When I was a kid I could not for the life of me understand how someone could be hit by a train. As I grew older, I realized that some people intentionally took chances on the tracks and others were - well pushed. Then I realized that some people just ignored obvious signs. When I saw the short interest on Kandi Technologies, Corp. (NASDAQ:KNDI) increase right before some of the most significant milestones were coming to fruition, I was reminded of some who just seem to ignore obvious risks.
When a train is coming, the first warning is usually the lights. There is a large one on the front of the train and if you're at crossroads there is the flashing red lights on the big X. Then for sound, there is the ding-ding-ding at the crossroads, not to mention the whistle (horn) and the rattling of the tracks.
Now even with these overwhelming signs the train is coming it still might slow down or even stop. But unless it derails, it's still going to proceed down the track at some point. This is where we find Kandi. The train has slowed a bit but it's still coming. Now let's shift gears for a moment.
Arbitrage involves taking advantage of mis-priced securities between two or more markets. Suppose that you could buy a security in a market where it was selling for $1.00 and almost instantly sell that same security in another market for $1.05 for a 5% profit. While the spread on this example is exaggerated, computers do this all the time. With Kandi Technologies, Corp. or any other stock for that matter, taking advantage of an this type arbitrage situation is nearly impossible for the retail investor that has to use the speed of his or her eyes and hands to make trades.
But what if you could prepare for the arbitrage moment? What if you could see the train coming? What if you didn't have to be standing in front of the Kandi factory in China to watch the [EVs] roll out to realize that the value of their security had just changed in the US Securities Market? Well you don't have to wait; you just need to understand that in the real world you can do better than picking the arbitrage moment. You can actually position ahead of it. For a long investor, the risk is that the train that you can see will not make it the few hundred yards left to go. The risk for the shorts is that the train will somehow derail. Oh, even a derailment would have to be catastrophic which is highly unlikely for a profitable company that is increasing sales in its legacy business.
Kandi's financials reveal that they have had to reduce prices to stay competitive in the legacy international sport utility vehicle markets. And in doing so, they have increased sales at the expense of margin. This shows that management is serious about protecting and thus sustaining legacy business. The strategy increased 3rd Qtr Revenue 23.8% year-over-year. Income from operations also improved 164.5% for the 3rd Qtr of 2012. This is a rehash for anyone that has paid any attention to the company's last earnings release but still worth mentioning.
The company reported expectations to deliver 5,000 of the first Electric Vehicles (EVs) of their 20,000 vehicle order by year-end. But delivery is contingent on demand and administrative hurdles. Investors are waiting with baited breath at the first sign of deliveries. But it really does not matter if you understand where technology is going.
John Rockefeller once tried to prove that the kerosene that was used to light homes was safer and more practical than electricity. When that didn't work out he used his resources to convert his attention to use a byproduct of his production process called gasoline. Can you believe that a fossil-fuel is now pitted against electricity again? It's kind of funny when you think about it.
Trying to pick the next innovative company that can maverick the transition is tough. Some such as A123 systems, Inc (AONE) have entered bankruptcy but whose assets are still very attractive to potential investors. The auction for A123 assets starts this week.
But for Kandi, the train is still coming. It's on the tracks and when it reaches the next stop on the road to EV integration in China, a significant catalyst will be released. As of 15 Nov 2012 the short interest was 812,472 as reported by NASDAQ with 11.7 days to cover at the average daily volume. The days to cover will change with an increase in volume. But shorts would still have to pay significant premium on any good news.
The light of the train is approaching. How effective the bet against progress in China's EV market remains to be seen. Kandi's Annual Meeting is set for December 19, 2012. Past Annual reports have been somewhat non-events. But I would not want to be short during this year's discussion.
Disclosure: I am long KNDI, AONE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: AONE is now trading as AONEQ