Baidu Bulls Make Sense Here

By Markets Fool.com

Image source: Baidu.

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Baidu is rolling after a brief setback, and investors could have a major indexer's rebalancing effort to thank for the bullish nudge.

Indexing plays are often associated with buying companies being added to the S&P 500 ahead of institutional orders; but sometimes, things get shaken up for international market gauges. This is what's happening at indexer MSCI, as its MSCI China and MSCI Emerging Markets composites increase their exposure to Chinese ADRs trading on U.S. exchanges.

The rebalancing of the indices is happening in two parts. The first tranche took place late last year; but the second tranche went into effect after yesterday's market close.

The move will dramatically reshape the two indices. It will shift focus to tech companies, going from 25% to 31% of MSCI China, according to a Goldman Sachs note. The transition will come at the expense of banking, energy, and government-owned enterprises. In Baidu's case, the leading Chinese search engine will now make up 5.2% of MSCI China and 1.4% of MSCI Emerging Markets, according to Goldman Sachs, which sees a total of $43 billion of net buying into 13 China ADRs as a result of the second tranche that kicked in overnight.

Index-based funds appear to have been buying ahead of this morning's inclusion. Baidu stock moved higher in four consecutive trading days before taking a breather yesterday.

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More buy than due

Shares of Baidu rallied in late April after posting blowout quarterly results. Adjusted revenue soared 31% for the quarter since the prior year, at the high-end of its guidance, and enough to garner ananalyst upgrade. The mood soured in early May after a well-publicized death of a cancer patient that went for treatment at a questionable center advertising on Baidu. A government investigation followed the incident.

The market has had mixed reactions to Baidu, but it remains one of the tech world's best performers during the past decade. It remains the undisputed champ of search in China, commanding more than two-thirds of the market, and generating 80% of the ad revenue.

Margins have been an issue in recent years, largely the result of a push to diversify away from its PC search stronghold. The moves have resulted in profit-draining online-to-offline (O2O) endeavors; but earlier this year, we began to see the initiatives start to pay off as potential asset sales. It's not that Baidu needs juicy windfalls given its cash-rich balance sheet; but it does frame the side projects in a more-favorable light.

The MSCI rebalancing may result in unearned buying activity in Baidu's stock in the near term, but it's doing what it can to justify the pop after the fact.

The article Baidu Bulls Make Sense Here originally appeared on Fool.com.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.