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Mark Krieger is an avid stock market fan dedicated to the following mantra: (1) Focus on high relative strength, (2) Buy low, sell high, (3) Short high, cover low, (4) Go against the crowd, (5) It's all about the rules and discipline, baby! (6) Analyze the balance sheet (7) Cut your losses... More
  • BIDU-Sky High Expectations is Recipe for Disaster 1 comment
    Oct 8, 2009 07:51 AM | about stocks: GOOG


    Well I have to admit,  arguing with the market is a bad bet, especially when you are short one of the hottest search engines in the world, BIDU. Being part of the last $100 rise in a  BIDU short position has not been a pleasant experience, but being stubborn too long in the market is a recipe for disaster and I finally covered my position after the shares ran up another $40 just in the last two trading days.
                                                           
    I  just couldn’t take the pain anymore and decided to throw in the towel. For the record, every time I cover, it seems the stock drops immediately after ( anybody else have that problem?). Why is it climbing at such a climatic pace? I guess the fact that GOOG’s CEO said the worst of the economy is behind us, had something to do with yesterday’s spike, or speculators on the sidelines are  jumping in at any price in fear they might miss the boat  as it swooshes by. But let’s face it, the bulk of the rise is probably attributable to shorts covering such as myself and momentum players trying push the limit? The fundamentals have been  temporally replaced with the preoccupation  of robust earnings growth (or the perception of). Emotion and greed are running rampant again which is a precursor of disaster.
     
    The shares are  rich:  BIDU’s market cap has risen a staggering  50% In less than two months. In just the past two weeks alone, the consensus of analyst 2009 expectations have climbed another  6% to $6.14  (forward multiple of 68) while 2010 estimates rose  9% to $9.04 translating into 47% earnings growth from 2009 to 2010—those are pretty high expectations to say the least-but let’s assume they are correct and BIDU nails the $9.04 in 2010, placing BIDU’s multiple at a very expensive 46 times ( especially compared with GOOG's 21 times 2010 estimates) What if something goes wrong? Is there any room for error in these generous forecasts? Is the stock priced for perfection?
     
    Analyst one year targets: The high one year target now stands at only $430, which represents a paltry 2% premium to its current price. To make matters worse, the analysts mean target of $370, is more than 10% beneath today’s quote of $420.  It makes no sense why any potential investor would want to buy at these lofty levels and take so much risk,  just to attain a  measly 2% return ( the difference between the current share price and the highest target price)  The risk reward scenario simply does not pencil out. The analysts certainly need to adjust their targets higher if they don’t want to look too silly.
     
    Overbought? I guess the market has a short memory.   What about last year’s  financial meltdown or the  dotcom crash? Stocks do get ahead of themselves and eventually rationality finds its way back into the markets. BIDU has gone up way too far in too short of a timeframe and its extreme overbought condition certainly makes it vulnerable to a major correction when holders with big profits decide to ring the cash register. Bullish sentiment is at a high point, so caution should not be thrown out the door. In other words, be fearful when others are greedy, because sooner than later the abundance of greater fools willing to buy the shares will diminish. When this thing finally craters, it will fall at twice the magnitude it ran up because fear is a stronger emotion than greed and gravity always accelerates a fall.
     
    Bottom line: AA’s  earnings beat yesterday after the close has the market set for another big rally today, so I wouldn’t be surprised to see BIDU run up another $10-20 before the dust settles, but the bigger they are, the harder they fall. BIDU could eventually drop 10-20% in one session if they don’t blow away expectations the next time they report , especially when  those expectations are getting sky high.I will attempt to short this bad boy once again, but will do so when the shares go back  into a downward mode.
    Stocks: GOOG
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This post has 1 comment:

  •  
    Sky-high expectations is a recipe for disaster in ANY stock. But Bidu (and other tech stocks) lend themselves "better" to this than most others.
    2009 Oct 08 09:02 AM Reply
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