7 Chinese Stocks Remind Me Of The Technology Bubble

by: Efsinvestment

Remember the late 90s? There was only one direction for the markets. Stocks were going higher, higher and higher. Those were the times that people did not follow Warren Buffett much. They did not listen Alan Greenspan either. Warren Buffett was seen as the old man. His value investment style was seen as old style. Alan Greenspan mentioned irrational exuberance, but he did not do much to deflate the stock bubble. The momentum on tech-stocks was so powerful, at its peak, Cisco (CSCO) reached almost $500 billion market cap.

Since the collapse of the techno bubble, the markets were in the recovery mode, until the subprime crises. The failure of major financial institutions triggered another sharp sell-off, driving down the stocks to way below their intrinsic values. Even after strong recovery in the markets since 2009, many of the technology stocks are trading below their fair-value range. While major U.S. tech stocks are undervalued, we started observing another bubble among Chinese tech stocks. After suffering disappointing returns in American markets, many investors started seeking high profits in Chinese technology stocks, driving the valuations to higher levels. Here is a brief analysis of 7 stocks that remind me of the technology bubble:

E-Commerce China Dangdang (DANG) has been among the biggest losers of 2011. The stock gave up 75% of its market cap since January. Even after these losses, the stock is still a risky buy. It is trading at 46 times trailing earnings. Nevertheless, it can be a good play for contrarian investors. DANG will report 3rd quarter earnings on November 16. Price movements after earnings announcements should be watched with due attention.

Baidu (BIDU) is a perfect example of a technology bubble. Surely, the stock has been an outperformer, returning triple digit gains in the last few years. However, with a market cap of above $50 billion, it is trading at a trailing P/E ratio of 55, which justifies an earnings growth estimate of above 50%. It will be kind of insane to expect 50% EPS growth for a company of Baidu’s size. The stock is trading at 25 times its sales revenue. Price-to-book ratio of 24 is a strong signal. Moreover, the stock is highly volatile. In early October, it collapsed to $100, before bouncing back to $144. I would not hold the stock for long-term profits, but it might be a good stock to trade between $120 - $ 150 intervals for quick profits.

Ctrip.com international (CTRP) is an online provider of travelling and accommodation services. The company was founded in 1999 and its headquarters is in Shanghai. With a market cap of above $5 billion, it is trading at a trailing P/E ratio of 30.64. While the company does not have any debt issues, it is trading at 10 times its revenue and 5 times its book value. With a high Beta of 1.98, Ctrip is pretty volatile.

eLong Inc. (LONG) is another online travel services company located in China. The stock is highly volatile. It lost almost 50% of its market cap since May. The year-to-date return is -32%. While the forward P/E ratio is expected to be as low as 25, the trailing P/E ratio is a 112. This triple digit number is a scary factor. 3rd quarter earnings will be released on November 14. One should watch for high volatility, both before and after the earnings report.

Sina Corporation (SINA) is an online multimedia company providing several ranges of services to its users. Although the stock has lost 44% from its peak value of $147, the year-to-date return is 21%. SINA is trading at a forward P/E ratio of 49.76. It has a market cap of $5.5 billion. The stock is highly volatile, moving up and down in a wide range. I think buying at $80 and selling at $120 is the best way to play this stock. Earnings, which will be announced on November 8, should also be watched for.

Youku.com (YOKU) operates as an online, internet-based television company. Users can subscribe to several entertainment channels of their choice. The company does not have any profits yet, and analysts do not expect any significant profits in the next year. Its forward P/E ratio is 1312. The stock has gone hyperbolic in March, and April, climbing all the way up to $70 before collapsing back to $20. While the sell-off seems to be done, it is still trading at 25 times its sales revenue. That is a very high number in a pretty competitive sector.

Qihoo 360 (QIHU) primarily operates in the field of internet and mobile security products. The stock has been an underperformer, losing 50% of its market cap since its first trading day. The company does not have any profits, but the stock is trading at a forward P/E ratio 62. P/B ratio of 6.50 is a strong red flag. It is quite hard to infer about the short-term movement of the stock’s direction. 3rd quarter earnings, which will be reported November 16, should be watched with attention.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.