How To Trade Baidu And Sina Through September

Aug.22.12 | About: Baidu, Inc. (BIDU)

This following article will take a look at a combination of fundamental and historical analysis to determine positions on two leading Chinese Internet companies, Baidu (NASDAQ:BIDU) and Sina (NASDAQ:SINA). In the article, we will look at how each company has performed from July options expiration to September options expiration to determine any seasonal patterns. In addition to that, we will look at key fundamental information to determine if the stock is trading at discounts or premiums currently. From there, we will use that information to craft positions for each company.

Daily Data: Baidu

Baidu reported superb EPS numbers of 1.24 vs 1.11 on July 23rd. These earnings proved that the company is still growing fast and that the stock was truly trading at a discount relative to expectations. Even after earnings, Baidu is still trading at a discount with a 0.80 PEG ratio since the current P/E of 33.91 is below next year's EPS growth rate of 35.41%. Fundamentally, earnings look great. Technically the stock has held the $110/$100 support line for quite some time. A technical bounce was certainly due after earnings. There may also be some seasonal bias in Baidu stock in the July to September option expiration period returns since inception (see below).

Above you can see that Baidu has never really declined during this period by more than roughly -1% (I omit the decimals for easy reading). On the contrary, Baidu tends to go up during the July to September period, and it has gone up by a large amount. With an average gain of 15% during this period since inception there may be seasonality in the stock. The third quarter of the year tends to be a large one for Baidu as seen in the earnings picture below (note E*Trade lists the 3rd quarter of the year as Baidu's 2nd quarter earnings).

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The size of these large 3rd quarter numbers may explain why Baidu performs so well in the July to September option expiration period. Based on the data above I would normally suggest a full position in the Sept'21 110/105 bull put spread. However, since Baidu has increased in price dramatically since July expiration I would enter the following trade instead.

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Option Trade: BIDU - Sell Sept'21 115/110 put spread (Bull Put Spread)

(Sell 115 Put/Buy 110 Put)

Size - 10% of Option Spread Portfolio Size = (2 spreads)

Entry: Sell Limit: 0.30

Stop Loss: 0.65

Exit Price: 0.00

Max Return: 6.38%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin.)

Daily Data: Sina Corp

Baidu may have posted great 3rd quarter EPS results but SINA certainly surprised investors. SINA was expected to show a negative EPS number or the quarter but instead posted a positive 0.05. SINA was trading at a discount before earnings, now its current P/E ratio of 14.43 is still showing a discount to the EPS growth rate of 27.80%. Fundamentally, the story may be coming back for SINA after a number of mixed/disappointing quarters since May'11th, 2011. Technically, SINA looked terrible after breaking through to new lows in July, however after earnings the stock has popped +10%. SINA may close its gap at $50 before moving higher but I think $50 will be the floor in the stock for the month, if it sells off. The data below shows that SINA has posted strong returns during the July to September option expiration period.

Above you can see that SINA has seen a series of strong positive returns during the July to September time frame. Initially I wanted to trade the Sept'21 42.50/40 bull put spread, but the only time the trade had any attractive premium was before earnings. It would not have been responsible to place a trade in the Option Spread Portfolio before earnings. Thus, after reading the EPS numbers and the various upgrades and downgrades/news today on SINA, I suggest the following trade which is basically betting that a short term bottom is in place.

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Option Trade: SINA - Sell Sept'21 47.50/45 put spread (Bull Put Spread)

(Sell 47.50 Put/Buy 45 Put)

Size - 10% of Option Spread Portfolio Size = (4 spreads)

Entry: Sell Limit: 0.27

Stop Loss: 0.40

Exit Price: 0.00

Max Return: 12.10%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin.)

Disclosure: I do not own any investments in BIDU or SINA. I own short calendar/vertical spreads on GLL (I'm short GLL). I'm short SCO, GLL, and UVXY. I'm long AAPL.

I may insert footnotes to show my references for certain information.

Charts and fundamental data come from Finviz.com and Tradingeconomics.com.

News from: www.theflyonthewall.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.