New Trade $BIDU – Searched Far and Wide for a Chinese Enigma

by Enis March 27, 2013 10:57 am • Commentary

While GOOG has blasted to new all-time highs, the Chinese search engine, BIDU, has been an absolutely atrocious performer.  Here’s the 5 year chart:

5 year weekly chart of BIDU, Courtesy of Bloomberg
5 year weekly chart of BIDU, Courtesy of Bloomberg


BIDU had a fantastic run off the bear market lows, The 100 level served as support for most of 2011 and 2012, but the stock has leaked below that level in 2013, terrible performance in the context of a strong period for stocks globally.  A major pain in the side for BIDU has been the upstart competitor, QIHU, who has been gaining share for much of the past year.  QIHU shares are up 100% in the past 8 months, though it’s still only around 15% of the search market, vs. 65% for BIDU.  

Fundamentally, valuation is starting to look quite cheap in BIDU, because all the bad news surrounding the stock has hit the shares so hard in the past year.   BIDU is priced at 18x Trailing earnings, a cheaper multiple than GOOG, which is priced at 24x.  Meanwhile, projected earnings growth rates for both companies are around 15% per annum.  But BIDU is a $30 billion market cap in the largest internet growth market in the world, vs. GOOG as a $250 billion market cap that is in not in that growth market.

(Note: as much as we question future prospects for Chinese growth, the inevitable shift to a more consumer-driven economy there should benefit Chinese consumer-facing companies).

Meanwhile, we’ve observed a few interesting developments in BIDU from a positioning standpoint.  Short interest in BIDU has increased to 3 year highs, up from 4 million shares short in June 2012 to 12 million shares short today:

[caption id="attachment_24143" align="alignnone" width="621"]BIDU short interest, Courtesy of Bloomberg BIDU short interest, Courtesy of Bloomberg[/caption]

However, valuation measured by Trailing P/E has actually fallen to a lifetime low, to 18x:

[caption id="attachment_24144" align="alignnone" width="502"]BIDU Trailing P/E, Courtesy of Bloomberg BIDU Trailing P/E, Courtesy of Bloomberg[/caption]

But what about timing?   Why buy now, when valuation for BIDU has been falling for the past year, and the stock has not stopped going lower?

Technically, the stock finally looks healthy after its recent descent.  Here is the 1 year chart:

[caption id="attachment_24145" align="alignnone" width="635"]BIDU 1 year daily, Courtesy of Bloomberg BIDU 1 year daily, Courtesy of Bloomberg[/caption]

Importantly, momentum as measured by RSI has been moving higher even as the stock has not moved much since February.  In addition, I haven’t shown it on the chart, but the 20 day moving average around 88 has not breached since the stock’s February gap lower.  Resistance is at the 50 day ma around 95, and the important 100 level that was for former support.  But the entry here offers a decent spot for a 10% rally in the shares.


TRADE: BIDU ($87.50)  Sell the June 82.5 / 77.5 Put Spread to Buy the June 92.5 / 100 Call Spread, pay 0.45

-Sell 1 June 82.5 Put at 3.48

-Buy 1 June 77.5 Put for 1.95

-Buy 1 June 92.5 Call for 3.73

-Sell 1 June 100 Call at 1.75

Break-Even on  Expiration:

Profits: At expiration, gains above 92.95 with up to 7.05 in profits at 100

Losses: At expiration losses of 0.45 between 82.5 and 92.5, and losses up to 5.45 at 77.50

Here’s the risk chart for the structure:

[caption id="attachment_24152" align="aligncenter" width="521"]Screen Shot 2013-03-27 at 9.56.43 AM Risk Chart from TradeMonster[/caption]

Trade Rationale:  We went out to June because we wanted to give ourselves enough time in case the stock spends a bit more time basing.  Our target on the trade to take it off would be the 96-100 area.  Earnings are in late April, so we’ll likely update our plan before then.