We recently compiled a list of the Top 10 ADR Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where Baidu, Inc. (NASDAQ:BIDU) stands against the other ADR stocks.
Diversifying an investment portfolio is one of the best ways of spreading risk and minimizing the impact of heightened volatility. While the focus is usually on investing in stocks in various sectors, it’s also prudent to spread risk across multiple countries. American Depositary Receipts (ADRs) offer one of the best ways of spreading risks into companies in various markets instead of focusing on U.S. companies
ADRs are simply securities issued by banks that represent shares of non-U.S. companies. The stocks are often listed in national exchanges and offer a way of investing in foreign companies.
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Global corporations financing, building, and powering the traditional global economy are increasingly surpassing American businesses that once held the top spot in market success. Likewise, companies operating in the more established value sectors, such as Europe, China, and Japan, offer high risk reward opportunities at discounted valuations.
The top 10 ADR stocks to buy, according to hedge funds, are way cheaper, with their valuations sitting near 10-year low multiples. The cheap valuations and prospect of significant upside potential make them attractive compared to mainstream U.S. companies.
As investors endure uncertainty about U.S. interest rates that remain at highs of between 5.25% and 5.50%, many are increasingly paying attention to international equities trading at discounted valuations.
The prospect of lower interest rates before year-end is one catalyst that should continue strengthening sentiments in the equity markets. ADR stocks listed in the U.S. market should be one of the biggest beneficiaries as investors look to diversify their portfolios.
While investors have pulled more than $12 billion in mainland Chinese equities since June, the Financial Times reports that professional investors stay put in foreign stocks, as they offer significant upside potential.
The UK also continues to offer exposure to some of the best stocks right now in the aftermath of the Bank of England cutting interest rates in early August. With one more cut expected before year-end, analysts believe the lower interest rate environment would be positive for the stock market, which should benefit some of the top ADR stocks listed in the US.
Over the past few years, UK companies have been moving into the US to seek broader investor exposure. As late as two decades ago, UK-listed companies accounted for 11% of the MSCI World Index. Now, the figure has dropped to 4% as most companies seek listing in the US owing to the country’s less stringent standards.
While the S&P 500 is up by about 17% for the year in anticipation of the FED cutting rates, the S&P Global 1200 ADR Index is only up by 11% year to date. The underperformance is not a point of concern but affirms that there is plenty of room for growth for most of the ADR stocks.
Amid the high interest rate environment, signs of the US economy plunging into recession are becoming ripe daily. According to CNBC, the country’s unemployment rate rose to 4.3%, its highest level since 2021.
Similarly, U.S. manufacturing fell to an eight-month low, signaling economic weakness amid the high interest rates. Analysts at BCA Research believe the upcoming interest rate cuts could be insignificant in averting the economy plunging into recession.
“Every single one of us now believes there’s a recession, and that’s exactly the opposite of what the market believes. There’s things that are breaking down quite rapidly now. A few rate cuts are not going to prevent a recession. Average recession is 10 months… It takes something like a year before fed cuts start to give a boost to the economy,” Garry Evans, BCA Research’s chief strategist of global asset allocation, told CNBC’s “Squawk Box Asia.”
Amid the recession concerns, U.S. stocks could come under pressure. On the other hand, the Top 10 ADR stocks to buy according to hedge funds could act as safe havens as most are in jurisdictions with low interest rates.
Our Methodology
To compile the list of Top 10 ADR stocks to buy according to hedge funds, we analyzed the major US indices and settled on stocks of foreign companies with more than 50% upside potential. Once we had consolidated the list, we ranked the stocks in ascending order based on the number of hedge funds that owned it.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A modern internet space with a person using Baidu services on a laptop.
Baidu, Inc. (NASDAQ:BIDU)
Number of Hedge Fund Holders: 48
Stock Upside Potential: 61.90%
Baidu, Inc. (NASDAQ:BIDU) is one of the top 10 ADR stocks to buy, according to hedge funds, owing to the role it plays in China’s internet landscape. The company offers internet search services and generates a significant chunk of its revenues through advertising.
While Baidu, Inc. (NASDAQ:BIDU) is best known for its search business, it is also diversifying its footprint as it seeks to become an artificial intelligence first business. It’s already working on its large language model LLM ERNIE that is to leverage in its autonomous driving and robotaxis segments. The platform already handles 600 million requests daily.
AI is expected to strengthen Baidu, Inc. (NASDAQ:BIDU)’s competitive edge while opening up new growth opportunities, especially on the cloud. For starters, the company is staring at opportunities around autonomous driving technology, with the segment expected to grow by 32% over the next six years.
Baidu, Inc. (NASDAQ:BIDU) delivered solid second-quarter results showing modest growth despite grappling with a slowing Chinese economy. Revenues in the quarter were flat at $4.67 billion, driven by 10% growth in non-online marketing revenue, mainly from A.I. Cloud.
Baidu, Inc. (NASDAQ:BIDU) is trading at an attractive valuation, with a forward P.E. ratio of 7.70, which is a 40% discount compared to the industry average of 12.91. Additionally, analysts rate the stock as Buy with an average price target of $138.89, implying a 61.90% upside potential from current levels.
Likewise, 48 out of 920 hedge funds tracked by Insider Monkey held stakes in the company as of the end of the first quarter. As of June 30, Citadel Investment Group is the top investor in the company and has a stake worth $151.24 million.
Here is what Ariel Global Fund said about Baidu, Inc. (NASDAQ:BIDU) in its first quarter 2024 investor letter:
“Alternatively, several positions weighed on performance. China’s internet search and online community leader, Baidu, Inc. traded lower alongside Chinese equities as intensifying problems in China weighed on investor sentiment during the period. The company continues to invest heavily in Artificial Intelligence (AI) and recently launched its generative AI, Ernie Bot, aimed at rivaling Open AI’s ChatGPT. While monetization of the new technology is largely dependent on regulatory review, we think Baidu should continue to experience margin improvement with the ongoing implementation of efficiency and profitability initiatives. While some investors remain on the sidelines due to uncertainty surrounding China’s economic growth, government regulations, and the political rhetoric towards Taiwan, we remain enthusiastic about Baidu’s longer-term opportunity for revenue growth and margin expansion across internet search, cloud, autonomous driving, artificial intelligence and online video.”
Overall BIDU ranks 2nd on our list of the top ADR stocks to buy according to hedge funds. While we acknowledge the potential of BIDU as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BIDU, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.