Hedge Funds And Insiders Are Betting Big On NQ Mobile: Are You Getting The Big Picture?

Nov.22.13 | About: NQ Mobile (NQ)

Our lives require regular maintenance such as running errands and paying bills. Many of us have regular doctor visits to make sure that we are keeping our bodies fit.

As investors we must also take the time to make sure that our investments are still in line with our goals and expectations. It wouldn't be smart to invest in something, only to never check up on it. With so much information available nowadays, let's look at some things that investors should be watching with regards to their investments.

1) Fundamentals: Every quarter, investors have the opportunity to go over the financial reports. In these reports, investors are able to see the type of direction companies are headed (for better or for worse).

2) Insider Trading: All over the world insiders of companies are buying and selling shares. While you shouldn't base your entire investment decisions off of what insiders are doing, watching what they are doing can be very helpful.

Peter Lynch said it best when he said, "There's no better tip-off to the probably success of a stock than people in the company putting their own money into it. Insider selling usually means nothing, and it's silly to react to it...but there's only one reason that insiders buy: They think the stock price is undervalued and will eventually go up."

3) Institutional Holdings: Institutions, hedge funds and many other firms are required to update their holdings every quarter. These filings can offer some interesting insights as to which stocks are being accumulated and which stocks are being dropped.

Funds Are Buying NQ Mobile

Watching what the big guys ("smart money") are buying and selling can be a good indicator for longs or shorts. With a number of teams and analysts at their disposal, institutions and large funds have access to data in which they are able to perform in-depth analyses to decide which investments can maximize their profits.

Does this guarantee that they will make money? No. But it does greatly enhance their probability of doing so and puts them in a better position than most retail investors. So which funds have been buying big stakes in NQ Mobile (NYSE:NQ) lately?

Name Date Shares % Change
Toro Investment Partners 11/12/13 7,591,695* NEW
ChinaRock Capital Management 11/18/13 8,360,010* NEW
Oberweis Asset Management 11/19/13 9,000,000* +100%
Altimeter Capital Management 11/15/13 9,497,535* +2,000%
Total:   34,444,240  
Click to enlarge

*Shares represents five Class A Common Shares

As we can see, these funds have been busy acquiring big stakes in NQ Mobile, as they took advantage of the allegations made by Muddy Waters ("MW") a few weeks ago. These funds now own close to 23% of the Company.

So what exactly do they love about the Company? Here is what Jim Oberweis told Bloomberg news after doubling his stake in the Company.

"When you look at the business prospects, their position in the marketplace, their ability to start to monetize and most importantly, the valuation, the valuation, the valuation, the business begins to look pretty compelling."

It must be noted that Oberweis's China Opportunities Fund has beaten all competitors in 2013 and over the past five years. The good news for shareholders is that NQ Mobile now represents the largest position in five of six Oberweis funds. After beating competitors over the last five years, I wouldn't want to be betting against him. Oberweis continued by saying, "It says something that they released their earnings on time. I don't think Pricewaterhouse (NQ's auditor) would let them if they had significant concerns."

Seeing a big influx of funds building positions in NQ Mobile can only add to investors confidence. Not only that, but the Company currently has a $35 million share repurchase plan in place along with top executives buying shares with personal funds. These events along with many others, should propel the stock to huge gains over the next little bit.

Big Money: The Good And The Bad

No matter how big or how small your investment is, it's important to make sure you do your own proper due diligence with stocks that you are interested in. Never invest blindly because somebody told you about a "hot stock."

Depending on the circumstances, it can take awhile for some funds to build positions in stocks (especially those with low volume). Nevertheless, when funds do obtain large positions, you can bet the farm that they are confident and will do their utmost to make sure their investment stays on track.

Because funds have a vast amount of money at their disposal, their involvement in most stocks is usually welcomed with open arms to shareholders. However, it's not always a positive thing, especially when they are selling.

Just take a look at Longbow Securities which on October 31, disclosed that it had amassed an 8% stake in NQ Mobile. That same day, the Company filed another report saying they liquidated their stake. Shares of NQ mobile fell after that announcement.

I know what your probably thinking right now. What makes me think that these funds won't pull a fast one on the Company like Longbow securities did?

First, these funds would have already sold out by now if they were Longbow securities. Second, Longbow securities saw what happened and took advantage of the situation for a quick gain (shares aren't as volatile now as they first were). Third, many of these new funds did their due diligence by going to China and meeting personally with management. These are a few reasons why I believe these funds are in it for the long haul. After all, shares were trading well above $20+ before MW's hit job came out, and they know that.

When fund managers are having a bad quarter and underperforming, they will usually dump underperforming positions and buy into stocks that have trading momentum. Some momentum examples this year include: Netflix (NASDAQ:NFLX), Tesla Motors (NASDAQ:TSLA), Amazon (NASDAQ:AMZN), Groupon (NASDAQ:GRPN) and Vipshop (NYSE:VIPS).

When this takes place, the likelihood that funds are selling some stocks at an inopportune time can be pretty high. This leads to volatility in stocks and hurts those investors who happen to be on the wrong side of the short term trade at that time.

New Analyst Price Targets

On November 20, 2013, Topeka Capital Markets reiterated a Buy rating on NQ Mobile with a price target of $36.75. So how did they come up with this figure? While there are many of things to take into consideration, I believe the easiest way is to look at the forward price to earnings ratio. If we take the standard market approach and apply a 25 forward P/E to NQ Mobile, and multiply that by 2014's expected EPS, we get $36.75. (1.47 [2014 EPS] X 25 [Forward P/E] = $36.75)

A couple of week ago, I wrote an earnings preview on NQ Mobile and explained why I believed that shares could triple. Looking around the market we can see that a forward P/E for most companies is in the 10-40 range with the average being around 25. Looking at some of the bigger Chinese companies we can see that their forward P/E is towards the high end around 32-33.

  Trailing P/E Forward P/E PEG Ratio 2014 Sales Growth Estimates
(NYSE:QIHU) 169.1 39.6 1.28 56.40%
(NASDAQ:SINA) N/A 36.1 2.78 28.80%
VIPS 131.6 36.4 1.43 68.00%
(NASDAQ:SOHU) N/A 33.7 N/A 23.90%
(NASDAQ:BIDU) 33.1 23.6 1.41 37.10%
(NASDAQ:YY) 54.44 25.4 0.77 54.20%
Average 97.1 32.5 1.09 44.73%
NQ 104.6 10.1 0.32 60.00%
Click to enlarge

Looking at the table we can see that NQ Mobile is clearly undervalued as shares currently sit at $13.92. The Company has a forward P/E of just 10.16. This is 3X lower than most other Chinese companies along with its PEG ratio. Does this make any sense for a company growing revenues more than the rest? No, but given the markets lack of understanding, it does allow plenty of room for profits going forward.

If we give NQ a forward P/E relative to its Chinese peers, NQ should be valued around $47.77 (1.47 [2014 EPS] X 32.5 [forward P/E] = $47.77). This would represent upside well over 300% for the stock. While some might think that Topeka's price target is a little high, I feel that it their target is quite conservative.

Conclusion

If you are anything like me, you invested in the stock market for one particular reason. To make money. By doing your due diligence about a company you are taking the necessary steps to put yourself in the best possible situation.

Looking at insider trading, stock ownership and the fundamentals of a company will give you a great leg up on other investors. I've written several articles about NQ Mobile here and here explaining why I like the Company going forward.

As a reminder investors should watch for big changes one way or the other in overall stock ownership. A change by a number of institutions could signal that something significant has changed about the company and its future prospects. Also, don't ignore the fundamentals of companies. Fundamentals will always tell the best story about a company's long-term chance for success.

Knowing who you can trust in the market is very important. That's why I'm providing you with my track record and other particular stocks that I like. The link provided will show you all of my picks, how they have fared, and where I think they will be going in the near future.

Disclaimer: Investors are always reminded that before making any investment, you should do your own proper diligence on any stock mentioned in this article and to make sure you are comfortable with your investment strategy. Have a great day and as always, I look forward to hearing your thoughts or questions that you might have.

Disclosure: I am long NQ. 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.