How Lenovo, world's worst tech stock 5 months ago, became China's hottest

What was the world’s worst technology stock only months ago has become China’s hottest, staging a defiant comeback since it was booted off Hong Kong’s benchmark gauge.

Lenovo Group Ltd. has seen its shares surge 43 percent in the nearly five months since the announcement of its removal from the Hang Seng Index -- an increase that beats every other Chinese technology stock during the same period while outperforming the broader Hang Seng index that this month slumped into a bear market.

The rapid reboot of the PC manufacturer’s shares is a welcome surprise for investors who had grown accustomed to Lenovo being the world’s worst-performing technology stock, plunging 56 percent between March 2013 and April as it repeatedly missed turnaround targets for its embattled smartphone business.

"Lenovo’s fundamentals are having a rebound, which surprised some investors," said Linus Yip, a strategist with First Shanghai Securities. "The sales recovery story is particularly attractive in a bear market, at a time when a tech darling such as Tencent Holdings Ltd. is facing growth bottlenecks." Tencent has fallen 20 percent since Lenovo was removed from the Hang Seng gauge in June. 

Driving the rebound is a revival in global PC shipments, which saw the fastest growth in six years in the three months ended June as Lenovo reported a better-than-expected net income of $77 million during the period. Its loss-making smartphone unit, which used to be a big concern to investors, almost halved its losses on-year while it is benefiting from strong sales and shipment momentum in the global server business.

Short sellers are getting burned as the stock soars: bearish interest fell to just 5.6 percent of free float from 16 percent in May, which was the highest in at least 12 years. Analysts have lifted their average target price by 20 percent since the day before Lenovo’s quarterly results, the second-biggest increase among all MSCI China Index members, according to data compiled by Bloomberg.

Lenovo’s sales recovery comes at a good time for China as it looks to domestic brands amid a deepening trade war with the US, says Yip. "It was a quiet stock for a few years until recently. And the upside may not be fully priced in yet."