Intelligent Speculator

As much of a fan as I am of Baidu, I think that these two stocks moved two far given the recent news. The major movements by Baidu(BIDU) came off of news that Google might be pulling out of the Chinese markets as it announced it would no longer tolerate the Chinese internet policies even if that ends up meaning the company has to pull out of the largest internet market (measured in terms of users not dollars). And yes, that could help Baidu, especially in the short term, but the impact on Google’s profitability is not as obvious.

Baidu’s rise justified???

Baidu had been stable in recent weeks until the news of Google’s possible pulling out of China was announced. When that happened, Baidu(BIDU) quickly jumped from 386.49$ to 464.23$ in 2 days, a 20% rise based only on possible action against Google(GOOG). The stock has since backed off a bit but it continues to look a bit overvalued. Baidu(BIDU) continues to trade at a P/E ratio over 70 and I simply do not see enough growth to justify such a ratio.

No need to say that shorting such a fast growing company does have risk involved but I do believe that there is more upside in this trade.

Google is the real play here

All of that having been said about Baidu(BIDU), this trade is mostly about Google(GOOG) and its recent fall. There have been a few tougher moments for Google including the episode with the Chinese government but also earnings that although they were higher than expected, still came as a disappointment to many investors. Google’s launch of its phone, the Nexus One, has also not impressed investors. And finally, the announcement by former founders Sergey Brin and Larry Page that they will be selling a portion of their shares and giving up more voting power to investors has depressed the stock.

But in my opinion, Google still has a lot of growth in its future and is as well positionned as anyone (with Apple) in the mobile internet. That is one of the reasons why I picked Google among my 4 picks in the 2010 stock picks competition.

So, do you have any thoughts on this trade? I would imagine many investors being very reluctant to go short on Baidu(BIDU), we’ll see how it turns out!

Disclaimer: No return is guaranteed and each recommendation should be considered within the investor’s individual situation. As with any financial investment, there are risks involved.