China's Twitter Is on Its Way Up

05/24/2013 7:45 am EST

Focus: STOCKS

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

This company has seen its shares drop considerably, but now the turnaround is happening, says Paul Goodwin of Cabot Wealth Advisory.

China has been the fastest-growing big economy in the world for many years, but all most investors see is the dangers. And that's been keeping them away from one of the most profitable plays around.

You remember China, right? The country with 1.3 billion people and an economy that has "slowed" to an annual growth rate of just 7.5%? The manufacturing dynamo that's still the default "factory to the world"? A place that's being transformed by the Internet and cellular technology and a new city of a million people being built every month? Yes, that China.

The excitement in stocks outside the US is widespread. I know that there has been a lot of bad publicity for Chinese stocks in the past. Stories about heavy-handed government, pollution, human rights abuses, and stocks that simply went down.

As a growth investor, you need to remember what a maturing bull market feels like, so you can be prepared to bail out before the wings come off. Conversely, you should remember enough about market bottoms to be watching a deepening bear market (sitting heavily in cash) with a gleam in your eye while you wait to spot the birth of the new bull.

China and the emerging markets (and, yes, even the frontier markets) are still on many investors' no-go lists. Their long memories are blinding them to what's happening right now.

There are still dangers out there. Not all Chinese stocks are going up, and not all of the stocks that are going up deserve your investment.

My stock recommendation today is a conditional one. Chinese Internet portal Sina (SINA) offers a huge bundle of news, weather, sports, games, e-mail, mobile services, affinity groups, specialized content, and most important of all, the Sina Weibo micro-blogging service.

Sina uses a relatively conventional business plan, offering a wide array of information and services to attract people, then selling advertising space to merchants. This kind of advertising contributes about three-quarters of Sina's revenue, with most of the rest coming from wireless value added services.

Much more sexy is Sina's Weibo, which is like a Chinese version of Twitter, with a couple of big differences. First, Twitter is banned in China, as the government worries about its potential for inflaming anti-government sentiment, organizing demonstrations, and disseminating subversive content. Weibo gets more tolerance because the government is more confident that the company will enforce content rules.

SINA stock has had a rough time of it in recent years, dropping from a high of $147 in 2011 (the height of Weibo excitement) to just $59 in recent trading. Competition has eaten into the company's profitability, and it has probably allowed its content to get a little stale.

Despite this, more than four out of five analysts rate SINA as a buy, probably because of its improved valuation and its long-term potential for growth.

The big story about Sina is that Alibaba Group, the largest e-commerce company in China, has bought an 18% stake in Sina's Weibo service for $586 million. This tie-up got investors' attention; SINA jumped from $50 to $55 on April 29 when the news came out.

That's a big catalyst for change. But in the near term, the bottom-line truth about Sina came out on May 16, when the company reported its Q1 results. Analysts were looking for a loss of 4 cents per share, which would be a major improvement over year-ago losses. In fact, SINA earned 2 cents per share, beating those estimates handily.

There's a lot of long-term upside potential for SINA, but you'll have to wait for more reaction to last week's earnings announcement to see how things will fare in the short run.

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