Watch Out for BIDU Stock
What caused Baidu Inc (ADR) (NASDAQ:BIDU) to fall more than 35% in less than four months? From my vantage point, BIDU stock was unfairly dragged down by the Chinese stock market crash. It’s not like the company is doing poorly or anything like that—they were just collateral damage.
Though it’s tragic to see a good company dragged through the mud, savvy investors can use this as an opportunity. A small window opens in which huge returns can be made.
I’m going to teach you how, with a little patience and skill, you can take full advantage of this rare opportunity. The first step is to understand why the company’s stock price crashed.
We have to find out what happened in the past before we can predict what will happen in the future. So let’s establish a timeline.
On June 11, 2015, Baidu stock was trading at $206.77. The very next day, China’s stock market started crumbling.
By the end of the August, BIDU stock closed at $147.25, a stunning drop of roughly 29%. Meanwhile, the Shanghai Composite Index (which tracks Chinese equities) was down about 30% in the same time frame. Coincidence? I think not.
Could Baidu Surge in 2016?
So we’ve determined that BIDU stock crashed in sync with China’s broader market. The depth and duration were nearly identical. But we still have no reason to believe that Baidu is worth more than its current trading price.
Here’s where we reach the second step of our analysis. Look at the company’s business. Is it profitable? Is it making the right choices to keep growing? These are the questions all hard-nosed investors need to ask.
I’ve taken a solid look at Baidu and I can tell you that this company is just incredible. To be fair, there are some legitimate criticisms about Baidu’s shrinking margins, but they only go so far. The company is still delivering almost 20% return on equity, far above the industry standard of 12%.
There are also a ton of rumors that Baidu could spin off its less profitable businesses. By getting rid of low-margin divisions, the company’s bottom line would increase dramatically. Profits would skyrocket, along with BIDU’s share price. (Source: “Is Baidu Finally Getting Ready To Unlock Further Shareholder Value?” Forbes, February 21, 2016.)
It’s exactly the kind of shift a company needs to restore investor enthusiasm. Baidu’s PR team tried to rein in the speculation, but it was too late. The cat was out of the bag. Heck, we even saw the CEO and founder, Robin Li, offer to buy the video streaming service iQiyi for $2.25 billion. The company is drilling down on businesses in which it knows it can make a killing. And investors are taking notice.
Baidu’s share price is up more than seven percent in the last week. The real tipping point could come on Thursday, February 25, when the company releases earnings. I’ll be looking for strong guidance and more spin-offs to really get the stock soaring.
Considering that it was well above $225.00 less than a year ago, I expect the pendulum to swing hard in the opposite direction. There’s a strong chance we could see BIDU stock hit $250.00 before 2016 is over.