Many investors thought it was a suicidal decision. Yahoo (Nasdaq: YHOO) should be investing domestically and in itself rather than in a speculative and relatively unknown Chinese Internet company.
Or so went the conventional wisdom back in 2005.
As many successful companies have done, Yahoo bucked the conventional wisdom with its purchase of 24% of Alibaba. Since then, Alibaba has grown to be considered Yahoo's most valuable asset. For example, Yahoo's massive uptrend in 2013 can be attributed to Alibaba's incredible growth.
While the exact date of the Alibaba IPO remains uncertain, the company has vowed it will happen in 2014. With a soaring valuation of $153 billion, up from $120 billion in October, Alibaba is slated to be the largest initial public offering ever. Serving China's 618 million Web users, the company had sales of $160 billion in 2012, crushing the $86 billion posted by e-commerce giant Amazon.com (Nasdaq: AMZN).
The IPO will likely make Alibaba's investors -- which, in addition to Yahoo, include SoftBank (SFTBY) with 37% and Chairman Jack Ma and the company's other founders with 10% -- quite wealthy. Unfortunately, it will be difficult for most investors to get a piece of this IPO before it actually starts trading.
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However, I have a little trick for impossible-to-get pre-IPO stocks (and what I call "hot news" stocks): Rather than buying into a "hot news" stock that is soaring higher or waiting for shares to be available in an IPO, you can look for similar companies that will benefit from the excitement surrounding the IPO or hot news.
In the case of a piece of stock-moving news, one can wait for the story to break and move the targeted stock before looking for similar names in the same sector. In the case of IPOs, similar stocks in the same sector and market often move higher in anticipation of the pending IPO. As excitement builds for the IPO, savvy investors often look for similar actively traded companies in anticipation that they will also move higher.
Researching stocks that are likely to benefit from Alibaba's pending IPO led me to Qihoo 360 Technology Co. (NYSE: QIHU). This unusually named Chinese ADR (American depositary receipt) trades on the New York Stock Exchange and has impressive credentials with or without the excitement of an Alibaba IPO.
Qihoo is a multi-pronged company involved in Internet and mobile security products, search engines, gaming, apps and messaging. The company has a market cap of $12 billion and $1 billion in cash, and posted $329 million in revenue in 2012.
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Qihoo boasts an incredible 461 million monthly users for its products. The company is the largest Internet security firm in China and the second-largest search company, behind Baidu (NYSE: BIDU). While its core business is online security, the company also has market penetration of greater than 20% in the app market, making Qihoo the owner of the top app store in China.
It is this huge base of users that makes Qihoo an attractive buyout candidate. It is extremely difficult to build a huge user base organically, so many companies grow by acquiring firms that have already built sizable user bases.
I would not be surprised if Alibaba, after the IPO cash has flowed into its coffers, were to make a move to acquire Qihoo. Baidu and Tencent Holdings (TCEHY) might also be potential suitors.
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In the technical picture, QIHU recently fell back about 10% and then rebounded about 5%. This pullback and bounce sets up an ideal buying opportunity.
Risks to Consider: Although the reliability of earnings reports from Chinese companies has improved, it's difficult to trust their numbers. Everything from deliberate fraud to translational issues can cast a shadow of doubt on the accuracy of the data. Always use stop-loss orders and diversify when investing.
Action to Take --> I love Qihoo as a long-term hold. Buying in the $95 to $97 range with a 12-month target price of $118 and stops at $85 makes good investing sense.