For the past couple of years, investors who listened to the old adage "Sell in May and go away," did very well. Last year in particular, the markets experienced a serious correction shortly after the month of May as Summer doldrums, debt issues in Greece and a downgrade of the U.S. credit rating all took a toll. Many investors are taking money out of the markets now, as they fear a repeat sell-off after May 2012. After all "fool me once, shame on you, fool me twice, shame on me." But that might be way too simple and so many investors expect a market correction now and especially around May, that it just might not happen. While the problems facing Europe are considerable and scary, they might be able to muddle through.
Unless a new crisis breaks, the markets might even be poised to rally on optimism in May. This is because one of the most highly anticipated initial public offerings will take place with Facebook. This IPO combined with other fast-growth companies like Apple (AAPL) will be a reminder to all investors that there are dynamic companies that are making investors rich, even in a very less than favorable economy. If the Facebook IPO goes well, it could easily ignite optimism in the market in spite of the problems in Spain. Plus, many investors are shorting the market in anticipation of the expected downturn after May. If the market stays stable or rises, short-covering could add even more fuel to the fire. With this in mind, it might pay to stay invested or consider buying these Internet stocks, which are particularly well-positioned to benefit from the excitement and market capitalization for Facebook (FB). The Facebook IPO is likely to set new standards of valuation for certain Internet stocks as the company could be trading for about 30 times revenue, which is around $3.7 billion per year, if it has a market capitalization of about $100+ billion. The Internet stocks below also have high-growth potential and trade for much less than 30 times revenue. To be sure, Facebook is a unique situation and few companies will ever be able to command such a premium valuation. However, the Facebook IPO will remind investors that Internet growth stocks can achieve staggering valuations and that might make investors take a second look and re-value the share prices for these undervalued names to higher levels:
E-Commerce China DangDang Inc. (DANG) shares were reaching new lows in late 2011, as impatient investors dumped the stock for tax-loss and other reasons. That kind of short-term thinking cost many investors because the stock has rebound and even almost tripled from those lows. This company has significant upside potential as it is positioning itself to be the "Amazon.com" (AMZN), of China. Just like Amazon.com, it offers many products from appliances to books and it also recently launched an E-book reader. This company has been posting losses and is expected to continue to do so in the future, as it is focused on growth. If this company becomes one of the leading retailers in China, the potential upside is exceptional since the economy continues to expand in that country. This company has a strong balance sheet with about $224 million in cash and only about $24 million in debt. It has revenue of about $571 million and a market capitalization of around $678 million so it trades for about 1.2 times revenue, far less than the proposed valuation for Facebook.
Here are some key points for DANG:
Current share price: $8.24
The 52-week range is $4.11 to $26.40
Earnings estimates for 2012: a loss of 90 cents per share
Earnings estimates for 2013: a loss of 92 cents per share
Annual dividend: None
Renren, Inc. (RENN) seems to already be benefiting from the headlines
over a Facebook IPO. This company runs a few popular Internet sites, which include a social networking website. Because of this, many investors consider Renren to be the "Facebook of China." This stock was also under heavy selling pressure in late 2011, as investors sold for tax-loss and other reasons. However, these shares have more than doubled off the 52-week low and could have more room to run. This stock never should have traded as low as it did in December 2011, so even though the stock is higher now, the company valuation still looks very cheap when compared with the values for Facebook. Some analysts expect the Facebook IPO will value the company at about $100 billion. Renren has a current market capitalization of about $2.9 billion, which is so much less. Renren is strong financially as it has about $1 billion on the balance sheet. This stock is likely to see a speculative run in the days and weeks before the Facebook IPO, as it is considered the Facebook of China by many. I would consider taking profits perhaps on the day ahead of the Facebook IPO as that could mark a short-term high for this stock.
Here are some key points for RENN:
Current share price: $6.85
The 52-week range is $3.21 to $24
Earnings estimates for 2011: a loss of 10 cents per share
Earnings estimates for 2012: a loss of 4 cents per share
Annual dividend: None
Baidu, Inc. (BIDU) is the most popular search engine company in China.
This company has managed to become a leading Internet stock for investors as it continues to execute and grow. This stock isn't cheap as it trades for about 35 times earnings, however, it still has upside potential. Investors are willing to pay for growth, especially in a world that is full of companies and countries that are seeing little or no growth. China has a huge and growing population, plus many Chinese consumers are expected to see their incomes rise in the future. The growing middle-class will result in more Internet usage. Baidu has become a "blue-chip" Internet growth stock for China and it is a great way to play the secular growth story in that country. Baidu is likely to see heightened investor interest as the Facebook IPO shows the valuation potential of Internet stocks. Baidu has a market capitalization of about $51 billion, which is close to half of the proposed Facebook valuation.
Here are some key points for BIDU:
Current share price: $147.19
The 52-week range is $100.95 to $165.96
Earnings estimates for 2012: $4.63 per share
Earnings estimates for 2013: $6.51 per share
Annual dividend: none
Google, Inc. (GOOG) is best-known as a search engine company but it
has continued to innovate in so many ways beyond search. It has developed many other popular products and services, which include mobile phones, email, maps, and more. Google recently reported strong results in the first quarter of 2012 with a 24% jump in revenue. Sales came in at about $10.65 billion and GAAP earnings per share were $8.75, which compares favorably to $5.51 in earnings per share for the first quarter of 2011. The stock declined after earnings were reported probably because investors were expecting too much and bid up the shares in the days just before the earnings release. Google is a conservative and stable way to invest in the growth of the Internet and the stock could resume the recent uptrend when the Facebook IPO puts the spotlight on Internet stocks. Google has annual revenue of about $40 billion, which is about 10 times that of Facebook, and yet Google has a market capitalization of about $198 billion. Therefore Google trades for about 5 times revenue, which is very favorable compared with what could be about 30 times revenue for Facebook.
Here are some key points for GOOG:
Current share price: $608.82
The 52-week range is $473.02 to $670.25
Earnings estimates for 2012: $43.18
Earnings estimates for 2012: $50.60
Annual dividend: none
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.