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Why I'm Buying This Bargain Stock

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Last week, I introduced you to three stocks that I was considering adding to my Roth IRA: lululemon athletica (Nasdaq: LULU  ) , SodaStream (Nasdaq: SODA  ) , and Baidu (Nasdaq: BIDU  ) . All three stocks, in my mind, were compelling buys given their respective potential and current prices. Below, I'll reveal which company I'll be buying, and at the end, I'll give you access to a report detailing how you can profit from the presidential election no matter the winner.

Evaluating based on price
If I were to make my decision based on value metrics alone, I think I'd have a pretty tough decision to make. Take a look at how these three companies currently stack up.

Company

P/E

P/FCF

PEG

Lululemon 43 53 1.3
SodaStream 26 N/A 0.6
Baidu 33 38* 0.6 

Source: Yahoo! Finance. N/A=not applicable due to negative cash flow. *2011 figures.

A strong case could be made for each company. Though Lululemon is the most richly valued of the three, its stock has fallen significantly even over the last week as rumors have circulated that hedge fund manager David Einhorn could be taking a short position against the yoga retailer.

SodaStream, on the other hand, offers up the most attractive combination of a reasonable P/E with a PEG that assumes that its stock is significantly underpriced given its potential. Its cash flow situation, however, is currently negative -- as the company is focused on building up its inventories to meet expected demand.

And though Baidu's P/E and P/FCF certainly aren't cheap by conventional standards, they are at lows not seen since the depths of the Great Recession.

But let's forget the numbers for a minute and think about the businesses
Though I'd say Baidu and SodaStream have a slight edge based on the numbers, we need to take our heads out of the books and look at the real world around us to see where the opportunity really lies. This is where I ask myself: What is an investment in these companies really based on?

With Lululemon, it's based on the belief that the company's unique store experience will continue to draw customers in as locations expand across both America and the globe. With SodaStream, the thesis is that consumers will choose the company's at-home carbonating system for their beverage needs and appreciate the reduction in pollution that comes with it. With Baidu, you're betting that more and more Chinese residents will come online and use the company's search engine.

Though I believe all three of these theses could play out, there's one that clearly sticks out as the winner here, and that's Baidu. Though I don't think yoga or at-home soda machines are a fad, there's always the distinct possibility that I'm wrong. When it comes to people using the Internet on a daily basis, I think the last two decades have proven that this is not a fad, and as more Chinese come online, Baidu will be a huge benefactor.

Some numbers to crunch on
Just how big is Baidu's potential? Since Google (Nasdaq: GOOG  ) made the decision to shy away from the country because of restrictions put in place by the Communist regime, Baidu and Russian Yandex (Nasdaq: YNDX  ) are the two dominant players on the Asian continent.

Take a look at some of the facts I dug up and you might get an idea of what a wired China could look like:

  • In 2006, only 10% of Chinese residents used the Internet. Just four years later, that number had more than tripled to 35%. But that leaves 65% of the Chinese population yet to come online.
  • The Asian continent alone has 56% of the world population, but only 26% of those people were using the Internet by the end of 2011.
  • The total number of Internet users China added between 2005 and 2010 was greater than the entire population of the United States.

This might just look like a lot of numbers, but the potential is somewhat mind-boggling. Of course, growth in Internet usage may slow, and it may take decades for China to reach Internet penetration rates that are anywhere near what they are in the United States, but that should matter little to long-term investors.

I'll be adding more shares of Baidu when our trading rules allow, but if you'd like to know how you can profit right now from the upcoming presidential election, we have just the thing for you.

"These Stocks Could Skyrocket After the 2012 Presidential Election" is a special free report our analysts have put together that shows you how you can win no matter whether the election's winner is Mitt Romney or Barack Obama. Get a copy of the report while you still can, absolutely free!

Fool contributor Brian Stoffel owns shares of Baidu, Google, and lululemon athletica. You can follow him on Twitter, where he goes by TMFStoffel.

The Motley Fool owns shares of Baidu, SodaStream, Google, and lululemon athletica. Motley Fool newsletter services have recommended buying shares of Google, lululemon athletica, Baidu, and SodaStream. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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10/23/2014 4:00 PM
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