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Chinese Rocket Stocks

James Altucher

07/03/07 - 09:43 AM EDT
It's exciting for me to see stocks move like Research In Motion(RIMM Quote) did on Friday, climbing 17%, and Baidu(BIDU Quote), which was up $18, or 11%, on Monday.

RIM soared Friday, and added another $14-plus yesterday, because the company blew away earnings, right in the face of all the short-sellers who anticipated its premature death in the wake of the release of Apple's(AAPL Quote) iPhone.

Baidu's ascent came when Chinese gaming company Shanda Interactive(SNDA Quote) released a new online game. Does it make sense? Not necessarily. Baidu is hard to value at 60 times earnings but does have year-over-year growth of more than 100%.

However, investors are nervous about putting money in the online China stocks. They are worried about bubbles. They are worried about the Chinese government. They are worried about corruption. In other words, these companies that are spinning off a ton of cash, have excellent balance sheets, and great growth prospects have a solid of wall of worry built in, too.

That's why, in an effort to to find the next Baidu, I set up the Chinese Rocket Stocks portfolio on Stockpickr.

I focused on stocks that have great balance sheets (I want to see a lot of cash and no debt); good growth prospects (ideally 50% anticipated growth or more); potential for a short squeeze (when the short-sellers run for cover, good things can happen); and a good multiple price-to-earnings-ratio-p-e over cash flows, relative to growth.

Do you have ideas of other Chinese stocks that could replicate BIDU's run?
Answer Here

Here are two of the stocks I found:

Netease(NTES Quote): This stock fits all of the criteria, and it's an online gaming company (like Shanda). The company has $438 million in net cash. So with a $2.2 billion market cap and $200 million in cash flow, it trades at only nine times cash flows. Analysts expect earnings to go to $1.23 per share in 2008 from $1.15 in 2007.

Analysts have not been correct often in the past. Netease beat analysts' expectations the past four quarters in a row, and if it beats again in 2008, then the forward P/E will be 13, or even lower, which is why it is first on my list of Chinese Rocket Stocks. Netease is also on an interesting portfolio of the companies of young billionaires.

CDC Corp.(CHINA Quote): This company runs China.com and sells enterprise software to companies in China as well as online games. The company has $247 million in net cash on a $961 million market cap. Analysts expect earnings to go to 57 cents a share in 2008 from 43 cents a share in 2007, giving it a forward P/E of 14, despite 30% growth. The company has met or beaten estimates four quarters in a row.

For the rest of the top 10 Chinese Rocket Stocks, including Sohu.com(SOHU Quote) and Ninetowns(NINE Quote), check out the China Rocket Stocks portfolio. The list includes some Chinese Internet companies that are so cheap they are almost trading with an enterprise value of $0, despite being profitable.

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