Tuesday, September 25, 2007

BIDU: Hogs (Eventually) Get Slaughtered

As I write this, BIDU is trading at about 301, meaning that if you got in near the August 16 low, you may be sitting on a 140 point profit.

I was indeed fortunate enough to grab some BIDU on August 16th, though nowhere close to the day’s low of 161. Over the course of the past few weeks I have been taking profits, with less than 10% of my initial position remaining after selling some earlier this morning.

As I was selling some shares, it occurred to me that it might be time to update my watch list of “Overripe High Fliers.” This is a list of ten momentum stocks that I keep a close eye on and expect to provide some clues about speculative activity. These stocks should be strong when the market is rallying and move sharply down when the market turns down. The list currently consists of AAPL, BCSI, BIDU, CROX, DRYS, FSLR, GRMN, LVS, RIMM and VMW.

In keeping with Amazon’s “people who bought X also…” approach, optionsXpress has a tool that tells you what people who traded BIDU were also trading. The results, in the graphic below, could easily be an updated list of those “Overripe High Fliers.” Consider that when BIDU finally makes a sharp turn south (and I expect a -20 day soon), the rest of the stocks on this list will probably be dumped with the same bath water. Contrarians, aim your guns at these targets.


…and don’t count on the nearly vertical rise in BIDU to continue much longer. As a general rule, the steeper the rise, the more spectacular the fall back to earth.

7 comments:

Justin said...

It's interesting that they are also purchasing SDS -- the inverse leveraged S&P 500 ETF.

Bill Luby said...

I was surprised to see SDS in there too.

Bill Luby said...

Courtesy of Theflyonthewall.com and the WSJ comes a list of the opposite ten stocks, those 'recession resistant' conservative plays. You can tell a lot about what's happening by comparing the performance of these two groups of stocks.

Felix said...

“Overripe High Fliers" -- terrific phase, Master Bill. Perhaps you'll consider using it for a portfolio name over at Stockpickr! :)

As for BIDU, no doubt that it will fall back towards earth sometime. Its impressive (incredible?) growth rates might account for its lofty P/E, but how long can triple-digit revenue and income growth rates be sustained, eh?

Still, I don't see a trade for people without a position in BIDU, like me. I'm disinclined to go short on a stock on a tear like this, as trying to call tops consistently is a much too difficult way to make a living, imho.

And despite the juicy premiums (~65%) BIDU currently commands, I wasn't motivated to sell calls either. Short naked calls would face a similar problem to the short stock scenario (not to mention, be [i]insane[/i]), and the high premiums that make the options such attractive sell candidates also make my hedging options too expensive to warrant doing vertical spreads.

I suppose if I had an idea of where BIDU would settle on Oct expiration a butterfly might be relatively cheap.... but it'd be a speculative play.

IF I wanted to be long BIDU, felt it was too expensive at $300 (but not at say, $275), but was afraid that it would run up from here and not look back, I might sell some OCT 280 puts for around $11.50/contract. If assigned, my net share cost is $268.50, which should make me happy -- unless the price is below there already, one think people don't always think about!

What's troubling is that the average implied volatility on BIDU appears to be trending higher in the runup to its highs, which suggests that it's peaked, or rather, that some traders are hedging their long positions by buying puts (driving up option prices) on the expectation that BIDU may fall sharply and soon.

But hey, what do I know? I need to have my head examined, I trade the VIX..... and yes, I'm staying away from BIDU.... it scares me.


Thanks for thought-provoking post, Master Bill. Your indicator stocks are on my watchlist now too, thank you!

Felix

James said...

All the Chinese stocks are scary.

Bill Luby said...

I might as well throw the "hottest stock on earth" in this pile.

The hardest part about a bubble is waiting for the top to form and tide to turn...rather than trying to anticipate it.

I say this as BIDU is up 32 today to 317.

Bill Luby said...

Nice summary of the performance of individual Chinese stocks (for the 10/3 selloff) at CougarJump: "Chinese Companies on 3 Oct 2007"

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