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Baidu (BIDU) shares began to trend higher in December, about the time when many stocks that stand to benefit from the "January Effect" begin to rise. Oftentimes, the shares of stocks penalized through the year for reasons that may not hold, see share selling into the close of the year for tax loss purposes. Those same shares often experience a turn in their fortunes around the start of the following year, as capital seeks such values. Your former analyst/author here has favored Baidu for fundamental reasons since publishing about the company in November 2012. Investors who bought on that day would be ahead 7.5% at the close on January 8, 2013, even when excluding the stock's 1.8% gain on the day of recommendation.

Chart forBaidu, Inc.

Chart at Yahoo Finance

The seasonal capital flow factor is one shared by many companies. I published a similar article about Facebook (FB) on December 6, 2012, entitled Capital Flows Favor Facebook Now. The premise of that article was based on several factors that influence the flow of capital, including the tax factor but also involving Facebook's IPO lock-up expirations. FB shares are up 7.7% since our December recommendation. Baidu has a lot in common with Facebook, including each company's relevance in the Internet space and also with regard to capital flow trends post poor performance in 2012.

The fundamental reason institutions and investors would have interest in BIDU is its discounted valuation and its substantial growth prospects. Some see serious threat from rival Qihoo 360 Technology (QIHU), which launched its own browser and search engine last summer, and also from the drive of other companies for the Chinese mobile market. However, Baidu's massive market share in the Chinese Internet search market (78.6% of search in China, according to Analysis International, a Beijing based research firm), demands respect. The company has the resources it needs to compete in mobile, and what it does not have already, it should be expected to find, because there's no underestimating the importance of mobile computing anymore.

Last quarter, the company reported Street beating EPS results, but its revenue growth rate at 49.7% was still substantially slower than its prior quarter pace of 60%. As a result, tension might increase heading into the just concluded quarter's EPS release. The price might also come under renewed pressure starting a couple weeks ahead of that release scheduled for February 11th. However, such an issue could present long-term investors willing to take some short-term risk another opportunity for discounted entry. And they might be rewarded quicker than the Street seems to think possible. For now and probably through January, capital flows should continue to support higher pricing for BIDU.

The consensus estimate for the current quarter's EPS (December) has stabilized at $1.30, while the March quarter estimate has continued to drift lower, and is now at $1.16. The full-year 2013 EPS consensus has drifted from $6.22 90 days ago to $5.98 most recently, so analysts are not as confident in Baidu's market share strength moving forward as I am, but I suspect they could be proven wrong if Baidu rises to the challenge as I believe it can. China based companies can be difficult to forecast for.

Even if it doesn't beat the expectations set for it in 2013, the stock is priced at just 16.9X the 2013 EPS consensus estimate. But that estimate represents 25.6% growth over the 2012 estimate. Now, the company's growth in 2014 and beyond will matter more to BIDU's value, but analysts see the next five years' growth at 36% on average annually, according to Yahoo Finance. The quality of that data record is debatable, but even if BIDU could manage a slower 15% to 20% long-term EPS growth rate, the stock would be worth buying today in my view. It has a significant first mover advantage, though in technology, that doesn't necessarily matter. However, Baidu can look to the efforts of its peers in the U.S. in Google (GOOG), ranked second in China search market share, and companies like Facebook, to navigate the quickly evolving field and its landmines.

I see capital flows continuing to support BIDU through January as investors find the share value that tax loss selling pounded into them into the close of 2012. Thus, purchase prices booked today would seem to have support, and given the stock's valuation, some longer term margin of safety as well.

Source: Capital Flows Favor Baidu Now