China Natural Resources Is on 'Chinagra'

What is it with all Chinese stocks seeming to go from $15 to $45 in just a few days? First, financial information provider China Finance Online (JRJC - commentary - Cramer's Take) did it in 11 trading days. Now, in just two trading days, Chinese mining operator China Natural Resources (CHNR - commentary - Cramer's Take) has accomplished this same impressive feat.

But these speculative Chinese companies couldn't be more different. While I like a strategy of buying China Finance Online on dips and breakouts, I believe that China Natural Resources, with its newfound $500-million-plus market cap, will soon be a great short (if you can find shares) because it's really no different than an old man on Viagra.

Yes, you read that correctly. China Finance Online is a young, vibrant company, growing in multiples of 100%, while China Natural Resources offers little in the way of growth. I believe the current surge is the result of a geographically-induced stimulant I like to call "Chinagra." See, luckily for China Natural Resources, its company name contains the magic word "China," which in effect is a prescription for Viagra, hence its rapid ascent and this term that I should probably trademark.

Sure, over the past six months the company's revenue has climbed 14% and yielded a profit of $4 million, but over the past three months revenue growth was only 2%. That's hardly worthy of a tripling in stock price. Not that fundamentals really matter here; at this point, this is purely a momentum play.

Of course, there are some potential side effects. As with Viagra, Chinagra is known to cause prolonged and potentially painful surges that can last longer than expected. China Natural Resources' float is only 1.4 million shares, so when it trades nearly eight times that in one day, you know short-sellers are chomping at the bit, and their premature entry and probable forced short-covering combine with the effects of momentum buyers to cause this kind of trading volume and price action.

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At the time of publication, Sykes had no positions in any of the stocks mentioned in this column, although positions may change at any time.

Timothy Sykes trades for his own account. He managed the Cilantro Fund, starred in the reality show Wall Street Warriors, and authored An American Hedge Fund. Currently he also writes the blog timothysykes.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Sykes appreciates your feedback; click here to send him an email.