SOHU: China Plays With Growth Potential

Over the weekend, the big news was that a Chinese investment manager won the bidding to have lunch with Warren Buffet. Considering that the winner of the lunch last year got the chance with a bid of $650,000, it is rather mind-boggling that a year later the winning bid is $2.1 million! Even more telling is the winning bidder is a Chinese investment manager. How appropriate since China is the world's fastest growing economy. Of course, from an investing point of view, China has been anything but hot. On the contrary, the Chinese stock market has been the worst performer of 2008 after more than doubling last year. In the meantime, the Chinese economy keeps growing, increasing non-stop like a juggernaut, but there are some areas of concern. Inflation in 2007 was just 4.7%; in the most recent reading it was 8.7% - the highest in 12 years.

It is almost amazing the degree which Chinese stocks have fallen this year. While retracements aren't unusual after massive rallies, this correction suggests that the Chinese economy will come to a grinding halt. With that in mind, there is a chance the equities market in China is acting like a canary in a mine. More than likely the easy part is over. Chinese investors tapped billions of savings to fuel the rally and were joined by investors from around the world. Now it is going to be a more selective rally based on management competencies as well as potential. China is not immune to the inflationary pressures being felt all over the world, but the government has been able to grin and bear it in the past. The capitalism genie is out of the bottle and with it more freedoms and desires that should drive the nation higher.

For all the talk of China's muscle, there are 300 million living in poverty and 47% of the population makes it on $2,500 a year. The nation has had a taste of the good life, so while there could be natural growing pains the long term story should remain intact and very compelling. 3100 is a very pivotal number on the chart for the Shanghai Composite. A move through 3100 could spark a major rally back to 4,000 or higher.

China Plays for the Second Half 2008

I have compiled a free report with four China stock plays for the second half of this year. All the stocks I selected have PEG ratios well below 1.00 and potential for growth well beyond the Summer Olympic Games. The PEG ratio is price earnings against growth and a great metrics to consider when looking at high growth stocks.

Here is one of our favorite plays.

SOHU.Com (SOHU) $71.58

We have been in and out of this stock over the past couple of years, and the reality is, if an investor has the wherewithal to hang tough through the gyrations, this is a buy and hold for the next two years, maybe longer.

The company that provides online products and services has beaten the earnings estimates in each of the last four quarters, most recently by a margin of 49%. June quarter estimates have been surging and now the street is looking for $0.66 just three months ago the consensus was $0.44.

Technically the stock sees some resistance at $72.0 then $77.0 beyond there we see the stock rallying to $90.00. By the way, the PEG ratio is only 0.91.

Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies (www.wstreet.com) providing information to over 50,000 subscribers. Charles is a regular contributor to the Fox Business and Fox News Networks.

Disclosure: none

Comments

[tech man]

YES, MY RESEARCH SHOWS THE SAME FOR SOHU. I BELIEVE IT CAN GO UP TO 130 BEFORE THE END OF THE YEAR. BUY AND HOLD, IT CAN TAKE YOUR BREATH AWAY AT TIMES BUT IT IS A KEEPER FOR NOW.

[jegan ;-)]

Clearly hot returns- better than BIDU or SINA... Increasing fund buyers compared to BIDU and SINA . Looks like price is rolling over on the weekly charts . Kinda curious how much of the recent bump-up is related to the recent Buffet news? And if the rise is sustainable..

Nice article... Thx jegan ;-)

[zoltan kovacs]

The earnings surprises look very nice but people focus on them way too mechanically. It's really the potential, which is determined through the market (China and internet) and the competition. The business model of SOHU seems to adapt changes in the market very well, and finally they don't srew up the financials as a result. So it's a big and dinamycally growing market with a healthy and manageable competition and a lot of new evolving opportunities.

[borisb]

i am not sure one momentarily hot online video game title is that defendable.

[Daniel Hechter]

Why is Sohu going down after such a good Q2 ?
Was'nt it supposed to follow the same pattern that Bidu did last week ?

Would Q2 pay back soon ?

Has anyone got any kind of explanation ?

Thanks to all

[e-mail]....


On Jul 02 04:52 AM zoltan kovacs wrote:

> The earnings surprises look very nice but people focus on them way
> too mechanically. It's really the potential, which is determined
> through the market (China and internet) and the competition. The
> business model of SOHU seems to adapt changes in the market very
> well, and finally they don't srew up the financials as a result.
> So it's a big and dinamycally growing market with a healthy and manageable
> competition and a lot of new evolving opportunities.