Something interesting has been happening in financial markets over the last few months that would be missed by casual observers. On the surface, it's smooth sailing as the major averages have been moving higher with little volatility. Any sort of dip or weakness has been met with furious buying that inevitably ends with higher highs.
Yet, pockets of the market have encountered enormous turbulence. One notable example has been the steep drop in interest rates as growth expectations have declined over the last couple of months. Previously, we had a steep sell-off in growth stocks. Since then, many have recovered and are even making new highs, while others continue to languish near their lows.
Selloff in Chinese Stocks
Another example is the major selling in Chinese tech stocks as the Chinese government increased its enforcement of a variety of measures such as data security, monopolistic practices, and anti-competitive actions. It caused investors to sell first and ask questions later with many stocks dropping by more than 50%. However, just like with growth stocks, high-quality ones managed to bounce back, there will likely be similar opportunities developing in the space for savvy buyers.
Of course, these stocks could go down further if these actions continue. However, there are already signs that the Chinese government is ready to ease up. For one, they convened a meeting with financial institutions and investment banks expressing that they wanted these companies to succeed. They also reached out to the U.S. Securities and Exchange Commission and expressed interest in teaming up in terms of regulation to increase compliance.
It also makes logical sense as China had worked hard to build its own domestic tech industry to serve as a counterweight to U.S. tech companies, so it makes sense that they want to ensure compliance, it doesn't make sense that they would destroy the trillions in value that have been created.
Baidu
Among the companies that have been negatively affected, one of the highest quality ones that should bounce back to new highs is Baidu (Nasdaq: BIDU). Prior to its decline, it was a high-flyer as it had nearly tripled from March 2020 to February 2021.
This fall has made it quite cheap with a forward P/E of 14 despite being projected to grow earnings at a 10% rate over the next 5 years. It remains the most dominant company in China in terms of online search which continues to be the cash cow for the company. It's plowing these proceeds into a variety of projects to prepare for the future including its cloud computing division, AI projects, autonomous driving, and its own EV unit.
Baidu is a leading company in all of these niches which are projected to become industries worth over a trillion dollars. Thus, the stock is attractive from a growth and value perspective. This combination makes it one of the stocks that investors should scoop up on weakness.