Where to Find Some Market Excitement

Chinese stocks are again the focus of increased attention and speculative trading. In China, the benchmark Shanghai Composite Index (SCI) was rallying and was down less than four percent this year, which is impressive given that the index had been down over 28% earlier in the year. Unfortunately, fortunes have turned, as there has been selling in Chinese stocks. The SCI is currently down 14.25% on the year.

But don’t tell that to the speculative and bubble-like trading in Chinese Initial Public Offerings (IPOs).

There have been some spectacular debuts that would make even Broadway happy.

On Wednesday, Chinese online video superstar Youku.com Inc. (NASDAQ/YOKU), which was subscribed at $12.80, surged to close at $33.44, up a staggering 161% in a day! YOKU is up another 10% in early morning trading on Thursday. I guess when the company has a 40% penetration rate in an Internet market with over 420 million, rich valuations are demanded.

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The other Chinese IPO that also presented a dazzling debut on Wednesday was online book seller, E-Commerce China Dangdang Inc. (NASDAQ/DANG), sometimes referred to as the Amazon.com (NASDAQ/AMZN) of China and you know how AMZN has done in trading. DANG was subscribed at $16.00, and nearly doubled to $30.55 in trading on Thursday morning.

Prior to YOKU and DANG, there were several new Chinese IPOs coming to the market that debuted well above the IPO price and surged. These included Country Style Cooking Restaurant Chain Co., Ltd. (NASDAQ/CCSC), an operator of fast-food eateries. The stock was priced at $16.50, but debuted at $25 on September 28 and surged to $36.45, before settling back to the current $22.96 level. In our view, I feel the buying frenzy is too optimistic. Another example is Chinese online real estate portal SouFun Holdings Ltd. (NASDAQ/SFUN), which debuted at $67.00 on September 17, surged to $95.50, and continues to hold above $75.00.

The IPO action indicates that there continues to be speculative trading and excitement towards Chinese companies, something that I have maintained despite the SCI being down over 28% earlier in the year. The key in China is patience and buying on weakness.

The key to trading Chinese IPOs is to wait for several weeks and watch if the stock settles down in a set buying range. Buying on the first day can generate some impressive returns, as we saw in YOKU and DANG on Wednesday, but it also makes you vulnerable to downside profit-taking, especially if you do not get in near the IPO price.

Just be patient, follow the stock, and wait for weakness to buy. For China, a country that has been around for thousands of years, patience has been a critical trait.