A Strange Day

 | Jun 05, 2013 | 1:39 PM EDT
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It's a bit of an odd day with the markets down pretty significantly at midday while many of the Chinese Internet names are up. Usually, when it's risk-off across the board in the U.S., all the Chinese Internet names are hit doubly so. But that's not happening today.

As an example, as of midday:

  • Sina (SINA) is up 1.7%
  • Qihoo 360 (QIHU) is up 1.9%
  • Youku (YOKU) is up 0.8%
  • Renren (RENN) is up 3%

The only big Chinese Internet name not up is Baidu (BIDU), which is down 1.2%.

Why is this happening? I think the main reason is that these Chinese Internet names have just not participated in the rally, which we've seen so far this year on Nasdaq. Nasdaq has been up 13% this year to date, yet Baidu is down 5% this year and Renren is down almost 8% this year.

Sina is up 14% for the year and Youku is up 11%, but, normally, when the Nasdaq is ripping -- like 12% -- these Chinese Internet names are doing 3x to 4x multiples of that. So, Sina just keeping pace with the Nasdaq -- especially when it's coming off such a low level -- is strange.

Qihoo has been a real standout this year, up 44%. It has benefitted from a shift of money away from Baidu as it has continued to chip away at Baidu's dominance in Chinese search. Even though 44% is impressive, if a couple of years ago the Nasdaq saw a 12% climb, it wouldn't have been unusual to see Qihoo up 60%.

Sohu, like Qihoo, is having a good year, up 32%. Again, it could be doing double that.

So what gives? It's a combination of things holding these stocks back more than they would normally be.

  1. Ever since the outbreak of Chinese accounting frauds a couple of years ago, there has continued to be reticence from U.S. investors in these names. You could say there's an increased governance discount that seems to be applied to all these names
  2. Fears about China. Folks like hedge funder Jim Chanos and others are still banging the drum about fears of a Chinese economic crash. At the same time, Chinese PMI numbers are shaky. The biggest thing for the entire Chinese Internet sector has been advertising revenue. It was blowing hot coming out of the 2008 crash with the help of the Chinese government's stimulus program, yet it's been tapering off for the last couple of years. Investors want to see more signs that it's coming back.

I believe that these Chinese Internet names (with the exception of Baidu, which I think will continue to bleed market share) should do well in the second half of this year. I see the rally continuing in both the U.S. and Japan, and when it comes back, these Chinese Internet names should come back with their former multiple-like returns of whatever the Nasdaq does.

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