When I buy a stock, I usually buy it for the long turn (except in my Roth IRA, where I do some small active trading in down markets and use it as a dividend shield). Occasionally something happens to one of my stocks that requires that I sell the stock since the story has changed. Such was the case yesterday.
I sold a stock that has increased in value by around 10 fold! It was a great stock and had a wonderful business model where it’s at (in China). In fact the company is so good that it practically has a monopoly in it’s area of expertise. It’s main competitor (Google) exited the environment leaving all the spoils to this company. Yes, the company is Baidu (ticket BIDU). I’ve held this company for a few years and it has been the equivalent of a rockstar among stocks.
So why am I selling it now? China!
China is an incredible country and there is a lot of great growth happening over there with respect to their economy. Baidu has been a shining star, even in a fast growing country like China.
So again, why am I selling?
The state media is starting to sling mud at Baidu by stating that Baidu is allowing bogus drug companies to sell fake drugs on it’s site and claiming that the auction bidding process for Ads is rigged. In the US, this would not be room for alarm and wouldn’t bother me much since the company would most likely just get fined. But in China, they can do whatever they want, whenever they want. They have no restrictions. If they want to shut down Baidu tomorrow, they would just walk in to Baidu and shut it down. If they wanted to take over the company and claim it’s now a state company, they can do that too. China actually has no limits as to what they could do.
So the real question is, has Baidu’s story changed?
- Well, the last identification of problems by the state may change Baidu’s business model. if this happens, then there is a chance that it might not be as profitable. This would destroy the stocks growth rate and stock valuation.
- Potential loss of the drug Ads could have an impact on Baidu’s profits too.
- Changing the business model (if this is done again), may prove less profitable than the prior model.
- If China nationalized the company, many would be out of lots of money.
The reasons above dances in my mind, but mostly it’s investor sentiment that worries me. Others may be thinking about the small subset of problems points that I mentioned above and start to sell even more that what has happened already.
Depending on what goes down and how brave I feel, I might try to buy some more shares if the price falls far enough.
So yes, because of uncertainty, I’m out of one of my favorite stocks.
What would you have done? Do you think I’m panicking too quickly?
Time will tell,