The new norm on Wall Street is to only care about the guidance when evaluating earnings reports. Last night, Baidu (NASDAQ:BIDU) reported theirs and luckily they guided higher than expectations for the coming quarter. So BIDU stock rallied as much as $8 per share in after hours.
This morning, the momentum is still positive albeit less than last night, but it does so around important levels. More on this later. But first, it is important to examine the fundamentals.
I will state the bottom line first: BIDU delivered a strong quarter. Management beat current expectations and raised beyond their prior guidance. I believe them so I am long BIDU stock.
Even after a strong start to 2019, Baidu stock was still 40% below its all-time highs coming into the earnings event. This is mostly due to a hideous sentiment on Wall Street in the second half of last year. So it’s not the fault of this stock in particular as investors were selling the good and the bad alike.
Two positives emerged from this correction in the stock. First, the Christmas dip solidified the $155 per share zone as solid multi-year support. It has been pivotal for eight years. Those with conviction can stay long the stock even if it gets retested this quarter.
Second, unwarranted corrections like this one create value. This brings out new buyers who missed the rallies the first time around. When Baidu stock, which is a growth stock, falls to trade at a price-to-earnings ratio of 13.4 for the trailing 12 months, I can hold it for the long term. This is a proven management team and they will navigate the short-term challenges without sustained damages.
Timing the very best tick to enter is not the strategy for mid- or long-term investors. So I can safely assume that I won’t catch the ideal time to buy it. Luckily, I am already long the stock with a small call options position, so I already have my starter position. Options deliver a bigger bang for the buck, but they are a time constraint.
How to Approach BIDU Stock Today
Would I buy Baidu stock outright here? Yes. But since we are still facing so many political uncertainties, especially on the tariff front, I would recommend doing it in pieces. Don’t take a full bite at once.
My forte is trading options, so when I am interested in buying a stock but leery of another dip, I usually sell puts lower. Doing that, I would collect a premium today so I am getting paid to be long BIDU stock. But if BIDU falls below my level, then I have to own the shares and keep the premium. In that case, I would have accomplished my goal of owning the shares only lower and the premium as a bonus or hedge.
For those faster traders who want shorter-term details on levels there are a few interesting ones for Baidu stock here.
Depending where it closes today, there is a neckline that if the bulls are able to break through would invite momentum buyers. The target of that would be near $200 per share but there are resistance areas between now and then.
On Dec. 3, the equity markets failed miserably and BIDU traders emphatically rejected the $195 per share like it was the plague. I expect that the bears will put up a good fight there on the way back up. But first, I also expect some resistance at $185 per share. So active traders should manage their exit points accordingly. Otherwise, I am long BIDU through mid-year or until it meets my upside targets.
Conversely, and based on individual risk appetite, I’d consider stop-out levels below $169, $166.70 or $162.80 per share. This would only affect any upside call options I may own but not the sold puts or the outright shares.
The bottom line is that Baidu stock is a strong performer and deserves to be higher than current levels. If the equity markets survive the tariff mess, then BIDU should be much higher in six months.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
