A Chinese Stock That's On a Roll
But I’m not ready to throw in the towel on growth stocks quite yet. My recommendation today is a Chinese stock (Surprise!) that’s been on a roll since the middle of March. It’s NetEase (NTES) and here’s what Cabot’s analysts had to say about it in the May 4 issue of Cabot Top Ten Trader.
Why the Strength
The major Chinese Internet portals—like NetEase, Sina.com and Sohu.com—all provide a wide range of services that include news, weather, sports, email, shopping, messaging, search and entertainment. But each portal also has a specialty that sets it apart from its competitors. So, while NetEase is the largest e-mail provider in China (over 740 million registered users) and has one of the most popular portals, including mobile offerings, its differentiating specialty is games. NetEase is the top developer of in-house-designed games in China, with popular titles like Fantasy Westward Journey II, Ghost II, Tianxia III and Heroes of Tang Dynasty Zero. The company is also the sole Chinese affiliate of Blizzard Entertainment, and has offered World of Warcraft and other Blizzard titles, since September 2009. By keeping content fresh, NetEase can make money from subscriptions and sales of in-game items. After a couple of years with just 15% growth, revenue accelerated to 26% in 2014. And estimates of earnings growth are for 14% in 2015 and 19% in 2016. NetEase, which pays a higher-than-usual dividend for a growth stock (forward yield is 1.3%), will be revealing its Q1 results on Wednesday, May 13, after the market closes. From the recent strength of its stock, investors appear to be expecting good news.
NTES has been in an uptrend since late 2012, but several large pullbacks—the latest was a dip from 118 in February to 94 in March—have made it tough to stick with it. The rally that kicked off in the middle of March has lifted NTES from 94 to nearly 130. Despite that rally to new price highs, NTES is trading at a reasonable trailing P/E of just 22. We think NTES is buyable on any pullback of a couple of points, although you should keep any buying small this close to earnings. A stop a bit below the rising 25-day moving average, now at 117, will provide protection.
Suggested Buy Range: 124-128
Suggested Loss Limit: 114-116
Note that the rising 25-day moving average is now around 121.5, and adjust the buy range and stops accordingly.
A Chinese Stock With Excellent Prospects
Originally from the Cabot Wealth Advisory on 2/24/15
From Cabot Wealth Advisory on 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!
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.
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Industry: Internet Software & Services
Full Time Employees: 5,254
2/24/15 A Chinese Stock With Excellent Prospects
12/1/11 Low P/E ratio of 13