Chinese Reverse Merger Stocks

There is a ton of debate regarding reverse merger Chinese stocks. It is a relevant debate to Magic Formula investing as NEP, CNET, GPRC, JGBO, NEWN and SCEI from the list are all reverse merger stocks. Toss in LIWA, UTA, CSKI and CEU as other recent listees (not to mention CCME, which is not on the list as it is strangely categorized as "Finance stock", despite being in advertising) and you can see why we should care.

Here are a handful of stocks and how they have performed since November 8th:

Stock	11/10/2010	Current	Change
CCME	18.82	11.92	-37%
NEP	7.17	4.70	-34%
CNET	4.33	3.77	-13%
GPRC	3.86	2.94	-24%
JGBO	6.29	5.49	-13%
NEWN	7.19	6.22	-13%
SCEI	8.56	7.02	-18%
LIWA	11.9	10.16	-15%
UTA	5.42	7.17	32%
CEU	5.06	2.23	-56%
CSKI	8.54	4.65	-46%
CMFO	5.75	3.76	-35%
CHOP	6.05	5.57	-8%
VALV	6.62	5.76	-13%
Average			-21%

Down 21% on average. In the same time frame, the Russell 3000 is up 12%. So, I ask you gentle reader, are these stocks now a tremendous opportunity, or something to be feared? Obviously it is a prime driver in the fact that I have underperformed in the past three month.

It is easy to say, "don't buy". Certainly that feels safer. Certainly any of these stocks may go under a vicious short attack tomorrow. So if you're buying a stock for one day, you should not go there. But has the market gone a little "nuts" on these stocks? Should we be greedy when others are fearful?

Of course no one can know until we know. I have of course made my investments and have added a bit recently as the continual dropping of price makes a few of these difficult to resist. Now for a final bit of fun, here are some of the recent headlines:


Read All About It!

The China Market Has Gone Mad
U.S. Listed Chinese Stocks: Mistreated and Undervalued
YONG Too Risky?: China Watch Mail Bag
2011 China Investment Guide: Think Small
Reverse Takeovers: The Poor Man's IPO Deserves Some Respect
Why Chinese Value Stocks Get No Respect On Wall Street
China Small-Caps for the Attentive Trader
What Are the Top China Small Cap Picks of 2011?
With China Small-Caps, It's Shorts vs. Auditors
Shorting China Stocks: IPOs, Reverse Listings, All Or None Of The Above?
27 Red Flags for Chinese RTO Stock Investors to Look For
China's Companies Dump U.S. Stock Listings

A Few Statistics

As an actuary, I like to look at numbers and statistics. Here are a few of interest from my tracking portfolios:

Open Stocks with Initial Dividends > 2.5%

I should have bought GNI!!!

Date	Stock	Initial Price	End Price	Percent Change
1/22/2010	USMO	9.55	19.12	100%
12/31/2009	USMO	9.66	19.12	98%
2/26/2010	USMO	9.88	19.12	94%
1/22/2010	GNI	78.02	150.65	93%
2/26/2010	GNI	87.10	150.65	73%
3/25/2010	USMO	11.44	19.12	67%
6/29/2010	USMO	11.92	19.12	60%
12/31/2009	DLX	14.06	22.12	57%
4/23/2010	USMO	12.55	19.12	52%
5/28/2010	USMO	12.82	19.12	49%
1/22/2010	RGR	10.70	15.94	49%
9/24/2010	PRM	3.51	5.19	48%
3/25/2010	WTW	25.11	36.98	47%
1/22/2010	DLX	15.11	22.12	46%
7/29/2010	USMO	13.34	19.12	43%
2/26/2010	RGR	11.51	15.94	38%
9/2/2010	USMO	13.86	19.12	38%
4/23/2010	WTW	26.91	36.98	37%
5/28/2010	PDLI	4.40	6.04	37%
12/31/2009	VGR	13.09	17.80	36%
1/22/2010	VGR	13.41	17.80	33%
2/26/2010	VGR	13.49	17.80	32%
9/2/2010	VALU	11.46	15.08	32%
5/28/2010	MHP	27.38	35.98	31%
2/26/2010	RAI	24.74	32.22	30%
5/28/2010	RAI	24.83	32.22	30%
1/22/2010	RAI	24.87	32.22	30%
3/25/2010	RGR	12.42	15.94	28%
9/24/2010	USMO	14.96	19.12	28%
2/26/2010	DLX	17.31	22.12	28%
9/2/2010	UNTD	5.31	6.75	27%
9/2/2010	DLX	17.45	22.12	27%
6/29/2010	PDLI	4.77	6.04	27%
9/2/2010	PDLI	4.78	6.04	26%
3/25/2010	RAI	25.52	32.22	26%
1/22/2010	CHKE	15.36	19.38	26%
7/29/2010	VALU	12.17	15.08	24%
10/29/2010	USMO	15.61	19.12	22%
3/25/2010	VGR	14.71	17.80	21%
6/29/2010	CHKE	16.03	19.38	21%
1/22/2010	ELNK	7.59	9.13	20%
2/26/2010	CHKE	16.14	19.38	20%
9/24/2010	DLX	18.62	22.12	19%
10/29/2010	PETS	15.34	18.22	19%
1/22/2010	PDLI	5.10	6.04	18%
9/24/2010	UNTD	5.70	6.75	18%
5/28/2010	LO	69.50	82.15	18%
12/31/2009	ELNK	7.73	9.13	18%
12/31/2009	CHKE	16.46	19.38	18%
9/24/2010	PDLI	5.14	6.04	18%
2/26/2010	LO	70.03	82.15	17%
6/29/2010	DLX	18.89	22.12	17%
6/29/2010	ELNK	7.80	9.13	17%
3/25/2010	DLX	18.94	22.12	17%
6/29/2010	UNTD	5.78	6.75	17%
6/29/2010	LO	70.52	82.15	16%
2/26/2010	ACN	39.23	45.66	16%
10/29/2010	PDLI	5.22	6.04	16%
11/26/2010	USMO	16.70	19.12	14%
3/25/2010	ELNK	7.99	9.13	14%
12/31/2009	PDLI	5.33	6.04	13%
4/23/2010	VGR	15.74	17.80	13%
3/25/2010	CHKE	17.14	19.38	13%
3/25/2010	PDLI	5.35	6.04	13%
4/23/2010	PDLI	5.36	6.04	13%
5/28/2010	ELNK	8.12	9.13	12%
3/25/2010	LO	73.23	82.15	12%
10/29/2010	HRB	11.64	13.04	12%
7/29/2010	LO	73.69	82.15	11%
9/2/2010	CHKE	17.40	19.38	11%
10/29/2010	UNTD	6.09	6.75	11%
2/26/2010	PDLI	5.45	6.04	11%
4/23/2010	ELNK	8.25	9.13	11%
1/22/2010	LO	74.42	82.15	10%
7/29/2010	UNTD	6.22	6.75	9%
12/31/2009	LO	75.91	82.15	8%
9/2/2010	ELNK	8.46	9.13	8%
4/23/2010	LO	76.29	82.15	8%
10/29/2010	CHKE	18.14	19.38	7%
7/29/2010	GRMN	28.55	30.23	6%
5/28/2010	DLX	20.95	22.12	6%
11/26/2010	MHP	34.31	35.98	5%
1/22/2010	UNTD	6.44	6.75	5%
11/26/2010	PDLI	5.77	6.04	5%
9/2/2010	LO	78.82	82.15	4%
11/26/2010	HRB	12.62	13.04	3%
9/24/2010	ELNK	8.90	9.13	3%
9/24/2010	LO	80.30	82.15	2%
5/28/2010	UNTD	6.60	6.75	2%
9/24/2010	HRB	12.92	13.04	1%
11/26/2010	ELNK	9.05	9.13	1%
4/23/2010	CHKE	19.24	19.38	1%
9/2/2010	RTN	45.29	45.58	1%
4/23/2010	DLX	22.00	22.12	1%
9/24/2010	RTN	45.49	45.58	0%
12/31/2009	UNTD	6.76	6.75	0%
11/26/2010	LO	82.39	82.15	0%
11/26/2010	DLX	22.19	22.12	0%
10/29/2010	RTN	46.08	45.58	-1%
7/29/2010	RTN	46.29	45.58	-2%
5/28/2010	CHKE	19.70	19.38	-2%
11/26/2010	RTN	46.48	45.58	-2%
10/29/2010	LO	84.19	82.15	-2%
6/29/2010	VALU	16.17	15.08	-7%
3/25/2010	UNTD	7.30	6.75	-8%
10/29/2010	CMTL	30.82	28.03	-9%
12/31/2009	RTN	50.37	45.58	-10%
7/29/2010	HRB	15.08	13.04	-14%
5/28/2010	VALU	17.54	15.08	-14%
4/23/2010	UNTD	8.11	6.75	-17%
2/26/2010	HRB	16.56	13.04	-21%
3/25/2010	HRB	16.79	13.04	-22%
4/23/2010	HRB	17.47	13.04	-25%
4/23/2010	VALU	20.42	15.08	-26%

Average Gain by Market Cap Decile

This chart shows the average gain by decile of market cap (so far you would have clearly done better sticking to stocks $1b or greater):

	Values
Row Labels	Average of Percent Change	Max of Mkt Cap
0	11.8%	225,009
1	5.0%	11,370
2	15.0%	3,280
3	9.2%	1,685
4	9.0%	989
5	5.6%	731
6	4.8%	511
7	8.4%	379
8	3.0%	272
9	2.8%	190
10	8.9%	125
Grand Total	7.3%	225,009

Seasonality

Does it make a difference what month you buy your stocks? This one is kind of odd, as you hold for a year, you would not think it matters. But so far, the list has historically had more lemons in July and August, while June and February have been the good months to start.

	Values
Row Labels	Average of Percent Change	Average of Mkt Cap
1	9.6%	1,971
2	15.4%	3,414
3	11.1%	2,127
4	9.1%	2,154
5	9.6%	2,858
6	21.5%	2,905
7	-2.8%	1,838
8	-1.6%	2,486
9	5.3%	2,916
10	14.9%	2,855
11	-0.1%	2,804
12	7.1%	1,960
Grand Total	7.3%	2,513

By Letter

Here are the gains by 1st letter of stock symbol. Of course this is starting to get silly!

	Values
Row Labels	Average of Percent Change	Average of Mkt Cap	Count of Stock
A	0.3%	3,204	191
B	5.5%	1,416	106
C	5.4%	1,033	283
D	36.6%	2,283	122
E	10.9%	1,077	160
F	17.6%	4,262	143
G	11.9%	1,487	100
H	3.1%	1,874	142
I	4.4%	1,520	121
J	-6.4%	818	59
K	0.1%	1,868	126
L	-6.4%	4,564	78
M	14.8%	8,140	164
N	5.5%	3,579	87
o	-7.1%	767	46
P	4.3%	3,548	250
Q	73.7%	304	28
R	-9.7%	6,177	65
S	3.7%	1,094	148
T	15.9%	2,818	162
U	6.7%	712	129
V	6.0%	1,401	142
W	-5.7%	1,768	50
X	-48.0%	336	10
Z	-4.0%	179	6
Grand Total	7.3%	2,513	2918

"Q" has been a big winner (helped by QCOR) and X a laggard (hurt by XOMA?).

Number of Letters

Last one I promise. The number of letters in the stock symbol (note 4 is usually Nasdaq and 3 or less is usually NYSE).

Row Labels	Average of Percent Change	Average of Mkt Cap	Count of Stock
2	12.9%	4,741	106
3	12.2%	4,181	1125
4	5.4%	1,225	1628
5	13.6%	8,705	11
7	-52.5%	249	36
8	-63.5%	2,411	12
Grand Total	7.3%	2,513	2918

Note 7 or 8 usually would have a .pk or .ob at the end. Looks like you should runaway and hide from them. Two and three letters do the best, which is consistent with our finding of larger cap stocks out-performing.