Market Report: Chinese Gaming Stocks - Further SNDA Upside, says Black Sheep Trader

Never listen to the opinions of big banks… ever.

In 2006, Piper Jaffray downgraded shares of Shanda Interactive from “Market Perform” to “Outperform” on the notion of profit limitations.

I, on the other hand, believed otherwise. Basing my research on fundamentals and Black Sheep Trader methodology, I recommended a buy on SNDA at $13.50. You’ll notice the mid-May 2006 DMI+ move above DMI-. Once that move confirmed the MACD (12, 26) blue line move above the MACD 9-day, we issued the buy recommendation.

The bank missed the move. We didn’t.

Since that buy recommendation, we’ve held and watched it soar to $40 a year later.

But is it too late to buy Shanda for further upside? Not at all…

According to Black Sheep Trader, we have bullish confirmation once again. A six-month daily chart shows MACD (12, 26) crossing above MACD (9) in late August. Our confirmation of a bullish trend came in early September when DMI+ shot above DMI-.

But, even at $40, SNDA is undervalued with a PEG ratio of 0.7. For a company with 20.5% market share in a space where revenue soared 185% year over year in Q2 2007, that’s cheap.

Just compare it to its peers to see just how cheap. Electronic Arts trades at 28x earnings with a PEG ratio of 2.54. Sohu trades at 31x earnings with a PEG ratio of 2.28. And Baidu trades at 78x earnings with a PEG ratio of 2.37.

There’s still reason to be bullish on SNDA upside. Look for Q3 2007 earnings on November 8, a seasonally strong period, and the release of a highly anticipated new game. Each could give shares of SNDA further boost.

Stay tuned to Black Sheep Trader for more.

Ian L. Cooper
Black Sheep Trader