zorazhuang for Getty images
This week, according to the Chinese zodiac, we entered the year of the pig. That brings to mind the old Wall Street warning that “Bulls make money and bears make money, but pigs get slaughtered,” which is essentially a warning against greed.
On the other hand, though, some of the best advice ever given to investors comes from Warren Buffett, who encouraged us to be "greedy when others are fearful," so which is it: should we be greedy or not?
The honest answer, as is usually the case when it comes to trading and investing, is “it depends on the circumstances and timing.” There are times when, as Gordon Gecko famously said, greed is good.
Right now looks like one of those times when it comes to Chinese stocks, and in particular the internet giant, Baidu (BIDU).
As you can see from the chart below, the Buffett axiom applies here, in that others are currently well and truly fearful about BIDU.The reasons are well-known and often quoted. The top two are that Chinese growth is slowing and that the trade war with the U.S. is taking its toll on the economy.
When you think about it though, both of those things can be true, and yet BIDU could still be a buy.
Lower than previously expected growth is not the same thing as no growth at all, and the “disappointing” growth rate in China is currently 6.4%. That is less than the seven or eight percent rate that has been the norm in the recent past, but still enviable for what looks increasingly like a mature economy, with the world’s second largest GDP.
As for the trade war, concern about that essentially amounts to headline bias. It is a prominent worry because it is in the news, but do you really think that high tariffs and restricted trade between the world’s two largest economies will still be the situation a few years from now?
Slower than anticipated growth and a temporary disruption to trade would both be good reasons to avoid a stock like BIDU if it were priced in expectation of really aggressive earnings growth, or if there were no path to expansion for the company’s business.
Neither of those things are true.
The stock, or more accurately the ADR that represents the stock for U.S. investors, is trading at a trailing P/E of around 13, a significant discount to the S&P 500 and Dow, which represent around 20- and 25-times last year’s earnings respectively.
If you prefer a more like for like comparison, Alphabet (GOOG) has a trailing P/E of around 25 and operates primarily in an environment where economic growth rates remain stubbornly under 3%.
The real value proposition though lies in the long-term outlook for Baidu. They are the leader in artificial intelligence (AI) in China, an area that has massive potential, and have the best developed autonomous vehicle system too.
In addition, China has well over 700 million internet users, which is more than twice the entire U.S. population, so the company is continuously acquiring massive amounts of data to put to use in whatever future projects arise.
So, while the price suggests an end to expansion of Baidu’s business, circumstances hint at the exact opposite.
The chart reinforces the buy from a short-term perspective too. The ADR hit a multi-year low of $153.78 at the beginning of the year, but the bounce off that level, which also provided significant support back in the summer of 2016, is now confirmed. That bounce is taking the form of a classic 5-wave Elliott pattern, with the last couple of days being the fourth wave and, in theory, another significant move up to come.
There are, then, multiple reasons to buy BIDU at these levels. This looks like a time to be greedy, not fearful, and celebrating the year of the pig by gobbling up some Baidu stock may prove over time to be a smart move.