Seeking out the 10 mid caps to rule them all is the only logical follow-up to seeking the 10 small caps to rule them all. Unlike small-cap companies that offer investors the potential for high-risk, high-reward returns, mid-cap companies usually have significantly less risk built in because of their proven business track records. These companies offer either distinctive products or exceptional value to investors -- or possibly both.
For reference, here are the choices for the previous three weeks:
This week, I want to highlight a Chinese Internet company that's growing by leaps and bounds and has only government regulations standing in the way of its becoming a powerhouse: Sohu (Nasdaq: SOHU).
What it does
Here's an easy way to think about what Sohu does: Think about Yahoo! (Nasdaq: YHOO). Now strip out the stagnant growth, the countless management gaffes, and its stale image, and you'll have Sohu.
The company operates as a basket of Internet destination portals in China that provide news, information, video content, and communication services. Like other popular Internet destinations, including AOL, Yahoo!, Google, and SINA (Nasdaq: SINA), Sohu earns its keep by selling advertising space on its Web pages, by offering pay-per-click ad services, and through the sale of online games and downloadable content.
How it stacks up
Sohu's greatest current risk is being lumped in with the recent IPO craze coming out of China. New issues Renren (NYSE: RENN) and Youku.com (NYSE : YOKU) have traders in a mad frenzy over their potential, which has caused near-bubble conditions in the Chinese Internet sector.
In the most traditional sense, I'd hesitate to call Sohu an inexpensive company, but toss this company up next to its competitors and you'll see a night-and-day contrast.
| Company | Price/Operating Cash Flow (TTM) | Price/Book | PEG Ratio |
|---|---|---|---|
| Sohu |
8.8 |
3.3 |
1.0 |
| SINA |
58.7 |
5.1 |
5.87 |
| Baidu (Nasdaq: BIDU) |
60.1 |
30.2 |
0.84 |
| Youku.com |
N/A |
13.6 |
N/A |
| Renren |
275.9 |
N/A |
N/A |
| Yahoo! |
15.5 |
1.57 |
1.59 |
Sources: Yahoo! Finance and Morningstar. Ratios as of June 7.
I want to know what Sohu ever did to the investment community to deserve the complete disregard it's being shown. Youku.com and Renren's valuations are enough to scare even a day trader away, while more seasoned plays Baidu and SINA trade at ludicrous prices relative to their operating cash flow. For kicks I threw Yahoo! in there as well. Even though it's inexpensive on a book basis, it leaves a lot to be desired on the growth front.
How it could make you money
Before being so careless as to lump Sohu in with these new IPOs, take a hard look at Sohu's balance sheet and growth prospects. The company boasts $21 in cash per share with zero debt, meaning you're essentially paying $50 per share after backing out cash for a company expected to produce more than $5 in EPS in 2012 while maintaining revenue growth in excess of 20%. That all equates to a forward P/E of 13, which, in some circles out there, makes Sohu a value play.
No one gives the company's online gaming division enough credit, yet this should be the main growth driver for the next few years. Changyou.com (Nasdaq: CYOU), the former gaming wing of Sohu that was spun off in 2009, continues to be owned in large part by Sohu (66% of outstanding shares) -- so Changyou's gain is also Sohu's gain. Analysts expect Changyou to grow 15.4% per year over the next five years, a rate that should bode well for Sohu and its shareholders.
It's tough, if not impossible, to find value in the Internet information sector, but Sohu looks to offer investors the right amount of risk versus reward while providing the safety of a debt-free balance sheet. For that reason, it deserves a spot among the 10 Mid Caps to Rule Them All.
Do you Sohu? Let the community know your thoughts in the comments section below, and consider adding Sohu to your watchlist to keep up on the latest news stories out of China.
