Biding Time on Baidu

09/30/2009 12:01 am EST


Timothy Lutts

Publisher, Cabot Heritage Corporation

China's top Internet search engine may soon find the support for another pop, writes Timothy Lutts of Cabot Wealth Advisory.

One of my favorite investment areas, because of its growth rate, remains China, and one of my favorite stocks is "the Google of China," Baidu (Nasdaq: BIDU).

The best coverage of the stock has come from Cabot China & Emerging Markets Report, which back on July 9th said this:

"Baidu is the dominant Chinese-language search engine in China, with a market share that hit 65.8% in 2008. (Google was second with 22% and Chinese rival Sogou was a distant third with 2.9%. Yahoo was an even more distant fourth.) It is now the third-largest search engine in the world. For a company incorporated in 2000 and limited almost entirely to operations within a single country, this is a remarkable record. ...

"Baidu has built its towering advantage over its powerful competitors by being both imitative and innovative. The imitative part of the Baidu’s strategy is its total adoption of Google's paid keyword search as its revenue model. The innovation has been understanding the Chinese language better than its competition. According to the language mavens at Baidu, the Chinese language has 38 ways of saying "I," and an equally bewildering profusion of terms for other topics of interest. By incorporating a native speaker's intuitive grasp of the poetry and ambiguity of this rich language, Baidu can deliver the results users want no matter how oddly they may ask for it. ...

"Baidu's future growth is expected to come from the growth of the Internet in China. Despite the controls and restrictions demanded by the Chinese government—mostly aimed at pornography and politically sensitive topics—the Chinese people are taking rapidly to life online. China now has more people online than any other country in the world (221 million in early 2008) and estimates put the growth rate at 18% per year, with a target of 490 million users by 2012."

When that was written, editor Paul Goodwin's China-Timer, which monitors the health of the Chinese stock market, told him to be cautious, so he rated BIDU a Hold. But just seven days later he wrote to subscribers, "The combination of a new buy signal from the Cabot China-Timer and a breakout on good volume makes this an easy call. BIDU is now rated Buy."

Since then, the stock has soared 24%, and now it's building a base at 400. Of course, this seems like a ridiculously high price to some investors, but it's clear to me that the folks at Baidu have taken another lesson from the Google (Nasdaq: GOOG) playbook. They've learned that leaving your stock's price high (instead of splitting the stock to artificially bring it down to a level attractive to the masses), means that more shareholders will be institutional investors who (hopefully) will treat the stock more wisely.

BIDU's 50-day moving average is now at $350 and climbing, and if you wait until the stock and that moving average meet, you could find a decent entry point. [Shares closed at $394.42 on the Nasdaq Tuesday—Editor].

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