Editor’s note: This article is part of InvestorPlace.com’s Best Stocks for 2019 contest. Kyle Woodley’s pick is Weibo (NASDAQ:WB).
The Dogs of the Dow is a well-trodden investing technique in which an investor buys the highest-yielding Dow Jones Industrial Average stocks at the start of the year, holds them for the year, then rinses and repeats every 365 days. You can read more about the strategy and track record here, but in short, it works.
But despite the focus on yield, this isn’t only a dividend strategy — yield is used as a gauge of value. The strategy typically elevates stocks that haven’t done so well over the past year or more, with the expectation that the market will lift these quality companies once more.
That’s basically the tack I took in 2018. While I didn’t focus on yield, I looked for a distressed comeback candidate and found it in Chipotle Mexican Grill (NYSE:CMG). Chipotle limped out of 2017 thanks to fallout from its inability to serve burritos without giving its customers the runs, but I felt it still had rebound potential if only it could bring on the right leader. It did, and with two weeks left in the year, CMG is up 59% to curb-stomp a lousy market and is currently holding onto second place in the contest.
This year, I’m hoping for a similar performance from beaten-down Chinese social stock Weibo (NASDAQ:WB).
Weibo is a so-called “micro-blogging” website in China, often compared to Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB). (In practice, it’s something of a mix.) It boasts 430 million active monthly users — for comparison’s sake, Twitter has 326 million — making it the most popular such site in China.
Of course, Weibo enjoys the protection of China’s censorship state — it doesn’t have to compete against the likes of Facebook, Twitter, Instagram or Pinterest.
Weibo is monetized much like other social media sites in that it surfaces ads — something that benefits not only WB but also Chinese internet Sina (NASDAQ:SINA), which owns roughly 46% of the social media company that it spun off in 2014. (The link between the companies remains strong, however; Weibo’s contributions to Sina’s results are featured prominently in its quarterly results.)
Why WB Stock?
The investing thesis here is relatively simple: Weibo is growing, but its stock has been thrown out with the international bathwater.
For as bad as U.S. stocks have been in 2018, Chinese stocks have been far, far worse. The SPDR S&P China ETF (NYSEARCA:GXC), for instance, is down about 17% for the year to date versus a less-than-3% loss for the S&P 500.
Everyone’s well aware of at least one of the woes: China’s tariff standoff with the United States. But there have been numerous other worries, such as the deep fourth-quarter declines in oil and other energy prices, slowing growth that has shown up in disappointing GDP figures (Q3’s 6.5% growth is the worst since 2009) and the rollout of policies to spur commercial banks to lend to private Chinese companies that is being seen negatively — as a form of protective stimulus rather than a growth measure.
The tech sector has been particularly hard-hit, with the Invesco China Technology ETF (NYSEARCA:CQQQ) off nearly 30% with a couple weeks to go in December. And you won’t be surprised to find that Weibo (3.4% of assets) and Sina (3.3% of assets) are helping to lead it lower, with each down about 40%.
Weibo remains the dominant non-messaging social media player in China — Tencent Holding’s (OTCMKTS:TCEHY) WeChat surpassed the billion MAU mark earlier this year — and its forecasts for future growth are simply far more promising than the market is giving it credit for.
For instance, Weibo is forecasting 35%-38% year-over-year revenue growth to a range of $480 million to $490 million for the final quarter of 2018. That’s actually more optimistic than the 28.8% growth analysts are projecting, and even that lower bar would cinch a consensus growth estimate of 49.9% for 2018. Expectations for next year aren’t as flashy, but still robust, at 26.2% on the top line.
What makes WB stock stand out more, though, is that unlike Twitter — which only recently figured out how to turn a profit — Weibo has been consistently profitable on both adjusted and GAAP bases. WB is expected to earn $2.67 per share this year, up 48% YoY, then grow profits another 20% to $3.20 per share in 2019. Looking farther out, the consensus estimate is for more than 32% annual profit expansion over the next half-decade.
Yet WB stock is trading at just 20 times next year’s profit-growth estimates. That’s more expensive than both the 15.5 forward P/E for the S&P 500 and 16 valuation for American tech stocks, according to recent Yardeni Research figures, but not by much. But it’s on par with Facebook and twice as cheap as Twitter, despite having far better profit-growth prospects than both of them.
There’s nothing complicated or exotic about this pick, other than the locale. Weibo is a flourishing company that operates in a field with a few huge barriers to entry (including the Chinese government), limiting competition. Growth expectations are appealing, and the price is just about right.
Are there risks? Absolutely. Every day America’s trade war with China marches on is another blow to Chinese economic growth and confidence in the stock market. There’s always the chance that Weibo somehow upsets the government and is punished via restrictions … but so far, Sina and Weibo have been good about playing ball. There’s also the potential effects on growth of a recently enacted minimum-age restriction of 14 for new users, though Wall Street hasn’t appeared overly worried about this policy, which is pretty standard throughout the social world.
But 2018 looks like a gross aberration that was fueled mostly by mob panic. Investors should begin to realize that fact in 2019 — especially if China’s broader woes begin to fade.
Kyle Woodley is senior investing editor of Kiplinger.com. He will be long WB as of Jan. 1, 2019.