The World's Cheapest Market – And I'm Not in It

I hate it...

Outside of Russia (which is always cheap), what I will share with you today is the world's best value in stocks... But I won't allow myself to buy it – yet.

Why not?

I will explain all the details... But first, let me tell you about this great value.

Then, I will tell you when I want to get back in...

The world's best value in stocks is in a specific country stock index.

It holds many of the largest companies in the world. In some cases, these companies are even bigger than their U.S. counterparts – based on simple measures like assets and sales.

Why is this index the world's best value today? Let's take a look...

Two of the most classic measures of stock market value are:

  1. The price-to-earnings (P/E) ratio, and
  1. The dividend yield.

The P/E ratio compares an investment's share price to its earnings per share. The dividend yield shows how much a company pays in dividends each year, relative to its share price.

This stock index is trading at a trailing P/E ratio of 8.2. And its dividend yield is 4.2%.

For comparison, the benchmark index for the U.S. – the S&P 500 – has a trailing P/E ratio of 21. And its dividend yield is 1.8%.

Why is this important? It tells us in rough terms that we have an incredible amount of upside potential here...

For the cheap country to catch up to U.S. valuations, it would have to rise somewhere between 133% and 156%.

Take a look...

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(To understand how this works for the dividend yield... If a stock is at $10, and it pays 40 cents in dividends, that's a 4% dividend yield. If the stock rises to $20, then a 40-cent dividend is now only a 2% dividend yield. So if a stock rises by 100%, the dividend yield falls in half.)

So what country am I talking about?

What index of massive international companies needs to rise by 133%-plus to catch up to U.S. valuations?

I'm talking about the Hang Seng China Enterprises Index (HSCEI).

It is a simple index. It basically holds the 50 largest Chinese companies that trade in Hong Kong. (That's not its official mandate. But that's about what it does.)

Take a look at the HSCEI's top 10 holdings and their valuations. I've also included the size of these companies, based on their market capitalization...

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For comparison, Disney's market value is $167 billion. General Electric's market value is about $110 billion. These Chinese companies are some of the largest in the world... And they're incredibly cheap right now.

If you are familiar with my work, you already know this story...

You know I strongly believe we have huge upside potential in Chinese stocks for the long term.

The short term is where the problem comes in...

Chinese stocks are in a downtrend. I have hit my trailing stops on all my China recommendations in my True Wealth letter. I am out. And if any of my stops are triggered in my China-specific newsletter, I will follow them – no questions asked.

When will I get back in? When the uptrend returns.

When will that happen? I don't know.

Chinese stocks can boom dramatically – and bust dramatically. I want to be on board during the booms... and out during the busts.

I strongly believe we will make a large amount of money in China over the next five years. Just not now. Not in a downtrend.

If you want to keep an eye on the world's best value (the HSCEI) – or even potentially invest in it when the time is right – we have an easy way to do so...

The iShares China Large-Cap Fund (FXI) tracks the HSCEI closely. Take a look...

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As the chart shows, when the HSCEI finally takes off, FXI is the best way to take advantage of it.

I'm not a buyer – yet. But outside of Russia (which is always cheap), this is the best value in the world right now.

When the uptrend returns, I will be back in.

Good investing,

Steve

Further Reading

Chinese stocks are an incredible value right now. And in another part of the world, Steve is seeing another type of extreme setup – one that could lead to major opportunity. Read more here: This Is the World's Most Hated Market Right Now.

"Instead of an 'apocalypse,' we see an opportunity... a cheap sector that has been left for dead," Steve writes. This group of beaten-down stocks is flashing a clear sign of a turnaround. Learn a simple way to take advantage of it right here.

Market Notes
THE KING OF PEST CONTROL IS GROWING EVERY QUARTER

Today, we revisit a simple investing idea: If it ain’t broke, don’t fix it…

You don’t have to sell “flashy” products to be an industry leader. The simplest businesses – like garbage collectors, uniform suppliers, or those that sell cleaning products – can make great long-term investments. Their products and services are in constant demand. And they don’t need a lot of expensive updates…

Take Rollins (ROL), for example. This $13 billion company leads the pest-control industry. It owns more than a dozen pest-control businesses, including Orkin (termite treatment) and Critter Control (wildlife removal). It’s not a “sexy” business… but Rollins serves more than 2 million customers worldwide. And it has improved its revenue and earnings for 49 quarters straight.

As you can see, the stock price is growing, too. ROL has climbed about 35% over the past year, and it just hit a new all-time high. As long as people need to rid their homes and businesses of rats, termites, and bedbugs, Rollins should continue to thrive…


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