How far could a $100 wager on Baidu (NASDAQ:BIDU) stock take you? In the short term, don’t expect huge gains, as traders are still nervous about Chinese President Xi Jinping’s consolidation of power. They’re anxious about the nation’s strict Covid-19 policies as well. Yet, Baidu shares have lost so much value that there seems to be more upside than downside potential.
Want to know a great way to reduce the risk in an inherently risky trade? Just keep your investment size down to $100. In the case of Baidu, the company could completely disappear (which is highly unlikely), and the most you’d lose on this bet would be $100.
Meanwhile, the upside potential would still be unlimited. Ask yourself: Is it possible that the market overreacted when Xi secured a third term? Just maybe anxious traders were too hasty in dumping their Baidu shares — and there could be a great buying opportunity here.
BIDU Stock Collapses as Xi Cements His Position
What caused BIDU stock to plummet below $100? Is the company falling apart and heading toward bankruptcy? More likely, the share dump was due to a political consolidation that made investors in China-based businesses skittish.
The wreckage of Chinese stocks on Oct. 24 was so severe that it made headlines in the Wall Street Journal and other U.S. news outlets. Overall, it was the worst single session for Hong Kong-listed stocks since the financial crisis of 2008.
The catalyst was Xi officially securing a third term as general secretary of the Chinese Communist Party, and therefore as China’s president. With this, Diana Choyleva of Enodo Economics conveyed a dire outlook:
“Investors are now repositioning for a China where Xi Jinping rules supreme in an echo chamber of sycophants. For him, ideology and national security trump all other considerations, including growth.”
Fear of Xi’s Rule May Be Overstated
Xi is known for imposing strict and long-lasting Covid-19 restrictions in China. Yet, investors’ fears seem to be overdone, as there are already indications that China’s zero-Covid policies may be easing soon.
According to a Reuters report, China “will make substantial changes to its ‘dynamic-zero’ COVID-19 policy in coming months.” The informational source here is Zeng Guang, a former chief epidemiologist at the Chinese Centre for Disease Control and Prevention.
Furthermore, Reuters cited “three sources familiar with the matter” who reportedly claimed that China “may soon further shorten quarantine requirements for inbound travellers.” All of this, if accurate, runs counter to investors’ worries about excessively restrictive policies under Xi’s rule.
In other words, financial traders have done what they’re prone to do: hastily price in the worst-case scenario. In doing so, they forgot about what a dynamic, diversified business Baidu actually is. InvestorPlace contributor Dana Blankenhorn made a compelling argument on this topic:
“Baidu was a search engine. It is now a technology conglomerate. What drives it is Li’s vision for artificial intelligence, which includes quantum computers as well as software. Some of its self-driving taxis are now operating without human staff.”
Clearly, Baidu is a tech powerhouse. and hopefully, it should be able to withstand Xi’s restrictive policies — which might not end up being as restrictive as some people feared it would be.
Here’s Why You Should Bet $100 on BIDU Stock
It appears that the worst possible outcome has already been priced into BIDU stock. Anxious traders shouldn’t dismiss the potential for a relief rally.
If Xi’s regime isn’t as restrictive as many people initially believed it would be, then Baidu and its shareholders should benefit. Besides, a $100 wager on Baidu probably won’t break your account — and if Baidu thrives during Xi’s third term, a small investment could turn a sizable profit.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.