Stop Shorting BIDU

Stop shorting Baidu (BIDU). A while back I wrote an article advising you to short BIDU, however it has not turned out that way. As a result I have lost 9% on Baidu and am cutting my losses. I still feel Baidu is a momentum based stock carrying solely on the rise of both the Stock Market and China’s improving economy. As a stock the numbers don’t add up, with a P/S of over 10 I classify this as a momentum based stock. 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 majority 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. This time I was wrong however looking at my past history in my Stock Picks section the next one should be a winner.

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