Voodoo Curses: A Superstitious, Superlicious Alternative
Imagine with me, if you will, hypothetical Company X. In 2Q, X reports its all time best quarter, shattering the old record by 35% and surpassing estimates by 9%. It also guides revenues and profits higher for 3Q, while predicting 3Q will break the all time record just set by 2Q. It further guides that 4Q will again break 3Q's all time record. So, an amazing 3 consecutive best quarters ever.
Naturally, the market responds positively to X's amazing run by bidding the stock higher, to $165. In the following weeks and months, news concerning the company remains good: X issues no earnings or revenue warnings, while its most direct competitor announces record profits of its own, but admits defeat in X's geographic area. In addition, not a single analyst decreases his numbers for revenues or earnings for 3Q or 4Q, while several adjust them higher on the strength of 2Q's numbers and guidance.
Given that story, we'd expect that $165 price to be, what, $200? Higher? But it's not; in fact, it's trading approx $135 into that record breaking 3Q report. So, what the hell is going on? Did the company screw up, is this a NFLX situation? No, and that's the worst part: None of this is Baidu-the-company's fault. Consider: none of us had ever heard of VIE's (and that would still be true), except that Jack Ma got greedy, so Alibaba screwed Yhoo. The macro Chinese slowdown? Certainly not Baidu's fault. Accounting problems? Baidu's never been accused of any misleading accounting and they use the big 4 firm E&Y, how could they possibly do better? Transparency problems stemming from SEC vs. Chinese govt? Thanks a lot, Longtop Financial, but again, that conflict has nothing directly to do with Baidu.
So, what can we call it when a company does everything an investor can hope for, providing ever escalating revenues and profits, and it's stock price still goes down due to factors beyond its control? That sounds like the exact definition of bad luck -- just plain bad luck. And since nothing rational explains bad luck, I'm partial to the theory that Baidu's been operating under a voodoo curse (or possibly a bad horoscope). The upside here is that no run of bad luck has ever lasted forever. My guess: next quarter will see the luck factor stuff, and the long term stock price, improve for Poor Old Company X.
Good point, good point. On the earnings issue tonight, I'm a captive long, as my Bidu position is made up of 4 tranches: 1 that's roughly even, 1 that's way under water (one of the purchases in that tranche was at $163.75!), but 2 that would have such significant tax implications that I'm essentially stuck with them.
Nuts, I might've missed the mark with my Voodoo theory, then; what I meant to indicate was that all the bad things that have befallen Bidu were non-company specific, so they have no direct impact on tonight's numbers at all.
But fwiw, here's my guess for tonight: based on Bidu's track record, I'd place the True Expectation Number tonight at roughly 89/90 cents. I give Bidu a better than 60% chance of beating it's True Expectation.