Trading the Yin and Yang of the “Seeking Alpha Effect”: CXDC

You may already be familiar with what I call the “SeekingAlpha Effect.” That’s when a SeekingAlpha author gets a story published about a stock. If the story is positive, it tends to lift the subject issue’s share price. If it’s negative, however, a stock’s price can absolutely crater in a single session.

Unfortunately for anyone who owned shares of China XD Plastics, Inc. (CXDC) on July 9, that’s exactly what happened. Prior to the publication of a bearish SeekingAlpha article on July 10, this stock was one of the biggest gainers of 2014. In fact, CXDC shares had been absolutely en fuego since the end of March, after the company released its Q4 and full year earnings.

For the specialty chemical company’s fourth quarter, management reported revenue of $384.6 million, an increase of 128.1%, from $168.6 million in Q4 2012, while net income increased to $57.5 million from $17.3 million over the same period.  For the full year, total revenues were $1.05 billion and net income was $133.8 million, compared to $599.8 million and $85.9 million, respectively in 2012.

At the time of that announcement, Jie Han, Chairman and Chief Executive Officer, said, “The accelerated growth reflected China XD’s strong execution of our market share gaining strategy, which translated into our solid revenue and earnings growth and positive business development.”

Of course, those earnings numbers and management’s bullish outlook are the kind of the thing that whet’s the appetite of market participants hungry to sink their money into the kind of growth story that China XD appeared to be. As you can see from the chart below, the marketplace responded accordingly, with CXDC shares ultimately jumping from about $5 each all the way to a new 52-week and all-time top of $13.24, touched intraday on June 9. It obviously helped that in early May the company released Q1 results, and they too were exceptional.

cxdc

Simply from a technical standpoint, however, CXDC shares had reached unsustainable heights, evidenced by a series of candlestick leaps higher with minimal selling representing at least some price consolidation to support those moves. Then, the July 10 SeekingAlpha article titled “China XD Plastics: When the Numbers Don’t Add Up, There’s Over 80% Downside” hit the web, and CXDC shares hit the skids.

Specifically, the report, authored by Bleeker Street Research, questioned the chemical company’s numbers, alluding to a trend of overstating net income. According to the report, China XD Plastics has much higher margins than its main competitor, despite their numbers showing that the company spends far less on R&D. The report also stated that the company reported higher revenues and net income in SEC filings than in SAIC filing from 2008 to 2010. And, the authors went on to note that China XD Plastics’ CFO refused to answer any questions about the company.

Although profit taking had already set in prior to the publication of the article, the bottom fell out of CXDC’s share price in the immediate aftermath of its appearance. On July 10 shares barely managed to hold the $5 level before making a technical bounce back through $6. That’s where they’ve held over the past two weeks or so, as investors and traders remain leery of the issue — another common trait of the “SeekingAlpha Effect.”

Company management gave a blanket refutation of the charges, but has said very little otherwise, further shaking shareholders’ confidence. And, as often happens in these cases, a spate of class action lawsuits is being prepared against the company, which if nothing else will raise the company’s overhead as their legal fees grow.

From where I sit, all of that volatility is a good thing from a trading perspective —          from both the long and short of things.  If the company somehow can demonstrate that its numbers are indeed legitimate, then that should act as a nice catalyst for a resumption in the northerly trajectory of CXDC’s share price, creating the potential for some nice, quick trading gains. If, on the other hand, the plot worsens for CXDC’s credibility, then CXDC shares could end up making a nice short play.

Right now, my crystal ball has no insight into which direction CXDC will head, although my gut tells me the stock will be hit with another wave of selling given the cloud of suspicion that hangs over so many publically traded Chinese companies. Either way, the inherent volatility of CXDC makes this stock worthy of close monitoring going forward, as the longs and shorts engage in a classic yin-yang struggle to gain the upper hand.

Warren Gates, Senior Analyst, Normandy Research

 

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