BIDU Revisited

Why is Baidu overpriced? It is eerily similar to Google's earnings report. "Favorable tax rate" allowed Google to post blow out numbers. But when you dig below the favorable tax credits that Baidu got, it would have come in line to below consensus estimate by about 2 cents, depending on which consensus estimate that you look at. I think the consensus was .37 off the top of my head but the whisper was .40 eps. At any rate, their current revenue matched analyst consensus and then they lowered their projections for at least the next 2 quarters. No revenue growth! They are now trying to expand into Japan, but why? If China offers so much opportunity for growth, why not try to maximize their presence there first and then consider expansion into Japan? The capex expansion just to establish its presence in Japan is ludicrous! Do I have to remind everyone that China and Japan aren't exactly best buddies? In addition, search market in Japan will be a hard nut to crack with Google and Yahoo already having presence in that market. So why are they doing this when their revenue is now declining in China? The PE of 138.90 is based on the premise that they can continue to grow their earnings. This does not seem to be the case. In fact, from revenue stand point, we can expect that it will contract or remain static. While they have grown their yoy earnings to 16 million from 3.1 million. While on surface that may seem like a phenominal growth in earnings, roughly 500%, revenue contraction will catch up, especially with uncertain capex needed for Japan market entry.

What does all this mean? I expect that earnings will taper off as a result of this within the next 3 quarters and with continued competition from SOHU and Google, it will only get more difficult to grow. The Chinese internet adoption rate is at its early infancy with less than 10% of the population penetration. Perhaps that is why they are trying to enter Japanese market for additional growth. To me, it just doesn't make much sense.

I anticipate that the PE will continue to increase, but watch the PEG! It is currently trading at 2.40! You will see that expand as well in the near future. All told, this stock deserves a multiple of no more than 60, which would equate to a price of lesss than $60.00.

Next week will be interesting, I don't wish for anyone to lose money but in this game there are winners and there are losers. Good luck to all longs and shorts.

Update on the market; CRI crumbles and CAT attack!

Uncle Ben came to the rescue today. Last few days seemed like the short term bottom as the negatvity factor was high. It was in the last two days where the "noise" was heard and palpable. It is at those times, the market will usually change character and rise higher. Uncle Ben is "comfortable" with the inflation but would like to observe few more data points before hinting at a rate cut by 25 basis points. I believe that will come in April or May of this year. The cyclicals and transports lead the way.

Carter's crumbled on lowered guidance and continued weakness in their retail division. While the direct distribution business is humming along, they are still struggling with the Osh Kosh acquisition. I got out of my call contracts with significant losses. My calls were worth $14000 at its peak but I managed to escape today with $3200. I still think that Carters may be a good long term hold as I have faith that the management will be able to turn the retail segment around. I would advocate accumulating stocks and not playing options in this matter. I believe anything below $17 would be a good buy.

CAT is benefitting from the renewed market enthusiasm for a possible rate cut. Based on that, it rose $1.43 to $66.16. My 20 contracts in CAT are doing well with cost basis of $3.03. I may consider adding more call contracts to 100 contracts tomorrow. I am holding May $65 contracts for those who want to know.

Ruth is hanging in there and should provide an upside earnings report which I hope will propel this stock beyond $25 level by June. I am holding 90 contracts of May $22.50 contracts which closed at $1.00 today. I may add more but I am happy with this position right now.

EMC contracts were sold today to gain entry into BIDU prior to earnings. A big gamble of which I hope will pay off. I have 200 contracts of March 135 contracts with average cost of $1.21. Today, Bidu reported earnings of $.45 eps versus conensu of $.32 today. Revenues increased 136% to $34.8 million. Revenue guidance for Q1 was below analyst consensus of $36.6 to $39.4 million to $34 to $35 million. While on the surface this may seem troubling, the fact remains, the profits grew over 400%. That is some growth. I believe the short term guidance cut is temporary and reflects the company's ongoing interest into the Japanese search market as well as coincident overlap of Chinese New Years that has been factored in. I also believe that the management is always lowering expectation for the analyst. There is a lot of chatter at Yahoo message board that the shorts will take this stock down but I think the shorts will be surprised by the ferocity of this stock within the next couple of weeks. I will stick my neck out and say that this stock will take out the $135 mark within the next two weeks, market conditions permitting.

I have added two new entities to my portfolio today. I have added Valuclick and Denny's. I have 300 shares of Valuclick and 200 shares of Denny's. Valuclick is growing revenues and profits quarterly yoy at 69.3% and 52.60% respectively. Their business model relies on internet ads in a diversified fashion. It operates in three segments of business: Media, Affiiliate Marketing, and technology. They are well diversified in their business and they are providing strong growth. With the internet ad market expected to continue to grow, I believe Valuclick will do well for the future. I have average cost basis of $25.89. I will look to expanding my shares to 1000 total shares on any pull back. It is also #20 on IBD 100 list and the stock pattern is bullish with base on base pattern. It has formed a 7 week cup and handle base. Usually, this pattern portends strong upside price movement.

Denny's is a restructuring play and I believe that a turn around in this company is fully in place. They will report earnings tomorrow after market close with analyst consensus eps of $.01. I believe that this company will provide upside surprise with $.02 eps. They should also raise next quarter revenue guidance. This is a speculative play but with much upside. The forward PE is projected to be 34.38 but it is expected to continue to grow revenue and profits at 40%+ clips going forward. They currently manage over 500 stores and addition 1000+ stores to licenscees and frachises. When you visit Denny's they serve good food at reasonable prices and it is pretty much a vernacular among American culture. When was the last time you went to Denny's after a long night of clubbing? At current price levels, I believe that the prices can reach $10 by the end of the year.

I continue to remain bullish on EMC and CSCO and may be repositioning myself for the next leg up.

Adobe Upgraded by Oppenheimer; Dennys looking good.

Adobe shares rose today inspite of the weak market conditions to $38.09 +0.45 +1.09%. Oppenheimer & Co analyst Sasa Zorovic states that the shares are undervalued at the current levels. He sees strong Adobe Acrobat 8.0 sales.

As I said in my previous blog, Adobe price action is very interesting and may be worth while to consider accumulating. Adobe still remains in a down trend but today's price volume action may have halted that and we may see upside price action soon. I will continue to monitor this stock for possible entry point. Short term resistance is near the $40 mark.

Dennys restaurants DENN is also showing encouraging price to volume action. This stock has had tremendous run but I don't think it is done yet. They report earnings on Thursday 2/15/2007 and continues to make progress in their turn around. The stock closed today at $5.52 +$0.10. This has broken out of what appears to be an awkward double bottom base, or if you look at the most recent base, a cup with handle base. Volume is kicking in and this may prove to be a good intermediate term holding. This is a speculative stock and should be apporached with much caution. But technically, the stock looks strong.

Disclosure: I have no position in Adobe or Denny's.

Take advantage of short term weakness in the market

I am taking advantaqe of the short term weakness in the markets today. Traditionally, Late January through February presents challenging trading environment. Not to be outdone, this year also remains true to form. What is happening to the market now? I believe high momentum stocks are simply correcting from their highs, which in my opinion is a constructive event. Without corrections, there cannot be further gains to be had. I reiterate the fact that we are not topping and that intermediate term correction is unlikely at this point. It may happen in the future, but we are not yet due for that type of correction.

This is options expiration week which will make trading even more difficult. Nasdaq remains in sideways consolidation pattern with key support level being 2400. If 2400 is breached, We may see as low as 2300. Nasdaq composite is now riding the 50 day moving average but sell pressure is rampant for the past 2 weeks. Dow Industrials are still in an uptrend and is above the 50 day moving average. S&P 500 is also getting close to the 50 day moving average and the uptrend is still intact. If we breach the key support of 1400, that may signal the beginning of the intermediate correction and may retrace to the 1360 level.

Techs are extremely difficult to trade but some bright spots in the industry groups exists. There are opportunities in the apparel groups (CRI looks to be emerging from the down trend and may have started its leg up). Believe it or not, CAT is also showing promise with 2 week short stroke pattern forming. It has also emerged from the down trend that started last May.

EMC is the only tech that I am interested in at the moment. It is also performing well inspite of the recent market volatility and weakness. It looks poised for another break to the upside. Today, the stock held ground at 14.62 despite tough market conditions and ended at the top end of the trading range for the day. This stock appears to be accumulated by the institutions right now. I see a upside price of $17 from current levels.

I added to EMC today and continued to trim my Cisco options, at a loss today. I think Cisco will consolidate their gains for a while here at these levels. I also added to CAT May $65 options today. I also added to Carters June $25 options today. I still have some money on the sidelines to continue to add on dips. This week will provide more opportunities to add to my positions in EMC, CSCO, CRI, and CAT. I am officially long those stocks.

Wednesday will be a crucial day as Ben Bernake addresses congress. In his statement, I believe we need a "dovish" language for this market to regain its upward leg. In fact, the recent subprime mortgage lender noise is a warning shot that needs to be heeded by the FED. That is, they should consider cutting interest rate by 25 basis points sooner than later. Wouldn't it be great if the FED gave this market a much needed break by cutting rates in March? Maybe...it could happen.

Until then, happy trading.

Interesting Action in Adobe and Comcast

Adobe and Comcast is also an interesting candidate for some options play. The prices of these options have been deflated due to recent decline in share prices and is trading at a discount. I would be compelled, if I wanted to play this, to look at the June options slightly out of the money for Adobe and July options slightly out of the money for the Comcast options. I believe that the rbound is in order for these share prices before the options expiration and it should provide for some good upside.

I would probably be interested in taking 10 to 50 contract positions in these options with expectations of returning a quick $1000 to $5000 returns.