AABP Award 728x90

BERKO: Chinese Internet stocks not for the faint of heart


Dear Mr. Berko:

Could you recommend four Chinese stocks like Google that are in the same business as Google? I’m down on the U.S. stock market and our economy, and I want to invest about $20,000 in popular Chinese Internet companies hoping to make some big bucks in the next 12 months, which I doubt I can do here. Please recommend four good ones and I’ll put $5,000 or so in each. Also, should I sell 300 Vanguard Natural Resources, which you recommended in late 2009 as a gamble at $15 and is now $28?

W.P., Bloomsburg, Pa.

Dear W.P.:

There are more than 1.5 billion people who live in China, speaking 292 official languages. By comparison, there are 350 million folks in the U.S., speaking only three official languages: English, Southern and Spanish. American advertisers who promote products have a much easier time than Chinese marketing firms that pitch products. And Sohu.com Inc. (SOHU-$44.26), with $986 million in revenues, Baidu Inc. (BIDU-$118.70), with $3.5 billion in revenues, SINA Corp. (SINA-$52.55), with $500 million in revenues and Tencent Holdings Ltd. (TCEHY-$29.18), with $5.0 billion in revenues, have been around for years with combined annual revenues that are about 20 percent of Google Inc.’s $40 billion.

But it’s difficult to be comfortable with most Chinese issues, because their balance sheets and income statements have “corporate finagle factors” and the resulting numbers are Greek to me. Some of these Chinese accounting guys make Bernie Madoff, Ken Lay, Goldman Sachs and Bank of America/Merrill Lynch look like pikers. Chinese accounting practices might pass muster with Standard & Poor’s or Moody’s (investors have to be fools to trust S&P or Moody’s), but in this instance, I’d be more comfortable trusting a member of Congress. The Chinese Accounting Standards system (CAS) is a paper tiger without claws. And the Chinese Securities Regulatory Commission (SRC) system is a paper tiger without fangs. Both tiptoe through the lotus blossom with care. It’s scary over there.

BIDU, the most well-known, traded between $101 and $166 in the last 52 weeks and is on track to produce 2013 revenues of $5 billion, up from $3.5 billion this year, and earn $6.41 a share, up from last year’s $3.57. Wall Street’s China watchers think BIDU could trade at $227 in the coming year. During the last 52 weeks, TCEhy traded between $18 and $32 and is on track to record revenues of $7 billion in 2013, increasing its earnings to $1.19 per share from this year’s 88 cents. This is a favorite of the China watchers, who think the stock could trade at $36. A third is SHOU, with a 52-week trading range between $42 and $91. SOHU is having a bad year, expecting to earn $2.68 per share this year, down from 2011’s $4.65. However, the China watchers think per-share earnings for 2013 will come in at $4.15 and a potential stock price of $72. Lastly, SINA, with a 52-week trading range between $46 and $128, should improve 2013 revenues about 25 percent to $640 million and earnings from 28 cents per share to $1.30. The China watchers have a $67 target price for SINA. These fortune cookies represent the most reliable of the various providers in China and hopefully those with the most appreciation potential. And if you have a high risk tolerance, they might post attractive long-term gains in the coming dozen months.

Vanguard Natural Resources LLC (VNR) is now $24.90 and may move lower if the market continues to fall. You have a nice 10-point profit, and if profit, rather than income, is your game, sell VNR this year before the capital gains tax rates rise. VNR owns and acquires oil and gas properties in the U.S., pays a $2.37 dividend that yields 9.5 percent, and the consensus for this and next year is higher revenues and higher earnings. The dividend that has been raised in each of the last 9 quarters is expected to be raised several times in the coming eight quarters. This looks like a good income and growth stock for investors with a moderate risk tolerance. The choice is yours.

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