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3 Reasons Why Baidu Could Beat the Market in 2016

By Rick Munarriz – Feb 5, 2016 at 1:00PM

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China's leading search engine is paving the way for back-to-back years of double-digit declines, but that could change if a few things go right for Baidu in the year ahead.

Image source: Baidu. 

Gauging your success when it comes to investing in Baidu (BIDU -0.20%) is all about perspective. If you owned the stock through 2015 you suffered through a 17% decline. However, if you were able to buy in just when it bottomed out this past summer you're probably doing pretty well. The stock soared 38% during the fourth quarter. 

Folks that have held the stock even longer probably aren't complaining. The stock has moved higher -- often sharply higher -- in 8 of its first 11 years as a public company. It's actually the biggest winner of the Motley Fool Rule Breakers newsletter service, up 1,751% since being recommended in late 2006.

Then there's the perspective of the most recent Baidu investors, and they're probably not very happy. Baidu stock has slipped 19% in 2016 through Thursday's close. If this is where the stock remains by the end of 2016 the performance would amount to Baidu's second worst year as a public company.

That's unlikely. Baidu stock has been volatile over the years, and that's unlikely to change. Let's go over a few things that can turn things around for China's leading Internet search provider in 2016.

1. Baidu can go through with the spinoff rumors it's denying
Marbridge Consulting reported last week that Baidu was in the process of spinning off nine of its non-search businesses as stand-alone companies. It would do this in China instead of the U.S. given weak stateside investors for speculative Chinese growth stocks these days.

Baidu's spokesman quickly shot down the chatter. It's clear why the dot-com darling doesn't want to go this route. However, as it stares at the prospects of having back-to-back down years for the first time in its trading history it may have to explore moves like this before activists begin calling for this to happen. Spinning off some of its profitless online-to-offline or O2O endeavors that have long-term potential would help improve the perceived value in the sum of Baidu's parts while also helping improve its bottom line.

2. It can start investing in businesses that will pay off right away
Baidu reports quarterly results later this month. Analysts have been inching their profit targets higher for the fourth quarter that just ended, but at the same time they're lowering their income projections for 2016. Wall Street sees Baidu ramping up its investments in O2O weighing down results, particularly in the first half of the year.

Baidu can put an end to those concerns by announcing that it will begin emphasizing profit growth again. That seems unlikely after all that it has been doing over the past two years to make sure that it doesn't have all of its eggs in the search basket, but earnings growth remains the biggest obstacle holding the stock back these days.

3. Baidu can put its money where its mouth is
There aren't too many tech companies with as much cash on its balance sheet in China as Baidu. It had more than $11 billion in cash and short-term investments at the end of the third quarter. It's been using its healthy financial position to acquire or invest in new growth categories, but it obviously wouldn't hurt to see it spend some money on buybacks. 

Baidu has enough cash to gobble up a fifth of its shares outstanding if it wanted to. It won't do that, but it has already taken an aggressive stance on that front. It announced a $1 billion buyback this past summer, and its board widened that authorization for another $2 billion in October. 

It may be merely a coincidence that the stock moved higher following the most recent buyback announcement, but there's nothing like eating your own cooking to boost earnings on a per-share basis while also generating positive buying momentum. 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. 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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