Let me share a secret with you.
If you really want to get rich in stocks, don’t waste your time trolling the headlines for investment ideas.
All you’re doing, you see, is following the herd.
And a follow-the-mentality crowd can only have two outcomes …
You’re either late to the party on the good ideas – meaning all the profits are gone.
Or you end up getting shunted away from the winners – and into the losers.
Either of those outcomes takes money right out of your pocket. And one investment in particular really makes my point.
If you followed the headlines over the past six months – even in the venerable Wall Street Journal – you’d have wanted to get as far away from this market – and this stock – as possible.
The reason: The headlines couldn’t have been more negative in tone.
But the stock has rocketed 175% during that short stretch.
Don’t worry … that’s just the beginning.
I can show you why this stock can be an easy double from here – even though the headlines will continue to be as negative as can be.
A “Signal” With Muscle
Rule No. 2 of my five keys to tech-investing wealth tells us to “Separate the Signal from the Noise.”
And the story I’m relating today shows you why this is true.
If there’s one message that’s dominated the mainstream financial media over the past year, it’s the one that says “Don’t invest in China.”
Consider some of the headlines we’ve seen.
Last Oct. 18, for instance, a headline in bold black letters told us that “China’s Growth Continues to Slow.”
That message has turned into a mind-numbing mantra.
Just last month – on July 13, to be specific – another Journal headline asked investors: “Can China Live With Slowing Growth?”
I’ll grant you, there are issues in portions of the Red Dragon’s hefty economy. Real estate has experienced some overbuilding, and Beijing has been trying to transform the Chinese market from one that’s completely export-driven into one that gets some of its muscle from a consuming middle class.
But by making such blanket statements about the “slowing” Chinese marketplace, The Journal and other mainstream media outlets have missed one of the world’s biggest investment stories.
And investors who succumbed to all that “noise” about China missed what would have been an extremely profitable “signal.”
China, you see, is poised to become the world’s biggest e-commerce marketplace.
Here in the U.S. market, the Commerce Department is forecasting online sales growth of 16% – putting e-commerce on track to reach $261 billion.
A growth rate of 16% in an economy that’s growing at 3% (if you believe Washington) is nothing to sneeze at.
But it’s nothing compared to what’s happening in China, where Web-based retailing is going like gangbusters.
In the first six months of this year, online retail sales there zoomed 60.2% to reach $139.62 billion, says the Ministry of Industry and Information Technology (MIIT), the Beijing bureau that oversees the country’s high-tech industry.
If China maintains that pace, China could end the year with total e-tailing sales of $280 billion.
And that means the Asian giant would leapfrog its American rival to become the biggest e-commerce market in the world.
That is one strong “signal.”
You don’t have to be a Nobel laureate to know that, in a market that’s growing at 60% a year, there’s a boatload of money to be made.
In China, one of the biggest beneficiaries has been Qihoo 360 Technology Co. Ltd. (NasdaqGS: QIHU), an e-commerce leader that provides Web-security products with a special focus on mobile-communications technology.
From a low of $28.52 in early April – in the face of the afore-mentioned worries about the “slowing” China economy – Qihoo’s shares have zoomed to nearly $79. That’s a gain of about 175% in just five months – nearly seven times the return of the U.S. Standard & Poor’s 500 Index during the same period.
And before you start fretting that the best is past, consider what some of these signals are saying about what’s still to come.
These Bullish Signals Aren’t “Bull”
When you look at a “new” or emerging online market like China, one of the key metrics, or statistics, that you have to consider is something called “Internet penetration” – you know, the percentage of consumers who have online connections.
In China, that penetration rate is only 40.2%. Because the country has a total population of 1.34 billion people right now, that “online population” of 40.2% means that there are still 807 million people who still need Web access.
In other words, the market for new Web candidates in China is more than twice the size of the entire U.S. population. So China can add hundreds of millions of new Web customers – even as current Internet users, who are still pretty new themselves, can ramp up the amount of time (and money) that they spend online.
And for a mobile-technology specialist like Qihoo, the story gets even better from there.
Clearly, not all of the new Internet users will access the Web using hard-wired PCs or laptops. In a country as geographically large as China, it will be much cheaper to add those folks wirelessly.
The reason is straightforward: It’s much cheaper to build out a series of cell towers than to lay cable over thousands of square miles and connect hundreds of cities, towns and villages.
The statistics bear this out. In the first half of the year, China’s MIIT says that wireless Web traffic increased by 62%. Much of that surge was focused on shopping: Buying activity that originated from mobile devices zoomed 58% in the period.
And the outlook continues to be bullish. In the first six months of this year, smartphone sales nearly doubled on a year-over-year basis, advancing 91% to total 244.4 million units.
With smartphones in hand, those consumers can now hit the “buy” button – on books, music, apps, games, travel packages, and all the other products and services that shoppers in a healthy economy want to have.
And China’s economy is healthy – in spite of the “slowing growth” noise that continues to dominate the headlines. The Chinese market is advancing at about a 7% annual pace, more than double the “official” 3% pace of its U.S. counterpart.
Ride This “Unstoppable” Double
Rule No. 3 of my five wealth-building rules tells us to “ride an unstoppable trend.”
And Qihoo 360 – in translating all that e-commerce growth into zooming revenue and profits – is doing just that. In fact, the company is fueling growth in two important ways: It’s riding the market growth; and it is stealing market share from rivals.
For June, Chin- market-researcher CNZZ said Qihoo 360’s search-engine market share came in at 59% – an increase of 15.3%. Nearly half of that increase came from industry leader Baidu.com Inc. (NasdaqGS: BIDU), which saw its market share drop from 73% in October to a recent share of 69.4%.
Qihoo 360 also took market share as measured by page views. In June, QIHU’s page-view share was 16%, up from 14% during the second quarter, says Morgan Stanley (NYSE: MS). Heavyweight Baidu.com was again the victim, as its share dropped from 71% to 68% in the same period.
As a result, Qihoo 360’s earnings have surged. Last week, the company crushed expectations with second-quarter earnings of 40 cents a share. That represented a jump of 135% from the year-ago quarter. And it was well above the 26-cent-a-share profit that Wall Street had expected.
With a market cap of $9.33 billion, QIHU trades at around $78.50 a share.
If you just consider Qihoo’s share price as a multiple of trailing earnings, QIHU appears to be an expensive stock: The trailing Price/Earnings (P/E) ratio is a pricey-looking 260.
But I prefer to look at tech companies based on future earnings. QIHU has a “forward P/E” of 42 – which actually makes the stock cheap given the company’s growth rate and sound fundamentals.
Qihoo 360 has a 10.3% profit margin and a return on equity (ROE) of 8.45%.
If you want an interesting comparison, look at Amazon.com Inc. (NasdaqGS: AMZN), the U.S. e-commerce leader.
Amazon has a forward P/E of 99, which is more than double that of Qihoo. Amazon has negative profit margins and a negative ROE. But its stock is trading at $285 a share, nearly four times that of Qihoo.
That’s why I believe that Qihoo has a much bigger upside.
Over the past three years, the China tech firm has grown earnings per share by more than 300%. If we were to be conservative – and use an estimated projected growth rate of 30% a year, one-tenth of what we’ve seen in the prior three – Qihoo’s bottom line could still double in just 2.4 years.
And if the stock continues to trade at the current forward P/E, that would translate into a stock price of nearly $166 a share by the end of 2015.
That’s one heck of a return from a “slowing growth” market.
We’ll keep searching for new signals … even as we show you which “noise” to ignore.
As a final note, today is the last day I am able to share my research on what I believe may be the biggest technological breakthrough in modern history.
It’s a single device with the power to end all disease. It’s FDA approved and it costs less than $50. I know that sounds almost hard to believe. But when you see the presentation I put together for you, I have no doubt you’ll be convinced. Take a look at my full presentation here before it gets removed at 5 pm today.
[Editor’s Note: I welcome your comments, questions and suggestions. Post a comment below … I look forward to hearing from you.]