Sell This Stock

When you're looking to research a stock who should you listen to, Wall Street or Main Street? Wall Street has its analysts and they don't have a good track record. They are known to be short-sighted, overoptimistic, and rarely negative. Savvy investors read their research but ignore their buy and sell ratings. So who can you trust?

At Motley Fool CAPS we use the collective opinion of 165,000 investors to inform our stock ratings. Members are scored on their accuracy and overall outperformance of the S&P 500. We then aggregate all the ratings such that members with higher scores have more influence on a stock's CAPS rating. This gives us some of the best ratings around.

Let's look at one stock:

Source: Yahoo! Finance.
*In this case, the higher the better for both analyst ratings and CAPS ratings.

Baidu
Investors on CAPS have a sober opinion of Baidu as it has been overvalued for at least a year. For a cheat sheet on the stock click here. In January, when Google (NYSE: GOOG) announced it was thinking of leaving China, Baidu shares took off. Now trading at 95 times earnings, the stock should be attracting only the most fearless of investors. That said, I wouldn't short Baidu; there is one big rule of shorting: Never short on valuation.

For a members opinion, CAPS member Rglean72 has been short Baidu since the beginning of the year and has been feeling the pain. An excerpt of the 31 reasons why he is short:

I am short BIDU at [$44.20], humble, & patient. Here are some of the reasons I believe that I will prevail in making a profit. Also, please inform me if there are reasons I have missed, thank you.

1. By BIDU's own admission issues with its Phoenix Nest Internet advertisement conversion will persist into 2010
3. Recent stock price run-up not fundamentally based, in my view
4. COO & CTO departed within 10 days of each other
6. 2010 P/E of over 50x & a growth rate slowing into the mid-thirties for revenue
7. Revenue & earnings growth declined sharply in 2009
9. 2010 EPS expectations reduced dramatically following 3Q09 results; any disappointment on already lowered results would crush the stock
12. Move to Phoenix Nest system very disruptive for BIDU's customers.
15. BIDU is priced for perfection
18. BIDU – should get a corporate governance discount
19. BIDU – ownership & legal structure – investors don't have a claim on key business licenses or profits/dividends in order to comply with Chinese laws to sell stock offshore
20. The leading "investment thesis" of many that believe BIDU shares will trade higher is that the stock is going up or it's CHINA
23. BIDU has yet to be able to move meaningfully into new markets outside of China. Recently BIDU denies recent rumors about expansion in Europe: http://searchengineland.com/baidu-calls-european-expansion-rumors-groundless-11417
26. Most Wall Street Analysts have moved price targets up & are bullish – few discount GOOG staying, BIDU's recent technology challenges, the departure of senior executives, the recent run-up in BIDU's valuation, etc.
29. Interesting perspective on timing of BIDU departures & events at Google: http://www.techcrunch.com/2010/01/18/baidu-cto-quits/

Not To Be A Negative Nancy
I try not to say bad things about a stock without giving two alternatives I believe will outperform the company.

NVIDIA (Nasdaq: NVDA)

NVIDIA has been hit hard as investors worry whether it will have to pay out hundreds of millions of dollars or worse to Rambus, a designer of high-speed memory chips, over a patent infringement dispute. NVIDIA has taken precautions and is currently sitting on roughly $1.8 billion dollars. According to Bloomberg, Rambus' efforts to enforce its patents depend on the legal interpretation by the International Trade Comission over whether an earlier licensing deal with Samsung negates claims Rambus is making against NVIDIA. If the commission sides with the Rambus, NVIDIA could owe a huge amount of money.

That aside, NVIDIA is a market leader with over 60% market share in the graphics processing industry, a great brand name, and a founder/CEO heavily invested in the company, a real Foolish business.

Google (Nasdaq: GOOG)

Google recently missed Wall Street expectations by $0.07 and the shares went tumbling. Currently trading at just 20 times earnings, Google's quarterly profits of $6.45 a share is stronger than the profits of $5.36 a share it reported just a year ago. Also, Google currently has just a 31% market share in China versus Baidu's 64%, if Baidu makes long term missteps, Google could become the next, well, Google of China. On top of that, Google is sitting on $30 billion dollars, that's twenty percent of its market cap. While it will definitely use some of that for acquisitions, many are calling for share buybacks or a dividend, both of which would be a boon to the stock.

Given Wall Street's perpetual bullishness on virtually every stock out there, you should turn to the completely free CAPS to harness the wisdom of the crowd to research stocks.