Larry Isen’s Emerging China Stocks
Anatomy of a Mover
This past week there was a template for China Small Caps that offers the possibility of providing powerful returns for the contrarian investors who still follow the sector.
Former EmergingChinaStocks.com favorite Gulf Resources (NASDAQ: GURE) traded up like a scalded cat this week thanks to an event outside the company’s activities.
This company came under vicious attack by short sellers in 2011 based on SAIC filings- if you seen my webinar on China fraud, you know those claims have no credibility.
However, when it happened, I didn’t care for way the company responded, leaving some possibility the claims against the company had some elements of truth.
GURE is a resource company specializing in the mining of Bromine- a substance in high demand by Pharmaceutical manufacturers. I thought this company would be an easy winner as the pharmaceutical industry in China is growing rapidly, and demand is increasing for bromine.
In the China small cap world there’s a proverbial Mexican stand off between shorts and longs. Short sellers decimated the sector in 2011 and won many major victories. However, the stocks remaining in the sector seem, for the most part, to be honest companies. Short positions remain very high, but there’s no one left to sell the shares, preventing short sellers from buying back and closing out positions.
Upcoming audited earnings numbers might get these stocks going, but short sellers appear to be far more afraid of losing money when MBOs come into play- management led buy outs.
There is still a lot of money chasing small cap companies in China, but it’s all Private Equity money these days. Many companies will choose to go private with buy outs at much higher levels than where they are trading. Many of these companies will partner with a financier and buy out their public shares. Likely, you’ll see them engage in initial public offerings on a Far East exchange within a couple of years.
Harbin Electric (Formerly HRBN) set the bar with an MBO at $24- short sellers got kill in that one last Fall.
As you can see, GURE had a great week:
At the beginning of this past week, it was disclosed Shandong Ocean Bright Stone Industry Fund Management is exploring the possibility, along the Shandong Haoyuan Industrial group, of executing a roll up strategy on China’s bromine producers with an eye towards privatization of companies in the industry. The plan would be to consolidate the better companies in the group, then eventually take the consolidated company public in China.
Despite GURE making a formal announcement it had not received any written offer or entered into any sort of LOI, the stock traded just great.
As you can see, on the day the “possibility was recognized, GURE traded its highest volume in months and broke above its 200DMA convincingly.
I don’t believe these kinds of events are attracting new money to these stocks. These rallies are the result of short covering. As of 1/31, there were still 2.4 million shares short in GURE. I’m sure there’s been quite a bit of short covering in this name.
I’m looking for an expecting a lot more MBO’s surfacing after year end numbers come out. To make money, we will just have to be there before the action materializes, and stick with the stocks we have.
Next Week- I’ll suggest some specific earnings trades.
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