The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Shanda Interactive (Nasdaq: SNDA).

Almost done with the tenth chapter
Shares of China's online gaming pioneer spiked 17% yesterday, after the company announced it was planning to spin off its Web-based literature business as a stand-alone IPO.

I'm not buying it.

For starters, Shanda's first spinoff didn't go over too well. Shanda Games (Nasdaq: GAME) was rolled out at $12.50 two years ago. It's waffling about in the single digits.

It's also hard to get too excited about e-books in China. It's a cutthroat business mired in piracy and a lack of leadership on the hardware end. There's no magical Kindle elixir here.

"Different country, different environment," E-Commerce China (Nasdaq: DANG) Chairwoman Peggy Yu explained in a Wall Street Journal interview shortly after her company's IPO.

Yu should know. Dangdang is China's leading online retailer of physical books. Her company is doing "preparation work" for its inevitable online push, "aggregating the content from all authors and publishers." However, Dangdang is in no rush. This is still a market that is in its infancy, and any e-readers that emerge will be quickly counterfeited.

I'll reserve judgment of Shanda's Cloudary spinoff until I see the actual numbers, but we already saw the company whiff badly with Shanda Games. Why would Cloudary be any different?

The best reason to bail on Shanda Interactive, though, is Shanda Interactive itself.

Analysts see Shanda earning $1.69 a share this year and $2.14 a share come 2012. This is considerably less than what the pros were targeting just a few months ago, because Shanda has been a serial underperformer lately. It missed Wall Street's profit expectations every single quarter last year.


EPS est.



Q1 2010 $0.66 $0.48 (27%)
Q2 2010 $0.53 $0.40 (25%)
Q3 2010 $0.50 $0.26 (48%)
Q4 2010 $0.39 $0.34 (13%)

 Source: Yahoo! Finance.

You deserve better than this choreographing.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • (Nasdaq: NTES): If Shanda's fetching 24 times next year's projected profitability appears reasonable given China's allure, consider that four other publicly traded Chinese Web-based gaming companies are trading between eight and 14 times next year's bottom-line target. NetEase is at the high end of that range, but it's worth it as the country's top dog and dot-com darling that won Activision Blizzard's (Nasdaq: ATVI) prized World of Warcraft licensing rights in China.
  • SINA (Nasdaq: SINA): If there's a spinoff worth waiting for it would have to be SINA's Weibo. The microblogging site has quickly become China's Twitter -- with a few Facebook-esque features for maximum stickiness. SINA has been a new-media darling for years, and it's not cheap. Then again, it has also earned its juicy premium by trouncing Wall Street guesstimates during every quarter last year. Take that, Shanda!
  • Baidu (Nasdaq: BIDU): China's leading search engine isn't as cheap as China's online gaming companies. However, I'd rather pay 39 times next year's Baidu earnings than fork over 24 times next year's Shanda's unlikely profit level. The online gaming niche is competitive, but the same can't be said for paid search, with Baidu serving up roughly two-thirds of the country's search queries. You can always wait for Baidu to pull back before hopping on, but there are too many people who felt that way and were stranded Baidu-less at much lower price points.

I'm sorry, Shanda. There's a reason why the Rule Breakers newsletter service booted you from the scorecard last year.