As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy Sohu (NAS: SOHU) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us.
Consistent earnings power.
Good returns on equity with limited or no debt.
Management in place.
Simple, non-techno-mumbo-jumbo businesses.
Does Sohu meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Sohu's earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Though they've stagnated somewhat recently, Sohu's earnings and free cash flow have grown dramatically over the last five years.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
Return on Equity (LTM)
Return on Equity (5-Year Average)
SINA (NAS: SINA)
Baidu (NAS: BIDU)
Yahoo! (NAS: YHOO)
Source: Capital IQ, a division of Standard & Poor's.
Sohu tends to generate high returns on equity while employing no debt.
CEO Charles Zhang has been at the job since he founded the company in 1996. Before that, he studied at MIT and worked for a year at Internet Securities.
Internet search and advertising can be fairly susceptible to technological disruption. Anyone remember Excite?
The Foolish conclusion
Whether or not Buffett would ever purchase shares of Sohu, we've learned that, although the company operates in a technologically complex industry, it does exhibit some of the other characteristics of a quintessential Buffett investment: more-or-less consistent or growing earnings, high returns on equity with limited debt, and tenured management.
If you'd like to stay up to speed on the top news and analysis on Sohu or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter, where he goes by@TMFDada. The Motley Fool owns shares of Yahoo!Motley Fool newsletter serviceshave recommended buying shares of Baidu, SINA, Yahoo!, and Sohu.com. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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