Qihoo Makes a Case for Higher Prices

By Roger Baettig | December 03 2012 9:47 AM

The major averages remain in confirmed uptrends which means it's important to keep an eye on stocks with strong fundamentals showing relative price strength. Some will eventually go on to be big market leaders -- especially newer companies still in the early stages of growth.

CFP

Sponsorship Link

It wasn't that long ago when my screens were teeming with China-based growth stocks under accumulation. It's a much different story now as names as Internet names like Netease.com (Nasdaq: NTES [FREE Stock Trend Analysis]), Sohu.com (Nasdaq: SOHU), Perfect World (PWRD) and Changyou.com (Nasdaq: CYOU) continue to face selling pressure. But China-based Qihoo (prononounced “chi-hu”) 360 Technology (Nasdaq: QIHU) continues to trade well as fund managers continue to embrace its growth story. The stock has the look of an emerging leader.

The China-based firm, with a market capitalization of $2.9 billion is very liquid with an average daily volume of 1.7 million shares. It's a provider of Internet and mobile security products in China. It went public in March 2011 at $14.50 a share and closed at $34 on its first day of trading.

The company has all the qualities I like to see in stock: Big earnings and sales growth in recent quarters, bright growth prospects and high return on equity. Recent price and volume trends point toward a stock under accumulation by institutional investors.

Last month, Qihoo reported strong third-quarter results, with profit up 25 percent from a year ago to $0.20 a share. Sales rose 77 percent to $84 million. The company gets most of its revenue from internet advertising (70 percent) and value-added software, including video games (26 percent). In August, Qihoo launched its own Internet search engine which, according to some estimates, has already gained eight to 10 percent of the search market in China. CEO Zhou Hongyi is gunning for a 15 percent to 20 percent share.

It's not surprising to see institutional investors continue to dump Baidu (Nasdaq: BIDU) and gravitate toward Qihoo. It makes sense, actually, because Qihoo is still in its nascent stages of growth.

Qihoo is expected to grow annual earnings by 45 percent this year compared to 2011, and 46 percent in 2013. Remember that earnings growth and institutional buying are the main drivers of a stock's price and Qihoo has both. The stock is quickly approaching its recent high of $25.50, bringing the possibility of a technical breakout into play. Still, after five straight weekly price gains, I wouldn't be surprised to see a low-volume pullback to shake out the last remaining sellers in the stock. This would also be constructive price action. If it happens, it could pave the way for a powerful, heavy-volume breakout over $25.50.