Chinese Small Caps Go Mental (HEAT & CREG)

Been really disciplined since I have started the blog, I had kept all losses small. That changed on Wednesday, I didn’t follow my plan and got squeezed on a dramatic  share price spike.

HEAT is a Chinese micro cap ($30m). The spike last Tuesday was caused by earnings, the company lost $30m for the year, but forth quarter cash flow was flat. The stock reacted very positively to the news, increasing by almost 100% to $5’s. The company has lost a huge amount of money over the last few years, and has a mere $12m in the bank. Although cash flow was neutral for the quarter, sales are plummeting and inventory is sky high. They will be lucky to stave of bankruptcy (or a huge dilution) this year.

My plan, based on other Chinese stocks reacting to earnings, was to sell the news. Other Chinese stocks up on earnings have faded well (FMCN & DEER). There were two differences in HEAT, it is not a strongly suspected fraud and it was much smaller.

My plan was to sell the morning spike, hold for a couple of days and pick up a 10-20% gain. What happened was a disaster.

As per the plan, I sold the morning spike, this was rushed, instead of giving it 15 to 30 minutes to setup, I sold straight away at $5.6’s, the spike continued I justified doubling up my anticipated position (@$6.40), av $6.0, the trade started working, not holding $6, fades looked set to continue. Then the turnaround came, new highs were hit at 25m, I should have been taking my loss here, particularly given the move was on big volume. The rest of the day was torture.

I started to get paranoid. I re-read the 10k, had I missed something, was the business going to turnaround? But, why was the stock not re-rated yesterday, when the 10k was released? And why was volume 4 times greater today?

At the end of the day the stock began to collapse. Closing in the 7’s, the next day the volume was gone, I covered half of the position near cost ($6.14). I will hold the rest for expected fades over the next week or two (which I'm not getting!!).

So what caused this dramatic price action? The dramatic fades from $9.50 show it was nothing more than price manipulation. $15m shares traded on Wednesday, the company only has $5m shares outstanding! The entire float was bought and sold three times over in one day! Remarkable how the SEC cannot prevent this sort of stuff from happening.

HEAT set off a whole heap of other China plays. No announcements, just pure speculation.

  

We grabbed some CREG April $2.5 puts for 30c, 2 hours later the share price had faded 70c and we were up 100% on our position. We sold at .85 a couple of days later.

HEAT mistakes:

Did not take loss (at day highs – 6.50 break)

Did not wait for trade to setup - traded to early given 

Traded twice (this added to the decision not to take the days loss – using up two day trades)

Position size was way too big (micro cap & dismissed possibility of a pump occurring)

Ignored volume on the break (this meant it was a definite sell!)