How Rick Pearson Moves the Market

The biggest problem for most Chinese Small Caps on US exchanges is that they are struggling to get their story out to the investing world. There are so many profitable, high-growth companies in this space which are trading at a significant discount to their domestic peers, a discount so steep that it is not justified by the much higher risk to invest your money in China alone. Reasons for this are plenty: lack of analyst coverage or coverage only by second tier brokerage firms, bad investor relations, lack of transparency for business developments and projections. But the main problem is that too few people tell their story to a greater audience.

Rick Pearson is one of those few people out there who has the platform (TheStreet.com) and the background (education, language, location) to pick up some of the compelling stories and he is doing that quite frequently. When Pearson publishes an article about a thinly traded Chinese stock on the OTC Bulletin Boards, this stock is usually reacting instantly, and massively!

During market hours on January 11th, Pearson posted an extensive interview with Subaye Inc. (SBAY) CFO Jim Crane on TheStreet.com. Actually it was more like an infomercial for Subaye than an interview. Subaye is a tiny Chinese media company that likes to compete and compare itself to the big players in the industry. The stock traded on the OTC/BB on very low volume, the average daily volume of the last 20 trading days was just 8190 shares.

After Pearson's article was published the stock surged from $16.00 to $21.75 to close with a 35.9% gain for the day on 4x average volume. The following day the run continued and the stock reached a new all-time high at $26.00, a whopping 62.5% surge within roughly 24 hours, to close at $23.50. And on January 13th, SBAY reached an intraday high of $24.50 when heavy profit-taking pushed the stock down to $20.00 again on the heaviest volume in its history of more than 84,000 shares.

All this craze faded pretty quickly and in February we saw SBAY shares trading mostly in the $12-14 range on microscopic volume until the company announced a surprise move to Nasdaq a few days ago when volume and volatility picked up again, though the stock never again reached the $26 level nor the record volume after Pearson's plug. Now the stock is back to where it was on January 11th, closing yesterday at $16.15.

On March 2nd, Rick Pearson featured OTC/BB-traded Sino Clean Energy (SCLX) as "a stock with multi-bagger potential". The company is in the liquified coal business and its stock is heavily diluted with options, warrants and convertible debt. SCLX was trading range-bound between $0.37 and $0.43 on a low average volume of 233,000 shares (less than $100k dollar volume) in the two weeks before Pearson's story appeared. That changed instantly when the article was posted and the stock exploded intraday from $0.40 to close at $0.53 for a 32.5% daily gain. Volume was 3.36 million shares or almost 15x average daily volume.

As with Subaye, the craze lasted several days, SCLX took out its former 52-week high and the peak was reached on March 8th with an intraday high of $0.95 (a 137.5% gain since Pearson's plug) on record volume of more than 6.2 million shares. The stock is still holding up very well now, it closed at $0.77 yesterday (March 18), so if you followed Rick Pearson's recommendation you are still sitting on a 90%+ gain now.

It might have been encouraging for Rick to see how well his SCLX article worked out, because just a week later he plugs another widely unknown, thinly traded OTC/BB stock on his TheStreet.com column. China Carbon Graphite Group (CHGI), a tiny Chinese maker of carbon and graphite products (duh!) has been introduced to his readers as "the next stock to skyrocket".

Rick Pearson's CHGI article was posted on TheStreet.com on March 9th before market open, but we can safely assume that a version of his piece has been floated already during market hours on March 8th as that day saw a huge spike in volume and price, and the article mentioned a current share price of $1.90 when CHGI closed above $2 that day and never again fell below that level. The volume of 664,000 shares on March 8th was by far the highest volume in CHGI's history, staggeringly high if you consider that the stock has traded less than 10,000 shares in five of the previous seven days.

On March 8th CHGI's share price surged 34.2% from $1.55 to $2.08, but to be fair let's take the $1.90 mentioned in the article to measure the effect of Pearson's plug. March 9th saw a turnover of more than 2 million shares or about 150x average daily volume, and the stock closed at $2.70 for a 42.1% gain from the $1.90 level. It didn't stop just there as CHGI climbed further to reach an all-time-high of $3.50 on March 16th which translates into a 84.2% for everyone who followed Pearson into the stock at $1.90.

Either the craze is fading now or the stock is hit by heavy profit-taking as the share price came down by more than one dollar in the past two trading days alone to close at $2.45 on March 17. We will see if it goes back to where it started like Subaye or if it can settle at a substantially higher level as Sino Clean. Time will tell.

So what do we learn from all of this? Tiny OTC/BB-traded stocks can be moved massively by a single article in the right spot. And that move can and will eventually fade if it is just based on that one article. What every investor should do at all times and no matter what is: do your own due diligence! Read all the available filings, get your own picture of the company you want to invest in, be comfortable with what you are holding for a reason, your very own reason. Then you can benefit from moves like those induced by Rick Pearson, otherwise you might be jumping on the famous bandwagon when it is already hot and sticky up there.