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The Dollar, The Passport And Baidu

First, Baidu (BIDU) is the Chinese equivalent of Google. Both companies get 99% of their revenue by presenting ads to Internet users. But Baidu is just 1% of the size of Google, as measured by revenues, and 5% the size as measured by market capitalization. And it’s growing twice as fast as Google. Furthermore, Baidu’s market penetration is far less than Google’s and it’s addressing a far larger population, so its growth prospects are substantially greater.

Last night I went through my mail quickly, discarding junk mail directly into our paper-recycling bag. A few hours, later, my son, also discarding something, asked, “What’s this dollar bill doing in here?” Turns out one of the solicitations had enclosed a real U.S. dollar, visible though a window, as incentive to open the envelope. I hadn’t even noticed it, but it sure got my son to open the envelope.

He didn’t respond to the solicitation, but now he’s considering examining the neighbors’ bags on recycling day!


A few weeks ago, both my wife and 21-year old daughter, whose birthdays are three days apart, visited the Registry of Motor Vehicles to renew their driver’s licenses.

They both needed to pass a vision exam, and happened to take the test at the same time, in adjacent lines.

When my wife’s examiner asked her to read the top line, she squinted a bit at the blurry forms, guessed at the ones she wasn’t sure of, and passed the test. Whether the examiner actually listened to the letters she recited will never be known.

But when the other examiner asked my daughter if she could read the top line, she answered, “Yes”, and that was the end of the test!


I’ve had a passport since I was eight years old, and I plan to keep renewing mine for a very long time. Travel is such an enjoyable activity for me that I think if I hadn’t been (nearly) born into the investment publishing business, I would have become a travel agent or travel writer. But an amazing 75% of Americans do not have passports, and I’ve heard too many stories in the past year about people who’ve had unexpected opportunities to travel overseas but had no passport, and didn’t have time to get one. So my message today is that if you ever think you might need one, you should apply today, even if you have no current plans to travel. As the sloganeers at Nike used to say, “Just do it.”


Finally, looking through the resumes on Craigslist recently, I came across this:.

“So I have recently found out that the job market in Boston is absolutely flooded with people more qualified than me, and the field I am experienced in is becoming obsolete (print media) So in order to pay rent I offer my services as an able bodied human being to anyone interested. I have professional experience as a mover, and am somewhat skilled in carpentry and gardening. I will also do anything else, as long as it is legal. Please let me know if you are interested to have me do something for you, long or short term. And here’s my resume in case you want to see what I’ve been up to recently.”

Needless, to say, I didn’t call him.


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And now on to the meat, Baidu, inspired by this letter from a long-term subscriber in Vancouver, British Columbia.

“Dear Mr Lutts,

Firstly I would like to thank you for changing my ways of investing to a great extent. Over past 5 years I have learnt to appreciate the philosophy of keeping your losses short and letting your winners run. I must however confess that I still have hard time to overcome my habit of checking stocks too frequently and become over reactive but my habits are a lot better than what it used to be. Today I have learned to respect the market and skim profits when the time is right.

The purpose of this letter is to confess to you that even though I feel I’ve matured as an investor, this stock BIDU is making me feel like a big loser. It is creating a frustrating urge inside me to trade and become a part of what pundits say is the next Google. Ever since you mentioned BIDU in your newsletter I have been trying to enter a position but the volatility makes my stomach churn and the only time it came down 10% crashing was when it was downgraded by Morgan Stanley.

Here are my questions for you :

How do we buy a high flier like BIDU without losing our sleep? Is it still a buy at these levels?



My short answer to CP was this:

“Your goal is to make money, not to own the hottest stocks, so if you’re doing the former, the fact that you don’t own BIDU does not mean you have failed.

BIDU is now rated hold by Cabot China & Emerging Markets Report, mainly because it has come so far so fast in recent weeks. Risk is excessive here. Continuing to wait for a lower-risk buying opportunity is prudent.”

But let’s look at the bigger picture, for there are many issues involved here, from Baidu’s growth prospects to the action of the stock to one man’s comfort level.

First, Baidu (BIDU) is the Chinese equivalent of Google. Both companies get 99% of their revenue by presenting ads to Internet users.

But Baidu is just 1% of the size of Google, as measured by revenues, and 5% the size as measured by market capitalization. And it’s growing twice as fast as Google.

Furthermore, Baidu’s market penetration is far less than Google’s and it’s addressing a far larger population, so its growth prospects are substantially greater.

Finally, Baidu’s profit margin is 37% while Google’s profit margin is 29%.

None of this is secret; it’s the main reason BIDU is up 170% this year, while GOOG is up “just” 28%. Another important reason is the strong bull market we’ve had most of this year, combined with the super-strong action by the Chinese market in recent months ... and that’s something worth remembering.

Going forward, the future for the company looks even brighter now than it did last week. On Tuesday, Baidu announced that it would enter the online commerce market by creating a consumer-to-consumer (C2C) service.

The company explained that 49% of China’s users conduct a search before entering an e-commerce site, leading us to conclude that its goal is to preempt that second step by presenting the desired product or service immediately after the search term is entered ... and then getting a cut on any purchase made.

We don’t know exactly what form this service will take, but if we imagine it as a combination of Amazon and eBay we get an idea of its market potential. Huge.

So now let’s look at the stock. The market accords BIDU a valuation of over $7 billion, or 48 times revenues. Its current PE ratio is 176, while its forward PE ratio (assuming earnings growth of over 70%, is 139. So it’s hard to call this stock anything but expensive. But, as I’ve said many times before, the best growth stocks are always expensive.

The chart, meanwhile, has been a picture of strength. It was selling at 100 in April, 200 in July, and it’s now 300-plus. Simple extrapolation says that 400 is likely in January!

But the stock market is anything but simple. In last Thursday’s market, which saw the market reverse violently mid-day, BIDU was one of the high-profile victims; it swung from 359 to 301 in the space of a few hours.

And trading volume exploded to 20 million shares, which is more than three times the stock’s daily average.

In the short-term, this action raises a red flag, suggesting the stock may need a serious cooling off period here. Depending in part on the action of both the U.S. and the Chinese stock markets (which are overdue for a correction), this stock could easily drop 20 to 30%! But that doesn’t mean it’s cooked.

Consider this: at last report, 811 mutual funds owned shares of Google, while only 53 owned shares of Baidu. Typically, I tend to think that a stock whose ownership approaches 1,000 funds (like GOOG) is becoming “fully owned” and thus has no great upside left. Everyone who wants to own it has bought it. BIDU, even now, is still far from that level, suggesting that pullbacks will be used as buying opportunities by institutions who want a piece of this fast-growing company.

The current correction, begun last Thursday in sync with the broad market, has nearly taken the stock down to its 25-day moving average twice, but failed to get there both times. Today, that moving average is at 298, suggesting that buyers who are eager to get on board this stock could buy on any dip below 300.

But the 50-day moving average is down at 250, so more risk-averse investors might well wait for that moving average to be touched. For the record, the stock has dipped through that moving average twice this year, in April and in August, and both dips presented terrific buying opportunities.

Finally, however, I want to make the point that you don’t need to own Baidu to be a winner. Even if Baidu turns out to be the #1 performing stock for this year and for next year (it’s possible), the fact that you don’t own it does not mean you’ve failed. It just means that you chose not to accept the risk of owning the stock. And if you succeeded in meeting your own investment goals, if you grew your own portfolio substantially, so what?

On the other hand, if you wait patiently for the right opportunity, and then invest an appropriate amount, it could work out very well. But you don’t want to invest so much that you have trouble sleeping!

Bottom line: I’m bullish on Baidu, as I am on most fast-growing companies whose stocks have strong positive momentum. But the risk inherent in the stock means it’s not for everyone.


Editor’s Note:

You can get regular updates on Baidu, as well as other high-potential investments in China, Brazil, Russia and India, by taking a no-risk trial subscription to Cabot China & Emerging Markets Report. Edited by Paul Goodwin, this service achieved the #1 rank of all newsletters in 2006, with a gain of 74%, and it’s still #1, with a gain over the past twelve months of 78%!

To get started simply click this link.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

Timothy Lutts is Chairman Emeritus of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.