It is no secret that the GeoTeam’s sentiment towards ChinaHybrids has turned decisively bearish in recent weeks fueled by our on the ground DD that has been less than positive. Yet, there is one development that could lead to a sharp near-term reversal of negative price momentum.
Recall from a past GeoWire article regarding buyouts:
“If these transactions materialize, round two becomes very intriguing. The shorts could get slaughtered in what could become an irrational surge in ChinaHybrid stocks as investors speculate which company will be next to go private. This scenario becomes more venomous if stocks that the shorts have actually accused of being fraudulent go private.”
I think it’s fair to conclude that the shorts have won every subsequent round thus far. However, now that the audit season it over, we feel that if a going private transaction is going to occur, it may happen soon. We want GeoFollowers to be aware of this possibility (read: risk) over the next few weeks. We will be adjusting portfolios accordingly by reducing our short exposure to prepare for a possible irrational bullish move. Ultimately, we think that a pop in shares will lead to an opportunity to re-short select companies that have been less than honest with investors. This opinion is strengthened by Carson Block’s (of Muddy Water’s Research) statement on CNBC that he has not found any investable U.S. listed China RTOS as of yet.
Another factor that could fuel an irrational sentiment- driven rally is the possibility that a temporary capitulation bottom is close to being set. It has been my experience that when the investing masses and casual investors enter a “profit opportunity party”, it can be a sign that a reversal in a trend may occur. It happened during the internet rally when you could go to a picnic and listen to arm chair experts talking about the next dot com stock to buy. It even happened at the height of the China RTO bubble.
Ultimately, there is the possibility that the market will act more efficiently as it discerns between which companies to crush and which ones to tag as real firms that could be going private candidates or have been unfairly punished; SAIC filing analysis should be useful to this end.
Stay tuned for more information on this topic. We are also taking a hard look at a few more companies that may not have been truthful with U.S. investors.