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Black Belt Trading: Investing Like a Pro 157

The Google of China
Baidu, which is the Google of China, first came to Jim’s attention after it
came public in February 2005. He didn’t buy the stock because its initial
base looked faulty, but he kept following it because of the unique story and
because many of the market’s biggest winners will have come public within
the prior eight years of their big price moves.
By 2007, Baidu had more quarters of earnings and sales data, so Jim
could do a better analysis of the company. As Jim did his research, he
thought that Baidu looked too good to be true. “It just seemed too perfect.”
Starting in the June 2007 quarter, Baidu had earnings growth of 100%
and sales growth of 120%. These were massive earnings and sales numbers,
and that is why Jim was able to have conviction in the stock and why he
bought shares aggressively. Earnings in the following quarters were 75%,
61%, 100%, and 114%. Sales rose 118%, 125%, 130%, 122%, and 103%.
With more than 1.6 billion people in China and only a small number on the
Internet at that time, Jim knew that the stock had enormous potential. Baidu
also had government protection and virtually no competition. Several mutual
funds, banks, and other institutional investors like Fidelity were taking large
positions in Baidu, and this gave Jim greater confidence in the company.
Jim thought that Baidu was likely to have the same success that Google
had as an Internet search engine. There was an exploding environment in
China with a whole new group of people using the Internet. Barriers were
beginning to break down in the Communist regime, and Baidu would go on
to become a truly giant market leader.

Market Leaders Get Hit Also in a Downtrend
Even so, as the market turned south late in 2007, Baidu was hit along with
several other market leaders. Jim sold his entire position in Baidu, knowing
that even the best stocks correct when the market heads lower.
The market went down dramatically from late 2007 until March 2009.
The Nasdaq suffered a loss of over 50% due to the banking and housing
debacles. But Jim had been through a period like this before with the
2000–2003 bear market, and he knew that eventually the economy would
pick up and that new innovative companies would emerge.

Baidu Hints of a New Uptrend
Starting in February 2009, Jim noticed that Baidu was beginning to move up
again. The stock advanced 13 weeks in a row, which indicated that institu-