Finding Uplist Clues: Getting in Before Prices Pop

BEIJING (TheStreet) - Sinocoking(SCOK), China Agritech (CAGC) and Puda Coal (PUDA) all saw double digit jumps in their share prices on the day their uplisting was announced. New Energy Systems (NEWN.OB), and Biostar Pharmaceutical (BSPM) both offer the opportunity to still get in before the price pop of an uplisting.

With the Dow hovering back around 11,000 it is getting increasingly difficult to find attractive value stock opportunities. However, by focusing on potential uplisting opportunities it is still possible to find stocks with the potential to double with a relatively low degree of risk.

The most difficult part of playing uplistings is judging the timing of the uplist. In the case of Sinocoking, the stock came public on Feb. 5 and with seemingly no advance notice uplisted on Feb. 18, only two weeks later. In other cases, such as Puda and Agritech, the companies leave many clues to the impending uplist including filing various 8Ks notifying investors about the appointment of the required independent directors or in some cases even announcing that they intend to or expect to uplist in the near future. And yet on the day they uplisted they still saw a double-digit jump in the share price.

In the case of Sinocoking, the stock ran from $12 pre-uplist to $18 in 2 days, and subsequently ran as high as $53.70 within a few short weeks. In the case of Puda and Agritech, both jumped by around 20% on the day their uplisting was announced even though it was widely known that the uplisting was coming. Puda uplisted at around $5 and now trades at over $11. China Agritech uplisted at a split-adjusted price of $6 and now trades at $23, having reached a high over $30.

In short, for each of these stocks getting in at the pre-uplist price provided a triple-digit return in a short period of time and for holding a stock that was clearly trading on a very low multiple, with minimal downside risk vs. the fundamentals.

If uplisting is such a profitable, low-risk strategy then how does it continue to persist? Why aren't all hot potential uplist companies bid up to fair value well in advance of the uplisting? The reason is that many institutional investors are specifically prohibited by their charters from investing in OTC stocks. In addition, many institutions have guidelines about minimum share prices and won't invest in low-priced stocks. As soon as the uplist happens, the institutional money flows in driving both price and volume to fair market levels.

As for the next uplisting opportunities, I am currently focused on New Energy Systems and Biostar Pharmaceuticals, both of which I see uplisting in the near future.

New Energy Systems has already announced that it intends to uplist in 2010 and currently meets the Nasdaq requirements for share price by a healthy margin. The company still needs to establish its corporate governance structures to satisfy Nasdaq but this is a very straightforward process and can happen very quickly. As this happens, NEWN will release a series of 8Ks notifying investors that they have established several board committees (audit, compensation and nominations) with a majority of independent directors. The only reason to take these corporate actions is to prepare for an uplisting. As a result, this type of announcement sends a clear signal to the market and has been known to cause share prices to jump in anticipation of the uplisting.

A good recent example is China JoJo Drugstores (CJJD.OB), which released several of these types of 8K filings and ran from $2.62 to as high as $5.00 on no other news over the period of about one week. So clearly investors are starting to figure out when an uplisting is becoming imminent. In the case of NEWN, they have already said that they are in the process of appointing independent board members and establishing the required committees so I chose to buy the stock before the 8Ks come out.

As for the timing of the 8Ks and the eventual uplisting, that is anyone's guess, it could be as short as a few weeks or as long as a few months. But after doing a significant amount of analysis, it is a stock I am comfortable to hold onto for a while, confident that it will be worth the wait in the same way that Puda and Agritech were.

NEWN released full year guidance of $1.23 per share for 2010, which is only 6.5 times earnings, whereas its Nasdaq comparables (such as Advanced Battery Technologies Incorporated (ABAT) and Hong Kong Highpower Technology (HPJ)) trade on P/E multiples in the mid-teens. So even if the stock shows some volatility I am unconcerned because it is still significantly undervalued.

In December 2009 Biostar Pharmaceuticals established all of the necessary corporate governance structures in exact accordance with Nasdaq specifications, so now it only needs to have its closing bid price stabilize above $4 for a set number of days and then it will meet all requirements for a Nasdaq listing. As a result, this is one that could happen very fast and with no notice. However, ultimately the timing on the uplisting depends on the formal Nasdaq approval, so while I always try to get in early, I also make sure I am prepared to wait a bit. Since I missed out on Sinocoking this way, I chose to buy Biostar early and not risk missing it.

Biostar has issued guidance of $18-20 million in net income which results in a forward P/E ratio of approximately 5-6x at current prices in the low $4 range. This low multiple is despite the fact that the company grew revenues and net income by 57% in 2009, and expects to nearly double them in 2010. Comparable Nasdaq companies (such as SVAC) trade at 2-3 times this multiple, so again it is a stock I am comfortable holding onto as I wait for the uplisting. (Note: in a previous article I had mistakenly noted the projected EPS of Biostar as $1.80, which is incorrect. As shown above, full year guidance is $18-20 million in net income.)

Disclosure: The author is long shares of NEWN.OB and BSPM.OB

The author can be reached at [e-mail]

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.