By Paul Goodwin, Editor of Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 12/15/11 Sign up for free Cabot Wealth Advisory e-newsletter
I want to say a quick word about stocks that experience big price increases in daily trading. I can usually predict that I'll get a couple of questions about any emerging markets stock that throws a double-digit percentage rise in a day. That kind of jump is just catnip to investors who are tired of a market grinding downtrend and hunger for some upside.
My example is SinoHub (SIHI), a Chinese supply chain manager and order fulfillment service for cell-phone components that has suffered through a precipitous drop since it came public in August 2009.
The stock hit its all-time high above 5 a couple of months after its IPO. But 2010 and 2011 have not been kind to the stock, pulling it into penny stock territory in August 2011 and sinking even deeper from there.
The stock is thinly traded (average daily trading volume is just 53,000 shares), and its last two quarterly earnings reports have been profoundly disappointing, featuring earnings declines of 75% (Q2) and 62% (Q3).
The wild card here is that SIHI popped up 13% in intraday trading yesterday on the basis of a six-cent advance to 0.50.
To a prudent investor, one who will note that the stock has stuck like glue to its 50-cent price for two months, this isn't of even passing interest. It's just a blip on a dismal chart.
A classic Cabot growth stock must meet much more stringent requirements, including a double-digit price, better liquidity (at least 400,000 shares a day) and an uptrend that features both some persistence and rising volume support.
Obviously, SIHI doesn't qualify on any reasonable basis. Even its one times price-to-earnings ratio is more of a raspberry to the stock than an indication of value.
I wish I had a great prospect for you rather than a great cautionary tale, but I hope the lesson will be of more value ultimately.
If it's value you're after, look at Baidu (BIDU), which is now trading below 120. After a calm quarter in which the company's earnings were up "only" 87%, the stock's 47 P/E ratio and projected 88% jump in earnings for 2011 look pretty darn good. That said, many former big winners are looking very tired, so we would guess that (again, if you fancy yourself a value player) BIDU will give you an opportunity to buy down toward 100 if the market remains grumpy.
If a 13% boink in SIHI tempts you, a warm bath and a relaxing beverage may be in order.
Editor's Note: To learn more about high-potential stocks from Brazil, Russia, China and India (the BRIC countries), check out Cabot China & Emerging Markets Report. Hulbert Financial Digest has consistently ranked it as one of the top-performing newsletters for the last several years, quite a feat considering the market's performance during that time. Click here to learn more today!
Emerging Markets Specialist, Analyst and Editor of Cabot China & Emerging Markets Report
A researcher and writer for over 30 years, Paul Goodwin has been a member of the Cabot investment team and editor of Cabot China & Emerging Markets Report since 2005. Under Paul’s stewardship, Hulbert Financial Digest rated Cabot China & Emerging Markets Report the number-one-rated newsletter of 2006 with a 78.6% gain for the year, the number-one-rated newsletter of 2007 with a 74.1% return, and the top-performing investment adivsory for five years with a 17.9% annual return.
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