BOSTON (TheStreet) -- Many investors stay away from Chinese stocks, preferring funds instead, as scandals dog smaller companies from the world's second-largest economy.Many investors have asked me for recommendations of highly rated Chinese companies. So I ran a screen of companies based in China with American Depositary Receipts (ADRs) trading on U.S. exchanges. Here are the results for TheStreet Ratings' five top-ranked Chinese stocks based on a quantitative equity model.
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 - Get Report) 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.