New Stock Pick: Long Baidu and Short Rosetta Stone

Includes: BIDU, RST, YHOO
by: Intelligent Speculator

On Friday I closed out a trade where I was long Amazon (NASDAQ:AMZN) and short Yahoo (NASDAQ:YHOO) - and thanks for Amazon's recovery and also because Yahoo seems to be heading down once again. Regular readers will not be surprised to read that I was somewhat happy to see Yahoo decline this way. It’s a company I enjoy shorting, and for me, seeing Carol Bartz continue to take the company down also is enjoyable.

Yahoo stock believers usually do so because the company can only improve. How so? It owns cash and valuable Asian assets that make it “nearly impossible” to go much lower. Valuing a stock based off of assets that Yahoo does not control was always going to be risky to some degree and now Yahoo seems to have been “screwed” by its most valuable investment; Alibaba (OTC:ALBCF) [interesting piece about it on the WSJ.] I honestly did think about going short Yahoo again today but it seems risky as the situation with Alibaba remains unclear and it could bring volatility in Yahoo.

For those familiar with the story, doesn’t it remind you a bit of how Eduardo Saverin, the Facebook co-founder got played and ended up losing much of his value in "The Social Network." Saverin was able to go to court and regain some his investment but that all took place on US ground. What can Yahoo do with its Asian assets that are often under Chinese law? The next few weeks will be very interesting for Yahoo shareholders.

I would like to thank Vitalogy80, who asked me to update our stock picks performance list. It was well overdue and it will certainly make things easier than looking through all of our stock picks! Back to the subject now, as today we are opening a new trade! Before going further, here are the numbers we used when judging these two companies:

Ticker Name Price EPS PE Ratio PE Next Year Sales Growth Analyst rating Book Value Return YTD
RST Rosetta Stone Inc 14.48 0.65 N/A 34.22 2.62 3.2 8.12 (30.17)
BIDU Baidu Inc/China 131.28 10.13 74.08 33.58 77.96 4.53 27.27 39.13

Long Baidu (NASDAQ:BIDU)

It might seem risky to many to go long Baidu (BIDU) at a time when many are predicting that the Chinese internet stocks are at “bubble” like valuations, a bubble that could end up popping at any point now. I do think that Baidu, and a few others, should be considered in a different context. Baidu’s place in the Chinese internet space is very solid and I do not think that growth will slow down significantly anytime soon. It is trading at a high P/E but faces little competition in China and I do think the next few years will be very good for China’s top tech company. I did discuss how strongly I believe in Chinese stocks right now and Baidu is at the top of that list. I did not take out any traffic measures on Baidu because I do not currently have reliable sources for Chinese traffic that can provide charts in the same way as Compete can provide for US ones.

(click charts to expand)

Short Rosetta Stone (NYSE:RST)

Rosetta Stone is one company that I personally like very much and I am a user of the products. That being said, the business model is a simple one but one that will not generate strong growth. The company has been trying to bring in users to pay for monthly services but that is a challenge and I do not understand why Rosetta Stone trades at such an expensive valuation. Last year I traded Rosetta Stone once and it did not turn out so well, so hopefully this time around things will go better. I just think that Rosetta’s stock continues to be priced for higher growth, which it is very unlikely to achieve.

Disclosure: No positions on Baidu (BIDU) or Rosetta Stone (RST)