Tuesday, February 5, 2008

Bookkeeping: Initiating Sohu.com (SOHU) "Starter" Position

I mentioned Sohu.com (SOHU) yesterday [Sohu.com (SOHU) Also Impressive]. This stock just can't get out of it's own way - each time it raises guidance or performs well the market rewards it with a sell off. This is my plan with the name.

I began a starter position today, 250 shares near $46, as the stock is down about 6% today. This gives me a 1.0% allocation - starter position. I will either buy more on (a) a pullback to the 200 day moving average (upper $30s) or (b) a breakout over and above the 50 day moving average (nearly $50). Stocks in between these 2 moving averages are sort of in no man's land for me, so I don't want to make a huge commitment since the stock has a 50/50 chance of moving in either direction. Technically the chart is quite ugly with a series of lower highs; another reason I don't want to get too frisky in starting a large position now.

Analysts currently peg $1.54 for 2008 estimates, but Sohu.com already commented that they will beat next quarter's $0.32 by $0.11-$0.13, so that already takes us to $1.65-$1.67 full year territory. The one risk with this name is the Chinese Olympics should drive advertising business for the next few quarters, but then the hand wringing will begin about what drives business afterwards? That's a perception issue but the internet is very young in China and this is a cheaper way to play the online ad market than the very well known (and dominant) Baidu.com (BIDU). Sohu.com is still a bit player (tiny bit player) - but a tiny bit of a growing pie is still growth. As for the gaming side of business, well it is a wildcard to me.

If we assume Sohu.com can create earnings of $1.70 for 2008 that is a forward PE of 27x. Not cheap, but not too expensive for this sort of growth. So perhaps we can get a drop in price to upper $30s and find a more opportune price point to build this position.

Long Sohu.com in fund; no personal position

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