Verge Of Bankruptcy
If you're looking for proof that we are in the midst of a stock
market bubble, look no further than VisionChina Media (
). The stock has produced a stunning 1300% return over the last 3
months! Clearly Wall Street isn't being fazed by its deteriorating
fundamentals, such as a string of losses, decreasing revenues and
negative cash flows. Instead, a brazen group of momentum traders -
with a gross disregard for valuation models - has turned VISN into
the hottest stock of the 4th quarter. This type of fevered trading
is emblematic of a market gone wild, flooded by cheap money and a
shortage of common sense.
Nothing about VISN has improved, except the stock
For most of 2013, VisionChina Media was a comatose $2-$3 stock,
with measly market cap of about $10M. With already one
reverse-stock split in hand, the stock was destined to be delisted
from NASDAQ and slowly fade into OTC oblivion. In fact, it was
averaging less than 20,000 in daily volume. Then suddenly all hell
broke loose on October 7th! That day, the stock vaulted 85% on no
news whatsoever, with more than 1 million shares changing hands.
And that's on a stock with barely 5 million shares outstanding!
VISN remains a mess of a company
VisionChina Media operates a network of TV displays in Chinese
subway cars and buses, where it bombards commuters with its ads (or
as the company bluntly puts it: "compulsive viewership inside
enclosed spaces"). What can be better as an investor than getting
in on the ground floor of a burgeoning industry, with a captive
audience, in a country quickly embracing capitalism? Although the
pitch is compelling, the sad reality is that VisionChina Media
isn't the ticker to bet on! Regardless, the company is hoping that
if it can keep talking about how attractive the overall market will
become, it can distract investors from the company's own inability
to capitalize on this opportunity thus far.
What can explain this insanity?
VisionChina Media now has a market cap of more than $150M. That
means $140M of "wealth" has been created over the last 3 months by
traders, without even a peep from the company itself. To understand
why, let's first look at few plausible explanations:
A takeover attempt?
While there was early speculation that Focus Media Holding could
be interested in acquiring VisionChina, this rumor never panned
out. The same goes for any talk of a take-private offer from one
of the company's insiders. Nothing has materialized despite the
fact that the company could have been bought 12 times over by
now, given its ridiculous volume in Q4 alone. Clearly, if someone
wanted to make a move, they could have done so already. We
therefore have to rule out any M&A activity as a possible
catalyst for this surge.
A short squeeze?
True, VISN is now nearly impossible to short. While this may give
the impression of a scarcity of supply, it's actually the result
of a dramatic increase in the number of new short positions.
According to NASDAQ data, the number of shares held short
skyrocketed in early October, from 9,298 to 554,528 today. (By
the way, my heart goes out to the courageous investors who are
still short VISN. There's no doubt they will ultimately be proven
right, but they might go broke long before that day finally
An earnings surprise?
In November, the company reported earnings slightly worse than
the one lone analyst following the stock had forecasted. So it
stands to reason, an earnings blowout is not what is fueling this
stock's meteoric rise.
A resolution to a pending legal case?
You'll remember that in 2011 a New York judge ordered the company
to fork over $60M to former investors for breach of contract.
Basically, VisionChina Media made the first payment on an
acquisition, but failed to make the last two after taking
ownership of the company. Oops! The judge has even held the
company in contempt of court. And yet to this day, the company
hasn't paid a dime. Instead, the VisionChina Media claims to be
"negotiating" with the plaintiffs. Most likely, management knows
that the court is powerless to enforce the ruling, since the
company has no American assets and is incorporated in the Cayman.
But being in clear violation of U.S. law hasn't stopped investors
from trusting VisionChina Media with their money.
Lately, small-cap Chinese stocks have been recovering from a
guilty-by-association sell-off that occurred two years ago.
That's when several of their peers were exposed as reverse-merger
pump & dumps, built on nothing more than fraudulent
accounting and the naivety of American retail investors. Now that
the dust has settled, perhaps the Mr. Market is finally realizing
what gems the surviving companies truly represent? Yes, a string
of equally beaten-down Chinese companies have been riding a wave
recently (e.g. Daqo New Energy Corp - which shares a common
director with VisionChina - tripled in value during the same
period). However, none of these run-ups have even come close to
being a 13-bagger like VISN. Therefore, it's likely that VISN's
price isn't purely a reflection of sudden and renewed confidence
in Chinese accounting standards.
Keep in mind, this is a company that has diluted shareholders in
the past, hasn't turned a profit since 2009 and has a trailing
gross margin of -40%. Over the last year, it burned through $27
million in cash. Plus it has that legal obligation to pay over
$70M in damages and court fees, or about twice the amount of cash
on hand. It has another $31M in debt. And its book value is less
than $4. Enough said!
? In a country not known for its transparency, it is hard to
determine if there are any insiders profiting from the recent
volatility. But from the absence of Form 4s filed with the SEC,
we are forced to assume insider ownership hasn't budged and still
represents about 12% of existing shares. Then again, this isn't a
company that believes in prompt filing of SEC paperwork. Remember
that VISN wasn't able to file their last annual report on time.
Despite announcing their non-audited results to investors on
April 8th, it took nearly 2 months and a few deficiency letters
from NASDAQ to finally file their GAAP financials.
An analyst recommendation?
There's only one analyst still covering VISN and they currently
have a 'sell' recommendation on the stock. In fact, they are
expecting the company to lose almost $8 per share this year and
about $5 next year. Clearly, the company's prospects are far from
The only people that are writing about the stock are equally
perplexed about the market's reaction. For instance, SA
' and '
' wrote a pair of well-reasoned articles questioning the rally
when the shares were still trading in the high single
Most likely, chartists and day traders are completely enamored by
this stock. In its most recent run, VISN never dropped below its
50-day or 200-day moving averages, while the MACD line didn't
cross back below zero. However, these technical indicators are
totally detached from reality. The true test of a bull market run
amok is the prevalence of the 'greater fool theory'. It doesn't
matter if the company is overpriced, as long as you can find
someone else to buy your shares at a higher price, why worry
about valuation? Well, VISN is the perfect type of stock to
inflate without having to worry about it bursting. It has little
analyst coverage, a small float, strong shorting constraints and
a lack of tradable options.
What could justify these exponential returns?
It turns out the irrational exuberance of momentum traders is
only plausible explanation of VISN's recent valuation aberration.
This type of positive feedback loop is predicated on the scarcity
of reliable and impartial information about the company.
VisionChina Media isn't quite the household name, even in China.
Compounding the problem is the foreign language barrier and its
complicated ADR structure, making it hard for investors to conduct
their due diligence. (Though if anyone can provide an alternative
explanation as to why the market is trading up this shady stock,
please feel free to share).
VISN could double again before market efficiency is
Sadly, there's no easy way to profit from this madness. Even
though most brokerages won't let you short a stock with a 3.88
beta, a few like Interactive Brokers are more trusting. But
unfortunately, they too have no shares to loan. In late September,
IB had about 60,000 shares available at a decent 5% rebate rate.
Indeed, those shares dried up in the October run-up and now their
inventory stands empty, with a prohibitive 80% plus loan rate, if
ever shares could be located (which I wouldn't recommend anyway).
On the arbitrage side, the stock belongs only to 1 ETF, a NASDAQ
small cap fund (PQSC), which means you would need to go long on 876
other stocks to be able to short the ETF, not a very practical or
Buyer and seller beware
Don't let the $30-or-so stock price fool you; VISN is a
penny-stock at heart! VisionChina Media has always been more
concerned about touting its company to investors than selling its
service to paying customers. Why the SEC or NASDAQ allows this joke
of a stock to keep trading is beyond me! While I suspect some sort
of price manipulation is taking place, without being in the loop, I
can't be certain. But one thing is for sure: VISN will eventually
fall and it will fall hard. And when the music finally stops, a
bunch of unlucky momentum traders will be left holding the bag!
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. 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.
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