The Danger of Chinese IPOs
The initial-public-offering market in China looks a lot like Silicon Valley back in the late ‘90s. Companies are popping for sizable gains (an understatement) on their first day or two of trading. Cramer’s caveat? Lock in those gains while you have them—or you could lose them.
Look at Youko.com and DangDang, China’s answers to YouTube and Amazon.com , respectively, which hit the market on Wednesday. The first priced at $12.80 but opened at $27 for an immediate 110-percent profit. Youko.com later closed at $33.44 to finish up 161 percent and then added another $9 on Thursday for a jaw-dropping 234-percent jump if you got in on the IPO. DangDang, meanwhile, doubled from its offering price to today’s close in the space of two quick trading sessions.
The same thing happened on Thursday with SemiLEDS. This stock priced at $17, opened up 41 percent at $24 and then closed at $25.76 for a 52-percent gain.
“If you own these stocks, I know what the feeling is—you’re feeling euphoric,” Cramer said. “So it’s time for me to put on my hall-monitor-slash-traffic-cop hat and start applying Cramer rules to the P.R.C., the People’s Republic of Cramerica. Specifically: Bulls make money, bears make money, but hogs get slaughtered. Meaning, if you don’t ring the register on a DANG or a YOKU, you are being a greedy hog who’s destined to become a plate of sweet-and-sour pork or maybe moo shu pork—pass the hoisin! “
Because this is what could happen if you don’t: Mecox Lane opened with a 59-percent jump over its offering price at $17.50 but peaked there. Now, after a class-action lawsuit relating to the IPO, the stock’s below $7. And there’s China Cache, a great cloud-computing play that popped 94 percent from its pricing to open at $27. Now it’s sitting below that level at $25.53.
And Cramer isn’t exempt from being caught in this trap. China Ming Yang and Bitauto Holdings both flopped after he recommended that viewers get in on their IPOs.
“So I just want to warn you,” Cramer said, “as good as many of these Chinese Internet IPOs are, picking winners in the P.R.C. can be very, very difficult.”
Now, Cramer isn’t saying to avoid these Chinese IPOs altogether. He’s only urging caution. And if you are lucky enough to get in on these deals, then play them smart—take profits when you have them. Because if history is any guide, they may not be around for long.
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