Adrian Sciberras'  Instablog

 I am looking into momentum trading, the following are some stock ideas most of which have the following similar characteristics which I believe offer highest upside potential at the time of writing.

 

* Daily trading volume over 500,000 per day and signs of institutional sponsorship.

* Shares in issue is less than 100m and preferably below 50m floated.

* Average trading volume has been increasing in the past year.

* Many characteristics of a typical Canslim type of stock (visit investors.com)

* Stocks trading within 5% of their 52 week or all-time high.

* In most cases, the price of company is over $50.

* Growing earnings, positive expectations, industry in favour.

* New company with some new hot product / business.

 

Here are the ideas (ticker, current price and suggested entry price):

 

OPEN - $105.00 - (enter immediately below $110)

CMG - $285.13 (enter immediately below $290)

MCP - $74.22 (enter immediately below $75)

SOHU - $95.38 (enter immediately below $100)

APKT - $72.50 (wait and enter above $75)

DECK - $94.27 (enter immediately below $95)

LULU - $93.28 (enter immediately below $95)

 

Riskier picks:

 

QLIK - $27.03 (enter if it stays above $27)

PANL - $52.84 (buy below $48, but make a stop $45).

IPGP - $56.76 (buy and stop at $53, and buy more over $60).

 

 

My initial recommendation date 04/17/2011 - target is buy and hold (until the S&P goes to 1525 later this year).

 

Disclaimer: Make a stop loss of $3 from your initial purchase (entry) price. I am not responsible for your losses. At the time of writing I own shares (long position) in NFLX, MCP, CMG and planning to enter some (but not necessarily all) mentioned stock positions in the other recommendations in the next 72 hours.

CGA describes itself as a humic-acid based compound fertilizer manufacturer and supplier from China.

As you will notice, the name itself is already fishy, notice the company name.... "CHINA" and "GREEN". The company clearly wants to capture attention, in reality the real name of the company was Discovery Technologies, Inc, which was some obscure venture capital firm I presume. 

The company is getting superb results in its business, thanks to its small float, earnings are growing rapidly. The company capitalized on a capital injection from new shareholders and a recent flotation on the Amex. 

Now that the company is beating its estimates and raising guidance, Wallstreet strongly rewarded the company with a boost in its share price. And so far so good, everyone is happy.

What not everyone is aware is that amongst this ecstatic moment, insiders will find the opportunity to sell their 'bonus' shares. Did you notice that the past week the whole float was traded? A company that was trading at $3-4 and no one bothered too look at a few months ago, is now trading at $17, and everyone wants to get in.

The company is richly valued - according to latest shareholder count available, it has a market cap of nearly $400m, more than 10x Sales and trades at a PE of 20+ which is a high multiple (but bullish investors say the multiple is justified due to its potential superior growth rates).

Agreed, but what naive investors are not looking at is that the company has a potential of dilution of around close to 9m shares - 6.4m "free" shares given to friends and investors a year ago prior to the listing, and another 2.3m shares to be approved by shareholders in the coming month under the 2009 stock option investment plan.

All in all, these shares will dilute the current shareholders by 27%. The company engaged in wise techniques to find a way of how not to report the 6.4m shares, and the 2.3m shares are not yet accounted because they still have to be approved at the AGM.

All in all very wise from CGA's insiders.

Furthermore, Mr Li Tao, CEO of CGA was given 3.2m+ shares as a bonus money on top of his miserable pay package of $128,000. With the latest surge, Mr Tao is sure to have sold some shares to secure his financial position for life particularly now that the lock-up agreement expired.

On a technical analysis perspective, the company is trading at the upper trendlines (see chart), and volume is very high - signs of a climax top. The agro industry is lacking, and I have seen too many similar runs end up busted like what's going to happen to CGA - see COIN, AOB, BBCZ.pk 

I am not saying this company is not great, or badly managed, but I believe any long-term investors should read and study their SEC filings to uncover the truth behind this company's real future intentions. The current stockholders will be diluted to the insiders - remember the mastermind - Discovery Technologies, it is not a "real" Chinese company as they want us to perceive, but rather another US venture capitalist firm.

If the company is making a good profit why doesn't it return it to its common stockholders, why does the company want to enlarge its stockholder base so much, why does it give free shares?

Does no one think the 3.2m free MAKE GOOD for 2009 shares to the CEO is not an exageratedly excessive pay package - at current market value - these shares fetch $54m which is more than the current company's turnover!!!!

Conclusion: This stock has a great PR initiative so to maximize the return to the insiders. They don't care about you future bagholders.

DNDN is committed to raise money. Judging by the annual data of their financial statements, they burn around $70m - $100m per year. That is $25m per quarter. The company has no revenues and they are increasing their job postings. The company right now is probably technically bankrupt as it has only $12m in assets as at 31st March 2009, and despite having a huge cash balance they are all due to be repaid, unless they manage to "convert" the debt into shares which is the idea of the bondholders. Someone has to pay for all this. And thanks to you "long" stockholders, they manage to do this very easily.

The very recent "Provenge news" pumped up the price so high that the debt holders went short of the stock and cashed out on 2.1m shares (they can never lose, because the conversion price was set at $10, so they only had to play the exact price so as to profit wisely, i.e. by selling over $20). They cover the short by paying $10 per share. The shares are now in public hands. The company raised $21m from this issue, just enough to survive 1 more quarter. Read their SEC filing 8-K dated 4th May.

Secondly, insiders managed to distribute stock over $20 last week and they unloaded over 1.4m+ shares again, the shares are now in the hands of the public, again! At an average cost of $5-7 the insider profited over $21m at the expense of the public. Dr. Gold benefited most. He has secured his financial freedom with a small piece of news, which is difficult to interpret, it's rather a play on words.

Thirdly Friday's announcement of a public offering is the string that broke the camel's back. They are going to further dilute the longs, but once again, someone must have taken a net short position between $24-27, just after the news broke out. This short position will be covered at the offer price, again here the shares will be immediately transferred to the public. There is no big institution who is willing to buy the stock, not at this price! Big retail investors who have big money always work in collusion with market makers to increase their capital and profits, and they rarely lose, they distribute stock they don't own before they buy it back! Some uninformed press leaked out the news that the offering was priced @ $19.20 so MMs worked their way to hold that price in a tight range. Longs are holding the stock since the mid-20s and are hopeful that this is the ceiling. They read every piece of news and are so scared of their and want to believe every piece of positive news? Why? Because there is lack of news, momentum traders have already left the stock. Now its in the hands of the MMs who are controlling. The analysts have done their work by getting everyone interested and pumping it. Why was no one pumping the stock when it was at $5. It has traded for a year at that price but no one seemed interested, it was building the base for this news. The really good analysts would have recommended you to buy shares when they were cheap! Not after they are 500% up! 

Selling was obvious during the whole week particularly on Friday 8th, as MMs were mostly sellers on the day, but they supported the market on purpose at $19.20+ and gave false hopes of an impending ceiling. But I tell you it was another day of manipulation. Because bottoms dont occur with volumes of 7m+ shares. Volume should have dried up by 80%, but the day of Friday shows clearly that the market was feeding shares. If you have watched the ticker on Level 2, you will have noticed big buys at $19.20 and big sells as the stock went above $19.50. The MMs were buying and selling but on balance, they were distributing shares to the public.

What about the offering price? What will it get? The company does not care about its shareholders. Now that insiders have sold, their interest now is to secure their financial future, i.e. their monthly salaries and bonuses. Since the company has no trading history, and the FDA still is 1+ years away (ability to generate cash flows is very far away), the company cannot survive without raising capital. So they will accept any price pre-conditioned by the short-sellers. Obviously they will negotiate the highest price possible, but they will accept any price even if it is below the market price.

Disclosure: I trade for myself, I am not involved in the hedge fund industry, I do not represent any firm, and the article above is not a recommendation to buy or sell shares. Please do your own research before you enter any position. I own May and June puts in DNDN.