China HGS Real Estate Inc (HGSH) is the latest mystery stock whose sudden activity has been a serious source of confusion. Based on my research so far, I believe HGSH is a horribly sketchy stock with numerous red flags, and that longs are about to experience some serious pain in the coming weeks. This post is only scratching the surface, so if you have any information on HGSH not covered here (especially regarding any promotional campaigns currently taking place), please contact me.
On Wednesday, 31st October, HGSH opened at $0.43 and creeped all the way up to a closing price of $1.1 on volume of around 200,000 (less than 0.5% of HGSH's outstanding shares of over 45M). For a Nasdaq-listed stock that kind of action is peculiar, but the real action came in the next two trading days, when we saw a huge spike in volume. On Friday, HGSH broke $3 before fading the rest of the day and closing at $2.25, still up over 400% from before Wednesday.
On both Thursday and Friday, HGSH traded over 1,000,000 shares. The stock barely traded at all for months before this, so what is the cause of this huge spike in price and volume? I have not found any material developments or news for HGSH that would explain such sudden interest in the stock. Think or Swim news and Google news are empty, there is nothing on HGSH's ihub board regarding any developments, and no SEC filings have been made in the past 3 days. Some argue that such a surge in price and volume is because the stock was previously "undiscovered" or "undervalued", and it has only just caught the attention of prolific investors independently researching the stock, but I strongly disagree.
A little probing reveals that HGSH has many skeletons in the closet. Unusually for a Nasdaq-listed stock, HGSH has a history of being promoted by penny stock newsletters, which strongly leads me to believe that the recent action this stock has had over the past 3 trading days is a result of nothing other than hype and manipulation.
Those unfamiliar with stock promotion should refer to this excellent article. Legitimate companies with real business operations do not pay stock newsletters huge sums of cash to send out thousands of emails urging people to buy stock; rather, they use their cash to invest in their business. The only reason stock newsletters are paid to promote a stock is because some large shareholder (usually a company insider such as the CEO) wants to dump stock on sucker investors. There have been literally hundreds of pump and dumps over the years, which I won't go into now - those interested can research the matter themselves. All you have to understand here is that when a stock is being promoted by newsletters that are paid in cash to bring in buyers (as has happened with HGSH) then you have to be very suspicious.
It's a good thing there are services like Stockreads and Hotstocked which archive promoter emails so we can look back at when certain stocks were covered by different newsletters. The first instance I can find of HGSH being promoted is on August 23 2011, by StockProfessors.com (see their promotional HGSH email here). According to their disclaimer, Stock Professors expected to be compensated $25,000 for covering HGSH, by a third party, EEA. Later, on August 28th 2011, the infamous Beacon Equity promoted HGSH for $10,000 cash (this time the paying party was Emerging Equity Advisors). On November 8th 2011 another stock promoter was contracted to promote HGSH this time for $25,000; then finally on November 19th 2011 yet another promoter group (Penny Stock Prophet) was paid $35,000 to promote HGSH. Refer to the following links: HGSH Stock Promotions - Page 2 (Hotstocked) and HGSH Stock Promotions - Page 1 (Hotstocked).
The stock newsletters who promoted HGSH back in 2011 have promoted a number of different stocks, all of which inevitably collapse and cause disastrous losses for naïve investors who were manipulated into buying them. Sometimes it takes days, sometimes weeks, or even months, but promoted stocks always eventually come back down. And indeed this is what happened with HGSH as it hit a low of around $0.25 in early October this year - roughly a 75% loss for anyone that brought it back in November 2011 when promotional emails urging people to buy were sent out. Now it looks like it's round 2 for HGSH, as the stock has gained a huge surge of activity on no news, just like before - only this time I don't yet know who or what promotional group is behind it all. But I predict the ending of this round is going to be just as brutal.
Those who believe in HGSH will claim that it is a real company with real business operations, unlike the vast majority of promoted stocks. If HGSH's unaudited financial reports are accurate, the company does have some assets and cash flow, but I am extremely suspicious of the real health of this company given their history of stock promotion and the area of business they operate in (Chinese real estate). A Chinese real estate stock would not be suspicious in itself, except when it happens to have a huge surge in volume out of nowhere and when it has a history of being promoted by stock newsletters. In my mere 2 years of experience in the stock market I have already seen numerous Chinese scam stocks which - just like HGSH - were listed on the Nasdaq exchange and had serious activity for a little while before being busted and exposed as scams. Some food for thought (these are just a few links, anyone who wants to research dodgy Chinese stocks can find dozens of articles and cases):
- Avoid Sketchy Chinese Stocks
- Are China's Real Estate Stocks the Next Great Fraud?
- Evergrande stock tumbles on fraud accusation
- Chinese stock scams are the latest U.S. import
- SEC Nails Another Chinese Stock Fraud Scheme (OTCQB:AUTCF)
So here we have a stock with unaudited financial reports, which was previously hyped up by corrupt stock promotion newsletters, which dropped 75% in the months since it was promoted, has numerous similarities with other China-based stocks that were revealed to be engaging in fraudulent practices, and has now spiked up hugely for apparently no reason whatsoever.
I will continue researching HGSH and encourage others to do the same. It would not surprise me in the least if a group like Citron Research, Muddy Waters or Infitialis were to find some pretty nasty details about HGSH if they were to spend some serious time looking into it. There's also a reasonable chance the SEC is going to investigate HGSH after its recent huge volume spike out of nowhere, if they were at all competent. The vast majority of major pump and dumps seem to go completely unnoticed by the SEC, but HGSH is listed on the Nasdaq exchange, which I believe makes it far more likely for its recent crazy price action to hit the SEC's radar. I also believe that anyone who is long on HGSH over the weekend risks facing huge losses in the event of an SEC halt or a negative report on HGSH being published by a major research group.
Disclosure: I am short HGSH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.