5 Highest-Rated China Stocks

The shares have been on quite a run, up nearly 250% over the past year. Current valuations at first do look a bit lofty, as a middle-of-the-pack valuation score insists. At a trailing P/E of 50 and a forward P/E of 27, if the stock can continue growing at the nearly 37% compounded rate of the past three years, it could still be a good investment. Our model rates the stock a "buy" with an $83 price target.

Shanda Interactive (SNDA), a gaming stock, has suffered slowing earnings per share growth over the past two years. Still, earnings in the most recent quarter beat analysts' estimates. The stock has a low growth score (3.73 out of 10), driven mainly by depressed earnings over the past year, yet the market anticipates a 27% improvement in earnings through 2012.

Optimism is based on expectations for a strong product pipeline for 2011, which may diversify some of the revenue streams. The company also looks great from a solvency standpoint, with net cash on the balance sheet of nearly $1 billion (or $18/share). Our model rates the stock a "buy" with a $49 price target.

Baidu (BIDU) is probably the most recognized Chinese company. It's the leading online search engine in China and our fifth-highest "buy"-rated Chinese ADR. The stock has a $179 price target.

Baidu scores highest on performance (the stock is up 128% over the past year), efficiency (it has generated more income per dollar of capital than 90% of the companies we review) and solvency (very little debt, over $1 billion in cash).

Our model shows some hesitation based on the valuation of the stock. It currently trades at 90 times trailing 12-month earnings, and at 37 forward. If the company can continue to increase earnings at the three-year rate of 80%, the stock looks inexpensive at these levels.

Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser.

Stuart earned his bachelor�s degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

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