The “China” Bubble

• Posted by zerobeta
• on September 13th, 2010

If you have been following the markets lately, you may have noticed that there has been issues with some stocks out of China.

Suspect One: China Sky One Medical ($CSKI)

Last Friday, $CSKI cut 2010 guidance.  From Reuters:

China Sky One Medical Inc., a Chinese over-the-counter drug maker, said Friday several major distributors have stopped doing business with the company, and it cut its 2010 profit and sales expectations.

The company said several major private distributors chose to end their relationships with the company because they learned that China Sky One is required to disclose information about their business in filings with the Securities and Exchange Commission. According to China Sky One, the distributors said the disclosures led to greater scrutiny of their businesses by Chinese government regulators.

Sounds fishy to me.

Suspect 2: China Northeast Petroleum Corp ($NEP)

Back in May $NEP was halted and delisted from the AMEX for misstating financial information.  Recently the stock has reopened down 15% and almost 60% off it’s 2010 high.

Suspect 3: China AgriTech ($CAGC)

Last Wednesday, $CAGC was killed after an Chardan Capital Markets raised concern regarding their auditors.

From TheStreet:

Shares of China Agritech(CAGC) were walloped Wednesday with volume running more than five times the usual churn as its auditors — past, present and future — suddenly became a hot topic on Wall Street.

The main driver for the selling was a downgrade by Chardan Capital Markets, a New York-based investment banking firm that focuses on the micro, small-cap and mid-cap markets.

Citing concerns about the company’s past auditor relationships and its ongoing earnings quality, the firm lowered its rating on China Agritech to sell from neutral and brought its 12-month price target down to $9 from $14.

What do these three companies have in common?  The word “China” in their name.

Below is a spreadsheet of 40 companies with the word “China” in their name.  These were selected by doing a Yahoo Search for companies with the word “China” in their name that trade in the US and dropping out any OTCBB stocks.

If you notice, these stocks have gotten killed over the last month. The average return of a stock with “China” in its name over the last month is -5.63% versus -1% of the $SPY (and about the same for the $FXI). The median return of a stock with “China” in its name is -9.12%. Over the last 3 months, they have been lagging as well.

Is it silly to perform this analysis? Not really. Back in the late 1950′s there was a boom in “Tron” or “Tronics” stocks.

From Forbes:

With the dawn of the space age, every electronics stock suddenly took off like a rocket on Wall Street, reaching valuation levels not unlike Internet stocks today. And just like a “dot com” can help an obscure offering surge into the stratosphere today, the key to a stocks success could often be found in its name in the 1960s as well.

“I call it the tronics boom because these soaring stocks usually had some form of tron or tronics in their name,” says Malkiel, citing such “trons” as Astron, Dutron, Vulcatron and Transitron and “onics” like Circuitronics, Supronics and Videotronics, as well as one company that, for good measure, put together the winning combination Powertron Ultrasonics.

Then, like now, the demand was huge but the IPOs were relatively thin, so that stock prices would soar at the launch.

Investors argued that “tronics” stocks couldnt be valued according to traditional methods because they represented a whole new era of the economy that was nothing like the past. Promoters entered the stage to talk the stocks up further. As a result, stocks soared to multiples of 50, 100 or even 200 times earnings.

But in late 1962, “tronics” stocks and other growth issues came crashing down in a massive sell-off.

Wall Street is a business of sales.  The easiest way to get uninformed investors to invest in China is to throw “China” into the name of the stock.  Back during the aforementioned “Tronics” companies were changing their name to something with “Tron” or “Tronics” in it just so people would buy their stock. @Legacy_Trades calls this investing in “fake China” and has been very adamant on the StockTwits stream about these companies.

Even if you believe in China as a growth area for investing, you must watch out for companies looking to piggy-back this growth.  When the fundamentals are too good to be true, usually they aren’t.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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