Searching in China? Buy Baidu

08/12/2014 10:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

For any growth investor who looks to emerging markets for investment ideas, China is certainly the best known market and here we are featuring what is probably the most famous stock in that market, explains Mike Cintolo, editor of Cabot Top Ten Trader.

Baidu (BIDU) emerged early as the dominant online search engine in China, using its founders' superior knowledge of the Chinese language to produce superior results.

With an assist from the Chinese government, Baidu vanquished Google as a competitor and retained an enormous market share for years.

The rapid movement of Chinese Internet users to mobile devices allowed a small competitor-QihooTechnology (QIHU)-to grab a shocking chunk of mobile search traffic in the middle of 2012 and investors moved away from Baidu for a while.

But the company responded to the challenge, buying smaller companies like Chinese app store 91 Wireless to strengthen its mobile footprint. Baidu reported 47% revenue growth in 2013 and 59% and 57% in Q1 and Q2 2014, respectively.

Profit margins have slimmed a bit as the company uses more of its cash flow to enhance its wireless offerings and buy out competitors, but were still a robust 33.3% in Q2.

Baidu looks like a company that has been re-energized by competition and represents a great way to add a little China to your growth portfolio ahead of the expected Alibaba IPO later this year.

BIDU tip-toed up to $205 ahead of earnings and then blasted off again on huge volume on July 25, topping $225 before last week's modest correction.

We think a small buy around $210 will payoff in the long run. A stop around $194, BIDU's July resistance, makes sense.

Subscribe to Cabot Top Ten Trader here.

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