Is Baidu the Next Enron?

With shares of Baidu (NASDAQ:BIDU) trading at around $111.66, is BIDU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

If you’re long Baidu, then the title may have already angered you. The results found here were based on research, and this is simply passing along information that might be valuable to the reader. I dug deeper than usual because the numbers seemed unrealistic.

During my research, there was one thing that stood out to me more than anything else. When Enron was on top of the world, Wall Street firms referred to it as a Black Box. This meant that the company didn’t provide any real substance as to how they achieved such incredible results. As far as Wall Street firms were concerned, as long as Enron continued to deliver and everyone was making money, no one asked any questions. This is important because at the current time, institutional investors in Beijing refer to Baidu as a Black Box. There are great results, but there isn’t much detail as to how those results are being achieved. All that said, it should be noted that Baidu’s stock has slowed over the past two years whereas Enron’s stock never quit. This should actually be looked at as a positive because if the books were being cooked, Baidu would likely do everything in its power to keep the stock price moving higher at all times.

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Even if Baidu’s numbers are 100 percent legit, there is still danger in this area. As you might already know, the SEC has cracked down on Chinese affiliates of top U.S. accounting firms. These accounting firms are now required to produce auditing documents of foreign companies if listed on U.S. exchanges. The bad news for Baidu is that if even one of these companies is showed to have been cheating, it will take most Chinese stocks down with it. Investors will assume that cheating is rampant. The good news for Baidu is that progress will require cooperation between the SEC and the Chinese government. The Chinese government is superb at stalling. Therefore, this could be an extremely long process. Prior to moving on to the next topic, it should be mentioned that many small-cap Chinese stocks failed an audit and were de-listed in 2011….