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By George Leong, B.Comm.

Could These High-Risk Stocks Pay OffWe all know about some of the insane valuations with social media and Internet services stocks, such as Twitter, Inc. (NYSE:TWTR), Facebook, Inc. (NASDAQ:FB), and Yelp, Inc. (NYSE:YELP), as I have discussed in these pages before. (Read “Two More Internet Stocks to Watch”)

These valuations make it extremely risky to buy, as a change in the market perception and valuation could lead to a sell-off in the stock, as was the case for Twitter recently.

Now, if you are willing to assume the risk, there are some more attractive Chinese Internet and social media stocks that offer far better valuations than their American counterparts, but these China-based companies also come with much higher risk.

A look at the valuations of these Chinese stocks really doesn’t tell us much, but based purely on strict metrics and valuations, these Chinese stocks look pretty good — in fact, the prices of these Chinese stocks seem too good to believe. And therein lies the risk: due to the questionable reliability of the financial reporting, auditing, and statements in China, these Chinese stocks carry a lot of risk. Sometimes, it seems as though numbers have been made up to suck in investors and drive the share price higher.

The U.S. Securities and Exchange Commission (SEC), as I said in a previous commentary on China, has been trying to clean up the reporting requirements and offer some potential hope that the numbers being reported are valid. While it’s a good step forward, there’s still no guarantee that crooks will not escape the watch of the SEC.

I was reading how there may be 30 or so Chinese stocks looking at listing on the U.S. exchanges this year if they are approved by the SEC. We know the appetite for valid Chinese initial public offerings (IPOs) is still there, as shown by several highly successful debuts by Chinese stocks in 2013.

Yet, as an alternative to waiting for possible Chinese IPOs to appear, there are numerous small-cap Chinese social media and Internet stocks that already trade here as American depository receipts (ADRs) and may be worth a closer look. Their valuations are generally much lower than their American counterparts.

China-based Phoenix New Media Limited (NYSE:FENG) ($10.17) is one of these interesting Internet media plays among Chinese stocks that could be worth a closer look.

(click to enlarge)

Chart courtesy of www.StockCharts.com

In the social media space, you may want to consider researching Renren Inc. (NYSE:RENN) ($3.33).

(click to enlarge)

Chart courtesy of www.StockCharts.com

And a China-based e-commerce play that looks interesting for American investors is E-Commerce China Dangdang Inc. (NYSE:DANG) ($9.69), which is a company that is trying to be the “Amazon.com” of China.

(click to enlarge)

Chart courtesy of www.StockCharts.com

The key to winning with Chinese stocks is patience. Make sure you are diversified within your portfolio to balance out any high-risk Chinese stocks, so you can withstand a possible loss that could emerge in this area.

Disclosure: None.

Source: If You Can Take The Risk: My Top 3 Chinese Stocks