To create the list below, we screened a universe of Chinese stocks for signs of institutional selling despite potential undervaluation.
First we searched for companies with significant net institutional sell-off over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these stocks to underperform despite valuation ratios that suggest otherwise.
Then we limited our results to those stocks with a Price/Earnings to Growth - PEG - ratio below 1, a common indication of undervaluation based on earnings performance. This left us with four companies on our list.
To understand why institutional investors see downside to these companies, we looked closer at their Price to Earnings (P/E) and Forward Price to Earnings ratios.
Only some companies had attractive P/E ratios, and not all had Forward P/E ratios below their P/E ratio, which would normally suggest that earnings are expected to grow in the near future.
We also scanned recent headlines for company news and earnings reports, looking for negative sentiments which, combined with varied price to earnings data, may have led hedge funds to invest their money elsewhere.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Do you see upside where these institutional investors do not? Use this list as a starting point for your own analysis.
1. Noah Holdings Limited (NOAH): Through its subsidiaries, operates as a wealth management service provider with focus on distributing wealth management products in China.
- Market cap at $672.26M, most recent closing price at $12.29
- PEG: 0.91; Industry average: 3.22
- P/E: 29.98; Industry average: 32.84
- Forward P/E: 15.17; Industry average: 13.33
Net institutional sales in the current quarter at -2.0M shares, which represents about 12.22% of the company's float of 16.36M shares.
NOAH has recorded great gains over the last month, when compared to its closest competitors. The stock returned 73.10% since 4/23/13, better than State Street Corp. (STT), Encore Capital Group, Inc. (ECPG) and BlackRock, Inc. (BLK), which returned 10.88%, 20.76% and 8.99%, respectively, during the same holding period.
The company's earnings growth looks weak, with EPS growing by -3.25% over the last year. This is considerably weaker than competitors like TICC Capital Group (TICC) (EPS growth over the last year at 284.35%), BLK (EPS growth over the last year at 11.47%) and STT (EPS growth over the last year at 10.61%).
As reported by Yahoo! Finance, NOAH experienced unusual trading activity on 5/13/2013, so much so that it was approached by the NYSE, which then prompted the company to state that its policy is to not comment on 'unusual market activity or rumors'. Interested investors may want to take a closer look at the causes of the stock's movement on that day.
2. Shanda Games Limited (GAME): Engages in the development and operation of online games in the People's Republic of China.
- Market cap at $976.4M, most recent closing price at $3.61
- PEG: 0.55; Industry average: 3.47
- P/E: 5.16; Industry average: 33.43
- Forward P/E: 5.16; Industry average: 113.08
Net institutional sales in the current quarter at -5.4M shares, which represents about 9.69% of the company's float of 55.71M shares.
GAME has recorded solid gains over the last month, when compared to its closest competitors. The stock returned 31.27% since 4/23/13, better than Giant Interactive Group, Inc. (GA), Electronic Arts Inc. (EA) and Konami Corp. (KNM), which returned 15.35%, 30.02% and 21.40%, respectively, during the same holding period.
But as reported by Daily Finance, GAME announced first quarter results for 2013, which included a drop in profits from the previous year, as well falling GAAP and Non-GAAP earnings per share. Compared to Q1 2012, total net revenue fell from $220.5M to $173.0M, where analysts had estimated revenue would be $173.72M. Non-GAAP EPS was 27% lower than the same quarter in 2012, at $0.16, and GAAP EPS also came in below last year, at $0.14 or 26% lower.
3. AutoNavi Holdings Limited (AMAP): Provides digital map content and navigation and location-based solutions in China.
- Market cap at $568.58M, most recent closing price at $11.54
- PEG: 0.90; Industry average: 3.41
- P/E: 16.72; Industry average: 58.72
- Forward 18.03: 9.63; Industry average: 37.53
Net institutional sales in the current quarter at -1.7M shares, which represents about 6.5% of the company's float of 26.16M shares.
AMAP has performed in line with the rest of its industry since 4/23/13, returning 8.87% over the last month. This performance has been better than Garmin Ltd. (GRMN), SciQuest, Inc. (SQI) and Guidance Software, Inc. (GUID), which returned 5.24%, -0.30% and -12.19%, respectively.
The company has reported strong earnings growth over the last year, with EPS growing by 73.34%, higher than competitors like GRMN (EPS growth over the last year at 3.43%) and GUID (EPS growth over the last year at 40.60%).
AMAP announced earnings for Q1 2013 on 5/14/2013, falling below analyst expectations. Revenue dropped 3.84% compared to the same quarter last year, coming in at $34.3M, where the average analyst estimate was $40.38M. And revenue was also lower than the prior quarter, which had been reported as $43.61M. Analysts have lowered their EPS targets for the stock, dropping from $0.23 to $0.22 over the last three months, and the average analyst estimate for the year has gone from $0.97 to $0.90.
4. Hollysys Automation Technologies, Ltd (HOLI): Provides automation and control technologies and applications to customers in the industrial, railway, subway, and nuclear industries in China, south-east Asia, and the Middle East.
- Market cap at $647.36M, most recent closing price at $11.56
- PEG: 0.76; Industry average: 3.70
- P/E: 12.57; Industry average: 44.33
- Forward P/E: 9.63; Industry average: 24.39
Net institutional sales in the current quarter at -2.0M shares, which represents about 6.15% of the company's float of 32.53M shares.
HOLI has returned -1.20% since 4/23/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like Eaton Corporation (ETN) and Ametek Inc. (AME), which returned 18.16% and 5.61% during the same time period.
The company has reported strong earnings growth over the last year, with EPS growing by 33.44%, higher than competitors like Siemens AG (SI) (EPS growth over the last year at -29.95%), Rockwell Automation Inc. (ROK) (EPS growth over the last year at 7.06%) and ETN (EPS growth over the last year at -11.93%).
HOLI also recently released its earnings for Q1 2013, as reported by The New York Times. Revenue for the quarter came in at $60.4M, and compared to the same quarter last year, this was a drop of 8.7%. Quarter over quarter, revenue fell by 30.8% (compared to $87.2M). Inventory also disappointed, as the company reported inventory turnover days were 78 for Q1 2013, compared to 42 days quarter over quarter, and 68 days year over year.
*Institutional data sourced from Fidelity, EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.