Volatile times have returned once again to Kandi Technologies (KNDI). Just 8 days ago, Kandi was a $5.00 stock. But then 3 bullish articles and 1 brief press release sent the stock soaring by more than 80%.
Back in June we saw the same thing. The stock more than doubled to $8.50 on the back of several extremely bullish articles and 2 press releases that appeared transformational for Kandi. Predictions swirled that "this time was the real deal" and that Kandi would continue to soar to ever higher highs. But just as it has each time in the past, Kandi quickly fell by 50% from those highs, giving up nearly all of its gains. The stock quickly settled back to below $4.50 and the transformational news was forgotten.
We are now seeing the same phenomenon again. The recent gains are evaporating on huge volume. By Monday, the shares had fallen by as much as 20% to $7.50 in extended hours trading. Just as we saw in June and July, the stock is once again likely to find itself back around $5.00 as investors come to better understand the latest developments.
I have lived in and out of China for over 20 years. I speak Chinese. I have owned and driven multiple electric vehicles in China. I have followed Kandi for years. If Kandi truly had multi bagger potential, I would be the first one to take a large long position and tell the world why. I would be thrilled to make a few hundred percent, as predicted by the Kandi bulls.
No one can predict what will happen in 5-10 years. It may still be the case that Kandi can turn itself into the company that its promoters are claiming it is now.
But in the near term, there are two reasons why the stock is basically certain to return to $5.00 or below.
First, some of the most important information being written by the Kandi bulls is 100% inaccurate. Despite the claims of the Kandi bulls, even with the cooperation with Geely, Kandi is still a very small player in the EV market in China. The bulls continually suggest that Kandi is the only or the largest EV player in China. They liken Kandi to Tesla Motors (TSLA), BYD or ZipCar (ZIP) which is just simply not the case.
Kandi's latest surge is due to the hype surrounding China's announcement of subsidies for electric vehicles. But what the bulls have missed is that there are in fact hundreds of identical EV makers in China that make cars which are nearly identical to Kandi. These manufacturers are already selling a far greater volume than Kandi. In fact, during the last quarter, Kandi only sold a few hundred EVs in total. The vast majority of its sales were for gasoline powered Go Karts. Other EV makers in China have a wide head start on Kandi, even though American stock market investors have never heard of them.
The latest developments with Geely and HangZhou will no doubt increase Kandi's sales of EVs into the thousands within a year or so.
But any statement that Kandi is the "only" company who will benefit from Chinese subsidies is 100% false. In fact, any statement that Kandi is a meaningful player in the Chinese EV market is 100% false. Investors who wish to confirm this can do so quite easily for themselves.
A link to prices and descriptions of literally hundreds of identical vehicles from different manufacturers can be found here on Alibaba. These descriptions are in English. In addition, beyond these there are even hundreds of additional makes and models which are listed in Chinese only. Additional searches on Baidu (BIDU) or even Google (GOOG) will reveal the same thing. Those who are interested can simply paste in the search term "电动汽车". The performance specs for these vehicles are nearly identical to the very generic vehicle made by Kandi. The production capacities for these hundreds of manufacturers in China is often larger than Kandi's. And the prices of these vehicles is consistently in the same range as (or even lower than) Kandi's.
This directly contradicts the repeated statements of the Kandi promoters that Kandi is unique in China the way that Tesla is in the US. It is simply a convenient hyperbole which helps to boost the stock.
The second reason why Kandi refuses to hold its gains is that Kandi is starting to become an obvious stock promotion scheme for Kandi to sell stock at higher prices.
Whenever the stock spikes, it is only because of promotional articles and well timed press releases from Kandi. Each time it seems that Kandi then issues millions worth of stock and the price immediately begins to plunge.
We have now seen the same exact game three times in 2013 alone. And we just saw it again last week.
We saw this in January when Kandi announced Geely news just in time to extend the maturity of millions of dollars in warrants.
We then saw it again in June when Kandi's share price soared by 100% to $8.50 following two press releases and several hyper promotional articles. The promotion and ramp up in the stock coincided perfectly with Kandi's need to issue equity immediately thereafter. Kandi had $25 million in debt coming due the following week and only $3 million in cash. After Kandi issued $26 million in stock plus millions of warrants, the stock quickly fell back to around $4.50. The seemingly "transformational news" quickly became irrelevant after Kandi had the money in hand.
Now we have seen it again in September. Once again, Kandi soared past $8.50 on a series of promotional articles and a press release. This was no different than in June. The stock had previously been trading at just $5.08. On September 20th, Kandi once again took advantage of the fortuitous share price spike to file an S3 registration statement covering over a million warrants which will result in over $5 million of new money to Kandi. The strike price on the warrants was $5.40, such that without a convenient stock promotion, the warrants would not be exercised and Kandi would not take in the $5 million. As in the past, now that Kandi has their money, the stock has quickly begun to plunge. The stock has already fallen by as much as 20% from its recent high and on very heavy volume.
The point is that every time the stock surges on major news, it seems to coincide with Kandi extracting money from an elevated stock sale. And every time Kandi gets it money, the stock price fades almost immediately.
Evaluating the recommendations from Kandi bulls
Authors Art Porcari, Harris Goldman and Tom Konrad have now written over 30 articles on Kandi between them.
Art Porcari himself has now written 19 articles on Kandi and has never written an article focused on a single other company. He is solely focused on this single stock. Mr. Porcari previously ran his own brokerage firm and his financial involvement with Kandi and its management dates back roughly to its reverse merger more than 5 years ago. In a previous article, I documented Mr. Porcari's regulatory violations where he misled investors by providing inaccurate information to imply a "short squeeze" in order to inflate the value of a stock. I will leave it to readers to determine for themselves if this is relevant to the present.
On June 24th he wrote an article that made the most bullish claims for Kandi yet, stating: "Kandi Technologies' Recent Multi-Billion Dollar Coup Creates An Avis ZipCar Times Ten"
As always, it was the prediction of a short squeeze that would make this investment payoff for those who quickly bought shares of Kandi. The stock surged (as always) and the very next day Kandi issued $26 million in stock. Management at Kandi should certainly be grateful for this timely publication of the "Billion Dollar Coup" analysis. But as soon as Kandi had their money, the stock price began to plunge. It settled below $4.50 within weeks.
Again on September 17th, the former brokerage owner predicted that an epic short squeeze would send Kandi soaring. Kandi did in fact soar based on the information provided by Mr. Porcari. Within 3 days, Kandi was filing an S3 for warrants which otherwise would not have been exercisable. Over the past 3 days, we can already see the 20% plunge from the top.
Mr. Porcari's relationship with Kandi management and his initial ownership of stock dates back to the time of their reverse merger. But Mr. Porcari has publicly stated that he has not taken compensation at any time for promoting the stock over the past few years or for introducing various investors to Kandi.
In actuality, investors who have bought on the back of Porcari articles have done extremely well for themselves - just as long as they get in early and then dump their shares within a few days of the rise. If the institutional buyers cited by Mr. Porcari have been selling on the back of each pump, then this series of successful articles has become a formula for them to make millions of dollars every few months. But those who simply hold their shares find that their gains all consistently evaporate within a few weeks of the pump.
Back in June, Mr. Porcari had given assurances in comments on Seeking Alpha and Yahoo! Finance that somehow he knew who was holding the majority of shares in the float and that these were very firm hands that would not sell below $15-30. He also assured us that Kandi would never consider issuing stock at prices below $15.00. Some were therefore surprised when Kandi issued $26 million of stock at $6.02 and the "firm hand" investors clearly dumped their stock. After hitting a new high for the year, Kandi quickly plunged by 50%.
But again, the pattern to notice is that Mr. Porcari tends to write his articles when the share price is low. The share price then leaps up accordingly, which is very fortunate when Kandi needs to raise money. As a result, buying on the back of a Porcari article has been profitable, but only if one sells very quickly thereafter.
This contrasts sharply with Harris Goldman.
Mr. Goldman has written a total of 4 articles on Seeking Alpha. As with Mr. Porcari, he has never written about any stock other than Kandi, despite his 40 years of investment experience. Likewise, of the 70 comments he has written on Seeking Alpha, he has only once referred to any company other than Kandi. Mr. Goldman does not appear to be a financial advisor, but repeatedly "advises" investors to buy and hold Kandi.
Unlike Mr. Porcari, Mr. Goldman tends to write on Kandi when enthusiasm is already high. We then see a brief surge in the share price followed by a sustained fall.
It is clear from his articles that Mr. Goldman adamantly refuses to even acknowledge any new findings on Kandi which might be negative. This has been the case even when such findings are brought forth by others who have been long the stock. We can see from his comments that when authors such as Tom Konrad are bullish, then their analysis is described as fantastic. When their analysis reveals problems, then it is denigrated as garbage.
This is a very dangerous and costly way to invest.
Mr. Goldman's last article came on September 24th and the statements he made appear to have caused a tremendous surge of around 40% in the share price. The stock quickly hit a lifetime high following his article. Unfortunately a number of the facts given by Mr. Goldman which drove the share price were entirely false.
It is likely that some investors may still be relying on this inaccurate information. Once it is better understood, we are likely to see continued selling.
Mr. Goldman clearly states that:
Yes, Kandi is now in the unique position of taking full advantage of this news by being the only "mass marketer" of affordable electric cars (EV's) in China. No other EV manufacturer can match Kandi's pricing and availability in China.
If it were really the case that Kandi were to be to sole recipient of billions of dollars in Chinese government subsidies, then Kandi would be a $100 stock immediately. But instead, there are clearly hundreds of other manufacturers who make low speed vehicles which are nearly identical to Kandi's.
In describing the winners and losers from the newly announced subsidies, Tom Konrad names a few of the more obvious candidates such as Chery Automotive, Shandong Shifeng Group and Hebei Yu Jie Ma. Hundreds more can be found on Alibaba or by looking at the official list from China's MIIT. Alternatively one can use Alibaba, Google or Baidu to runs one's own search.
Mr. Goldman also states that:
Currently Kandi has the largest EV manufacturing capabilities in the world.
Again, this is a statement that is demonstrably inaccurate, but it boosted the price of the stock considerably. Aside from the other manufacturers in China, we already know that companies such as GM (GM) (with the Volt) and Nissan (OTCPK:NSANY) (with the Leaf) have much larger capacities. Even BMW is already on par with Kandi. And this does not count the numerous other manufacturers in China.
After briefly exceeding $9.00 for just minutes due to this inaccurate information, Kandi began a steady descent on heavy volume. By Monday, the stock closed at $7.78, near the low of the day.
Prior to his article, the stock had been in the $6's, so it seems safe to assume that this is where the stock will return once the true facts are more widely disseminated.
Likewise, past articles from Mr. Goldman have delivered projections which can only be described as fantastic. He had previously given us some simple math to state that Kandi will quickly be doing $2 billion in sales.
Everyone is clearly entitled to make their own assumptions, but this one is clearly very extreme. For reference, in its most recent quarter Kandi sold just $12 million of total product. Of this, $7.1 million (59%) of sales were gasoline powered Go Karts (not EVs). In fact EVs accounted for just $2 million in sales. This would equate to just over 300 vehicles for the quarter. The ramp-up to $2 billion will have to be very step indeed - Kandi would have to increase EV sales by 1,000x!
It also means that Kandi is expected to be among the sole suppliers of EVs in China, despite the existence of hundreds of competitors.
Such hyperbole in an article can be good for a quick share price pop. But we can see from his past articles that the typical response to putting out information that is either outlandish or inaccurate has been that the share price quickly begins to sell off after the initial surge.
The author with the best track record on Kandi has been Tom Konrad who writes for Forbes and www.altenergystocks.com, as well as Seeking Alpha. Tom is a money manager who has written a number of positive articles on Kandi.
On September 18th, Tom provided an update at Forbes regarding the new subsidies. Unlike Mr. Goldman, Tom made it a point to highlight the fact that the benefit of the subsidies would in fact apply to numerous manufacturers aside from Kandi.
Tom was clearly bullish on the prospects for Kandi when the stock was at $5.00. But by the time his article was republished on Seeking Alpha a week later, Tom noted the following:
The day after this article was first published, Kandi issued a press release detailing the benefits of the new subsidy policy on its operations and received significant coverage in the US press. The stock soared as high as $7 over the next two days, and I sold my position.
Over the past few years, Tom has been focused on making Kandi into a profitable trade rather than on encouraging US investors to keep chasing the stock to ever higher levels. While Mr. Porcari and Mr. Goldman have only ever written about a single stock, Mr. Konrad writes on a wide variety of alternate energy stocks and lately has developed a bias towards graphene stocks.
We can see that Tom has evaluated the opportunity and views Kandi as a good long opportunity, but one in which it is wise to take profits when possible. This is especially true given the unique risk factors due to Kandi's history.
Tom had previously written an article entitled "Rent this EV Stock and Enjoy the Ride, But Don't Keep it Too Long". Investors who paid attention to this article profited handsomely within weeks. In the article, he evaluates the lengthy investigation into these misrepresentations made by a website called the Sharesleuth. Investors should keep in mind that these comments come from a Kandi bull who was long the stock at the time. This demonstrates that it is important to avoid the temptation to ignore new developments, just because you don't like them. Mr. Konrad notes the following:
With this in mind, I set out last month to parse through the novel-length and rather dense Kandi-bashing articles to demonstrate that there was nothing there for investors to worry about. I failed, and instead found myself doubting the judgement and/or honesty of Kandi's management. I'd like to emphasize that there is no proof of wrongdoing, but investors who wish to hold on to their money don't have the luxury of waiting until their suspicions are confirmed beyond a reasonable doubt.
Mr. Konrad also goes on to point out the following:
My distillation of the Sharesleuth revelations is:
A number of people made millions off Kandi's reverse merger, and these people were never properly identified in the company's SEC filings.
From 2009 to 2011, Kandi significantly overstated the number of EVs it sold. After Sharesleuth showed that Kandi's claimed sales of EVs were not supported by the number imported or sold by Kandi's dealers, the company quietly revised its financial statements, revealing that many of its claimed EV sales were actually sales of gas powered vehicles.
He also notes that it was "unlikely" that the false EV sales were a mistake.
He concludes with:
After weighing the evidence, I no longer consider Kandi a long-term hold. That said, my concerns about management are long-term in nature, If you still own Kandi, enjoy the ride, but this hot EV stock should be a rental, not a purchase or even a long term lease.
Not surprisingly, the Kandi promoters were furious at this expression of skepticism. Even though he disclosed that he continued to maintain a reduced long position., the message boards (and the Kandi private yahoo forum) as well as a Seeking Alpha reprint lit up with criticism that Mr. Konrad had either become a shill for the shorts or else was trying to talk down the share price so he could load up cheaply.
Mr. Konrad wrote his prior article in June, just before the stock hit all time highs. Both his enthusiasm and caution were well advised because within weeks, the stock had fallen by 50%. It remained at those levels until September.
His September article came out when the stock was still in the $5's. But within days Mr. Konrad was selling at $7.00. It was an enviable trade.
The goal here is to make profits, not to hold on and repeatedly watch them evaporate. On this latest trade Mr. Konrad likely netted about 40% by getting out at $7.00 and he does not seem concerned about the fact that he did not call the exact top. If the past is any guide, investors with a long term interest in Kandi will certainly get another opportunity to buy the shares at below $5.00 again.
Does recent "news" really justify the share price rise ?
Over the past few months, Kandi has put out several press releases which occasionally moved the stock. These press releases were often interpreted and amplified by the authors above which helped make for dramatic (albeit temporary) gains in the share price.
As we can see, these articles often contain a mix of opinion, bias and even factual mistakes.
The most important thing is to determine is whether or not the information contained in the press releases actually merited a doubling of the stock price.
It is also instructive to see how the release of these news items coincides with Kandi's desire to immediately raise money by selling stock.
Press release #1
On June 5th, Kandi issued a press release stating "Kandi-Geely Co-developed Pure Electric Sedan Receives Approval from Ministry of Industry and Information Technology of China"
Prior to this news, Kandi had closed at just $3.92. It should have been apparent to most that Kandi needed to issue equity in the near future. Kandi had $25 million in debt maturing in 2 weeks and only $3 million in cash. . In many of the preceding days, the stock had only traded 20,000-60,000 shares. In short, it was at too low of a price and too illiquid to for Kandi to issue stock. Fortunately the press release and (several positive articles) caused the price to rise as high as $8.50 within days. It also quickly traded as many as 18 million shares in a day - a jump of as much as 1,000x from prior levels.
The problem with this announcement is that the MIIT list referenced by Kandi included literally thousands of other vehicles made by hundreds of other manufacturers. None of these competitors saw any reason to put out a press release and none of their share prices showed any reaction whatsoever . For example, shares of Geely Automotive were basically flat to slightly down on below average volume that day, even though the sedan being referenced was co-developed by Kandi and Geely.
The press release simply mentioned that Kandi had been included on the same list that nearly every other manufacturer in China had been included on. In fact, the real surprise would have been if Kandi had NOT been included on this list.
This "news" was therefore a non event simply because the exact same "news" applied equally to hundreds of other companies in China.
After the initial spike, the market seemed to figure out the nature of this non event. The stock quickly gave up more than 30% of these gains, trading down to $6.06 within days. It was falling each day and looked set to fall further.
Press release #2
On June 20th (just 1 week before selling stock), Kandi issued a second press release. "Kandi Technologies Plans to Deploy 5000-10000 Pure EVs in Hangzhou for the Initial Launch of Public EV Sharing System by the End of 2013"
With just days to go before issuing stock, this press release caused the stock to jump by as much as 27% to as high as $7.68 on substantial volume. It was curious to see this reaction given that it was actually a repetition of news that was announced in 2012 and with an original size of up to 20,000 vehicles.
If anything, this news should have been a letdown. But it was portrayed as a massive positive and the stock soared.
In any case, this "news" was in reality a non event. But the timing of it was very coincidental.
Many readers are apparently not aware that just 2 days before releasing this latest news, Kandi had just signed an engagement letter with FT Global to raise money via a stock sale. A copy of the engagement letter between Kandi and FT Global is dated June 18th.
This is very important. The financing had already been planned just before releasing this "news". It was NOT the case that Kandi was simply opportunistic on the back of a fortuitous rise in the share price.
Press release #3
As I wrote in my first article, Kandi had over $25 million in notes and short term payables coming due just days later, beginning on June 24th. Meanwhile Kandi had just $3 million in cash. I felt that predicting an equity offering was quite easy. And in fact, on June 26th Kandi issued $26 million in stock.
The date of the equity issuance was almost exact to the day as to what was predicted. In addition, the amount of money raised was also almost exactly what was predicted. This was not a coincidence by any means.
But as an immediate response to my article (and before issuing the stock), Kandi assured investors of the following in a press release:
- Kandi's debts had already been repaid (despite having only $3 million in cash)
- The previous S3 from the company wasn't used until more than 1 year after it was filed
The conclusion was clear: Kandi didn't need money and wasn't about to issue stock.
As should have been expected, the share price rebounded on these assurances.
But within 24 hours of that press release, Kandi was issuing $26 million in stock.
Kandi had hit a new high of $8.50. But as soon as the company had its money, the promotion ended and the stock fell by almost 50%.
Press release #4
This takes us to the latest press release in September, which immediately preceded the filing of the S3 to register the warrant shares.
On September 19th, (just one day before filing the S3) Kandi issued a press release stating Kandi Technologies Announces Chinese Government Issued 2013-2015 Subsidy Policy for New Energy Vehicles
This press release mentions nothing specific to Kandi and the news should have been entirely expected by anyone who follows the electric vehicle market in China. It was simply codifying what had already been expected by the entire market. As before, the same news applies to hundreds of other EV makers in China.
Once again, this was a non event. As a result, any boost to the share price is certain to be short lived.
But the press release (and the positive articles shown above) caused the share price to quickly double, hitting a new all time high.
Once again, all of this excitement came just in time for Kandi to file an S3 registration statement covering the sale of over 1 million shares. The 992,731 shares under the $5.40 strike warrants could not be issued unless the stock was above this price. Kandi would not have been able to receive its money and the warrant investors would not have made a penny.
But with the stock at over $8.00 exercising the warrants was no problem. Likewise, with the volume at these levels, selling those shares will be easy for the warrant holders. As a result, Kandi takes in millions in new money while the warrant investors make millions in profits.
As an aside, the $5.40 strike warrants were originally struck at $6.30, but this strike price was reduced to $5.40 as described in the S3. In addition, the S3 registers more shares under warrants that were given to Placement Agent FT Global. These can be sold starting in January 2014.
Those who feel that "this time is different" for Kandi in September should realize that the volume in June was massively higher than it is now. And in fact, the news in June appeared to be far more substantial. Yet the June surge didn't hold for more than a week or two and Kandi returned to below $4.50.
Kandi shares have now become less of an investment selection than they have become a simple vehicle for promotion and speculation. Investors no longer need to concern themselves with the longer term prospects for Kandi. All they need to know is that occasional bursts of promotion and press releases will consistently provide a sharp (but brief) rise in the stock. We have seen this same pattern repeatedly during 2012 and 2013. Those who get in early do well - as long as they get out quickly.
Someday Kandi may actually turn itself into a substantial producer of EVs. But over the past few years there have been repeated false starts in the US, in Italy and in China. Each of those appeared to be the tremendous inflection point for Kandi. When the details were announced, they were heavily promoted and the stock price rose - but only briefly.
The biggest beneficiary of these brief promotions is clearly Kandi when it continues to issue new shares which would otherwise not be issuable.
The recent 80% run-up in the share price is in all respects identical to what we saw in June. Kandi and its promoters issue "news" and analysis which causes a spike in the share price. This all happens just in time for Kandi to raise more money through share sales. But because the reality behind the press release consists of nothing more than non events, the share price will quickly fade once the promotion falters.
Some may wonder: how does this all work ?
Ironically, Art Porcari explains in this article how firms with financial "muscle" can move a stock higher and then short it on the way down. This is what happened in previous days, but it seems that the intention was to move the stock price UP as opposed to DOWN. According to Mr. Porcari:
Depending on how he feels the volume will come out, he might buy a as many as a few hundred thousand shares and take the stock up 4 or 5% quickly buying ahead of the momentum traders who tend to chase it up. Then he quickly reverses his position by taking the shares he just bought and start pounding the bids. This serves him a dual purpose.
Mr. Porcari had previously stated that he had institutional "muscle", such as World Equity, which could place orders for as much as 500,000 shares without even asking the permission of their clients. That is muscle indeed and could certainly achieve the 4-5% move that he describes above. Momentum traders then do the rest. When these early buyers begin to sell (at a nice profit), the share price invariably plunges.
For those who have a brokerage background and the "muscle" to do so, this type of induced volatility can be the formula for creating millions on profits.
As I stated at the beginning of this article: I have been in and out of China for more than 20 years. I have owned and driven numerous electric vehicles in China. If Kandi could truly become a player in the EV market in China, I would be the first one to buy the stock and I would be eager to tell the world why.
Kandi is still selling just a few hundred EV's per quarter. There are literally hundreds of other low speed electric vehicle makers who already sell far more EVs in China than Kandi. What we have seen is just another pump and promotion which has allowed Kandi to raise millions more from selling its stock. It has also allowed a small group of investors to pocket millions in trading profits.
Those who to play the press releases and promotions can certainly find a way to profit from the swings in enthusiasm. But as we have seen, the hyper promotions only tend to last for a few days or weeks. So knowing when to sell is the most important key to making money (and avoiding losses).