If you’re searching for an attractive low in the market, look no further than Baidu (NASDAQ:BIDU). Beyond calling a bottom, here’s what you need to know about buying BIDU stock.
China-based search giant and diversified technology play BIDU is commonly referred to as China’s Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The company has been under larger-than-average pressure. Since mid-2018, Baidu has managed to shed roughly two-thirds of its value with last month’s low.
Baidu’s weak performance compares unfavorably to the Invesco China Technology ETF (NYSEARCA:CQQQ) and peers like Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY). Much of that pressure of course can be tied to the U.S.-China trade war. So, what gives in BIDU? Most of the relative weakness has been self-imposed and specific to Baidu stock.
The Good News … and the Bad News
The company’s well-publicized fallout tied to underhanded search practices was one problem along the way. Assertions against Baidu’s role in promoting the rise of Quanjian, a questionable healthcare products manufacturer, were another drag on shares earlier this year.
And two quarters ago, Baidu also reported its first — and a worse-than-expected — loss in 14 years as a publicly traded company. The news sent BIDU stock tumbling 25% over two sessions.
Now for the good news. Wall Street can be a forgiving environment, especially when there’s the proverbial blood on the streets. One recent example of forgiveness is Chipotle (NYSE:CMG). The restaurant chain has made a huge comeback after its own health scandal made headlines throughout 2016 and 2017.
Another item or two to consider is the company’s aggressive investment in autonomous driving was largely behind Baidu stock’s single-quarter earnings loss. Not only would it be nearsighted to believe the strategy won’t pay off long term, but the company is already on the mend as evidenced by its better-than-forecast profits in Q2. Baidu stock is also cheap.
Shares trade at a forward price-to-earnings ratio of 16 and sport a measly 1.5 price-to-book value. For a large-cap tech stock, other than possibly Micron (NASDAQ:MU), you’d be hard-pressed to find the same kind of valuation. And mind you, Micron has to deal with notorious cyclicality in its business.
Sure, there are risks with Baidu which will linger or new problems that could arise. But that’s investing. And right now it’s time to put shares on your radar for buying.
Baidu Stock Price Monthly Chart
One glaring piece of evidence that BIDU stock is extremely out of favor is the monthly price chart. Following May’s earnings-driven plunge in shares, Baidu went on to form a small bear flag around its 62% retracement level. Baidu stock then decisively broke this level in August.
To say the least, the price action in BIDU has shown little in the way of love among bullish investors. Also, with stochastics having remained oversold for months now, the idea of systemic bearishness is only reinforced. But there may be a light at the end of the tunnel.
The extreme negativity now has Baidu stock setting up as an undercut variation of the classic double-bottom pattern. And that could be very good news for longer-term bulls regarding a low in share price.
When the undercut variation breaks the formation’s initial pivot, it potentially forces out weaker holders and allows for less overhead resistance. Coupled with the “modest” failure of the closely watched 62% Fibonacci support, the possibility of a meaningful and powerful intermediate low is increased in my estimation.
How to Trade BIDU Stock
With last week’s shot over the bow the U.S. government may delist Chinese stocks, I’d rather err on the side of caution and stress investors seek exposure in BIDU stock using Baidu’s options market. I’d also recommend a bull call spread as a safer strategy which limits and reduces premium risk as the position of choice.
Wait to position until price confirmation of a double-bottom is in place. That nearly happened in September, but the entry I’d propose is slightly above the August hammer high at $116. This entry is roughly 13% from current prices. That may sound like a lot to wait on. But in the context of what’s been discussed, it’s small potatoes with an extra layer of security.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.