Monday, December 13, 2010

Chinese IPOs and the Value Investor

By Eric Jackson
RealMoney Contributor

12/13/2010 5:01 PM EST
Click here for more stories by Eric Jackson

A week ago, I think it's fair to say that 99% of investors and probably 99.5% of the media weren't paying attention to the fact that Youku (YOKU - commentary - Trade Now) or Dangdang (DANG - commentary -Trade Now) were going public.

However, after these stocks immediately jumped over 160% and 80% in value on their first day of trading on Wednesday, people sat up and took notice. Then, as their prices kept going up on Thursday and Friday morning, people's jaws started to really drop.

However, the inevitable backlash started to come against both companies. Most of the critics of both companies are Bill Miller-esque raging value fundamentalists.

Speaking about Youku, you often hear the complaint, "How can a company that had $35 million in revenue in the first nine months of the year and lost money be worth $5 billion?" (That was Friday. It's worth less today, but you get the point.)

I consider myself a value investor at heart. How can you not like the idea of picking up something for 50 cents when all indications are that it's worth a buck? And I certainly believe that the market is not always efficient or rational, thereby giving investors many opportunities to pick up something that has been temporarily thrown into the discount bin.

At the same time, I've never been good at investing on the basis of momentum or trading the technicals of a chart. Many people do it every day and swear by it. But that's just not me.

However, speaking as a "value guy," I get a little sick at the self-righteousness of some value investors and their criticisms of these Chinese IPOs. The simple truth is that any pure value investor missed - commentary - Trade Now) after its IPO and for the last 13 years since.

I don't think there's ever been a time during that stretch -- even post-Lehman -- when a value investor would have been said to get into Amazon. Yet it's been a great investment over that period.


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