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This Just In: Baidu Down, Up, and Why Nomura Loves

By Rich Smith - Jan 22, 2016 at 11:00AM

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We can't give you China advice direct from China, but here's the next best thing: three top stock ratings from the top stock picker in Japan.

When deciding which stocks to own in China, probably your best source for investment advice would be a broker right there on the ground, watching the market, and telling you what to buy and sell in China itself. But today, we're going to go with a second best option: Nomura Securities, which just announced new ratings for Chinese tech stocks Baidu (BIDU -0.59%), (JD -2.99%), and (TCOM 0.75%), too.

Is Japan-based Nomura close enough to China to give us good advice on the company? Let's find out.

The news
Just ahead of the weekend, and the big storm that's getting ready to shut down the East Coast for the entire weekend, Nomura announced its trio of new Chinese stock ratings on Friday.

MCHI Total Return Price Chart

iShares MSCI China Index Fund Total Return Price data by YCharts.

China's stock market has had a rough past 30 days. But Nomura sees things turning up, and perhaps soon.

Bye, bye, Baidu?
The news at Baidu is bad -- a downgrade to neutral and a new price target of just $180 a share (Baidu shares currently cost $173). Baidu may be the king of paid search on the Internet in China, but according to Nomura, "Baidu's position in mobile search is not as solid as its PC search." In particular, Baidu's tech has proven unable "to search for any content in third-party mobile apps which have generated most of the new content online." And until Baidu gets this fixed, Nomura sees the company as "vulnerable to competition."

The stock is also arguably no bargain at today's valuation. Investors might once have shrugged off Baidu's 34 P/E ratio on the theory that the stock would grow into its valuation. But with analysts now saying that Baidu's growth over the next five years will average "only" 17%, that high valuation may prove harder to stomach.

Does compute?
Nomura has a better opinion of online direct sales company As described in a write-up on this morning, Nomura's upgrade of JD (to buy) is largely opportunistic, and inspired by the fact that JD shares have slumped 15% in price over the past month.

Granted, unlike Baidu, currently has no profits. But on the plus side, it has no uncomfortably high P/E ratio that investors must explain away before convincing themselves to buy. Investors can simply assume that profits will appear...eventually. And once they do (and if they do) analysts' projections of a 90% annual profit growth rate over the next five years could make look like a bargain in short order.

Ctrip could fly
Last but not least, Nomura chose to initiate coverage of travel website on Friday, assigning the stock a buy rating and a $50 price target. According to Nomura, Ctrip is "the best proxy to the potential boom in China's online travel agency (OTA) market over the next decade." And Nomura thinks this is a market that will grow 28% annually from now through 2020.

Ctrip's market share here is "dominant," says Nomura. And while its stock is richly valued at 42 times earnings, most analysts who follow the company project earnings growth in the 47% range over the next five years. This suggests Ctrip's strength in online travel will only grow over time, and indeed, grow faster than the fast-growing market it dominates.

Let's go to the tape
Now that you know what Nomura's been saying about China this morning, let's take a look at how well Nomura's advice has panned out for investors in the past. On Motley Fool CAPS, we've been tracking this analyst's performance since back in 2012, and -- good news for investors in and -- Nomura turns out to be a simply fantastic stock picker.

Over the past three-and-a-half years, we calculate that better than 64% of Nomura's stock recommendations have outperformed the market, and by an average of better than 22 percentage points per pick. This performance has been good enough to win Nomura Securities out coveted Wall Street Best badge, confirming that this analyst outperforms 90% of the analysts on Wall Street.

Is that record good enough to convince you to buy into and, despite the fact that the one costs more than 40 times earnings...and the other one has no earnings at all? Does it scare you away from Baidu, despite the fact that Baidu has the cheapest P/E of the three, and is the only one of these stocks currently generating positive free cash flow?

Only you can be the judge of that. But take a look, decide if the stocks look good to you and, once you've decided -- tell us about it.

On Motley Fool CAPS.

Fool contributor Rich Smith posts his own stock recommendations on Motley Fool CAPS daily, writing under the handle TMFDitty, where he's currently ranked No. 245 out of more than 75,000 rated members.

Rich owns shares of Baidu. The Motley Fool also owns shares of and recommends Baidu. And The Motley Fool also recommends International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
$135.60 (-0.59%) $0.80 Group Limited Stock Quote Group Limited
$25.61 (0.75%) $0.19, Inc. Stock Quote, Inc.
$57.08 (-2.99%) $-1.76

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