2 Cheap China Stocks To Buy Before A Market Rebound

December 6, 2012  | 3 comments  |  includes: BIDU, RENN

The stock market in China has been one of the worst-performing indexes in the world for the past few months. Even many European indexes have outperformed China, in spite of an ongoing debt crisis and record levels of unemployment. The Shanghai Composite Index is down about 17% in the past year. With major weakness in many Chinese stocks, it could be a great time to buy for the long term. In spite of all the negative headlines and pessimistic analysts, the Chinese economy remains in much better shape than many Western economies and it is still growing at a rate that the United States and Europe would dream about. A recent CNBC articlesummarizes the growth opportunity in China and it states:

"Long-term, whether the actual economy in China is growing 3, 4, 5, 6 or 7 percent, all of these are faster than the U.S., Europe, and Japan are growing," Adam Parker, chief market strategist at Morgan Stanley, said in a note. "So, our judgment is that negativity on China is quite high and that there is potential for more optimistic news on the policy front over the next few months."

It's clear that many investors and analysts are downbeat on China now, even though it is growing faster than most countries. This presents a buying opportunity because China has a huge population base and as those consumers see incomes rise, it will lead to more demand for many products and services. In a world that is largely stagnant, China is a secular growth story that is giving investors a temporary window of opportunity to buy at lower prices. With that in mind, here are two undervalued China stocks to consider now:

Baidu, Inc. (BIDU) shares have been making new 52-week lows as China stocks fall out of favor. The sell-off seems to be more about sentiment and downward momentum rather than fundamentals and future growth prospects. This leading search engine has double-digit growth prospects and it continues to expand in areas outside of search. It is seeing some competition from Qihoo (QIHU), however there is room for more than one search engine in China, just as there is in the United States. Furthermore, as one recent article from Investor's Business Daily points out, it seems that Qihoo is gaining at the expense of Google (GOOG) and not Baidu in a significant way. Baidu has a very strong balance sheetwith about $3.4 billion in cash and just around $460 million in debt. This gives it plenty of resources to invest in research and development or for acquisitions that can support growth. Analysts expect earnings to jump nearly 30% from about $4.75 in 2012, to around $6.02 next year. That puts the forward PE ratio at just about 15 times earnings.

With this stock drifting lower and near 52-week lows, it makes sense to accumulate a position over time and average into a position. This stock could remain under pressure through the rest of the year as investors sell it for tax-loss reasons. However, that extra selling pressure could dry up after December 31, and that means Baidu shares could be well-positioned to rebound in January.

Here are some key points for BIDU:
Current share price: $90.17
The 52-week range is $89.16 to $154.15
Earnings estimates for 2012: $4.75 per share
Earnings estimates for 2013: $6.02 per share
Annual dividend: none

Renren (RENN) is often labeled as being the "Facebook (FB) of China" since it is the most popular social networking company in that country. It has been a tough year for social networking stocks and the Facebook IPO was a disappointment for many investors. However, Facebook has started to rebound as it pursues a strategy to capitalize on the growth of mobile phones. Analysts expect revenue to grow at double-digit ratesin the coming years for this industry and they specifically see Renren's revenue jumping from about $174 million in 2012, to around $248 million in 2013. This represents growth of about 30%, which is exceptional in a globally stagnant economy.

This stock appears undervalued considering the growth prospects and the balance sheet. Renren has about $892 million in cash and no long-term debt. That is equivalent to about $2.37 per share in cash for a stock that is now trading just over $3. That is one factor that could make Renren an attractive takeover target for a major Internet company. Earlier this year, Baidu announced it would be increasingly focused on making strategic acquisitions and a fast-growing social networking site could make sense. A few years ago, Yahoo (YHOO) made an offer to buyFacebook, which was unsuccessful. Microsoft (MSFT) [which owns a search engine called Bing], has since invested in Facebook. That's why it would not be surprising to see Baidu invest in social networking. At current levels, it appears that the downside is limited for Renren shares and with significant growth prospects, the stock is worth considering now.

Here are some key points for RENN:
Current share price: $3.12
The 52-week range is $3.10 to $7.87
Earnings estimates for 2012: a loss of 19 cents per share
Earnings estimates for 2013: a loss of 16 cents per share
Annual dividend: none

Data sourced from Yahoo Finance. No guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.