BEIJING (TheStreet) -- Companies such as Cleantech Solutions (CLNT) andChinaBak Battery (CBAK) have been the subject of explosive rumors that have driven their share prices dramatically higher in the space of one to two days.
These are just two examples of companies that have crashed to the pennies but then conducted large reverse splits to avoid a delisting by the Nasdaq. As the effect of the false rumors fades, Cleantech is likely to drop back to below $4 where it began. Likewise, ChinaBak will likely fall back to around 80 cents, where it was before the false rumor.
A few years ago there were hundreds of Chinese reverse merger stocks that traded in the US. Initially cheap valuations and seemingly stellar financials often led these stocks to deliver quadruple-digit returns. Unfortunately, it turned out that fraud and mismanagement were rife within these companies and the overwhelming majority ended up crashing. Many were delisted outright due to fraud.
Lately, a number of the straggling survivors that have avoided delisting have shown triple-digit spikes on the back of very specific rumors. This has led some to believe that there may be a resurrection within the space. But all is not what it seems.
Of the remaining companies still trading we can see that there is a common factor driving these stocks, and it is one that investors should avoid getting involved in. The common factor is that these are companies which have conducted a reverse split to avoid delisting and only then are the subject of explosive rumors. The reverse splits mean that there are very few shares outstanding, creating limited supply. Such stocks are ripe for manipulation by false rumors. A few weeks ago, CLNT tripled in the space of a few days, from around $3.50 to as high as $10.90. The cause of the spike was a rumor that the company would soon be selling to oil behemoths Sinopec (SHI) and CNPC. But the rumor was incorrect. The truth was that Cleantech had simply received a simple certification for its products, such that they could be deemed compliant with the oil giants' standards. This is far different than actually selling a product to them.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV