Sometimes companies go on sale because they truly deserve it. A drastic change in business prospects, accounting irregularities, or disruption by innovative upstarts are sound reasons for a stock price to be slashed.
Other times, a short-term earnings miss or bad news headline related to the company or industry may knock down its stock price. This can often be a good time to pick up shares of a good company for a discount.
Or, a stock can be dinged when the market as a whole crashes, or when other macro fears cause investors to pull out their money indiscriminately. Babies (the good companies) get thrown out with the bathwater (poor companies), and solid buying opportunities for Foolish investors abound.
With the Chinese stock market bubble bursting, now is a great time to look to pick up shares of the very best Chinese companies at a discount. Baidu (NASDAQ:BIDU) is at the top of my list.
Don't think so big
I was recently speaking to a friend who told me she was waiting to put new money into the stock market until "the situation in Greece was resolved." This is a mistake. Waiting for a cheery consensus in Greece since 2008-09 would have caused an investor to miss out on the massive gains since then. The success or failure of a company will ultimately depend on its long-terms sales and profitability, not the short-term fluctuations in the market caused by macro factors like Greek instability.
What does this have to do with China?
The two major Chinese stock markets, in Shanghai and Shenzhen, had been experiencing bubble-like euphoria and have recently seen that bubble burst. The Shanghai index fell from 5,166 on June 12 to 3,507 on July 8.This is a drop of over 32% in under a month.
The bloodletting might not be over since according to The New York Times, "China's major exchanges remain up about 75 percent from a year ago." There is still a long way to fall. Many companies in China halted trading and it might seem from this information that investing in Chinese companies is not the best idea. But for a few of the best companies, such as Baidu, this couldn't be further from the truth.
Pick up some Baidu on the cheap?
Baidu dropped to close the trading day around $185 earlier in the month and now trades just under $200 per share, which is down from its all-time high of $250 late last year. Baidu trades on the NASDAQ and is being lumped in with the panic on the Chinese markets.
At these levels, the company warrants a good, hard look, and any further drops should be welcomed by a long-term investor looking to buy into a wonderful company at a fair price.
Real, growing earnings, really fair valuation
Baidu is capitalizing on the expansion of mobile use in China and is already the dominant player in the online search space. It is using its brand to leverage into other business segments such as online-to-offline marketing, a potential driverless car partnership with BMW, and many other projects that may bear fruit in the future. In 2014, Baidu opened a research and development center (pictured below) in Silicon Valley to focus on artificial intelligence research.
This is a now $70 billion company by market cap with highly liquid shares, not some small, flash-in-the-pan Chinese company surviving on accounting gimmicks or outright fraud. Baidu has over $1.8 billion in free cash flow on a trailing-12-month basis.
Baidu's forward P/E ratio, according to Morningstar, is now 19.8, compared to 18.3 for the S&P 500. I consider Baidu to be a vastly superior company to the average one on the broader index. Baidu's trailing P/E of 31.3 compares favorably to its five-year average of 54.4. Baidu appears to be -- at the very worst -- fairly valued, and more than likely undervalued for an investor with a long-term horizon.
This too shall pass
In a few months or years, the short-term pressure put on Baidu stock by outside forces will be mostly forgotten. Investors who were able to pick up shares on the cheap and participate in the years of growth ahead should benefit from this short-term blip. Prices can continue to fall in the near term, but I recommend adding Baidu to your watchlist.