There is an excellent story in Seth Klarman's book "Margin of Safety" about market crazes. As the story goes:
There is the old story about the market craze in sardine trading when the sardines disappeared from the traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, "you don't understand. These are not eating sardines, they are trading sardines."
It should be clear to anyone involved in the markets that China Finance Online (NASDAQ:JRJC) is a "trading sardine." If one needs confirmation of that simply type in "$JRJC" on Twitter or StockTwits and see how many people are trading it. I suspect that when the traders trading JRJC stop and take a bite of it, as always happens, they will be sorely disappointed. I have covered just some of the fundamentals in a previous article, so I will not rehash those here, even though there is more to the story.
The three highest volume days in JRJC's trading history have come in the last week.
Source: Yahoo Finance, Personal Analysis
Looking at the table above one notices two things. The first should be that it seems highly unlikely that a company would have the three highest volume trading days in its history occur back to back to back. The odds of that occuring are very low. (The same pattern was present in Plug Power (PLUG)). And two, this pattern has emerged in this name before (in October 2007).
The next question is obviously what happened in October 2007 and what the consequence of it?
It was another hyped deal. And the pattern was almost exactly the same, eerily similar in fact. On October 1st JRJC announced a partnership.
China Finance Online ("CFO"), a leading financial information, data and analytics provider in China, today announced it has formed a strategic alliance with China Center for Financial Research of Tsinghua University ("CCFR"), one of the most reputable universities in China, primarily in the area of financial database development.
The days after this announcement were the second and third highest in dollar volume traded in JRJC's history.
Source: Yahoo Finance, Personal Analysis
So how did the buyers of that announcement of the partnership fare? As it turns out not well.
This is not the first time such an event has occurred in the shares of JRJC. First in 2007 on the news of a partnership, and again in 2014 on the news of a partnership.
When traders eventually take a bite of the JRJC sardine they will likely not like what they taste. It has happened before.
The last time we saw a similar story as the one that is playing out in JRJC right now was PLUG. The trading dynamics in JRJC are very similar to PLUG's in March.
On March 8th LongShortTrader published a post about "anomalous trading activity" in the shares of PLUG power. The YTD high in PLUG power came just two days later. Since then PLUG shares have fallen by around 40%. The trading in JRJC is strikingly similar to the trading in PLUG back in March.
The Fundamentals of The Sardine
Eventually someone will bite into the sardine. What will they taste? Well it all comes down to fundamentals. Seeking Alpha contributor "3D Analytics" believes that JRJC is a rapidly growing, undervalued company that is worth $20/ share and will pre-announce record earnings any day now. I disagree.
While I don't believe that there are only human traders trading this, there are some. They likely believed that the news that JRJC announced is a game changed. The press release reads:
China Finance Online Co. Limited ("China Finance Online", or the "Company"), a leading web-based financial services company that provides Chinese retail investors online access to stocks, commodities and wealth management products, today announced that it has launched China's first independent web-based securities trading platform, "Zhengquantong ("Securities Master")", on the leading financial portals it operates, www.jrj.com and www.stockstar.com. Securities Master is the product of a new strategic partnership China Finance Online has entered into with the largest brokerage firm in China, CITIC Securities Co., Ltd. (SHA: 600030) ("CITIC"), to seamlessly integrate China Finance Online's state-of-the-art, web-based architecture with CITIC's robust trading and settlement system.
That sounds bullish. And if that's all you read then it would be bullish. As Citron Research pointed out on Twitter, however, that is not the only story. Citron quoted from the annual report:
Competitors with larger customer base and greater market visibility, such as Alibaba Group (NYSE:BABA), Tencent Holdings Limited (OTCPK:TCEHY) and Baidu, Inc. (NASDAQ:BIDU), recently launched their respective internet-based financial platform which provides financial services similar to that of Yinglibao. In the future, banks and fund management companies may also enter this market and offer similar services to customers. Because of such expected influx of new market entrants, competition in this industry may become more intense. Many of our new competitors, especially Alibaba, Tencent and Baidu, have greater financial and marketing resources than we do. Thus, we may not be able to compete effectively or provide a compelling service alternative for potential customers. Our financial results may suffer as a result.
This clearly sounds more bearish. 3D Analytics also believes that JRJC will pre-announce record earnings any day now. While this may happen, I am skeptical. JRJC pre-announced record revenues on May 9th and reported the Quarter on June 19th. That means that they pre-announced 29 days before the call. JRJC has historically reported second quarter earnings during the second week of September. If they pre-announced it at the same time as before they would have pre-announced already. While I cannot say for certain whether they will or will not pre-announce earnings, it would appear that they would have already pre-announced.
While JRJC is clearly not trading on fundamentals at the moment, it will eventually and when that happens I believe the stock will fall substantially. It has happened before.
Disclosure: The author is short JRJC.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long puts on JRJC.