Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has plunged by 13.46% in early morning trading, as the stock felt the market’s cold reception to its gloomy outlook for the third quarter of the year. According to the Chinese electronic commerce firm, it expects revenues in the next quarter to be 18.17 billion yuan to 18.58 billion yuan (about $2.93 billion to $2.99 billion), which is below Wall Street’s expectations of 18.79 billion yuan (about $3.03 billion). The light forecast for Baidu comes as it reported a beat on earnings for the second quarter, with adjusted earnings coming in at $1.81 per share, up 3.3% year-over-year and soundly beating analysts’ estimates of $1.70 per share. Revenues jumped 38% compared to the same quarter last year, to 3.66 billion yuan (about $589.37 million). However, Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s bottom line was reduced due to higher expenditures, which is also why the firm issued a disappointing forecast for the third quarter. Baidu is focused on ramping up its online-to-offline (O2O) sales and its video streaming business. In the second quarter, selling, general, and administrative expenses jumped by 81% compared to the same quarter last year to 2.71 billion yuan (about $436.39 million) on the back of bigger promotional spending on O2O.
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The disappointing forecast for the third quarter which has punished Baidu.com, Inc. (ADR) (NASDAQ:BIDU) shares early today coincides with an outflow of investments in the first quarter among the hedge funds we track. The total value of holdings of funds still long on Baidu on March 31 decreased by 16.78% quarter-over-quarter, to $7.01 billion. Though slightly offset by the 8.58% drop in the stock’s value from January 2 to March 31, there was also a significant decrease in the number of funds long in the stock by the end of the first quarter, pointing to a clear bearish sentiment among the hedge funds we track. Heading into the second quarter, a total of 75 of the hedge funds tracked by Insider Monkey were long in this stock, down from 95 in the previous quarter, which ranked it as one of the top stocks hedge funds were selling out of in the first quarter.
At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically delivered a monthly alpha of six basis points, though these stocks underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning over 123% and beating the market by more than 66 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise rather than large-cap stocks.
We also track insider selling activity of companies in an effort to judge the sentiment of company executives, but there have been no cases of insider trading of Baidu reported with the SEC this year.
With all of this in mind, let’s analyze new hedge fund activity regarding Baidu.com, Inc.
What does the smart money think about Baidu.com, Inc. (ADR) (NASDAQ:BIDU)?
Of the funds tracked by Insider Monkey, Lone Pine Capital, managed by Stephen Mandel, holds the biggest position in Baidu.com, Inc. (ADR) (NASDAQ:BIDU). Lone Pine Capital has a $1.1 billion position in the stock, made up of 5.28 million shares, comprising 4.2% of its 13F portfolio. Coming in second is Coatue Management, led by Philippe Laffont, which holds a $628.9 million position in 3.02 million shares; the fund has 6% of its 13F portfolio invested in the stock. Remaining hedge funds that are bullish consist of Andreas Halvorsen’s Viking Global, William von Mueffling’s Cantillon Capital Management, and Rob Citrone’s Discovery Capital Management.
On the other side of the fence, Daniel S. Och‘s OZ Management sold off the biggest position in the first quarter of all the hedgies followed by Insider Monkey, dumping 921,800 shares worth close to $210.14 million. J Kevin Kenny Jr of Emerging Sovereign Group was right behind this move, as the fund manager dropped 845,700 shares worth about $192.79 million. Other bearish hedge funds were Christopher Lord’s Criterion Capital, Lei Zhang’s Hillhouse Capital Management, and Daniel Benton’s Andor Capital Management.
As hedge funds move away from Baidu.com, Inc. (ADR) (NASDAQ:BIDU), we recommend doing the same.
Disclosure: None
