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China’s Two-Child Policy Will Set These Super-Hot Stocks Ablaze

Newsflash: The world’s most populous country might be on the brink of a reproduction boom.

According to the 21st Business Herald, citing sources close to the National Population and Family Planning Commission, “China may relax its one-child policy at end-2013 or early-2014 by allowing families to have two children if at least one parent is from a one-child family,” says BofA Merrill Lynch economist Ting Lu.

If that happens, all the recent mind-numbing analysis about China’s sputtering economy becomes moot.

Why? Well, because if the Chinese start (ahem) getting it on, we’re talking about an extra 9.5 million screaming mouths to feed each year, or about 170 million more Chinese by 2033. That’ll be enough to put the U.S. Baby Boom to shame. And then some.

It’ll also unlock a new wave of demand for everything from commodities used in producing energy to the latest consumer goods necessary to feed and entertain the swelling populace.

With that in mind, here’s a rundown on two companies that stand to benefit from feeding the Red Dragon’s current and future needs.

Milking It for All It’s Worth

Back in 2008, melamine-contaminated milk killed six infants and sickened hundreds of thousands of others in China.

Outside of being tragic, the scandal also created a tremendous void in the marketplace.

It left a country with 82 million children below the age of five in need of a new source of food, since the contaminated milk was linked to domestic producers.

Although Chinese milk producers did all they could to earn back the trust of consumers, it doesn’t appear to be working.

Case in point: From 2011 to 2012, China’s formula market grew by 25%. Yet, sales at China’s biggest dairy company fell 3.5%.

Enter French dairy company, Danone (BN.PA).

Buoyed by double-digit sales growth of baby nutrition products in (you guessed it) China, the company recently reported overall sales growth of 6% for the first half of 2013.

The strong growth is likely to continue, too. Not only will tariff reductions on baby formula (from 20% in 2012 to 5% in 2013) make the company’s products more affordable in China, but the company’s direct investments in China promise to pay dividends, to boot.

In May, Danone agreed to invest $417 million in two deals with China Mengniu Dairy Co., China’s biggest dairy producer.

The timing couldn’t be more perfect, either. Euromonitor estimates that demand for baby formula in China will double over the next four years to about $25 billion.

That’s without factoring in any change to the country’s one-child policy.

Add it all up, and the Paris-based company represents a decidedly safe way to play the current and future demand boom for baby formula in China. Even with shares up about 20% this year, there’s still plenty more room to run.

Double Duty for Gaming Stocks

The next China investment opportunity relates to the ever-increasing popularity of video games. Specifically, Activision Blizzard (ATVI), which I’ve been touting ever since I appeared on CNBC over a year ago.

The company is the hands-down leader in the videogame market. And these two figures for the company’s bestselling game, Call of Duty, prove it:

  • 100 million: the number of people who have played Call of Duty, which exceeds the populations of the United Kingdom, Germany, or France.
  • 2.85 million years: total playing time that gamers have logged online playing Call of Duty.

Here’s the thing – the wildly popular game hit the streets of China in beta form only a couple of months ago, thanks to an agreement with Chinese internet behemoth, Tencent Holdings (TCTZF).

Tencent sweetened the deal by making a $2.3-billion share purchase of Activision, in return for a 25% stake in the Call of Duty and World of Warcraft publisher.

I won’t bore you with the details, but it’s looking good for Activision. So much so, in fact, that its stock price soared more than 15% when the news broke.

Now, Activision doesn’t disclose its revenue in China. If Chinese children have the same passion for playing videogames as Americans, Activision has just found a second home. The partnership with Tencent only promises to accelerate its growth in the country.

Or, more simply, it’s game on for both stocks, despite their already impressive run-ups this year. (Tencent is up about 42% this year so far. Meanwhile, Activision’s shares are up about 60%.)

Bottom line: A single policy change by the Chinese government stands to be its best economic stimulus plan yet. Whether or not it comes to pass, Danone and Activision represent compelling buys. Don’t miss out.

Ahead of the tape,

Louis Basenese