Are you a shareholder of Baidu (NASDAQ:BIDU)? If so, you’re likely all too aware that Baidu stock is down 23% year to date.
By comparison, the Shanghai SE Composite Index is down a mere 3% on the year, a far more palatable loss for the average investor.
If you don’t own Baidu stock but are thinking of buying on the dip, might I suggest that you consider an alternative?
But before I wade into a discussion about what I believe is a more appropriate investment, let me provide some expert opinion on Baidu.
Baidu Stock Is a Falling Knife
In September, InvestorPlace contributor Vince Martin discussed several reasons why Baidu was the wrong play for anyone looking to invest in Chinese stocks.
“Investors are concerned about a shift toward apps, which could hit Baidu’s search revenue. Alibaba and Tencent, among others, are trying to take advertising market share,” Martin wrote in September. “There are reasons beyond country risk why BIDU looks so cheap relative to U.S. tech plays.”
At the time, BIDU stock was trading around $213. Since then, it’s lost another 15%, getting hit especially hard during October’s global stock meltdown.
About a month-and-a-half later, Martin suggested better alternatives existed including NetEase (NASDAQ:NTES) and JD.com (NASDAQ:JD).
A Cheap Valuation
InvestorPlace’s Luke Lango recently recommended seven Chinese stocks ready to rebound. One of them was Baidu. Here’s what he had to say about its valuation.
“BIDU stock is pretty cheap at under 20X forward earnings for what was 27% revenue growth last quarter,” Lango wrote in December. “Falling margins are behind the low valuation. But, this is a near-term phenomena.”
Lango believes that Baidu has bottomed and is ready to move higher.
So, here we have two vastly different opinions about the future direction of Baidu stock.
The Easy Solution
I don’t know about you, but if someone asked me what U.S.-based company’s stock I thought would double over the next five years, I’d have an answer. It would be Church & Dwight (NYSE:CHD), the safest stock to own, in my opinion, that’s listed on the NYSE.
Now, if you asked me the same question about China-based stocks listed on a U.S. exchange, I wouldn’t be able to give you a confident answer.
Maybe it’s Baidu. Maybe’s it’s Alibaba (NYSE:BABA). I know it’s not JD.com. The point is it’s hard enough picking stocks in the U.S. where country risk is low on the Richter scale. China takes the country risk to a whole different level.
So, for me, if I liked Baidu, but were reluctant to pull the trigger, I’d consider an equal-weight ETF that invests in top Chinese stocks like Baidu.
Why equal weight?
Although there are times when equal-weight ETFs underperform their cap-weighted peers, over the long haul I want to own passive ETFs that don’t play favorites.
Sure, that means your favorite stocks aren’t going to get a significant weighting, but you can be sure that the winners will win and the losers will lose, and it will all come out in the wash.
There’s one problem with my logic: as far as I know, there is no equal-weighted China ETF available. Feel free to take me to school if there is.
The Winner Is?
Going to plan B, I’m going to suggest that anyone interest in owning Baidu stock given the current volatility might want to take the easy way out and buy First Trust NASDAQ-100 Equal Weighted Index Fund (NASDAQ:QQEW), an equal-weighted version of the NASDAQ 100, owning both Baidu, NetEase, and JD.
While it’s expensive at 0.60%, it provides greater protection on the downside with 12% returns over the past five years on the upside.
Like I said, an easy solution.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
