What Do AMC, Huffy, Hoover, and Your Stock Picks Have In Common?


If you were shopping for a bicycle, and if money were no object, would you buy a Trek ... or a Huffy?

Now, say you're shopping for a new luxury car. Think fast: BMW or Saab?

How about a vacuum cleaner: Dyson or Hoover?

What these three questions have in common is a single judgment call: Do you trust the quality of the "Made in China" label, or don't you? Because Huffy, Saab, Hoover -- all famous Western brands once considered of at least decent, and in some cases superior, quality, are all now owned by Chinese companies or made in China.

Red Storm Rising

This theme is going to become much more important to consumers -- and investors -- in coming years, as China accelerates its spending of foreign exchange reserves to buy up Western companies, hoping to piggyback upon their brands.

Just a few months ago, China's biggest movie theater operator spent $2.6 billion to acquire America's AMC Entertainment. Just last month, China embarked upon its most ambitious buy ever -- a $15.1 billion purchase of Canadian oil producer Nexen (NXY).

At the same time, in a little-noticed investment, China's biggest securities firm by market cap, Citic Securities, announced last month that it was buying leading independent stock analyst CLSA from France's Credit Agricole. Initially, Citic plans to take only a 19.9% interest in CLSA, but by sometime mid-2013, the securities firm says, it will acquire the whole brokerage -- lock, stock, and barrel -- for a total cost of $1.25 billion.

Why is this important? When it comes to the products you buy, it probably isn't terribly important to you. Your average American consumer probably has more to fear from the quality of poisonous Chinese toothpaste, lead-tainted children's toys, and other low-quality consumer goods than from anything that might emanate from a Chinese stock research house.

But for investors -- and you are one if you participate in your company's retirement plan or even buy mutual funds (where analysts handpick the companies that the portfolios purchase) -- there is a worry here, and it bears some examination.

We Come in Peace

On the surface, there may seem no cause for alarm. Announcing the acquisition, Citic stated its commitment to CLSA's "existing independent structure" and to the "independence of its operations." It assured investors that all it really aims to do is "bring capital market products and services from China to international clients" while also attracting "global clients who wish to access China."

Hard to argue with that. But here's the problem: Back in May 2011, when the plan to buy CLSA was but a twinkle in Hu Jintao's eye, CLSA strategist Andy Rothman warned investors of what happens when the Chinese government gets hold of a finance company. Not mincing words, he told us to expect "high-frequency interference" in that firm's operations.

Fast-forward 15 months, and now Rothman's employer, CLSA, is getting taken over by a company indirectly owned by the Chinese government.

This raises the question: Should investors keep believing in CLSA's impartiality? Or will we see an uptick in the number of Chinese small caps (fraudulent and otherwise) receiving "buy" ratings from this formerly independent source?

Just last week, CLSA recommended that investors pile into the stock of Changyou.com (CYOU) -- the "Chinese Zynga (ZNGA)" -- a stock that's lost 45% of its market cap over the past year. Sure, CLSA has always put particular effort into covering Chinese stocks. But going forward, its motivation for the coverage, and its motives in urging investors to buy or sell specific stocks, will be suspect.

Trust, but Verify

CLSA's Rothman says he fully expects to retain his "autonomy" under CLSA's new management: "They have committed to providing us the same degree of independence and the same room for creativity that we've enjoyed in the past," he recently told Businessweek.

Let's hope that's true. Because until it's proven true, concerns over the quality of anything coming out of China will linger -- bicycles, toothpaste, and now buy/sell recommendations for stocks.

Motley Fool contributor Rich Smith holds no position in any company mentioned above.

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Rothman will be out of CLSA before the end of the year.
Americans got all upset when the Japanese bought Pebble Beach and Rockefeller Plaza and look what happened to those and other deals. The Japanese have principals and integrity while the Chinese do not. The Japanese now have Toyota, Honda and other companies that are readily accepted for their quality in this country. That philosophy is something the Chinese will never understand. After 19 years in business, every time a Chinese person calls my company they start off the conversation with "What's the price?" As I sell a product that costs over $50,000, which has many options, I have no alternative but to hang up on them. I don't sell a price.

August 15 2012 at 11:33 AM Report abuse rate up rate down Reply
1 reply to Mel's comment

Do you remember Pearl Harbor? Sneak attack! Treatment of Chinese and Koreans?

August 17 2012 at 4:50 PM Report abuse +1 rate up rate down Reply

Walmart is the biggest problem,...80-90% of what they sell comes from China.
Thank our GOVT. for that.

August 15 2012 at 1:02 AM Report abuse -1 rate up rate down Reply

What do you expect,....ever since the NAFTA treaty signed by Clinton, you can thank why everything from America is made in China.
It`s all about the mighty $$$ ,..nothing else,...outsourcing / cutting American Jobs, for profit, .just to please Wall ST. and the likes,....hell, why are we bitching ? We ONLY lost MILLIONS of jobs because of it,....the standard of products have gotten LOWER, but hey,...you ONLY paid a couple of CENTS LESS, for the cheap crap, figure that out,....give away lives / workforce / pensions / better means of living,...ALL to support ANOTHER COUNTRY !! And we are NOW JUST complaining about living standards here in the U.S. ??? !! Really ,..where have you been ?
It`s just sad ,....we the great U.S.A. sold ourselves out to the rest of the 3rd World Countries for Big Business Profit !! Think about it. And our great GOVT. allowed it to happen,..for PROFIT of big business to feed the pockets of D.C. !!!!
Tell me I`m wrong !!

August 15 2012 at 12:58 AM Report abuse +1 rate up rate down Reply

Kruschev was right-Communists don't have to destroy us. We're more than happy to do it ourselves

August 14 2012 at 10:58 PM Report abuse +2 rate up rate down Reply

It's really too bad that there is very little national pride left in those selling these American businesses to those that wish to do us harm.

August 14 2012 at 8:49 PM Report abuse +1 rate up rate down Reply