And the underlying stock for my new 300K options investment is .....
Baidu (BIDU), the dominant search engine in China.
BIDU currently has about 75% of the Chinese search market and it's also the dominant Japanese language search engine in Japan. It formerly had GOOG as a major competitor in China but the Chinese government didn't like such a powerful American company taking away market share from a home-grown Chinese company and so the government made conditions so tough on GOOG that that company has announced iit will be getting out of China altogether.
The main Chinese competitor to BIDU now is another Chinese company only 1/8 of BIDU's size - it is Qihoo 360 Technologies (QIHU), a company that had been the predominant Chinese browser company that decided to go into search last August. But this search newbie only has about 12% of the market and after the dust has settlyed, it will have perhaps 20% to 25% of the Chinese market after GOOG is completely out of the picture.
So BIDU will still have about a 75% share of the enormous Chinese search market with China already having more internet users than the U.S. has for its population. Up until now, this company which has little long-term debt has had torrid earnings per share growth as follows:
$1.53 in 2010
$3.02 in 2011
$4.79 in 2012
Consensus earnings expectations for the next three years are:
$5.40 in 2013
$6.78 in 2014
$9.30 in 2015
You may notic e that there is a significant earnings slowdown expected for the current year. The reason for that is that the company wants to be prepared for the growing trend towares mobile computing and is greatly ramping up the R & D this year to try and completely outdistance itself from its smaller rival. But after this one year, it's back to enviable annual growth between 25% and 40%. Even counting this one slowdown year though, average annual growth for the 2013-2015 period is in the 30% range with the company almost doubling 2012 earnings by 2015. There are few companies this size in the world that are growing this fast.
And yet with such incredible expected growth, the stock at $85 is only fetching 16 times the 20`13 expectation, 13 times the 2014 expectation and 9.5 times the 2015 expectation. Pfizer, a 5% or 6% average annual grower, is actually selling at an equivalent PE relative to 2014 expectations and PFE has a 20% premium to BIDU PE-wise relative to 2015 expectations. And to me, that is just crazy.
Some of the company's detractors point to the one-year 2013 slowdown without thinking that this really is just a one-year slowdown and that the company really is growing at a rate in the 30% area. And companies with 30% growth simply shouldn't be selling for 13 times forward earnings.
Accordingly, today I bought 80 long options at a $50 strike not expiring until January of 2015. I will be selling far out-of-the-money covered calls against them after the stcok rallies a bit. In today's transaction, I bought the options for $$3,840 apiece or $307,260 after commissions. Every point on the stock will initially be worth about 8K and it will be more than rthat when I start selling covered calls and use the proceeds to buy more lon g LEAPS options for Jan. 2015. For the record, analysts on balance have a $122 target on the stock a year out.
In order to fund this new investment, I am taking 300K in cash out of the Pfizer portfolio which incidentally still leaves me with about 260K in idle cash. I am also temporarily borrowintg the remaining $7,260 from the kitty and I'll have that paid off within a week or two when I sell covered calls against the new BIDU holdings.
This is an opportunity that I felt I couldn't let slide any longer and I expect to shortly be showing enormous percentage returns on it. I will also eventually be moving over to the BIDU board.
03/25/2013 13:23:29 Bought 40 BIDU Jan 17 2015 50.0 Call @ 38.4 -153,629.68
03/25/2013 13:24:57 Bought 40 BIDU Jan 17 2015 50.0 Call @ 38.4 -153,629.68
Hardly anyone elso does what I do. The Jan. 2015 options have been in existence for four months now and yet prior to today, the open interest for the Jan. 50's for 2015 was a mere 21. I along with my group of investors bought 250 of the 251 contracts traded today. My group of investors now owns over 91% of the open interest.