Is Baidu the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Baidu (Nasdaq: BIDU) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

• Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  
  
• Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  
  
• Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  
  
• Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  
  
• Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  
  
• Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Baidu.

Source: Capital IQ, a division of Standard and Poor's.
*As of March 2010.
Total score = number of passes.

A score of 7 is quite good, even if it falls short of perfect. Like many young, high-growth companies, Baidu doesn't pay a dividend, which cuts two points off its score. In addition, the stock is far from cheap, although some would argue that with such amazing growth, using normalized earnings may make the stock look more expensive than it really is. On a forward basis, shares fetch just over 40 times 2011 estimates.

Just as Google (Nasdaq: GOOG) has found strong growth in the U.S. browser market, Baidu has dominated the Chinese market with around 70% market share. Yet even as Google has struggled with whether to exit China, Baidu may face new competition from Microsoft (Nasdaq: MSFT), which hopes its Bing search engine may help fill the vacuum of a smaller Google presence. As far as domestic competitors are concerned, though, Baidu doesn't have much to worry about; rival Sohu.com (Nasdaq: SOHU) has only a small search-engine presence.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

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