The China Connection - Pay attention to the details (RVX.TO / CREG / ACST)

Regardless of your opinions of U.S. President Donald Trump, his recent trip to China has coincided with some North American companies releasing news with a connection to the world's most populated country and fasted growing economy. 

I'm going to focus on three such companies: 

1. Acasti Pharma which trades on the Nasdaq with the symbol ACST.  
2. China Recycled Energy also on the Nasdaq with the symbol CREG. 
3. Resverlogix trades on Canada's TSX with the symbol RVX and as RVXCF in the U.S.

Acasti Pharma

They put out news on November 20th announcing a non-binding term sheet with a leading China based pharmaceutical company.  That news sparked a huge rally for ACST which previously had been trading around the $1.30 area on very thin volume, often less than 20,000 shares a day. 

After the news hit volumes exploded with over 20 million shares trading hands the day the news came out.  And the PPS exploded higher as well, reaching a peak of $3.36 inter-day.  Things have cooled off considerably since then however and the PPS has fallen all the way back to $1.64 with volumes having dropped to less than 1 million per day,  most recently falling below 200,000 trading.

While the news seems to have sparked a huge wave of excitement, in the days following I consider it probable that investors paid closer attention to the details.  This is a "non-binding" term sheet, which means it might not even come to fruition.  And the "leading" China "based" pharmaceutical company isn't even named.  

I'm always suspicious of the word "leading", because there are all manner of penny stock companies who refer to themselves as being a "leader" despite the fact that they're only able to stay in business by promoting their company and dumping freshly printed shares into the market.

In a nutshell they signed a deal that may not happen with a company that isn't even named.  I suspect that if the unnamed company hadn't been from China that the market probably would have yawned.

China Recycled Energy Corp

This one was absolutely crazy.  Their stock went from down around $1.20 to over $9 in a two day period that saw over 50 million shares trading.  The reason?  News was released on November 9th about China Energy Investment Corp signing an MOU to invest over $80 billion in projects in West Virginia.

In this case I believe investors got confused, and while thinking they were buying shares of China Energy Investment Corp, they instead bought shares in a completely different company with a similar name.  Think of it as one of those look alike doppelgangers who shows up at a Rock Concert and gets mobbed by people mistaking them for the real deal.  

And as probably should be expected CREG has cooled off considerably from that $9 peak and is currently trading around $3.  

Both ACST and CREG spiked big but pulled back. In both cases I believe a perceived connection to China helped spark a feeding frenzy.   But both cooled off, CREG because the news that sparked the interest was about a different company.  And Acasti because  a "maybe" deal with an unnamed company isn't exactly money in the bank.

Resverlogix

Resverlogix however is a different story.  They too announced a deal with a Chinese based pharmaceutical company, but it wasn't a "maybe" deal but rather one that was finalized.  Regulatory approval was given for an $87 million (CDN) investment in this small Calgary Biotech.  And it wasn't with an unnamed company, but with Shenzhen Hepalink, the world's largest producer of Herpain Sodium, a blood thinner.

As with ACST and CREG shares of RVX climbed sharply on the news.  But unlike those other two the gains didn't vanish, in fact the stock kept climbing right into Friday's closing bell.  The $2.20 closing price is the highest RVX's shares have been in the past 6 months.  And comparative volumes were much lighter, instead of 20+ million as seen with ACST and CREG, RVX by contrast didn't even reach 1 million on any single day.

Beacon Securities analyst David Kideckel's buy recommendation and 12 month price target of $8.55 from November 15 was repeated in a story put out by StreetWiseReports.  It highlighted how Dr. Kideckel referred to Resverlogix as one of Canada's most undervalued and impressive Biotechs.

http://www.thelifesciencesreport.com/article/2017/12/06/coverage-initiated-on-one-of-the-most-undervalued-biotech-companies-in-canada.html

Conclusion

The take away is fairly simple here.  Paying attention to the details often pays dividends down the road.  While its easy to get caught up in the excitement of a stock making unbelievable gains, its probably worth while to take the time to do the required research....to make sure the excitement is based on solid facts, and that you're sure of what the facts are.  

Full disclosure, I have no position in Acasti and no intention of opening one, long or short, anytime in the foreseeable future.  I do own some shares of CREG, however I sold off over two thirds of the shares I was holding before the PPS exploded and then pulled back.  

In Resverlogix I have what I consider to be a significant position and I added more share purchase warrants last week.  

CREG - A case of blatant manipulation?

Trading in shares of China Recycled Energy Corp cooled off a bit from Thursday and Fridays frentic action.  Of course volume of over 6 million is still eye-popping for a company with only 8.3 million shares reported as outstanding.  But its signficantly lower than the 25+ million that traded each of the previous two sessions last week.

If you're reading this miserable and pathetic little blog in hopes of finding some fundamental justification for shares of CREG to climb substantially from the most recent closing price of $5.36, then you're going to be disappointed.  Its not that I think China Recycled Energy Corp is a bad investment based on anything fundamental, its just that I don't think the fundamentals matter one iota at this juncture.  

Fundamentals don't matter???  That's what I hear some saying.  Nope, not with this stock, not right now as I see things.  What matters in my opinion is who owns shares, and who is short shares.  Its the old golden rule.  Not the "do unto others" rule you find in The Bible, but the more cynical: "He who has the gold makes the rules".  

In my opinion the surge in buying that took CREG by storm, it wasn't supposed to happen.  The company didn't put out a bullish press release, there were no promoters hyping this as a winning play, and no analysts were touting CREG to their books.  None of that was going on as near as I can tell.  

What did happen is that news came out about China Energy Investment Corp signing an $83.7 Billion MOU for engergy projects in West Virgina.  Coupled with Donald Trump's visit to China and a reported $250 Billion in trade deals that were announced, and you had a perfect storm.  Investors poured into CREG and sent the PPS soaring from around $1.25 as recently as this past Wednesay, to as high as $9.39 this past Friday.

Instead of buying shares of China Energery Investment Corp, investors were buying into China Recycled Energy Corp.  So what were they buying?  A profitable Chinese company which provides roof top equipment for industrial plants like steel mills.  This equipment captures the heat and converts it into electricity.  That's the 100 mile up version of the business, for more in depth information I invite readers to do their own research.  

Why am I not going into greater depth?  In case you missed it, I don't believe the fundamentals here matter.  Well, perhaps one fundamental metric does come into play with CREG, and that would be share count.

In this writer's opinion retail players, both big and small, they stormed in and started demanding shares...putting in buy orders through their brokerages.  From whom are buyers purchasing shares?  Not from sellers directly, but from Market Maker Broker Dealers (MMs for short) engaged in making a market for shares of CREG.  

And that's the problem.  I believe buyers overwhelmed MMs and forced them to go short to fulfil the demand.  And because MMs are exempted from regulations designed to eliminate naked short selling....well I think there's a massive open and naked short position in CREG right now.  

I'm going to be a bit harsh here and suggest that those who don't understand the concept of short selling in general, and naked short selling in particular....that you really don't have any business playing around with stocks in the first place, that's my view.  

Regulation SHO requires that short sellers first make positive determination that the shares they're going short on, that they're actually available to be borrowed.  When short sellers are unable to locate the shares they sold short, its called a delivery failure.  A delivery failure means the short seller is naked, and its against the rules.  There is an exception however, and it involves...yes, you guess it, Market Maker Broker dealers.  Here's the cut and paste from SEC.GOV, just click to go directly to the site:

• Failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period. A fail may also result from “naked” short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.

• “Naked” short selling is not necessarily a violation of the federal securities laws or the Commission’s rules. Indeed, in certain circumstances, “naked” short selling contributes to market liquidity. For example, broker-dealers that make a market in a security[4] generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks as there may be few shares available to purchase or borrow at a given time.  (All emphasis is mine)

That's exactly what's happened with CREG as far as as I'm concerned.  I can envision MMs having a collective short position in the 10s of millions of shares....I imagine that there may very well be shops that by themselves alone are looking at 5 million shares or more they need to cover.  And that's in a company with only 8.3 million outstanding shares reported.  

How can they cover?  I would suggest that the chances would be zero if the PPS had kept running higher and higher.  No, in my view....they had to slam the brakes on, hard.  But wait I hear some saying:  "So what"???  These MMs compete with each other, so here's a chance for those houses that aren't short to screw the shops that are.  Not so fast.

Years ago the US Department of Justice uncovered a practice called "Moves on Request".  Call it professional courtesy if you will, or better still maybe 'honor among thieves'.  It works like this, a broker who is looking to manipulate a stock will ask his fellow MMs to change their bid/ask based on the direction he needs the price to move.  Up when he's long and down when he's short.  Other MMs comply because they know that they'll be in a similar situation at some point. 

Its a quid pro quo situation, and for those who's Latin isn't great "quid pro quo" basically means "you scratch my back I'll scratch yours".  Here's that related info from the DOJ:  

• First, the investigation uncovered numerous examples of what are often referred to as "moves on request." A "move on request" occurs when trader A calls trader B and asks him to change the price he is quoting for the purpose of affecting the market in that stock.(18) When B complies, his move will generate a misimpression that there is an additional buying or selling interest in the stock, from which A will possibly profit. Trader B benefits because A will return the favor when B wants to influence the market in a stock.

If you're checking social media and seeing confident claims that CREG is a pump and dump, or a scam or other such drivel, then you're probably reading the posts of someone attached to a brokerage house that has found itself massively short, that's my opinion.  

But...like it or lump it, that's the public markets.  There are garbage stocks out there with accumulated deficits of $100 million or more, that are only surviving because they keep printing more and more shares to meet expenses and to enrich company executives.  And these companies will have Market Captializations of $100 million or more.  But MMs are not short on those stocks, in fact they may have clients who are dumping.  CREG's market cap isn't even $50 million, and its profitable as per the most recently available filings.  

But again, fundamentals don't matter....its the Cynic's Golden Rule and the players who control the market are short on CREG bigly, so the trend is going to be down in my opinion.  I will hold out one bit of hope, and its for this reason that I still am holding some of the shares I'd bought before this big move.  That hope is an announcement of some kind of dividend payment, even if its just one single penny per share.  A $0.01 per share dividend would only cost $83,000 for 8.3 million shares.  Those caught short would have to pay the dividend on the shares they borrowed, whether those shares exist or not. 

Comments of course are welcome, but no profanity or attacks.  

China Recyling Energy Corp (CREG) - End of week explosion...

I wrote about CREG back in June of 2016 expressing the opinion that shares were undergoing "smart money accumulation". I called it a thesis, for lack of a better word.  It was written as CREG was trading close to the $1.00 mark after having enacted a 1:10 share consolidation to regain compliance with the rules of the Nasdaq exchange.

Is a reverse split ever a good thing? China Recycling Energy (CREG)

That was a while ago, and until Thursday and Friday of this week CREG was about as boring a stock as you could find.  Typical volumes were low, pathetically low.  Most days saw just a few thousand shares changing hands.  A day with volume of 100K could be considered huge.  But that's nothing compared to the 50+  million that traded during the last two days.  

So, why the sudden surge in interest?  Firstly I think its important to note that, as per the most recent corporate filing, there were only 8.3 million shares outstanding as of August 9th 2017.   That's right, just 8.3 million, which means that the volume of the past 2 days of trading exceeded the number of shares by a factor of more than 6.  

Also from that same filing total current assets came in at $83.3 million, which on a per share basis is 

a little over $10.  I'm not pointing that out as a suggestion for a possible price target however.  These numbers are from the 10Q filing for the period ending June 30th 2017, and we're now in November.  Its very possible, and likely in my opinion, that there have been substantial changes to the fundamental picture.  

Here's a link to that filing:  

http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=12229141&RcvdDate=8/11/2017&CoName=CHINA%20RECYCLING%20ENERGY%20CORP&FormType=10-Q&View=html

That filing came out on August 11th, which means that the 3rd quarter 10Q should be coming out any day now.  However realize that the 3rd quarter ended on September 30th just passed, so information in the new filing will still be old, just not as old.   

If you're reading this miserable and pathetic little blog in hopes of finding a diffinitive reason for the sudden increase in trading, well you're going to be disappointed.  That's not to say I don't have an opinion, I do. I think it has a lot to do with the news of China Energy Investment Corp signing a Memorandum of Understanding to invest $83.7 billion for various projects in the state of West Virginia.  

Here's a link to that news:  

http://www.reuters.com/article/us-trump-asia-energy-west-virginia/china-energy-investment-signs-mou-for-83-7-billion-in-west-virginia-projects-idUSKBN1D90S9?il=0

To be clear, as far as I'm aware China Recycling Energy Corp which trades on the Nasdaq under the symbol CREG, I do not believe there is any connection with this publicly traded company and China Energy Investment Corp, none whatsoever.

I do however consider it likely that Wednesday's early morning news about Trump's visit to China and the $250+ billion in trade deals signed, that this was the spark which sent CREG on its wild ride.  Here's a link mentioning the trade deals in the context of President Trump's visit to China.

http://www.bnn.ca/trump-gives-china-great-credit-for-trade-advantage-leaves-with-us-250b-plus-in-deals-1.910448

If you were to search for publicly traded companies with the words China and Energy, then CREG would probably be top of the list.  And then.....in my opinion High Frequency Trading (HFT) takes over.  And with CREG having such a small float, and trading at an incredibly depressed level....its the perfect storm.   

I've already blogged on here about BOTs that monitor the POTUS Twitter account using algorithms to determine if a Tweet about a public company is positive or negative, and taking out a corresponding long or short position automatically.  Its all done in seconds, that's the world we're in now.  

We'll see what CREG reports when their filing comes out.  Regardless of the reasons this quiet and almost invisible little company now has a lot more people watching it. As PT Barnum famously said, "There's no such thing as bad advertising".  With the float being so small here the party might only just be getting started, we'll have to wait and see what the quarterly filing says. If the numbers are less than inspiring however, things might just start dropping off fast.  

It was with this realization that I sold a little over a quarter of my CREG shares on Wednesday.  I didn't get the top price, nowhere close, less than $6 in two trades.  We'll see what happens next week, no matter what happens though I will probably end up having some regrets.  If the PPS goes to $20 I'll wish I hadn't sold any, and if it falls back to $1 or $2 I'll be wishing I sold them all.

Bottom line though, and something I constantly remind readers of....Nobody ever goes broke from taking profits.

Happy Trading.  

Is a reverse split ever a good thing? China Recycling Energy (CREG)

For every rule there is an exception, or so the story goes.  That is never more true than in the public markets.  No one single indicator, whether fundamental or technical, is right 100% all the time.  It couldn't be, the market couldn't function if it was.  

If, for example, insider selling was "always" bad and was guaranteed to lead to a falling share price, then pretty much everyone would start jumping ship whenever a company's stock reported insider sales.  But if everyone is selling, that means there's no buyers.  Its that old analogy I use all the time about a football game with both teams lining up on the same side of the ball, the game wouldn't work, and neither would the markets.

Which brings me to the subject of reverse splits.  Like insider selling, consolidations are generally considered to be negative events, and its easy to understand why.  Share consolidations are most often the result of a falling share price, and are usually employed so that a company can maintain its listing on an exchange like the Nasdaq or NYSE.  

A reverse split cures the deficiency in the share price, by multiplying the PPS by 10, or 20 or whatever ratio is decided upon.  But it only treats a symptom, not the actual disease.  A stock price falls because of a lack of investor confidence.  While consolidating the number of shares fixes, at least temporarily, the share price requirement to remain listed on a senior exchange, it does nothing in of itself to fix the investor sentiment which caused the share price to fall in the first place.

Shares of China Recycling Energy (CREG) were consolidated 10:1 on May 26th after having fallen all the way to 26 cents.  The reverse split had the effect of immediately raising the PPS over the Nasdaq's required level of $1.00 which, if maintained for 10 consecutive days, will put the company back in compliance with the rules of the exchange.  Which leaves two days as of this writing.

I think these two days could prove interesting.  I'll explain why at the end.

I have been holding CREG since the summer of 2013, for almost 3 years.  And while I did sell a small number of shares when it spiked up around $5 in that same year, I held onto the vast majority.  

How did CREG come to be on my radar?  

I found China Recycling when researching small cap holdings of the Carlyle Group.  Years ago, back around 2000, I had done the same thing, seeing what publicly traded companies Carlyle held.  For those unfamiliar Carlyle is a who's who of conservative politics, with luminaries such as Reagan National Security advisor Frank Carlucci and George H.W. Bush's Secretary of State James Baker having been listed as board members.  In fact George Bush the elder reportedly did consulting work for them after serving as President.

Back in 2000 or 2001 I came across a company called Equinix trading under the symbol EQIX which was held in one of Carlyle's funds.  I invested in it and did very well.  After taking a large gain it also did a reverse split, in 2002, at a ratio of 32:1.  I bought in again after that reverse split but I didn't have the fortitude to hold on and eventually bailed at a loss.  Seeing where EQIX is trading now, for obvious reasons, I regret my decision.

But that's enough ancient history, besides its painful to remember :-)

So what has caused CREG's share price to languish so incredibly?  It was trading (as mentioned) up around $5 as recently as 2013, and fell to less than 30 cents necessitating the 10:1 consolidation.  

Frankly....I don't know, I can only guess.  I know I don't write much about fundamentals on this blog, viewing it as old information which is already "priced in" to a company's market capitalization.  But for those who are big on fundamentals CREG's don't look bad at all.   Post reverse the company is earnings positive with EPS listed as $1.78 as per WSJ.com. That puts their PE ratio at less than 1.5 as per the same site.  (Wall Street Journal Quote for CREG)

The first word in their company name might explain the low valuation however, that being China. After stories like Sino-Forest investors are justifiably cautious about Chinese companies.  But frankly, I believe there is more to it than that.

I wouldn't be the first person to see a stock plummet, and then to blame it on manipulation, but that is what I am going to suggest as a possibility.  Short selling is a legitimate market activity, and CREG has not been immune.  According to Nasdaq's site the number of shares short was just over 250K as of May 13th 2016.  I am assuming that number to be accurate  and split adjusted, which would have put it around 2.5 million prior to the share consolidation.

That's not a huge number certainly, with 8.3 million shares listed as outstanding its only about 3% of the total. Last year however the number, (before the share consolidation) was up around 5 million. If you look at CREG's volumes over the past 2-3 years, that's a lot considering there were many days the stock didn't even trade 10,000 shares.  (Price/Volume History as per Yahoo Finance)

Another point I should mention about Carlyle, which is currently (as per Nasdaq's site) listed as CREG's largest institutional shareholder with a little over 500,000 shares as of March 31st 2016, or over 5,000,000 pre-split.  Carlyle used to own millions more, but over the past 2 years has been selling.  In the last 3 months Nasdaq reports them having sold a little over 7% of their then remaining holdings.  But the fact they have maintained what I consider a still sizable position has me encouraged.  They had a deal in place some time (1 year or more) ago to sell all their holdings, but apparently it fell through.

To be clear, I am not recommending an investment in CREG, I am just putting this out there for anyone interested in reading.  My history with this stock, after all, is hardly stellar....quite the opposite. But that old saying about a broken clock being right twice a day, well maybe its time for the hands on CREG's clock to come around to a bullish hour.

After the 10:1 reverse CREG behaved as might be expected, it tanked.  Remember what I wrote about a share consolidation treating a symptom and not the disease?  Just two days after the reverse the PPS fell all the way from $2.60 to $2.00...almost a 25% drop.  But since then its rebounded, hitting 2.60 again inter day on June 7th and closing at $2.59

So why do I think the trading over the next couple of days could prove interesting?

My thesis, for lack of a better word, is that CREG has been the target of smart money accumulation, by parties that are not just "smart" but that have incredibly deep pockets as well.  That's what I'm gambling on.  EQIX all those years back saw similar swings and an even bigger reverse split.  And look where it is now.

I use the word "gambling" on purpose, because that is exactly what it is.  If I was 100% certain that CREG was going to follow the same path as EQIX and be worth hundreds of dollars per share in the coming years, I wouldn't be writing about it on a blog.  No, I would be taking out the equity in my home, my cars, maxing out my line of credit....I'd be buying every share I could afford.  But I'm not sure.

But if my gamble does end up being right, then these next two days represent a crucial time for CREG's share price as it must close over $1.00 on each of June 8th and 9th to be back in compliance with the rules of the Nasdaq exchange and to avoid being relegated to the OTCBB.  With that reality in place, and with any remaining retail investors (who knows I might be the last one) being notoriously price sensitive, then the PPS falling anywhere close to that $1 mark could conceivably shake free a good number of whatever shares remain in retail "dumb money" hands.  

I think you can probably guess what my intention is if that happens.