Can Baidu Still Outperform in the Current Market?

Baidu, Inc. (NASDAQ:BIDU) is a Chinese Internet-search services company with the top search engine in China by volume and revenue with over 70 percent of the market.

With shares trading around $89.36, is BIDU an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalysts are Moving the StockBaidu Coffee

On December 3, the Securities and Exchange Commission issued a statement declaring it was beginning “administrative proceedings against the China affiliates of each of the Big Four accounting firms and another large U.S. accounting firm for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.”

Investors or observers who follow the stock know that this announcement was followed a pronounced sell off in U.S.-held Chinese stocks across the board. Baidu closed down 5.9 percent on over two times the normal trade volume. The legal shenanigans that constitute the legal relationship between the U.S. and China have created an environment where accounting firms and U.S.-held Chinese companies are both caught in a catch-22. That is: the SEC requires audit documents on the Chinese companies to be released, but releasing those documents is against Chinese law.

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No matter what happens the law is broken and everybody loses. While there is hope that the situation will be resolved to everyone’s satisfaction, there is a risk that U.S.-held Chinese companies like Baidu, Qihoo 360 Technologies Co. Ltd. (NYSE:QIHU), and SINA Corporation (NASDAQ:SINA) could ultimately be de-listed. The concern is that since the SEC can’t verify the companies’ account records there is the possibility of fraud.

The concerns are not superfluous  either. Operating in the legal gray zone between U.S. and Chinese law has presented the opportunity for criminal accounting behavior before and business operators of dubious moral character have capitalized on the position. The SEC has filed more than 40 fraud allegations against individuals or companies to date related to the issue…