My New No. 1 China Internet Play

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

After a rip-roaring April, financial markets sold off sharply last week. The S&P 500 fell 1.7%, the Nasdaq dipped 1.6% and the MSCI Emerging Markets Index dropped by 3.5%. As many of your positions have breached downside technical levels, I have moved most of them to a HOLD.

But it was the sudden drop in commodities prices that proved truly painful. The broad-based DB Commodity Index dropped by over 10%. Crude oil began the week at $114 a barrel, but in one of the largest one-day drops since September 2009, crude prices fell 10% Thursday to under $100 a barrel. Silver continued its biggest collapse since 1980. Your commodities-related positions — coal play, Alliance Resource Partners L.P. (ARLP), global mining bet Joy Global (JOYG), and oil rig giant Nabors Industries (NBR) were hit the hardest.

You also hit your stop in Sina Corp. (SINA), closing the position with a gain of 138.39%. That’s not a bad thing as I have become increasingly concerned about Sina’s valuation. That said, despite some Chinese Internet stocks entering bubble territory, there continues to be some opportunities in this high-flying sector.

That’s why this week’s Bull Market Alert recommendation is another Chinese Internet stock, Sohu.com (SOHU), a company that I believe offers a much better value than higher-profile picks Sina.com (SINA) and search-engine company Baidu (BIDU).

Sohu.com is one of China’s leading Internet properties, providing search, online video, advertising, wireless services and online gaming through a portfolio of websites. Gaming and advertising are Sohu.com’s two core business units.  Sohu.com spun off its gaming unit Changyou.com (CYOU) in 2007, and is one of China’s top operators of massively popular multiplayer online role-playing games (MMORPGs). Sohu.com remains a majority owner of Chang-you.com and gaming brought in 53% of Sohu’s total revenue last year. Sohu.com’s advertising division, which provides ads on its portal websites, accounted for 35% of the company’s total 2010 sales.

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Sohu.com has an enviable record of delivering accelerating earnings and sales growth in recent quarters. In late January, Sohu.com beat views with a 34% rise in Q4 profit and a 27% gain in revenue. In April, analysts expected to see Q1 earnings rise to 96 cents a share and sales climb 30% to $168.8 million. But Sohu.com exceeded both those of forecasts, when it announced Q1 results on April 25 that showed its profit jumped 38% to $1.01 a share and its sales grew 35% to $174.4 million.

Sohu.com is also a bargain compared to its higher-profile rivals, trading at a forward P/E of 17. That compares with a forward P/E of 54.43 for Sina.com and 35.58 for portal Baidu. Sohu.com also generated 2.5X the gross profit of Sina.com — yet it is trading at one-third of Sina.com’s enterprise value. Based on this measure alone, Sohu.com is trading at one-eighth the valuation of Sina.com.

Sohu.com sold off sharply in last week’s correction, and is trading at around $94 — which is far off of its previous level of $106. It should bounce back to that level reasonably quickly.

So buy Sohu.com (SOHU) today at market and place your stop at $76.00. If you want to play the options, buy the September $95 calls (SOHU110917C00095000).

Portfolio Update

Alexion Pharmaceuticals (ALXN) ended the week 1.01% lower, though it bounced a solid 1.87% on Friday alone. Your biotech bet is now a HOLD.

Alliance Resource Partners L.P. (ARLP) ended the week 10.35% lower. As a master limited partnership, trading volumes are often very thin in this stock, exaggerating market moves. Trading below its 50-day moving average, ARLP is a HOLD.

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Bank of Ireland (IRE) fell 4.5% this past week. With both Greece and Ireland enjoying “bailout” rates of 4.2% versus Ireland’s 5.2%, I expect this level will be renegotiated in the coming weeks. This is bullish for Bank of Ireland. Trading below its 50-day moving average, IRE is a HOLD.

Joy Global (JOYG) dropped 11.35% this past week. This sell-off is completely unwarranted. But with JOYG trading below its 50-day moving average, I am moving this to a HOLD.

Millicom International (MICC) ended the week 2.44% lower, after hitting a 52-week high the previous week. With the global telecom sector coming back into vogue, Millicom remains a BUY.

Nabors Industries (NBR) dropped 10.35% last week. With oil prices pulling back, I’ll be looking to exit this position on any sustained bounce. NBR is a HOLD.

National Bank of Greece SA (NBG) ended the week 11.95% lower. European officials are discussing a new Greek economic plan that could push back the deadlines to hit budget targets, giving the economy more room to grow out of trouble. Until we get some clarity, NBG is a HOLD.

Novo Nordisk A/S (NVO) dropped back 2.98% this past week. As biotech is one of the strongest sectors in the market, I continue to be bullish on NVO. But having fallen below its 50-day moving average for the first time since November, NVO is now a HOLD.

ELEMENTS Rogers Intl Commodity Agri ETN (RJA) ended the week 5.98% lower. Trading below its 50-day moving average, this bet on agricultural food prices remains a HOLD.

Toyota Motor Corp. (TM) ended the week flat, seemingly immune from the fallout in global equities. Toyota will be announcing earnings on May 9. These won’t be pretty. Trading below its 50-day moving average, I am putting Toyota on a HOLD.

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