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China Internet Stock Picks for 2012

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

BEIJING (TheStreet) -- Over the past month, the U.S.-listed Chinese Internet space has continued its slow meltdown. As expected, the weaker names in the space have been pummeled quite badly. However, now even the marquee names such as Baidu (BIDU), SINA (SINA) and Sohu.com (SOHU) are being dragged down by negative sentiment even despite a recent rebound in the NASDAQ.

I still generally like names such as SINA and BIDU, but I sold my BIDU because I expect I will have the opportunity to buy it back at a lower price in coming weeks. In the low $50's SINA is also looking quite cheap and is probably being overly punished for losses due to its investments in Mecox Lane and China Real Estate Information which are already reflected in SINA's share price. If either SINA or BIDU drift much lower, I will be tempted to jump back with a longer buy and hold mentality.

On the short side, it is arguably too late to go short the weakest names in the space such as RENN (RENN) and E-Commerce China Dangdang (DANG). In addition, shorting either of these names has become very expensive. However, Youku.com (YOKU) and Qihuoo 360 (QIHU) both remain very attractive shorts, each with share prices hovering around $18 and market caps of about $2 billion. I am quite certain that both of these stocks will join the rest of the herd of China Internet stocks and see single-digit share prices in the near future, which is a drop of 50% or more from current prices. My best guess is somewhere in the range of $5 to $8 for each of these stocks.

In the case of YOKU, the company has seen losses accelerate due to increased content costs. Despite what Wall Street analysts had been saying, this should have come as no surprise to anyone as it is widely known that YOKU continues to single-handedly bid up the price of premium online content in China by a factor of several hundred percent. Over the past 12 months, YOKU has lost roughly 160 million RMB, despite very rapid growth in revenues. Cash flow has continued to be negative. The company has just over $500 million in cash compared to its market cap of over $2 billion, leaving plenty of room for the stock to drop.

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