Hot China Stocks: A Bubble to Avoid

by: Top Textrader

The last few weeks may have signaled a possible top looming in Chinese ADRs and our zealous impulse to own them. I believe this because of the recent emergence of China related stocks that are the product of reverse mergers.

BARRON'S also mentions these companies this week and the astonishing fact that they are up a combined 25% since Sept. 18. These stocks are coming in droves onto the Nasdaq and AMEX and with plenty of high flying moves, enough volatility to lure even the most disciplined investor into nibbling just for a chance at a quick 100% daily gain.

Sporting trendy names such as China Architectural Engineering (RCH) and AgFeed (OTC:FEED)and having businesses focused in hot market sectors such as fertilizer, chemicals, infrastructure and technology, these stocks may be trading more on hype than earnings. I spoke with one of the firms offering investor relations for one of these companies and he said that most companies in this particular space should not be trading at more than 5 to seven times its earnings, yet the firm was already sporting a PE of 24.

Some names that have been extremely hot, other than those already mentioned, are China Battery (NASDAQ:CBAK), Shengdatech (OTC:SDTH), China Automotive Systems (NASDAQ:CAAS) and China Finance Online (NASDAQ:JRJC). Coupled with their rise to stratospheric levels has been explosions in volume as well. This becomes a giant red flag as most of these reverse merger companies reported insiders can sell shares immediately upon being listed. You really need to wonder who is buying and who is selling.So why not short sell these momentum plays. That also poses a problem because most of these securities have been volatile and the spreads they offer are broad --- some sporting nearly 50 cent differentials between the bid and ask at different points during the market day.Alas, what's a trader or investor to do? For me, I will remain on the sidelines while these Chinese offerings play out and wait for the investor class action lawsuits to follow their crash to earth.

Disclosure: none