China Internet ETFs: Room to Run

Some of the air has come out of the sales of U.S. Internet stocks this week as investors are approaching high P/E names with caution. That approach to the Amazons (NasdaqGM: AMZN) and Facebooks (NasdaqGM: FB) of the world has prompted some retrenchment in some of this year’s top ETFs, but some still see opportunity with Chinese Internet stocks.

Chinese Internet names in J.P. Morgan’s coverage universe have jumped an average of 122% this year and on a P/E and PEG (P/E versus growth) multiple basis, the sector is now trading higher than its historical range, according to Barron’s.

Even with a plethora of jaw-dropping performances by Chinese Internet stocks, the ETFs that hold those names are not too stretched on a valuation basis. For example, the Guggenheim China Technology ETF (NYSEArca: CQQQ) has a P/E of 15.5 and a price-to-book ratio of 1.9, according to issuer data.

“Despite a strong P/E re-rating in 2013, most of these stocks still trade at what we believe to be reasonable PEG multiples (Baidu 1.0x, Qihoo 1.0x, Vipshop 0.9x, and Phoenix New Media 0.8x),” J.P. Morgan wrote in a note obtained by Barron’s.

Baidu (NasdaqGM: BIDU) is CQQQ’s second-largest holding with a weight of 11%. The newer KraneShares CSI China Internet ETF (NasdaqGS: KWEB) allocates a combined 19.7% of its weight to Baidu, Qihoo 360 (NasdaqGM: QIHU) and Vipshop (NYSE: VIPS). [China Internet ETF may not Need Alibaba]

Those are not cheap stocks. Qihoo trades at almost 160 times trailing earnings while Vipshops trades at 168 times last year’s profits. With that in mind, J.P. Morgan recommended focusing more on earnings surprises and less on multiple expansion.