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Hi Toro,
For whatever its worth, I thought Id let you know about my opinion on price action the last few days.
I think the short manipulation - naked block selling like we saw on friday close - has not really been evident in the last two trading sessions. Sell down has been calm and measured, with many day trading longs which set 12.00 limits now out of the stock.
It appears we now are relying on the 11.70 level which is both the bottom edge of the penant we have been in since the MW attack as well as a major technical threshold which we last held in November after three big sessions of sell down. Beyond that I see 10.30 and 9.30 as the next support levels.
Anyway, my point is given short manipulation is not evident so far this week I think there is a potential rally in the making off this important 11.70 level. This would be helped if there was a catalyst. The two that I have in mind is a release of your due diligence report, and an audit update on the 23rd dec annual meeting.
Obviously, the release and timing of such is your decision. However, I just wanted to let you know my 2 cents.
Toro Investment Partners December 10 at 8:40pm
Thanks.
Our view is that you build a stock through its top 20 holders, not its bottom 2,000. Note that there is a correlation between our arrival in China, the completion of our DD, and a sudden increase in top 10 holders, 13Gs, etc.
Hence, about half the float is not trading and in stable long-term hands.
While a shakedown to your levels might be painful in the short-term, maybe that's what's best in the long-term, since it's the bottom 2,000 little guys who are causing all the volatility.
That said, if you feel that the release of our report could be one of the two catalysts, we think you're giving us way too much credit. The first report was effective because it so strongly refuted the MW arguments. But at this point, everyone's read it, and incremental supporting evidence will not be impactful until big institutions are ready to buy. Institutions will not be ready to buy until there is a major third party confirmation of some sort, perhaps a large strategic investor, a monster buyback by the founders of the company or one of its insider investors, or the conclusion of the audit.
That is our current view.
LT-Investor December 11 at 3:34am
Understood and thanks.
Here are a couple of my thoughts:
Yes, I would definitely credit Toro for doing the DD which has helped many institutions to join the NQ roster. I for one am grateful for your efforts.
Still, I'm not entirely sure whether the need to have stable institutional hands is mutually exclusive to shaking out retail traders. The MW fallout succeeded in simply taking out one batch of retail traders and replacing them with another set. As someone who has been invested in the stock prior to the fallout I can attest to the rotation of retail followers on NQ message boards. At the end of the day NQ is a fast growing, small cap, technology, china momentum driven stock. It fits all the boxes to have a big day trader following.
I would also examine your assumption about how stable many of these institutions would be in the face of a decline to the 10.30 or 9.30 levels or lower. I imagine many of the new institutions bought in the 13 to 14.50 range in the days following the MW fallout. Would they be willing to tolerate 30-40% losses on this next leg down? Perhaps, although I would imagine some funds are more willing to trade out of a losing position than others (SAC for instance).
So far I have been assuming the downwards pressure we have seen is as a result of retail traders and stock manipulators but it is possible that institutions have been selling too. Like I mentioned the big market order blocks sold at Friday close have not been repeated so far this week, so perhaps the short manipulators are out and biding their time whilst one large holder continues an orderly sell down.
I agree with you on the need for an external trigger but other than the a clean audit, Id attach low probabilities for the scenarios you mentioned, unless you know differently.
For instance, I'm not sure management will engage in a monster buyback, in fact, personally I think they low balled their commitment, I recall $2mm within 6 months. However, I suppose if they did complete and announce it in time for the annual meeting that would be a positive.
I recall management had previously rejected advances from the likes of Baidu. I would imagine if peers were to make an offer or take a stake, we would probably have heard about it by now. Unless they're buying in the market which based on current price action looks unlikely.
I agree with your point that many new institutions will not be willing to invest in the stock till the audit gives the all clear. Given the EDU experience this took c 2.5 months so I think we should be expecting it mid to late January.
I did want to ask if you think management is likely to announce progress on the audit or corporate and management buyback at the annual meeting? I recall from investor day conference, no mention was made on any of those subjects. Do you expect the annual meeting to be any kind of catalyst?
Anyway, thanks again for all your efforts and insight.
Much appreciated.
Toro Investment Partners December 11 at 4:11am
Several of your assumptions are wrong.
Who knows about the rotation of shareholders, but that aside, just about everything you mentioned is not correct.
Nobody low-balled anything. These guys are not liquid. Think about it. What were they all doing before NQ? And since NQ, they have not sold a single share, not one of them. Do you have $3mm hanging around to buy stock with? That's after a similar commitment last year. I know this team and none is liquid. For most, their entire net worth trades every day on the NYSE. Henry drives a 2005 Audi and Vincent an Accord.
Which brings you to the interesting request from the founders to be able to pledge their shares. Why the hell would they do that? And who would lend them money with shares as collateral to buy anything other than, well, shares? Whether or not that's why they want to pledge their shares, you and I will never know, but the intent is as clear as day to us. The shorts make that out to be suspicious, but clearly, they have never worked in high finance before. There's not a lender on earth who would do that deal and let the cash loan go to an unspecified use. A lot needs to happen to get that approved, so we'll see, but that request at the AGM was bullish to us.
You're also wrong that if there were an offer, we'd have heard about it. Per Omar in earnings calls, the company has had plenty of interest in the past. Did we hear about a single overture? No. The company needs to make a takeout offer public, but we believe there's 0% chance of a takeout because the founders have definitively stated multiple times they're in it for the long hall. Much more likely is a minority investment, which nobody has to disclose.
Regarding stable capital, who sells to them if not the retail guys? SAC? They have like 500k shares left, insignificant.
We're absolutely not going to publish something for the sake of getting a few retail guys riled up and getting a temporary pop on the stock. That doesn't mean the right folks aren't hearing what we have to say. Our research is most helpful to sophisticated investors anyway, at this point. We're not explaining what a platform company is anymore, as we did in past articles. Now we're explaining how China's capital control laws work. It's not useful to everyone, especially retail guys.
We will never have a clue whether management will announce X, Y or Z so please don't ask again. It's funny how many questions like that we get every day. We are not insiders, just folks who've spent a lot of time looking under the hood. It would be illegal for us to know and we do not know nor do we have a clue. The investigation will be complete when Deloitte wants to end it, and we're not Deloitte. Typically these things take a few months, say 3 to throw out a round number.
AGM is not a catalyst, just housekeeping.
I've said more than I wanted, but I'll end by saying this type of volatility is normal for a stock attacked by a short seller. Look at the trading history for precedents. They all go through this for a while.
LT-Investor December 11 at 5:37am
Thanks for all the feedback. I understand where you are coming from much better now. By the way, please don't feel my intention was to contradict, it was meant more of an exploration/exchange of ideas.
I was invested in EDU, and FMCN prior to MW attacks and held on to both, so I am familiar with the trading history of precedents, although they were much smaller positions versus NQ.
From my examination of ONP, EDU, and FMCN it appears the stocks recover an average 85% of pre-attack basis within 3 months and I'd expect the same or better pattern to hold here notwithstanding the volatility in between.
Anyway thanks again for your input.
Much appreciated.