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Over the past year, I have been very vocal regarding my stance on China. Last summer, I warned that China's currency was poised for a sharp devaluation. In February, I warned that the economic situation in that country was much, much worse than we were being led to believe.
A little over a month ago, I reiterated my bearish case on China, focusing on slowing retail sales and the country's massive debt load.
During this time, I've made bearish bets on the broader Chinese market, related currencies and individual stocks that paid off big. Today, I'd like to share my most recent target and explain how I leveraged a small move in the stock into a 19.3% gain in just three days, which works out to 2,344.8% annualized.
Distrust Sends Consumers and Advertisers Running From Search Giant
Search engine giant Baidu (NASDAQ: BIDU) is essentially China's version of Google. In fact, Google's departure from China back in 2010 turned out to be a huge stroke of good luck for Baidu. With no major competition, the company thrived for a number of years.
But the past two years haven't been so great. Earnings growth at Baidu has been slowing, and there are other indications that show a company in trouble.
Chinese citizens are not known for speaking publicly against their government or big corporations with government support, like Baidu, but the search company has managed to anger both.
Baidu is currently under fire for allegedly profiting from shady advertising and controlling health-related forums that offer misleading remedies to Chinese consumers.
After a number of public criticisms, millions of Chinese consumers have rallied against Baidu, and the Chinese government has even promised to investigate accusations that the company is promoting false information.
The string of missteps at Baidu culminated with the death of a 21-year-old cancer patient, Wei Zexi, in April. According to China's state media, Zexi had used Baidu to search for the best place to receive treatment for his rare form of cancer and, based on his search results, selected a military hospital offering an experimental treatment that claimed to have a high success rate.
Unfortunately, the care he received did nothing to prevent his death. The highly successful experimental treatment touted by Baidu as "cutting-edge" was actually an ineffective, outdated treatment. A later Google search (done by one of Zexi's friends in the United States) revealed that American hospitals had long since stopped using the "cutting-edge" treatment due to poor results.
Before he died, Zexi accused the company of promoting misleading advertisements and false medical information. Even Chinese President Xi Jinping commented on the controversy, saying that an "internet search engine company should not promote a certain client just because they offer the highest price."
Zexi's story has added to Baidu's struggles on both sides of the revenue equation.
On one side, we have consumers, who have largely lost trust in Baidu's results, with some even calling for Google's return and a "less restricted" internet. The incident has also sparked a discussion of fair competition in business. The company earns nearly all its revenues from online marketing, so fewer consumers using its search engines should result in declining sales.
On the other side, we have the companies that advertise on Baidu, some of which have started pulling their ad campaigns in response to public outcry and newly imposed regulations (internally and externally). The number of Baidu's advertising customers is expected to continue declining, which is a bad thing for future earnings.
In short, Baidu has done potentially irreparable damage to its reputation that could last for years to come.
The news has also prompted Google to speed up its campaign to return to China. Google has been in talks with Chinese government officials to find the best way for the search engine to return the very lucrative China marketplace.
Google's potential return to China would be a devastating blow for Baidu that simply cannot be ignored by investors... and neither can Baidu's ailing reputation.
While this paints a grim longer-term picture for the company, anyone who follows my trades knows that I am in the business of capitalizing on short-term moves using simple call and put options.
One of the reasons I love options so much is that, unlike traditional stock investing, you can bet on a stock going up or down. And in the case of Biadu, I had more than a strong hunch that shares were headed down.
Earnings Miss Gives Us Our Big Short-Term Win
On July 27, the day before the company was scheduled to report earnings, I told readers of my Profit Amplifier newsletter to buy a put option on BIDU with a strike price of $175 that expires on Sept. 16 for $15 or less.
The past few quarters had been rough for the company, with profits sinking to four-year lows. Bearish forecasts by Baidu's executives indicated the company's problems were far from over. And my research showed a high probability that investors would be disappointed with the results yet again, sparking a sell-off in the shares.
Sure enough, when the company reported on July 28 after the close, it missed analysts' estimates and gave a rather bearish outlook. Shares fell as much as 5.7% the next day, but my Profit Amplifier readers closed their put options for a 19.3% gain in just three days.
Currently, shares of BIDU are trading back where they were before the earnings miss. You can thank the irrationally bullish overall market for that. But I remain bearish on the company and would certainly consider buying put options on it again in the future.
If you're interested in using options to make outsized gains, I recommend a trade just like this each week. And for a limited time, we're offering access to my Profit Amplifier service for just $49 a month. This special rate will be reserved for 15 minutes when you click here.
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