This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Blindly Shorting China Stock Yields Big Return

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.

BEIJING ( TheStreet) -- In March, Absaroka Capital (a firm I had never heard of) published a detailed report alleging fraud at China ShenZhou Mining (SHZ - Get Report). Without bothering to read the report, I immediately bought as many puts as I could. Given that the stock was already plunging, I couldn't get many puts and I overpaid for what I did get, but the share price subsequently fell from over $5 to below $3, so it was a worthwhile trade. I fully expected SHZ to go below $2, but the volatility (i.e. price) of the puts was so high that, at $3, it made sense to sell the puts, so I exited.

Why would I go substantially short without even reading the report? Because even in the absence of fraud, this stock is so stunningly overvalued that it is simply destined to come back down to earth.

For a while, SHZ was mistakenly being viewed as a rare earth play (which it isn't) and the price exploded from $0.70 to over $10 in just a few months. When other rare earth stocks would have a big move in one direction, SHZ would follow suit. It was bizarre to watch, but I never wanted to fight the tape on it. By now everyone knows that SHZ is not a rare earth play, it is simply a fluorite company. However, some investors clearly seem to feel that fluorite might also represent an attractive play.

Yesterday, SHZ shot up as much as 10% after the company published a press release stating that China's Ministry of Land and Natural Resources would reduce the quota for fluorite production to 10 million tons. Clearly, a reduction in the quota will boost the price of fluorite and limit competition, thus providing a big benefit to SHZ. Then again, maybe not. From its most recent 10Q, SHZ expects that it will extract only 150,000 tons of fluorite ore in 2011. That is about 1.5% of the quota amount and demonstrates that SHZ is simply not even a real player in this market and will not stand to benefit even in light of the quota reduction.

1 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SHZ $0.10 0.00%
AAPL $128.46 -1.50%
FB $78.94 -1.80%
GOOG $558.64 0.57%
TSLA $203.45 -1.80%


DOW 18,132.70 -81.72 -0.45%
S&P 500 2,104.50 -6.24 -0.30%
NASDAQ 4,963.5270 -24.3630 -0.49%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs