By Paul Goodwin, Editor of Cabot China & Emerging Market Report
From Cabot Wealth Advisory 12/1/11
My stock pick for today is a Chinese Red Chip stock that has all the hallmarks of a big winner, but whose chart says a little more patience is necessary.
The company is NetEase.com (NTES) a Chinese Web portal that offers a standard menu of Yahoo-like services, including news, blogs, search, matchmaking, social gathering spaces and so on. But what sets NetEase apart from other Chinese Web giants like Sina.com (SINA) and Baidu (BIDU) is that it derives 85% of its revenue from online gaming operations. The hot items among the company's massively multiplayer online role-playing games are Fantasy Westward Journey, Westward Journey Online II and III, Heroes of Tang Dynasty and Datang, plus World of Warcraft and StarCraft II, which it operates under license from Blizzard Entertainment. Game revenue comes from playing time fees and from the sale of in-game items.
The company's revenue growth hit 49% in 2010 and averaged 40% for the first three quarters of 2011, while earnings growth for the period averaged nearly 61%. After-tax profit margins have topped 40% for the last six quarters.
The company has no long-term debt, and the stock is liquid (trading over a million shares a day) and sports a laughably low P/E ratio of 13.
So why isn't this a screaming buy right now? The answer is in the chart, which has shown that NetEase has the power to move big, but is now trading at about the same level it attained in September 2009. The culprits are the usual suspects, general market weakness, fear that the Chinese government might initiate another one of its occasional crackdowns on playing time (just like parents in the U.S.!) and a general distrust in the reliability of Chinese reporting.
So when should you buy NTES? The cue will come from the chart, with special emphasis on rising volume accompanying a move past resistance at 48, 50 or 52, depending on your level of aggressiveness. But take the warning of the chart seriously; NTES looks like a high-quality bargain, but the chart counsels caution, probably in the form of a tight sell stop.
Editor's Note: To learn more about high-potential stocks from Brazil, Russia, China and India (the BRIC countries), check out Cabot China & Emerging Markets Report. Hulbert Financial Digest has consistently ranked it as one of the top-performing newsletters for the last several years, quite a feat considering the market's performance during that time. Click here to learn more today!
Paul Goodwin
Emerging Markets Specialist, Analyst and Editor of Cabot China & Emerging Markets Report
A researcher and writer for over 30 years, Paul Goodwin has been a member of the Cabot investment team and editor of
Cabot China & Emerging Markets Report since 2005. Under Paul’s stewardship, Hulbert Financial Digest rated Cabot China & Emerging Markets Report the number-one-rated newsletter of 2006 with a 78.6% gain for the year, the number-one-rated newsletter of 2007 with a 74.1% return, and the top-performing investment adivsory for five years with a 17.9% annual return.