BIDU: Go Bottom Fishing With Baidu Stock

Investors are always “searching” for something, which for investors with a stake in Chinese stocks could mean focusing on last night’s China GDP data.

Baidu Inc. (NASDAQ: BIDU)

But if you’re interested in buying a correction that’s put in the time and price effort in a more reliable, sort of way and rather than a falling knife; look no further than China-based search engine Baidu (BIDU).

Overnight, Chinese stock investors purportedly enamored by fanciful speculating aren’t buying an announced “holding steady at 7%” China GDP that topped Street views of 6.8%. It could be traders are questioning the data’s reliability given the government’s aggressive economic policies. But who knows how that will change by the time U.S. markets open.

Speaking of which, U.S.-listed Baidu stock looks terrific overall as a value and growth proposition — both off and on the chart.

Fundamentally, BIDU stockholders are looking good overall. Revenue growth last quarter came in at 34% while topping $2 billion in sales. That’s pretty attractive for a $67 billion market cap company. And it doesn’t stop there, as analysts expect full-year year-over-year growth of 38% this year, followed by a still-strong sales increase of 32% in 2016.

Baidu has been busy diversifying, investing into various growth areas beyond its search engine. BIDU has expanded its reach with a Latin American launch in Brazil last year, and it also has been moving into the mobile market with apps, online video and group buying sites and even the “connected car” in a deal with Daimler (DDAIF).

Growth has come with a cost, however. Breaking into new market areas has been expensive and impacted the company’s bottom line in recent quarters.

But the commitment is showing early promise for Baidu stockholders as mobile revenues surpassed the company’s desktop sales for the first time last December, and earnings are anticipated to grow nicely to below-market multiples over the next couple years.

Baidu Stock Weekly Chart

bidu baidu stock
Click to Enlarge
Source: Charts by TradingView

At eight months and 29% in the red, Baidu stock has put together a solid, but technically good-looking correction that in our estimate would make many growth traders blush. Growth names such as Baidu invariably pull back, and when the occasion does arise, 20% to 30% is par for the course.

The correction in Baidu stock is also attractive as it effectively resets the weekly base count since it took out the prior base lows from October.

Additionally, a hammer low nestled on top of a couple longer Fibonacci retracement levels of 38% and 62% and remaining above its prior 2011 highs are appealing, as is the positive divergence in Baidu stock’s weekly stochastics.

Baidu Stock Bullish Option Strategy

baidu stock bidu volatility chart
Click to Enlarge
Source: Charts by TradingView

With directional risk of just under 13 deltas and small gamma, a positive earnings reaction bias and a historically doable 6% to 7% in Baidu stock following its next report (July 27) would result in a paper gain of around 50% based on current prices.

And with plenty of time on the calendar to participate in any future base building back toward Baidu stock’s highs, this call spread could ultimately capture a return in excess of 450%.

Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

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