Short Baidu (BIDU) ASAP

For those of you who have been riding this stock up it has been quite a joy. Baidu has been a great emerging market play and a Hot Stock on many people’s watch-list. Baidu (BIDU), is China’s version of Google and is up 165% on the year and has been a great investment and stock to own until now. Baidu has now gotten a little ahead of itself and become over-valued and this is why. For the past month or so Baidu has been a monentum based stock. With a P/S of over 10 I classify this as a monetum based company and only in strong markets to I like to invest in monetum based stocks. To add to this the PEG ratio is well over 1 at 1.71. Strong companies usually have PEGs below 1 whereas Baidu shows quite the opposite. To add to this Baidu has seen the majorirty of its growth thanks to a large part of the Chinese Government. As I stated in my recent article about China’s Inflation worries, the loose lending policies supported by the government have allowed the chinese economy to grow at a rapid pace. However, without more regulation enforced by the government, a huge inflation problem could be at hand leading to a sharp decline in Chinese markets. The problem is more regulation will tighten up credit and slow down the economic growth affecting Baidu’s earning power and continued growth. A weaker chinese economy means a weaker Baidu. The only way for Baidu to maintain such growth is to aggressively increased spending on capital equipment, sales and marketing, etc. These increased costs will cut revenue forecasts however and lower overall valuations. To add to this, Baidu has some legal issues at hand as it was reported in October that they generated material revenues from medical firms selling unlicensed products. Investors should consider shorting Baidu (BIDU) down from its current level of $350 to around $280. Once that time we can reanalyze Baidu’s financial standing and long-term growth but until then I’m not interested. Potentially Baidu could go to $400 at max yet the risks outnumber the gains and if you are willing to continue to invest within it at least Hedge it against something else to save your portfolio. We are starting to see the sellout begin so don’t hold on until its too late.

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