A few years ago I was talking to a broker friend of mine about Warren Buffett. He said, "Ahh, he's just lucky. Look how stocks have grown since 1960. He happened to be a long-term buyer right when it was the best time ever to be a long-term buyer."

There's a lot of evidence that Buffett, the founder of Berkshire Hathaway (BRK.A), was more than just lucky. He avoided high-flying internet stocks such as Yahoo! (YHOO) and Amazon (AMZN) before the dot-com bust. He would buy severe dips in the stocks like he did with his biggest successes -- American Express (AXP), Coca-Cola (KO), and Washington Post (WPO) -- over the past 40 years.

But we get the point: It's better to have demographics working on your side than working against you. You don't need to make $50 billion in your lifetime. Most people would be happy with, say, half of that.

Fortunately, there's a stock that has the demographic tidal wave behind it, and it has dipped about 40% from its recent highs.

First, some basic stats:

- There are 270 million Internet users in China, exceeding the U.S.'s 230 million.
- There are 12 million domain names.
- Only 19% of China is online vs. 71% of the U.S.

When you think Internet in China, you think three names: Baidu.com (BIDU), Sohu.com (SOHU) and Sina (SINA).

Of these three, Sohu.com stands out. Baidu (the Chinese Google (GOOG)), while exhibiting smaller growth (approximately 100% earnings growth, give or take) sports a higher forward P/E of 36. Additionally, Baidu is dealing with questions related to how it generates its revenues. How much of its search and revenues is related to illegal MP3 searches (and questions on whether or not Baidu hosts MP3s)? Also, has Baidu taken payments from companies (the recent infant tainted-milk scandal) to suppress search results on various topics? If so, this could put a damper on investor interest in the company, regardless of growth.

Sina, a portal like Sohu, is also showing blistering growth, and shares are fairly cheap at 17 times next year's earnings. But I like Sohu's diversification away from advertising and into gaming. If a gun was to my head and I had to choose one stock, it would be Sohu. Here's why:

Sohu has been blowing away estimates:

- Last quarter was the fourth quarter in a row that Sohu beat analyst estimates.
- Earnings were $1.02 per share, vs. estimates of 70 cents.
- Earnings were up 600%. Gaming earnings were up over 1000%
- Sohu is spinning off its gaming company, ChangeYou.com, into its own IPO.
- Revenues rose 162%.
- Meanwhile, at current estimates, the stock trades at a forward P/E of just 13.
- As opposed to with Google or Baidu, analysts have been raising estimates on Sohu.
- Renaissance Technologies, the best hedge fund in the world, owns $171 million worth of Sohu and is the largest institutional shareholder. It added the bulk of its shares just this past quarter, at higher prices.

Bottom line: If Sohu stays consistent with both its growth and its ability to beat analyst estimates, then my guess is the company can earn $6 in 2009, which would mean it' trading for less than 10 times next year's earnings, front and center in a demographic tidal wave called
China Internet Usage. Now's the time to get "lucky" and prepare to reap the rewards in the future.

By James Altucher

Posted on Sept. 24, 2008