report on KONG

Read the full analyst report on TSL

Read the full analyst report on BIDU