It's been said that there are no mistakes, only "learning experiences." But when someone continually makes the same mistake, it ceases to be a learning experience and begins to become a serious problem. That's true for all areas of life, including investing.
My biggest investing regret of 2015 is simple: I'm always hesitant to add to my winners. In the past, this has been a minor nuisance, but this year, that tendency reared its ugly head into my awareness, and I missed out on a great opportunity.
The stock that I regret not buying more of
Shares of Baidu (NASDAQ:BIDU), the parent company behind China's largest search engine, represent the second-largest holding in my family's cumulative portfolio. The company's stock had a rough showing this spring and summer: After reaching $234 per share in January, shares fell over 40% to $132 in late October.
But though my confidence in the company and its mission never wavered, I didn't buy shares. As you'll see, that was a mistake, and I've already missed out on a 50% upside in just three short months.
The anatomy of Baidu's dive
There's no doubt that Baidu is a relatively expensive stock. When it peaked in January, shares were trading for about 42 times earnings.
When the company reported earnings for the second quarter in July, there was a lot to like. The company's core search business continued to perform well, with revenue from online marketing (ads via search) increasing 37% to $2.6 billion. Equally as important, the company's investments over the past few years in a switch to mobile were paying off as well: Monthly active users jumped 24% to 629 million people, and mobile itself accounted for one-half of the company's total revenue.
But then there was this: Spending on the company's new growth initiative, dubbed Online-to-Offline, or O2O, was going to cause some short-term profitability pain. Specifically, though revenue grew 38% overall during the second quarter, earnings per share jumped just 5%. The company also provided revenue guidance that was below analysts' consensus.
When a stock that trades for such a high multiple has trouble converting sales into profitability, admits it will be sinking millions into new ventures, and says that revenue will come in short of what Wall Street expects, it sinks. Baidu was no exception.
Why it was such an opportunity
There are lots of things I love about Baidu. It was founded by Robin and Jennifer Li, who currently act as the company's CEO and CFO, respectively. They also own a huge chunk of shares outstanding. Further, the demographics of China are astounding: Though the company has more Internet users than any other country in the world, only about half of them have access to the Internet. Millions more come online every year, and with Baidu's position in mobile, they are using the company for their search queries.
But then there's this added part: Because China is behind America in Internet adoption, Baidu can learn from the missed opportunities of Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), and capitalize on them. Herein enters O2O.
The best way to understand O2O is to consider a couple who wants to take in a movie. In America, the couple might search on Google for show times, go to a theater's website, and reserve tickets with their credit card. Though Google facilitated the search, it got no cut of the actual movie-purchasing transaction.
That's where Baidu comes in -- it wants to create a fully integrated platform for people to make purchases online for products and activities that they'll be using offline. Take that movie-going couple, multiply the instance by a few trillion transactions, and you have an idea for how big the opportunity is. The division doubled sales growth during the past year alone.
Robin Li was very surprised to the muted reaction on Wall Street to the potential of O2O. "It's kind of difficult for a typical U.S. ... investor to really understand why Baidu is losing so much money on [O2O]. We have a better understanding of this market," he said. "We think this kind of investment will pay off. So there's a little bit of education needed."
He was so surprised, in fact, that he said he might delist the company in the U.S. and put it on the China market if American investors remained so skeptical. "If one day I find that the U.S. market has no hope of recognizing our value, and the domestic market truly understands our business, I may do that," Li said.
As late as Aug. 31, I was talking about how cheap Baidu's stock was. But I never added more. That's too bad, because shares are almost 50% higher now. Between stronger-than-expected profitability and an announcement to obtain a stake in Chinese online travel agency Ctrip.com (NASDAQ:CTRP), investors have apparently rediscovered their love for Baidu.
Beyond this instance, though, the message for investors is the same: Do your own due diligence, don't be afraid to add to your winners, and take advantage of opportunities the market gives you.