No Random Walking!

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Stocks to watch: 

The month of May has turned out to be the best month ever for me. More importantly, I am starting to understand, under certain circumstances, how to invest in small-sized companies based on their intrinsic values and how to take advantage of market downturns.

IF - that's a big IF - the fundamental about a company is known, technical analysis plays a secondary and complementary role in all aspects of the investment decision making process.

Now the media is starting to tell the facts about China Finance Online: Link to A Smart Bet on China's Stock Market

However I don't think now is be the best time to buy the stock! The best time to buy it was a couple of months ago when it was around $14. Even though the valuation is still reasonable now (forward p/e: 20-25), the share price could go either way. I don't like what I heard from the conference call. 

1. The cancellation rate of 40-50% for previous subscribers. Some of those subscribers were people who paid $400 per month for two-year period.
2. The guidance for Q2 is actually quite weak. Management's explanation wasn't very clear. "Being conservative" may not be the only reason. (see point 1).
3. Most of the new subscribers probably ordered "low-ended" products.
4. The Q1 income wasn't as impressive as it appears: $880,000 of which was due to currency exchange gain.
5. With the Q2 earning out and the market in high level, there isn't much stimulus for JRJC to go higher near term.

The wild-card is the potential brokerage business, but it won't have an impact until Q3.

Another bearish sign: The media are pumping it. Where were they a couple of months ago?

[End of the Project JRJC, Phase I]

The following are comments I made to a Fox Business article published yesterday: Beware this Hot China Stock: China Finance Online at Emac’s Stock Watch | Fox Business , which contains so many factual errors.

RandomWalker Says: [Comment is awaiting moderation.]
May 29th, 2008 at 11:23 pm

Please use the latest and correct facts! The second part of the article sounds like it was copied from an article written six months ago and the earning power of China Finance Online has increased tremendously since then! According to the earning report issued yesterday, the revenue for Q1 2008 has risen to $11.06m instead of $5m, and projects to be around $58.5m [for the year] instead of $20m as you said in the article! Those are big errors, intentional or unintentional! The company has $80m+ in cash and expects to earn $1.09-1.26 per share. The forward p/e is around 20, not unreasonable for a China company that’s in a fast-growing market. Plus the company owes a brokerage license in Hong Kong and may get one in mainland China as well. Anyway readers please read the latest quarterly report and conference call transcript. — an investor who is living in China

Analysts have been bashing JRJC for months now and I have been defending it all the time. Its share price has risen from around $13 two months ago to $23+ now.

[Update on SIGM] Should have sold SIGM. I violated three rules [again]: (1) ignored sell signal on chart; (2) hold before earning report; and (3) failed to discount buying signals created by analysts' comments! 

Link to Ivanhoe Energy to acquire oil sands assets from Talisman Energy: Financial News - Yahoo! Finance

Probably good development for the company's long-term prospect, but the news is bad for the stock ... until next company event. Sold all shares for the following reasons.

1. Feared dilution did happen. (C$40m for about 5% of o.s. shares). The dilution price is only 25% above the 10-day average prior to the preliminary agreement.
2. Realization that the company will still need to raise cash to develop the oil sands, possibly resulting further share dilution.
3. Oil price went down sharply today and may go down further.
4. Investors may sell the news.
5. Bad chart pattern.

The trading volume was very high. Obviously other people are seeing something different.

In other news: China Finance Online reported its Q1 earning statement [strangely at 2pm EDT!]. No surprise. Guidance for the year raised. Share price jumped [for now].

Online business/product/services search company. Small capitalization (71M). Quarterly revenue of only $8.8m, but that's 50% over previous quarter. Losing money. Low float (12m). Nice chart. But can you buy enough shares? If you do get enough shares, can you handle its volatility?

In the meantime, curiously waiting for earning reports from Sigma Design (today) and China Finance Online (tomorrow) ...

But the day-after wire service stories miss the larger point about the Hu-Medvedev meeting. What was most important is what didn't happen.

... there is one thing that would demonstrate to everyone looking that our relations had truly entered a new era, where trust finally supplants suspicion. They need to sell us oil and gas — lots and lots of it — at a reasonable price.

Link to What China Wants from the Russians - TIME

The charts provide signals to buy or sell. However not all signals are equal. Some guidelines on how to avoid false signals:

1. Try to understand the driving force ("the story") behind the change of strength. Otherwise, i.e., when no other information is available, I recommend to use the following rules:
2. Avoid signals that accompany the sudden rise in price, especially after a sharp drop in price. Another turn of down-trend may occur (like aftershocks following a major earthquake), see example 1 below.  In charts this often displays an acute angle in price (or a V-shaped pattern). Gapping up/down is a special example of this pattern.
3. Signals that occur after a consolidation period are more reliable. In charts this often displays an obtuse or straight angle (or ____/ pattern). 
4. Before a true up-trend starts, the daily price range (High-Low) often decreases significantly as well as price change from previous day (P_t - P_t-1). See example 2 below. 
5. To be conservative, you may start to buy only if a W shape is formed in price or RSAP line AND the trigger line has turned green. Likewise, you may start to sell if a M shape is formed and the trigger line has turned red.

Examples of false and true signals: Example 1, Example 2 .

From nationalgeographic.com:

There is little reason to believe Chinese officials were aware of the July 2007 report, or that it would have made much difference if they had been.

"We had certainly identified the potential of these active faults," Ellis said. "But that information was effectively locked in an academic journal."

Link to Study Warned of China Quake Risk Nearly a Year Ago

I've been anticipating this to happen for many days now, but it finally occurred today: Ivanhoe Energy (IVAN) broke a multi-year resistance of $2.40 and did so in huge volume (IVAN two-year weekly chart). With a market cap just around $600 mil and multiple contracts and projects being negotiated in Canada, South America and Africa, I believe that the coming-out party will be underway soon for this HTL (heavy-to-light oil upgrading) technology company.

Am I way too optimistic? May be so. After-all, often-impatient investors have been disappointed many times in the past. The company has pitiful revenue. The technology has not been tested in production scale. Oil price may plunge. Hopeful contracts and projects may never materialize.

But ... it's exactly the kind of stock that I love. Plus, the story is there. The chart pattern is there. The CEO has a good track-record of making deals. Go for it!

[See Also Related Posts:]

1. Link to Take Advantage of Resistance and Support Levels
2. Link to World Heavy Oil Reserves