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Thursday June 11, 2009
Netease (NTES) : A Zweig-type growth pick
In his Validea advisory, he looks at Chinese gaming stock, Netease (NASDAQ: NTES) based on the investment strategy of Martin Zweig, a long established growth investor. Here, he highlights some of the ways that this stock passes the "Zweig test." "Netease operates an interactive online community in China, and is a provider of Chinese language content and services through its online games, Internet portal and wireless value-added services businesses. "According to Zweig's investment strategy, the P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current market P/E because the situation is much too risky, and never greater than 43. 
"NTES's P/E is 17.33, based on trailing 12 month earnings, while the current market PE is 14.00. Therefore, it passes the first test. "Revenue growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. "NTES's revenue growth is 33.79%, while it's earnings growth rate is 34.88%, based on the average of the 3, 4 and 5 year historical eps growth rates. Therefore, NTES passes this criterion. "If the growth rate of the prior three quarter's earnings, 50.00%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 100.00%, (versus the same quarter one year ago) then the stock passes. "In addition, the EPS growth rate for the current quarter, 100.00% must be greater than or equal to the historical growth which is 34.88%. NTES would therefore pass this test. "Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. "NTES, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.02, 0.04, 0.05, 0.06 and 0.07, passes this test. "Another earnings test required is that the long-term earnings growth rate must be at least 15% per year. NTES's long-term growth rate of 34.88%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test. "In addition, a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. "If a company does have a high level, an investor may want to avoid this stock altogether. NTES's Debt/Equity (0.00%) is not considered high relative to its industry (109.72%) and passes this test. "The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. NTES's growth rate of 100.00% passes this test." 
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John Reese