Another day on Wall Street and another record broken. The indices are in the hands of the bulls. The exception to the exuberance lately lies with the Chinese equities. The iShares China Large-Cap ETF (NYSEARCA:FXI) and Alibaba (NYSE:BABA) stocks are down 15% and 30% since February. Baidu (NASDAQ:BIDU) stock has it even worse, down almost 50% since then.
These are successful companies whose businesses are still very healthy. Nothing has changed with their outlook except sentiment. They are all under political pressure and arguably they could have avoided it. But this is the pickle they’re in, and the stocks are suffering for now. Therein lies a dilemma.
Under normal circumstances, this would be a big buy-the-dip opportunity for investors. BIDU stock fundamentals are as good as they’ve ever been – maybe even better. They operate in the largest market on earth, and they are in several up-and-coming industries. They are building momentum after the pandemic. It is worth adding to a long term portfolio.
BIDU Stock Is in Good Hands
Management grew its revenues more than 30% in four years. They did it while improving margins, because they also grew net income 160%. However the stock appreciation lagged so now the stock is cheap. BIDU has a single digit price-to-earnings ratio, and a 3.7 price-to-sales. Any which way you slice it, it has value. Buying the stock now for the long term is not a likely a financial debacle.
They even have their hand in self-driving technologies. Clearly the company is firing on all cylinders. In contrast, there is no acknowledgement from Wall Street. BIDU stock is still suffering tremendously in spite of strong scorecards.
There could be light at the end of the tunnel because of technical reasons. Baidu is falling into a potential support zone dating back to 2011. The turnaround will come when sentiment flips back to at least neutral. That’s the point where it would stop making new lows. The next step would be to start building positive momentum, but first things first.
Based on the monthly chart, below $165 per share would bring interest from buyers. It is imperative that the fans defend last week’s lows. If they let it fail again then the slide continues and they repeat the process from lower levels.
There Are Other Risks to Consider
Long term, I am confident that this would be a fine entry point. I am not as sure of the overall markets in general. Stimulative efforts by the Federal Reserve and the White House are on schedule to abate soon enough. Equities will lose strong tailwinds and it is possible that they face headwinds instead.
If that happens it will ruin any rebound efforts from Baidu stock. Therefore, entry points here – even for the long term – should be partial. No one should have absolute conviction in their thesis. Investors should not assume that they have nailed an entry into a stock. The only way to manage your risk is to leave room to add on dips lower. I am not a fan of averaging down, but it does make sense for the stock.
Using options can help mitigate some of the risk for investors. They offer hundreds of ways to get long a stock without putting money at risk without any protection.
Those who have not ventured into learning options should do it. The modern investor has so many more tools than just a few years ago. Deciding to not evolve means knowingly giving up the advantage to the others side.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
