'China's Facebook' Is Ready to Break Out

By Dave Goodboy

NEW YORK ( TheStreet) -- "They need to get rid of founder Mark Zuckerberg. Facebook ( FB) may have a chance if a talented leader is appointed; otherwise it's a no-go. The guy is a master at the start-up, but he needs to turn the reins over to someone else to run the company," exclaimed an under-the-radar Internet insider with whom I recently chatted in South Florida.

His words proved semi-prescient as the heavily anticipated Facebook initial public offering has gone down in history as providing the worst return of any large IPO in the past decade.

The massive $16 billion IPO was fraught with issues from its launch on May 18. A lack of communication at Nasdaq appears to be the initial trigger of the strife, causing the IPO to be delayed. Some investors complained that their orders weren't being filled or they were getting shares at a much higher price than they wanted.

The confusion resulted in about $115 million in losses for the four major market-makers in the IPO: Knight Capital Group ( KCG), Citigroup's ( C) Automated Trading Desk, Citadel Securities and UBS ( UBS).

The exact steps taken by Nasdaq officials on the IPO's first day are still unclear. However, the losses suffered by investors and the market-makers are very real. This has triggered a rash of shareholder lawsuits against the social media behemoth.

Obviously, it wasn't Zuckerberg who caused the initial confusion. But time will tell if he can help solve the problems or if a new leader needs to take over.

Either way, it looks like it's going to be a long and revealing road to get to the bottom of exactly what went wrong with the IPO. But one thing is for certain: Facebook's flop pulled down the entire social media sector, potentially setting up a great buying opportunity for savvy investors.

The Facebook of China

While the lawyers are sorting out Facebook's troubles, otherwise successful social media companies have been knocked down into bargain territory. One of these is Renren ( RENN).

The so-called Facebook of China nearly doubled in 2012 prior to the Facebook flop. As you can see, shares plunged into the $4 range in sympathy with the Facebook selloff. However, the price appears to have stabilized and may be beginning to climb higher.

Since shares are below the 200-day simple moving average, this stock does not qualify for my value zone buying system. However, it is a classic break-out buy at $5.

The fundamentals look solid. The company is sitting on $1.04 billion in net cash. This works out to be $2.65 per share. This cash can be used to start a stock buyback program, or pay a dividend, which would push the shares higher. It may also be used, as it has been previously, to buy out smaller social media start-ups in China. One never knows if one of these start-ups could have cracked the code, taking Renren down an entirely different and lucrative social media avenue.

Another solid positive is that the company is aggressively pursuing partnerships with major technology companies. Renren will partner with Intel ( INTC) for network assistance, as well as Japan's popular photo app, SnapDish.

This willingness to work with others unmistakably signals that further deals may be pending. Obviously, Renren could provide any large, western company the perfect marketing gateway to reach the Chinese masses. Partnerships of this sort could easily send shares into the stratosphere.

Risks to Consider: Although Renren looks appealing both technically and fundamentally, there are certain risks to investing in the Chinese American depository receipt. Political and macroeconomic risk factors are my primary concerns.

As you know, China is far different than the United States when it comes to politics, both corporate and national, not to mention contract law and disclosure. In addition, the latest economic numbers may be signaling a significant slowdown in Chinese economic growth. However, it's critical to note that the economy is still growing like gangbusters; the growth has just missed the consensus estimates.

Due to these unknown factors, investors need to position size accordingly and always use stop-loss orders.

Action to Take: Renren is set up to be a classic breakout play. Start to build a position by buying on a breakout above the $5 level, and then add to the position on a break above the 200-day moving average. Other knocked-down social media companies such as Quepasa ( QPSA) and even micro-cap IZEA ( IZEA.PK), although not as appealing as Renren, should also be watched for potential momentum buy opportunities.

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