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Summary

  • High growth expectation stocks have been taking a beating lately.
  • Baidu has the best return on assets and equity in the business.
  • The stock is at a big technical support level here around $149.

Baidu, Inc. (NASDAQ:BIDU) is a Chinese internet search provider, just like Google (NASDAQ:GOOG). On February 26, 2014, the company reported fourth quarter earnings of $1.39 per share, which beat the consensus analysts' estimates by $0.02. For the past year the company's stock price is up 79.14% while the S&P 500 (NYSEARCA:SPY) has gained 16.89% in the same time frame. I've already purchased a batch of the stock in early March for my growth portfolio and am down a whopping 14.75% on the batch due to a bad market tape for growth stocks. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if right now is a good time to purchase more of the stock for my portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 31, which is expensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 20.51 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (0.76), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 40.87%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 40.87%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 21.41%.

Financials

On a financial basis, the things I look for in general are the dividend payouts, return on assets, equity and investment. The company does not sport a dividend to speak of but is sporting return on assets, equity, and investment values of 25.9%, 45.7% and 16.7%, respectively, which are all respectable values. In this particular instance, I will forego the dividend aspect of the financials because the stock is in my growth portfolio; and in the growth portfolio a stock does not have to have a dividend.

The really high return on assets value (25.9%) is important because it is a measure of how profitable the company is relative to its assets, telling us how efficient a management team is at using its assets to generate earnings (for comparison purposes, Baidu has the highest ROA followed by TripAdvisor Inc. (NASDAQ:TRIP) which sports an ROA of 14.4% and Google Inc. (NASDAQ:GOOGL) which sports an ROA of 12.5%).

The really high return on equity value (45.7%) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry (for comparison purposes, Baidu is tops in the industry once again followed by TripAdvisor once again which sports an ROE of 24.6% and Google which sports an ROE of 15.9%).

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around middle-ground territory with a current value of 42.21. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is even with the red line with the divergence bars increasing in height, indicating bullish momentum if it can just cross over the red line. As for the stock price itself ($149.74), I'm looking at the 20-day simple moving average (currently $155.05) to act as resistance and $134.51 to act as support for a risk/reward ratio which plays out to be -10.17% to 3.55%.

Recent News

  1. Qunar (QUNR), which Baidu owns 58.6% of, is in conversations with Ctrip (NASDAQ:CTRP) about a possible partnership. Combined, Qunar and Ctrip has sales over $1 billion in China last year but the talks appear to be just at an early stage.
  2. Pac Crest rates the company at an "outperform" and says Baidu should have a solid first quarter earnings report. The solid performance outlook is based strong online video ad pricing due to exclusive deals for popular content.

Conclusion

I whole-heartedly believe the beating that this company has been taking so far this year is solely based on profit taking and investor rotation. The growth stocks are taking it on the chin right now and the money is flowing into the old-school big cap tech stocks and high dividend payers. Fundamentally, this company is fairly valued on next year's earnings but pretty inexpensive on earnings growth potential while short and long-term earnings growth expectations are excellent. Financially, the company doesn't pay a dividend but the financial ratios are the best in the business. Technically, the stock is up against some major support here at the $149 level but if support breaks it could be another 10% move down. Due to the high earnings growth rate expectations, solid financial management efficiency ratios, and a support level which I don't think will be breached I will take a chance here and buy an additional small batch to my position.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Baidu Beats Out Google In Financial Efficiency Ratios And I'm Buying More Of It