Trades

When do fundamentals matter more than technical or sentiment analysis?(ticker BIDU)

When do fundamentals matter more than technical or sentiment analysis?(ticker BIDU)

I am a fundamental trader that loves to hold onto stock positions so I “get” to pay the long term capital gains tax.  The traders’ saying goes “Fundamentals trump technical analysis in the long term, but sentiment trumps all!!!”  I use options to protect the stock when the stock has a bad earnings event.  If technical crossovers occur to the bearish side or something unexpected occurs I will create a protective put or a collar strategy.  My goal is to make up some of the downside risk in the stock price because stock prices move up or down significantly all the time in today’s volatile market. 

Fundamental analysis, defined by investopedia, is a method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. (Read more: http://www.investopedia.com/terms/f/fundamentalanalysis.asp#ixzz277a0JBwo) In real life they are just numbers or ratios to value the strength of the company against the sector, another company or an index like the S&P 500.  There are certain ratios that as traders, we will gravitate to in order to justify our purchase of the equity in our portfolio.  Some of the fundamentals are P/E ratios, profit margin, revenues, etc…  These numbers give us the strength to keep the equity in our portfolio even when the stock starts a downward trend.  We know through fundamental analysis the stock should come back or move higher from the price we purchased the equity.

BIDU has awesome fundamentals all the way across the board.  BIDU fundamentals are above the industry average in many areas and below the industry averages in the areas that benefit the strength of the company.  Yet there is a small internet company called Qihoo360.  This is where sentimental analysis has dropped BIDU shares $25 per share or over 20% of the value of the stock price.  Qihoo360 had a Q2, 2012 increase in revenues (107.4 %) with total revenue coming in at 72.8 million U.S. dollars.  BIDU, the same quarter, had revenues of $858.8million U.S. dollars.  BIDU has a more realistic P/E ratio of 28.56 (trailing 12 months) while QIHOO has a higher than normal sector P/E ratio of 65.62.  There was an article that stated the fact Qihoo360 took 4% – 9% of the internet market advertising from BIDU.  Fundamentals do not show that fact but then again I guess we are always supposed to believe the internet.  Technically BIDU is bearish and QIHOO360 is bullish so what to do with your portfolio.

Is it time to sell BIDU and jump into Qihoo360?  In my humble opinion, definitely NOT!  I like proven companies that I can rely on the fundamentals.  Qihoo360, in my opinion, has put back to back quarters that show improving fundamentals.  It doesn’t mean they will continue into the future.  The news article that started BIDU’s fall and Qihoo360 rise was not fundamentally correct.  If it had been reported that they increased profits in the mobile marketing side of the industry then they have a case.  Qihoo360 is a software company while BIDU is a search engine, a mobile search with AAPL using their website, a cloud investor with many other internet related revenue streams

Doing fundamental research is the homework in trading.  It is the pencil, paper, and calculator work that can bring us to a conclusion to these two companies.  It is a Fad or upcoming company vs a proven company.  There are plenty of times that a Fad can make you money.  CROXs is proof of that.  Maybe Qihoo360 can be the next, but my portfolio will remain with BIDU and fundamentally all I can see is a buying opportunity!

Disclosure:  I am long BIDU shares

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