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Will Facebook Frenzy Fizzle for China Internet Stocks?

With this type of volatility going on, there is substantial money to be made. But it remains to be seen whether these stocks are now momentum plays to be chased higher, or overbought plays to be shorted lower. The biggest problem is that there is no way to judge the rationality of investor sentiment. Many smart people went broke in the late 1990's by shorting irrationally priced internet stocks that continued to power higher for years. Many others went broke by failing to sell on the way down in 2000, or even buying on the dips.

The strategy I am taking is to wait until earnings get closer, because that should force these stocks back to sensible valuations. I don't have a very good sense of how RENN will fare for Q4 and full year 2011, but with its pile of cash and renewed interest in the stock, it is hard to imagine it trading below $4 again. If it gets to $4 again, I might consider buying, but if it gets to $7, then it would look like a good short.

If current price levels hold, I will be short both DANG and YOKU. DANG simply loses too much money (and will be losing more). With a $2.6 billion market cap, YOKU is simply overpriced. Upcoming earnings reports will correct both of these stocks substantially.

One stock I did buy on the dip in December was SINA, which I previously noted was already looking cheap in the $60's, and a true bargain in the $40's. But I am nervous about a reversal in the current frenzy, and happy to book some quick gains, so I sold out of SINA for now. I still like the company and the stock, but if Friday's buying frenzy was the only thing driving the stock higher, it could drop back quickly.

Disclosure: The author holds no positions in any of the stocks mentioned.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Rick Pearson is a private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.

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