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How to Buy the Next Baidu

By Frank Curzio, editor, Small Stock Specialist
Friday, December 10, 2010

Imagine investing in Amazon the day after it started trading in 1997... You would have made over 7,000%.
 
What about Baidu, China's answer to Google? If you bought Baidu the day after its initial public offering in 2005, you'd have an eightfold return.
 
 
It would have been crazy to buy Baidu the day after it became a public company. After all, the China-based online search engine more than doubled on its first day of trading. And it's certainly been a bumpy ride for shareholders. But the stock has jumped from $12 to $110 over the past five years.
 
The reason for the enormous gain is simple. China has over 400 million Internet users. If they want to search online, Baidu is their first choice. While 400 million is an incredibly high number, it only amounts to 32% of China's population.
 
To put these statistics in perspective, more than 75% of the U.S. population uses the Internet. That's why companies like YouTube and Amazon have hundreds of millions of people going to their sites on a monthly basis.
 
Looking at China, it's just a matter of time before its Internet penetration rate catches up to the U.S.'s. It took about 12 years to go from 15% of the U.S. population using the Internet to 75%. If China follows in the same footsteps, in 12 years, over 975 million Chinese citizens will be using the Internet.
 
These numbers are staggering. That's almost 600 million new Internet users looking to shop online and watch videos.
 
That's probably why Youku (YOKU) and Dangdang (DANG) soared after becoming public companies on Wednesday. Youku surged 161% to $33 and Dangdang jumped 85% to $30. These companies also moved sharply higher on their second day of trading.
 
Youku is the YouTube of China. It allows users to search, view, and share video content. Based on its IPO filing, the company claims it gets 203 million monthly unique visitors. To put that in perspective, that's almost twice as many monthly unique users as eBay.
 
Dangdang is considered the next Amazon. It's China's largest online book retailer. The company is beginning to sell other products like clothes, electronics, and almost anything you can think of. According to several studies, of the 400 million Internet users in China, only 130 million shop on the Internet. So there's plenty of growth here.
 
Most of you reading this may feel like you missed the boat on Youku and Dangdang. After all, these stocks skyrocketed right out of the gate.
 
But I believe these companies will follow a trend similar to Baidu's. Investors will book short-term profits. That will cause the stocks to pull back over the next few months or so. That's when I would use the opportunity to scale in.
 
Based on the enormous growth potential in Internet usage in China, these companies have the potential to grow their market caps into the hundreds of billions. Huge gains are possible if just half the population in China starts using the Internet.
 
Put these stocks on your watch list. Once they come down, I suggest buying shares and putting them away. In a five-year period, I wouldn't be surprised to see 800% gains or more.
 
Good investing,
 
Frank Curzio




Further Reading:

Right now, a boondoggle is unfolding in China's coal industry: the government has hand-selected a few companies to acquire huge assets for pennies on the dollar. These "anointed" few will lead the sector for years to come. Get Frank's first write-up here: The Coming China Coal Boom and the follow-up here: The Best Plays in China's Coal Boom.
 
Frank also sees a huge opportunity in Asia's gaming market. Get the details on his trip to Asian gambling hub Macau – plus two easy ways to play it – here: I Just Saw the Greatest Gambling Spectacle in History. And learn about one company replicating Macau's success all over Asia here: The Gambling King of Asia.

In The Daily Crux
Market Notes
Crude oil and natural gas prices already up more than 5% in December.
 
Ten-year bond rates surge from below 2.5% in early November to over 3.3% this week.
 
Shipping giant UPS breaks out to two-year high.
 
Uranium miner Denison Mines soars 125% in three months... it's a brand new bull market.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1233.00 +0.4% +12.5%
Oil 37.94 -0.1% +5.8%
Gold 135.37 +0.4% +22.1%
Silver 28.03 +1.2% +63.4%
US-Dollar 80.00 +0.1% +5.3%
Euro 1.32 -0.1% -10.1%
Volatility 17.25 -2.8% -23.9%
Gold Stocks 568.36 +0.9% +25.2%
10-Year Yield 3.22 -0.6% -5.9%

World ETFs
Symbol Price
Change
52-Wk
USA 123.76 +0.4% +12.5%
Canada 30.27 +0.2% +17.9%
Russia 21.86 +0.1% +21.0%
India 36.63 -2.4% +18.2%
Israel 16.75 -0.5% +10.8%
Japan 10.61 +0.2% +6.4%
Singapore 13.80 +0.4% +19.4%
Taiwan 14.93 +0.8% +19.2%
S. Korea 57.92 +1.5% +23.6%
S. Africa 71.71 +0.5% +31.0%
China 43.36 +0.1% -0.5%
Lat.America 51.89 -0.7% +8.1%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.03 +0.6% +20.9%
Big Pharma 64.18 +0.3% -2.7%
Internet 72.83 -0.3% +29.3%
Semis 16.59 +1.0% +29.5%
Utilities 31.00 +0.4% +0.4%
Defense 18.39 -0.6% +8.9%
Nanotech 10.00 -1.0% -0.8%
Alt. Energy 10.29 +0.1% -2.7%
Water 18.79 +0.1% +15.5%
Insurance 16.32 +0.3% +22.1%
Biotech 20.64 -0.2% +28.4%
Retail 19.57 +0.4% +29.0%
Software 25.04 +0.2% +26.6%
Big Tech 54.13 +0.1% +22.8%
Construction 13.32 +0.1% +17.6%
Media 13.81 +0.1% +23.0%
Consumer Svcs 67.45 +0.1% +24.2%
Financials 56.40 +1.1% +10.3%
Health Care 64.12 +0.2% +1.9%
Industrials 63.80 +0.2% +21.3%
Basic Mat 74.09 +0.5% +27.0%
Real Estate 54.11 -1.1% +22.1%
Transportation 92.01 +0.9% +25.7%
Telecom 22.91 +1.0% +16.5%

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