Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Just like many stocks outperform the market when its going up, those same stocks might under-perform the market when it is going down. Many smart shorts, knowing this, might pile into those high-beta names when they think the market is going down. Often this means nothing bad about the company, but simply that they want the high beta downside movement (Note that I am not making any mention whatsoever to the RTO space with this statement).
Your certainly correct that the market can get evaluations incorrect and go WAY too far to the upside. AMZN, NFLX, etc etc are examples. My simple point is that you can't claim the market 'gets it wrong and goes too far to the upside on certain names' and then claim there are not insane deals out there for people to pick up that are 'mispriced' by the market. Both sides of this coin exist and investors can benefit from both sides -- Just as both sides of this coin have their respective risks associated with them.
Often you will find these 'mispriced' names with companies that have convoluted corporate structures or weird accounting-rules that mask their true value from simple screening-searches and so forth.
-Fernando
I agree on BAC, hehe. But if you asked 12 months ago, the vast majority of investors would have called it a very 'high quality' institution -- The market certainly seemed to think so when the stock was $16+.
The market is often dumb, most usually with companies below 1-2 Billion in market cap -- The more visibility a company has the less chance of Mr. Market being dumb.
Take GKK for example, trading below cash on its corporate-entity for quite awhile when I bought it at $2. Solid earnings flow and below cash? Huh?
A simple time period to study, to prove beyond a doubt that Mr. Market can be dumb for extended periods of time, is to study the Jan-March 2009 period. How many non-recourse REITs had preferred shares trading at below 10% of face value? I could provide endless examples from that time of Mr. market being panic-driven and ultra short-term minded.
In this day and age where stocks move in a highly correlated fashion due to ETF's, Program Trading, and so forth...How can one expect the market to be ANYTHING but stupid when it comes to specific companies? I mean, when individual stocks have 90%+ correlation to market movements you know something is wrong and babies are being thrown out with the bathwater.
-Fernando
In all fairness, Brian, people have been losing money in the markets for 6 months now pretty widely. Just look at how supposedly 'high quality' companies have fallen in price.
PBR, VALE, Morgan Stanley, Bank of America, FCX, X, etc, etc etc.
Those companies, and many more like them, just go to show you that 'expensive high quality companies' can also fall very significantly in value -- Unfortunately these 'expensive stocks' have much more limited upside than some ultra-value plays.
So yes, buying a company at a P/E of 15 is a scary thing on a risk/reward basis (Of course, it depends on the company and its growth profile/balance sheet/etc)...Specially when you can buy so many at a P/E of 5 that are pretty high in quality.
Note that I am not endorsing chasing a P/E 1-2 China stock versus going for a P/E 4-5 stock, given their wildly different risk assessments.
-Fernando
LPH: Strong? What on earth is new about that PR that we didn't know 10 minutes ago?
Just a standard 'We gotta put something out because our stock is going down' PR, IMO.
-Fernando
I can certainly understand that interpretation. Pretty much every RTO is guilty of not buying back more than a token amount of stock and not paying a dividend, even while the evaluation goes lower and lower. Disgust with the China microcap sector is probably the only sane response to that.
Maybe thats what will create a final bottom in the space, when disgust has hit the maximum (chuckle). I'm net negative exposure the space at this point since I took profits on my long-YONG position when it spiked before.
-Fernando
HRBN: Vote date officially Set - Oct 29th. Stock up nicely in afterhours.
Disclosure: No position.
-Fernando
CCCL: I'm not really surprised by this reaction from management because around June I contacted the CFO and told him a private-equity friend of mine was curious if they would be interested in pursuing a take-private transaction -- The CFO said they were not interested at that time. I hoped that with the continued bad stock performance they would chance their tune, guess not.
The fact though, is that every single Chinese RTO has the opportunity to do a take-private at these evaluations -- Private-equity is salivating at the chance to make the big bucks on transactions. I expect the vast majority of them have been approached with such ideas by people wanting to conduct such transactions. I highly doubt CCCL is in the minority of companies who don't want to go through such a process (which can take quite awhile BTW) less than two years after they come public in the USA.
What I find funny is that when a company decides to go private, shorts claim they want to escape ongoing public-company-oversight and are trying to hide the fraud (Or its a gimmick to buoy the stock price). When a company decides NOT to go private, shorts claim they want to avoid the 'oversight' of the going-private process. Make up your minds people, it can't be argued both ways!
Do I wish the company would pursue such a take-private deal? Yes, definitely. Do I believe the fact that they do not wish to do so immediately implicates them in fraud? No way. If that was true, i'd expect the same implication for every single Chinese company out there trading at a P/E below 3 -- Because you can bet your money that someone has asked management if they want to do a take-private/list-in-HK deal sometime in the last 6 months.
-Fernando
CCCL: I'm simply taking a wait and see approach at this point. Kelly could have been trying to be 'proper' about it and wanted everything done in a transparent way -- But yes a bit strange.
No idea about how receptive CCCL will be to the idea at this point, I can guarantee that there will be questions about it at the next conference call (chuckle).
-Fernando
Umm, how was I throwing a jab at SIAF? My buyback talk earlier was NOT about SIAF, I made that very clear. I'm also being very transparent about the fact that i'm trading my SIAF shares -- I could easily miss a sustained rally, but I have to make judgement calls based on market MACRO facts as well.
I don't see any Chinese name making a sustained rally -- I don't care if it is an IPO, RTO, or whatever. Heck, I don't see almost any American company doing it either in this environment. So yes, I take profits where I can find them, SIAF included.
SIAF as a company seems to be doing fine, JF seems to have been satisfied with their visit and the SEC-filing approval was a good thing. SIAF is even getting close to the stage where they can 'walk their talk' when Q3 is reported -- Thats good as well. I'd think that once they demonstrate their growth profile in actual EPS numbers that it might draw some more buyers -- Hopefully it will be able to differentiate itself from all the other China companies trading at insanely low evaluations since it went through the SEC-process.
-Fernando
CCCL: News (good), large shareholders getting active -- http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=7831048
"September 26, 2011
The Board of Directors
China Ceramics Co. Ltd.
c/o Jinjiang Hengda Ceramics Co., Ltd.
Jinjiang Industrial Zone
Anhai, Jinjiang City
Fujian Province, PRC
Paul K. Kelly, Chairman
China Ceramics Co. Ltd.
c/o Stuart Management Company
830 Post Road East
Suite 205
Westport, CT 06880
Re: China Ceramics Co. Ltd. – Take-Private Proposal
Gentlemen:
We are writing to you in our capacities as shareholders who collectively own approximately 13.4% (approximately 23.7% excluding Huang Jia Dong’s, Paul Kelly’s and Cheng Davis’ ownership) of the issued and outstanding shares of China Ceramics Co., Ltd. (“CCCL” or the “Company”). As you are aware, our group includes members of the founding group of China Acquisition Holdings Corp. (“CHAC”), CCCL’s business combination partner, and the largest independent shareholder of CCCL. In response to a letter sent by certain members of our group dated August 25, 2011, we received an e-mail from Chairman Paul Kelly dated September 2, 2011 in which he declined our offer to meet with the Board to assist with its evaluation of strategic alternatives, including a take private transaction. Mr. Kelly instead invited us to submit any proposals that we have in writing to the Board. Accordingly, we are submitting this proposal (the “Proposal”) with the support of Macquarie Capital (USA) Inc. (“Macquarie”), an affiliate of which has proposed to provide financing for a take private transaction.
As we indicated in our previous letter, as a U.S.-listed Chinese company, CCCL is operating in a hostile capital markets environment where it faces a myriad of challenges that are suppressing shareholder value. In our view, CCCL’s Board must meaningfully and carefully consider the implications of the following issues and implement remedial measures and strategic initiatives to counteract them:
- 1 -
--------------------------------------------------------------------------------
· U.S. investors have not understood or properly valued CCCL’s operating results and growth prospects, notwithstanding CCCL’s investor relations efforts;
· The fear of “China frauds” has significantly reduced CCCL’s valuation along with the valuations of other small capitalization China stocks traded in the U.S. and this trend does not look likely to change; and
· CCCL’s cost of capital, particularly equity capital, is extremely high, such that it cannot raise working capital or growth capital on reasonable terms without significantly damaging existing CCCL shareholders.
Since the closing of the transaction with CHAC:
· the Company has consistently met or exceeded all of its financial and operational targets; and
· the management team has exceeded our expectations and has proven its ability to successfully manage and grow the business.
Despite this superior operational performance, CCCL’s shares trade at a Price-to-Earnings multiple of less than two times on both a trailing and forward basis. This valuation multiple is at the bottom of CCCL’s peer group (see attachment).
Proposed Transaction:
We believe that the Board needs to actively and quickly address CCCL’s current U.S. capital markets situation. We have reviewed and discussed CCCL’s capital markets alternatives with financial advisors and other interested parties. We believe that the best alternative for CCCL is to execute a take private transaction (the “Transaction”) and subsequently consider public re-listing opportunities on viable international exchanges, such as the Hong Kong Stock Exchange.
As noted in a recent Wall Street Journal article, other Chinese companies that trade on U.S. markets are also employing the take private strategy as a means to address the institutional issues and bias in the US markets. (See “Stung, Chinese Firms Now Look to Go Private,” Dinny McMahon, September 2, 2011.) A take private transaction is the best solution for a credible Chinese company to address these issues.
We have spent significant effort and expense investigating the potential Transaction. Macquarie has proposed providing the financing for the purchase of the outstanding equity of CCCL. As you are aware, the Macquarie Group is a global diversified financial services firm with a leading market position in the Asia-Pacific region and a strong presence in selected markets around the world. The firm is a highly-respected underwriter and investor in the Hong Kong and China markets.
Please understand that we hope to work cooperatively with the Board and management to effectuate this Transaction. At a minimum, we would expect the management of CCCL to participate by rolling their equity into the Transaction. We would also expect the other founders of CHAC to seriously consider participating with us.
- 2 -
--------------------------------------------------------------------------------
Next Steps:
Our hope is that the work necessary to evaluate the Transaction we have proposed could be completed in a limited time frame with minimal disruption to CCCL. The process would follow appropriate corporate governance procedures and confidentiality guidelines so that the Board of CCCL can ultimately review a complete offer proposal.
In order to advance our current Proposal, we request that our designees and Macquarie be granted access to CCCL in order to:
· Perform reasonable commercial due diligence;
· Generate reasonable financial models;
· Prepare a strategic business plan; and
· Meet and confer with management.
This will allow a more complete proposal, including a price per share, to be delivered to the Board for its consideration.
In order to fully explain our Proposal, we would like to have a meeting to discuss a process and timeline with the U.S.-resident board members and have an identical discussion in Mandarin between the China-resident board members and our China-based representatives.
We hope that this letter and our request for a meeting with CCCL’s Board to discuss our Proposal will be favorably received. Please notify us by Monday October 3, 2011 whether you will do so and provide us with some suggested dates and locations where we could meet. Please note that we have filed this letter with the SEC consistent with our obligations under U.S. federal securities law."
-Fernando
Definitely true. Heck, i've been flipping my shares too since I know I have a good probability of that being the trend given the current macro environment. Nothing to sneeze at to buy around $0.60 and sell $0.80+, percentage wise.
The problem is that once a pattern like this gets established, even people who are not usually flippers start trying to take advantage of the pattern -- Thus reinforcing the issue. At some point the increasing quick-selling softens the size of the rallies and thats when the stocks continue on their downward path, bottoming lower every time. Thats the danger pattern everybody needs to watch for, IMO. Hopefully a big Q3 (as expected) will be enough to break such patterns before they get entrenched.
-Fernando
Oh I agree that SIAF should not do a buyback at this point, but then again, the P/E here is not really 2 (Gotta use TTM earnings, not projected). One can also argue that their new business segments have a much higher growth-profile than their current platform -- Which weighs against a buyback.
-Fernando
If I was management? I'd hedge my bets and allocate a percentage of cash to both. Some buybacks and some growth capital. Buyback is risk-free return while growth-capital provides scale to the business.
Growing a business is great but why do it at the expense of shareholders if the ROI is lower? Do a nice big buyback, re-establish investor confidence in management's view of shareholder rights, and prepare the platform to being able to ACCESS the capital markets in the future.
Regarding revenue declines from depletion of oil/bromine, outdated factory equipment, etc, thats not really growth-capital but 'depreciation-replacement' to sustain the business. Such 'required investing' should theoretically be subtracted from the reported earnings IMO.
Take LPH for example: Whats the real benefit from going from 2 facilities to 3? The organic growth profile will be the same after you do the 'ramp-up' of the facility addition. Sure EPS will grow from $0.65 to $1-ish, but EPS would grow a heck of a lot more if they could spend 100M at the $1.1 share price (No way can they buy that much at the current average of course since the price would go up from such a big buyback).
The fact is, ROI is simply greater from a buyback for LPH right now than their acquisition. Significantly so. Of course, they can't really stop the acquisition easily at this point since they already deposited 80M...
When management chooses 'empire building growth' versus optimal shareholder-friendly EPS investments, that says something about how they view investors.
Note that nobody is claiming a company should spend all their cash in a buyback, simply that 100% growth and 0% buyback at a P/E of 2 makes a VERY strong statement all on its own. I'd be perfectly happy at a company utilizing 20% of its earnings on a buyback (while its at a P/E of 2) and using the other 80% for growth -- Not asking for more than that.
-Fernando
I wasn't talking about SIAF at all since their big profits are in the future (Q3/etc), just CGS companies in general.
Its all a matter of Return-On-Investment. Say you have a company that earns $1 EPS that is trading at $2. Every penny they spend in a buyback gets a 50% ROI and has the same growth-profile as the current business-platform going forward. The only reason to spend nothing on a buyback in this scenario is if the money can be spent in program that gives more than 50% ROI (You won't find such lying around, 50% is simply too high).
Of course, if the 'current platform' has a negative growth profile such that the $1 EPS is not sustainable then yes, that plays against the buyback idea.
-Fernando
Definitely agreed. The problem of course is that fundamental analysis of a stock has become worthless in the sector for the time being. Rumor, innuendo, specific event causing stock pops, charting, etc take control in that environment -- A pure traders paradise.
At some point, I hope, fundamentals will matter again... But it is hard to defend a company that keeps investing in its business when it is at a P/E of 2 instead of buying back stock. It simply shows a lack of respect for those same fundamentals from the side of company management and feeds doubt about the reported-financials being hogwash.
-Fernando
Why don't you, or one of the SIAF diehard fans, make the post on the CGS board? Mention the SEC form, mention the bull case on the company, etc.
I'm actually very happy they finally did SEC form, I remember talking to Chad a long time ago that I would wait for that :).
Looking forward to their Q3, lets see the company walk all their talk this year (I hope they can do it)!
-Fernando
Disclosure: I was long but sold on that spike to 0.85+. Looking for re-entry now.
HRBN: Personally I have a weird feeling the HRBN buyout goes through, but go for it. You can only lose 15%, can make alot more if it does not go through. I guess it all depends on the odds you assign the event!
Finding shares to short right now is hard though! I guess you can sell calls...
-Fernando
TSL: Yep its impressive! Gotta stop sometime though, RSI 22 now :).
-Fernando
TSL: Yes, I agree. Someone can buy right now at $8.5 and then, if by chance the stock hits $8, they can sell $8 Oct puts to lower their cost average.
Say you buy 1000 shares at $8.5.
Stock hits $8.
You can then sell 10 contracts of the Oct $8 put for $1+.
Your cost basis will then be $7.5 on either 1000 or $7.75 on 2000 shares, depending on if the stock closes above $8 at expiration.
Easy way to lower the cost-avg, alot more effective than if you just buy more common :).
As long as you have a small position and are willing to double the position (or quadruple since you can repeat the tactic again later with the $7 put, etc) this is one way to get yourself into a stock like this.
-Fernando
CCCL: Isn't there a rule in place now that short-sales become restricted for a day if a stock goes down 10%? Maybe thats why.
http://www.sec.gov/news/press/2010/2010-26.htm
"SEC Approves Short Selling Restrictions
FOR IMMEDIATE RELEASE
2010-26
Video: Open Meeting
Play video of SEC Chairman Schapiro discussing short selling
Chairman Schapiro Discusses Short Selling:
Windows Media Player
QuickTime Text of Chairman's Statement
Washington, D.C., Feb. 24, 2010 — The Securities and Exchange Commission today adopted a new rule to place certain restrictions on short selling when a stock is experiencing significant downward price pressure. The measure is intended to promote market stability and preserve investor confidence.
Additional Materials
SEC Final Rule — Amendments to Regulation SHO
This alternative uptick rule is designed to restrict short selling from further driving down the price of a stock that has dropped more than 10 percent in one day. It will enable long sellers to stand in the front of the line and sell their shares before any short sellers once the circuit breaker is triggered."
-Fernando
CCCL: A few shares traded at 2.999 but then it ran right through that and traded at 3.03. Looks like that was simply someone who wanted to get out below the $3 visible ask, but no indication of size there.
-Fernando
IB Margin Change Note:
Please be aware, that the IB Risk Management department has submitted a revised schedule for the Small Cap stock margin increase (note that this includes any stock having a market cap below USD 250 million, or equivalent).
COB= close of business
COB 9/21 goes to 35%
COB 9/23 goes to 50%
COB 9/28 goes to 75%
COB 9/30 goes to 100%
IB has since posted a Knowledge Based article that includes the potentially affected small cap stocks (see revised link below). The list is subject to change as the Risk Management department considers removing some preferred stocks, etc. Also, later today IB intends on sending a communication that includes the list of symbols and respective positions that are likely to be affected. Thank you for your patience.
-Fernando
CCCL: Yeah, until two days ago it seemed to be 'apathy' then someone seems to have decided to unload. I haven't seen the short-borrow-available go down at IB the past couple of days...so its not someone shorting AFAIK.
-Fernando
CCCL: At least now I don't feel like i'm the only buyer anymore (laugh). Grabbed another 10k shares this morning. Would be nice to see sellers get exhausted at this point but who knows.
-Fernando
TSL: Yes i've read what Bronte said. His research here didn't impress me, they even backed off their fraud allegations.
The fact is, pretty much all these solar companies have been investing in capacity expansion and sometimes that causes negative cashflow for awhile. 2012 will be highly positive cashflow though.
Survival is assured for the simple reason that they ARE in the bottom quartile of cost in their industry. Around 12GW can produce at TSL's cost basis when demand is 20GW+ (Projected 21GW demand for 2012 by Goldman Sachs, but could go higher with all these ASP reductions). For there to be a problem in this coming year, demand would need to fall of a complete cliff -- Just not going to happen given everything currently in the pipeline including the new China FIT policy, which YGE and TSL will benefit the most from.
So low-cost production simply cannot satisfy demand, thus those low-cost producers will still have nice gross-margin percentages. Net margins will certainly come down from 2010 levels going forward, no question about that -- At least until we start seeing some of the non-tier1 producers get out of the business and supply come down.
TSL has by far the strongest balance sheet of all the Chinese solars, their net debt/equity ratio is fantastic. You will see companies like JKS fall off into bankruptcy before you start seeing TSL be stressed -- Which would once again reduce incoming supply.
-Fernando
No idea how you subscribe...I got it automatically as a premium member I think? At least I don't remember doing anything special.
-Fernando
No way the P/E is under 1. Earnings for Solars coming down very fast now. If you want to buy a solar, buy TSL IMO -- Much better balance sheet. I've been nibbling TSL personally.
Goldman, in an update yesterday, expects JKS to earn 0.70 in Q3 and -0.07 EPS in Q4. Their 2012 estimate is $2.51 EPS. They also just lowered their rating to NEUTRAL yesterday on JKS.
-Fernando
VALV: Geo put out small VALV update in their "News on the China Front" email to subscribers.
-Fernando
CCCL: LOL, guess I got to nibble a few more shares earlier than I thought :D. P/E of 1.33x now, cheaper than almost every name in the SPACE with NO significant short interest or negative-information about it.
Its clear some people here are losing faith in alot of companies, from the incessant selling in this board-favorite. I'll stick to my guns personally, my shorts in the space will hedge my long positions.
-Fernando
CNTF: I don't think one NEEDs any such conspiracy-theory to stay away from this name at this point -- At least I don't. Everyone knows i've been cautious on the name simply due to disliking the industry/etc -- But what they did last quarter is inexcusable.
The fact is, management flat out LIED to everybody when they talked about Q2 -- And then came out with completely contradictory results a few weeks later. That removes all credibility they might have had with shareholders.
Its bad enough when a company does not 'update guidance' when a extremely bad quarter is coming (Which is forgivable IMO), but when they lie? Walk away and don't look back. Period.
RIP.
If they actually USE a good chunk of cash and do a buyback? I'll reconsider the facts at that time. Until then, let the funeral song continue.
-Fernando
CCCL: I'm holding my shares. People keep selling a few shares everyday -- Slow deflation on the stock price the past few weeks.
I'll buy more as we get closer to Q3 results. Not really worried about what happens to the stock price for now given all the uncertainty out there.
-Fernando
SVM: Alfred Little report, seems very well done.
http://labemp.files.wordpress.com/2011/09/silvercorp-metals-final-report.pdf
-Fernando
AHA, looks like my reverse-psychology post is working! Muhaha!
-Fernando
Maybe once the 10-K actually comes out. This whole 'We are safe once they announce a CC' relief is so pre-UTA ;).
-Fernando
LLEN: Yeah, those mine shutdowns have hurt their numbers for sure. Thankfully all but one mine is now operational as of July 31st.
I'm hoping the market has a massive LLEN selloff tomorrow so I can buy some below $3 :D.
-Fernando
Disclosure: I do not own any LLEN shares at this time.
CHGY: My take on his letter is that he is claiming the company did not want to maintain a respectful board of directors and was putting in a 'close relationship' crony in the place of the foreigner who was demanding further accounting/financial improvements.
No way I buy this stock ever after reading something like that personally. Whenever I see a insider resign with 'bad blood' like this i've *never* regretted staying away from that company. Shrug.
I guess LLEN is left standing as the only coal name I can buy in this space (chuckle).
-Fernando
CHGY: Ouch.
http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=7811838
"September 2, 2011
Dear Mr. Ding,
China Energy Corp. has informed me that as a result of recent changes in market sentiment, the Company is not prepared at this time to commit the resources necessary in my opinion to either maintain a Board of Directors that would meet market standards and expectations, or to develop a professional financial reporting and control capacity. For this reason, I hereby resign as a Director of the Company with immediate effect.
Sincerely,
/s/ Brock Silvers
CC: Frank Marinaro, Loeb & Loeb
September 9, 2011
The Board of Directors of China Energy Corporation
No. 57 Xinhua East Street
Hohhot, Inner Mongolia
People’s Republic of China
Gentlemen:
I have reviewed the statements in the Current Report on Form 8-K filed China Energy Corporation (the “Company”) on September 9 with respect to my resignation from the Board of Directors of the Company, and I have no disagreements with them.
Sincerely,
/s/ Brock Silvers
Brock Silvers "
-Fernando
YONG: More buys at avg 5.925(weee!) --
http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=7812078
Up to 2,165,843 shares now, avg cost basis over $5. Thats over 10M bucks, the energy bunny is still going.
I added up all the money they spent in the three SC 13d/A filings and it sums up to $10,736,550 plus broker commissions.
Maybe its the OCD in me but I figure they don't stop till they hit a fairly 'even' number in either share count or money spent :P. 3M shares, 20M dollars maybe? lol... Who would stop at 10.736kM?!? (chuckle).
-Fernando
YONG: Your guess is as good as mine :).
I bought TSL common and calls today. Did both $10 Sept calls and $11 Sept calls (hehe, short term trading position), Oct $9 buy / call Oct $10 sell call-spread (Trying to do this right now).
-Fernando