Thursday, January 13, 2011

Dang Dang is carving out the first IPO base

and looks like it is ready for the up leg ...

Since the uptrend started Sept last year, market has not made any significant pull back. One day we will get a more than 5-10% correction and even a bear market, the current market condition still looks solid and healthy. One negative is that the bullishness among investors are getting very frothy, it is however not an accurate indicator to ping point a market top.

There are several high profile Chinese IPOs over the last couple of months. One of them is Dang Dang, the Chinese version of Amazon; the other is Youku, the Chinese version of Netflix or Youtube. Chinese new issues tend to be volatile and are among the highest number of fraud in accounting (take a look of RINO, for example). It is prudent to be cautious when investing in Chinese new issues.

You never want to buy IPOs on the first day, because it is gambling, period. Well, unless your dad works as CEO or COO for that company ... (still I think that is gambling ... )

It is much safer to wait for a new IPO to consolidate its gains and establish a price range. Carefully observe the price and vol pattern. Study the fundamentals and decide if the stock present a compelling story. Then when the time is right, you pull the trigger.

Let's first look at YOKU. YOKU's market capital is 4 Billion. What is Netflix's market capital? 10 Billion. How much is Netflix's annual revenue? 2 Billion. How much is Youku's sales over the 1 year period? 20 Million!!!!!!!! With 20 Million sales, Youku is priced with a market cap of 4 Billion. Would you buy this hype? I won't. YOKU is a junk in my opinion. Once the bear market returns, YOKU will be among the first to drain into the rat hole. Could YOKU have explosive growth in the future? who knows. I don't bet on unknowns. Show me the money first!

Now let's look at Dang Dang, Dang Dang made 300 Million sales last year. Sale growth has been between 50% - 100% over the last 7 quarters. Dang Dang's PE ratio is 400!!!! Once PE ratio gets that high, you know the market is getting frothy. High PE does not mean it won't go even higher, it only means your purchase gets a lot riskier.

Looking at the price vol action of Dang Dang since IPO, it finished 6 week consolidation and the price is breaking out to the new high. During the 4th week, Dang sold off with very little vol indicating selling pressure drying up. Starting this week, vol comes in and price got steadily bid up.

Dang is buy right here right now in my opinion. Your cut loss should be set at 31-32 area. Never lose your line ... If it goes up as planned, ride it ... otherwise cut loss and let it go.