Divergence

Chinese Internet stocks are the bomb right now. Its divided between search engines, like Baidu.com (BIDU) and Qihoo 360 (QIHU), auto sites, like BitAuto (BITA) and Autohome (ATHM), and real estate sites. such as SouFun (SFUN) and Leju (LIJU).

Most analysts and investors don’t follow this sector. I do. And one thing that you need to know is the Chinese real estate market is in a correction. The Chinese governments are taking measures to ease lending, but the market has been weak for two quarters now and the companies like SouFun don’t expect to feel the difference until the third quarter. The third quarter, that’s what SouFun management said last quarter, before it lowered estimates for the second time in two quarters.

On the other hand Leu’s business is doing quite well because Leju has a coupon business for soon-to-be homeowners looking to take advantage of the weak real estate market. Most Chinese purchase new homes btw, seldom used ones. So builders & developers have a way to attain clients via Leju even if it means selling for less.

Last Friday I bought LEJU at $18 (and today it’s $17, just my luck) and sold my position in SFUN. I still like SFUN, but I see the divergence in business and want to have my money in what’s moving. Let’s look at why I sold SFUN:

One Year Chart

The 7% profit growth last quarter I knew about 3 months ago when company management warned the first time. Still, SFUN missed even these lowered estimates by a penny.

What I really don’t like is Annual Profit Estimates for 2014 dropped from $0.80 to $0.67. Again, the second drop in 2 qtrs (not a good sign). Before this last estimate cut SFUN was still expected to have profits rise 10% this year. Not bad considering the real estate market is against them. Now profits are expected to fall year-over-year.

Estimates for the next two qtrs dropped to -22% and -25% from 9% and 0% respectively.

Fair Value

At 20 times earnings this stock might stay around the $12 mark. If profits rebound next year the stock could shoot higher.

Sharek’s Take

Although I sold SFUN, I still like the stock a lot. Comin down from a high of $20, it still made clients money because I bought at $9 and sold this last bunch at $12. In the short-run the real estate market is weak but in the long-run I still expect many Chinese will move to the city and look to purchase housing. But the bottom line is I think I can take the SFUN funds and put them in LIJU and have my money work for me now. I’ll keep SFUN on the radar and will probably buy back in once business turns up.