RedChip - Tomorrow's Blue Chips Turned Pink
posted by The Traveller on Sunday, February 13, 2011
RedChip Companies is an investor relations firm that has become very popular with small cap Chinese stocks. The majority of the 31 clients that are currently listed on RedChip's website are Chinese, among them several names that are listed on a national exchange - such as AMCF, BEST, CDM, CELM, CHNG, CIL, CWS, DHRM, KGJI, LLEN, LPH, NIV, RCON, and ZSTN - but also many OTC-quoted stocks as BFAR, CBLY, CECX, CHCC, CHNC, CMDI, LTUS, SGAS, WEMU, and WKBT.
RedChip began in 1992 as a small-cap research firm, and praises itself as having discovered Starbucks (SBUX) and Nike (NKE) back in the days before they became 'blue chips', accordingly the firm's slogan is "Discovering Tomorrow's Blue Chips Today"! Its website contains enthusiastic testimonials by several past and present clients, and also impressive looking performance charts. And those very charts prompted this research article.
Longwei Petroleum (LPH) is an oil storage operator in Shanxi province that is currently trading at $2.49 or a measly P/E-ratio of under 4. RedChip's performance chart reveals that their campaign for the stock began in December 2008 when it was trading at $0.20 and the stock is "up 1875%" at $3.95, the all-time high reached on November 8, 2010. Funny enough their campaign started exactly at LPH's all-time low, the stock has never traded below 20 cents, I call that perfect timing. RedChip's performance chart ends in November 2010, so it doesn't show the 37% drop in the last three months.
Another example of misleading performance charts is the one for Kingold Jewelry (KGJI). According to this chart, RedChip started their campaign at a price of $8.00 and notes "up 49%" for performance as the stock reached a high of $11.95 shortly after. The KGJI chart presented ends in December 2010 when the stock was trading just below $7.00, however with RedChip's logic the performance is still "up". KGJI - still a client of the firm today - is currently trading at $2.84, significantly below the $8.00 start price.
I began to get really interested in RedChips track record, but I couldn't find a list of their past clients on their web presence. But anything that has ever been published on the internet can still be found with a little effort. So let's have a look at yesterday's "blue chips for tomorrow", and how they passed the test of time.
Tomorrow's Blue Chips as of August 22, 2008: (Reference Link)
Out of RedChip's 32 clients from August 2008, 10 (31%) have now been demoted to the pink sheets. 5 stocks (16%) are trading significantly higher now with ZAGG being RedChip's biggest success. I haven't checked how much of the 10-fold rise can be attributed to RedChip's work, depends on for how long ZAGG was a client, but let's not nitpick here as anyone who purchased the stock during RedChip's reign has a big winner now. However, those are the exception from the rule. 24 out of 32 stocks (75%) are now trading significantly lower, and more than 40% (13 stocks) have lost more than 90% of their value - 15 stocks (47%) are trading at a share price below 10 cents, 10 stocks (31%) at or below a penny.
Tomorrow's Blue Chips as of August 20, 2007: (Reference Link)
The performance for RedChip's 2007 clients could hardly be worse. Yes, there is one stock - China Kangtai Cactus (CKGT) - that is not red, but it's up only a measly 8.5% in the past 3 1/2 years. Everything else is blood red, 55% of RedChip's clients (12/22 stocks) have lost 90% of more of their value, 50% have been demoted to the pink sheets, 10 stocks are trading below 10 cents, and 6 stocks (27%) under a penny.
Tomorrow's Blue Chips as of August 31, 2006: (Reference Link)
And for 2006 the returns don't look any better: 19 out of 20 stocks are red, and a whopping 80% have lost more than 90% of their value. You find 65% of those wannabe-Blue Chips (13 stocks) on the pinks today, 60% are trading below a penny or have since de-registered their shares for a total loss.
I must confess that I would have never expected such a disastrous picture. Had I thrown some darts on all the available ticker symbols, I am sure I'd found a group of stocks that would have outperformed RedChip's past clients by a wide margin. To be fair, most of those names have probably suffered their steepest losses after the investor relations campaign has ended, but that is not the point here. A company that hires an investor relations firm wants to get their story out to the world, to retail investors, brokers, hedge funds and institutions. In the end the performance of its business will determine the performance of its shares. If there is no story worth telling then a credible IR firm should probably not take the account in the first place.
Now that we have seen what happened to all those "blue chips for tomorrow" of the past, I am getting a tad concerned about the names on RedChip's list of current clients. Is it reasonable to assume that the company has learned from past mistakes and screens potential new clients for quality before they take on the account? Time will tell, I guess.
It would be interesting to compare RedChip's performance to its competition from other investor relations firms. Maybe someone wants to take over that task, I am seeing red already from all those -90% results.