A friend of mine recently asked me what I thought the most fashionable market opinion is right now. It didn’t take long to respond with the über-trendy notion that China’s economy is headed for a “hard landing,” and that one should avoid Chinese stocks like the proverbial plague. These days, it seems like every pundit has become a China hater, railing against the country for its slowing GDP growth, untrustworthy economic data, inflated property bubble, declining electricity usage — the list goes on and on.
Certainly, when one absorbs the data coming out of China, it’s easy to take on a bearish posture. The country reported GDP growth of 7.6% for the second quarter, slightly lower than expectations, and a sharp decline from the 8.1% growth we saw in the first quarter. And even though the Q2 number was well above the 7% growth rate that constitutes the hard landing scenario, the decline in growth has fueled the notion that the breached China ship is taking on water fast.
The declining growth rate in the country has prompted policymakers to cut interest rates, not once, but twice in less than a month. Those dual moves to cut the cost of capital also serve as confirmation that Chinese leaders are fearful that the economy is grinding to a halt.
Anecdotally, I must admit that for the first time in a long time, my sources in Beijing and Shanghai have told me that they’ve seen signs of a slowdown. Many of the most popular restaurants in both cities have empty tables — a circumstance not experienced by these sources in years.
So, with all of the negative news wafting through the Chinese air, why would anyone consider owning stocks pegged to the fortunes of the nation’s economy?
The answer is as simple as the tried-and-true pearl of market wisdom popularized by Baron Rothschild in the 18th century — “The time to buy is when there’s blood in the streets.”
So, which Chinese stocks have been bloodied up the most of late? Well, the list is long and distinguished, but the best of the best are in the tech/Internet space. Here are my five favorite beaten-down Chinese tech buy candidates:
Internet television company Youku Inc. (NYSE:YOKU) is akin to a Chinese version of Google‘s (NASDAQ:GOOG) YouTube. Video content on this site is extremely popular, and advertisers can get targeted exposure to key demographics. YOKU shares are down nearly 28% over the past month, and they are some 54% off their most recent high. When the tide turns in China, look for this Internet sector stalwart to surge.
#4: SINA Corporation
Online media and mobile device content company SINA Corporation (NASDAQ:SINA) is another Internet stock slammed by the recent bearish cloud over China. The shares are down nearly 18% during the past month, and they are about 63% off their most recent high. As more and more Chinese own smartphones, SINA will see growth. When that growth filters down into the share price, the sky is the limit.
#3: Shanda Games
Another Chinese Internet/entertainment firm beaten down of late is Shanda Games (NASDAQ:GAME). The provider of online games — an extremely popular pastime among Chinese youths — has seen its shares plunge over 17% in the past month, and the stock now trades about 40% below its most recent high. In June, the company reported earnings that bested estimates, so it’s not a case of slow demand for Shanda’s products. Rather, the selling is more due to the “hands off” approach to anything China — an approach that is destined to correct itself when the Chinese tide turns.
When it comes to video games, there has been perhaps no more highly anticipated new issue than Diablo 3 from Activision Blizzard (NASDAQ:ATVI). The game already has been released in the U.S. and other markets, and will launch later this year in China, which is the largest online gaming market. Millions of Chinese gamers are going to play Diablo 3, and that should be a huge windfall for China’s leading online gaming company, NetEase (NASDAQ:NTES). NetEase is Activision Blizzard’s long-time partner in the country, and the two are close to a deal that would make NTES the publisher for Diablo 3 in China. Getting in on NTES shares now after their 12.5% decline during the past month means you’re getting in on the Diablo 3 whirlwind at a big discount.
When you’re talking Internet technology, gaming, advertising, etc., it all starts with the portal site. Sohu.com (NASDAQ:SOHU) is China’s premier Internet portal site, and as the sector goes, so too does Sohu. Shares have sold off about 16% during the past month, and they are down nearly 60% from their most recent highs. However, that selloff is just part of the overall distaste for any stock in the China kitchen. When taste buds go Chinese again, look for Sohu.com to lead the charge higher.
Finally, I am of the opinion that China’s recent GDP figures should be viewed as a “bad news is good news” situation. This means that China’s economic slowing is just enough to nudge policymakers into cutting interest rates further. Moreover, you have to figure that the reduced cost of capital hasn’t yet filtered into the economy. When it does, there will be an increase in consumer spending that certainly will filter down to the five beaten-down Chinese techs on this list.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.