Dangers of False Confidence in China Stocks
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
Over the past year, and subsequent to the filing of its last 10K, CHBT has been the target of a number of short-seller reports and fraud allegations. Shares of CHBT bottomed out at $7.22 on April 15.
As of Wednesday's close, the shares were trading at $11.78, up 63% in less than a month. The shares rose nearly 20% just this week following the posting of two 13G filings by Wellington Management (10.2% stake) and Value Capital Holdings (8.1% stake).Since there was no other news, I am assuming the filings drove up the stock this week, as investors took extreme confidence from large stakes by institutional investors. These stakes look big on the surface, but in fact represent an infinitesimally small portion of their overall holdings. In addition, the institutions buy in at very favorable prices, then watch the share price automatically rise when their holdings are disclosed. Take Wellington, for example. From its Web site, Wellington manages $663 billion in assets. Its $20 million investment in CHBT represents 0.00003% of its total assets. Granted, no one wants to lose $20 million, but even if CHBT went to zero, Wellington would not even notice. Retail investors have the shoe on the other foot. They buy in after the institutions, paying a higher price and allocating a tremendously greater portion of their capital to concentrated positions. The assumption that institutional investors have an informational advantage and perform superior due diligence is not necessarily something that should be relied upon blindly. There are a number of recent examples. In 2009, Carlyle Group announced that it had invested $15 million in China Agritech (CAGC), a 16.5% stake. The share price was below $10, but within weeks it rose to $30. Carlyle's price was around $5 (split adjusted) and included a large number of free warrants, lowering their effective "in price" even further. In short, Carlyle got a sweet deal while retail investors simply bid the stock up by triple. Fast forward a year, and CAGC is now halted, having last traded at $6.88, and it has "dismissed" its auditor, KPMG.
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