The Big Money Says Baidu's a Buy

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Baidu (Nasdaq: BIDU). Are institutions bullish or bearish when it comes to China's king of search?

Foolish facts

Data current as of Jan. 21.

Google (Nasdaq: GOOG) retreats from China and still Fools don't like Baidu? Color me confused. Sure, at 71 times estimated 2010 earnings the stock trades for a premium. A massive growth opportunity justifies the multiple.

But don't take my word for it. According to Capital IQ, analysts believe Baidu's normalized profit per share will double by the end of next year. Not that you should believe them. Wall Street has a history of underrating the company's earnings power.

"Anyone nervous about the P/E ratio, or EPS growth rate estimates, is having an issue with comprehension. We all must understand the context in which Baidu exists, which is foreign, profitable, and growing. It should set some records with this setup. Don't be afraid of success," wrote Foolish investor JFFTYJNSN earlier this month.

Institutional ownership history

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

Big Money investors aren't afraid. If anything, they're more enthusiastic for Baidu shares today than they've been in a while. That may be due to a recent sell-off in the stock. Shares of Baidu dipped noticeably in December, recovering only after institutions resumed buying.

What's behind their enthusiasm? Demographics would be my guess. China's growing middle class is a ripe target for Sino businesses and global trading partners alike. The Obama administration made its pitch for access this week when Chinese premier Hu Jintao visited the U.S. Investors needn't work that hard; a bet on Baidu gets them all the exposure they need to China's emerging consumer market.

Competitor and peer checkup

Source: Capital IQ. Data current as of Jan. 21.

Interestingly, Baidu isn't as widely owned as you might expect for a Nasdaq stock that commands $37 billion in market value in the U.S. alone. Valuation concerns only partially explain that skepticism. Expansion is the other worry.

For as good as Baidu is at providing expected search and related e-commerce services in its home market, there's little evidence of the company's ability to expand beyond the Great Wall. A successful foray into Japan three years ago is about all management can crow about. That has to change if Baidu is to become a global phenomenon on par with its closest rival, Google.

Executives and other insiders appear to believe that's exactly what the company will achieve; they still own close to 23% of the business. Among the peers listed above, only NetEase.com can boast as much internal sponsorship. That's the sort of fiscal commitment I'm looking for as an investor, and a big reason why I've rated the stock to outperform in my CAPS portfolio.

Do you agree? Disagree? Let us know what you think about Baidu using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

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Interested in more info on the stocks mentioned in this story? Add Baidu, Google, Microsoft, NetEase.com, Sohu.com, or Yahoo! to your watchlist.