51job: A Stock for Your Watch List

October 11, 2010

If you take the responsibility seriously, recommending any stock is a genuine risk.  After all, mutual fund managers who can pick 51% winners—even with all the research and analysis resources in the world—are considered real gunslingers.  For me, if a stock doesn’t meet all of my requirements, it goes on the Watch List, not into the portfolio.

That’s why I won’t be recommending 51job (JOBS), the Chinese recruiting and human resource company, for the readers of Cabot China & Emerging Markets Report.

The company has lots of things going for it, including its admirable earnings line (up 300%, 233% and 120% from terrible 2008/09 levels) and revenue growth (gains of 15%, 43% and 37%).  After-tax profit margins have been over 20% for the latest four quarters, with an juicy 24.9% in the latest quarter.  And earnings estimates are running at $1.14 per share for 2010, well up from $0.73 in 2009.

51job is a pretty seasoned company for China, founded in 1998 and based in Shanghai, which is the heart of China’s commercial zone.  The company serves both potential employers and job seekers, using both online and print media.  The 51job Weekly is a recruiting publication that’s customized for particular cities and distributed in newspapers or as a stand-alone.  51job also offers executive search and business process outsourcing services, and will train clients in job skills from secretarial and manufacturing to management and financial planning.

JOBS has been on a roll since April 2009, with a seven-month basing period from December 2009 to July 2010 under resistance at 20.  The blastoff from that base began in July, but really picked up speed (and volume support) in September.

All in all, it’s a great package, and the prospects for the company are excellent as China’s need for better-trained employees and executive talent heats up.  51job is a very direct play on the growth of China’s domestic economy.

So what’s the problem?  It’s the discouragingly low volume the stock trades at.  With only an average of 150,000 shares changing hands per day, the stock’s volatility is just too high to recommend to a large group of people.  It’s an appropriate vehicle for the nimble individual investor, but its float of seven million shares will have to increase to make it attractive to institutional investors … and to me, of course.

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