Great way to start the week by opening a new trade. Last week, I opened two new ones and I’m off to a decent start so far (still very early so I’m hoping to not jinx it). Today, I am back with another similar pattern to the trade I opened on Thursday but this time, both companies are trading at almost identical P/E ratios.
I did think about going long Baidu against Google but in the end, decided against it. I may not be in love with Google’s stock in the same way that I was last year, but I still consider the upside potential on Google to be important enough, I would hate to be short Google going into its next earnings report. You could say that any short could explode, but I still think that there’s a lot of good going on at Google and in this new leadership era, information is not coming out as much so it’ll be difficult to judge until we get the numbers. Chances are greater that I’ll go long Google but it would have been a nice match with Baidu given their similarities (and the fact that I believe Chinese internet stock leaders will outperform US ones over long periods of time).
Let’s get started with the details on both stocks:
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Long Baidu (BIDU)
There is a lot to love about Baidu. The top player (by very far) in China did have a few bad moments but overall, it’s been very clear since the Chinese government kicked out Google that Baidu would be a forced to be reckoned with. If the Chinese government wants to build corporate leaders that can create jobs and develop expertise at home, Baidu seems like the perfect candidate. It has been working with little competition at home and numbers are showing it with revenues and profits exploding year after year. It will not be permanent as eventually some Chinese companies will emerge but I think that the Google exit caused many US and other foreign companies think about their desire to be in China which has meant slower entry by companies like Bing and Facebook.
The best part about Baidu though is that it operates in the fastest growing “significant” market by far as Chinese users are not only increasingly becoming connected but there is also an exploding middle class that advertisers are trying to reach and corporations are trying to sell products to. In this digital world, that is worth its weight of gold. So can Baidu keep up the growth? Absolutely.
That being said, there are still worries about Baidu including the fact that China’s economy is slowing and some say it could end up being the bursting of a bubble. There is also the fact that at some point, Baidu will need to enter other markets in a more important way at which point it will have to change many of its practices. Still I think Baidu is a terrific long term play at this valuation.
Short XO Group (XOXO)
The company formerly known as The Knot is mostly in the wedding business, as it operates all ind of media (mostly magazines and websites) dedicated to helping couples live happily ever after. That has been a market that they’ve dominated but there continues to be a lot of competition and I just don’t see how growth can accelerate. If you take that into account, there is no way that the company should be trading so high. As is the case with Blue Nile, a few players seem to believe in this name supporting its current price but I just don’t see it.
The big downside with XOXO is that it is “rather” thinly traded and thus fairly volatile compared to most stocks that I trade. That has led to a few bad trades even though I’ve generally done well trading this name, most of the time on the short side.
Disclosure: No positions on BIDU or XOXO prior to starting this trade