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.

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13 Comments:

At February 14, 2011 11:56 am , Blogger aw said...

Sound do you think LPH is a dud? Seems like a promising industry. Lots of buzz, not only from Red Chip, on this one. I got in at about 2.1, so the price is still a decent profit for me.

 
At February 14, 2011 3:18 pm , Anonymous Anonymous said...

LTUS issues nothing but positive reports yet their stock is at $1.89???

 
At February 14, 2011 3:19 pm , Anonymous Dutch Trader said...

Nice piece of research. I think investor relations firms are the first ones that have to do due diligence before presenting a company.

 
At February 14, 2011 4:19 pm , Blogger The Traveller said...

LPH and LTUS are both trading below a trailing P/E of 4. The question is, what exactly is the value-add provided by RedChip here? Ridiculously low multiples for an extended period of time can be a warning sign. One thing RedChip should do for LPH is getting them a proper accounting firm. Getting up the share price depends on credibility here, the filed financials say both LPH and LTUS were a steal. RedChip's primary task should be strengthening investor confidence and management credibility.

 
At February 14, 2011 6:54 pm , Anonymous Anonymous said...

The Traveller: Is there a Hidden Agenda?

The trader who refers to himself as “The Traveller” [sic] leaves out several of the stellar returns on multiple RedChip stocks, such as LPH, LLEN, NG, CHGS, DHRM, SAC.TO, CTXIF, NTWK, CECX, BEST…

The Traveller blogger lists three RedChip stocks in his portfolio of picks: LPH, LTUS, and ZSTN. Interestingly enough, he uses some of RedChip’s past conference clients from several years ago to paint a misleading picture of RedChip’s performance.

Strangely, Traveller has a complete list of his “China Tracker-Covered Stocks” alongside of which scores allocated for predictions about particular stocks outperforming the market. A score of 8 or higher indicates the belief that the stock should outperform the market or the Chinese Small-cap space. It appears that Traveler agrees with RedChip’s opinion about our clients that they are viable investment opportunities, unless the scoring system displayed is misrepresented.

On that list, one can find 9 stocks with top scores (in parentheses) that are past or present RedChip clients: ALN (12); AMCF (12); BEST (9); CEU (12); CMDI (13); CTXIF (11); LLEN (9); and ZSTN (10). Traveler also lists several stocks that are under RedChip Research Independent Coverage: BFAR (7); CBEH (12); and NIV (8).

Unfortunately, the picture painted is not an accurate one. Multiple high performing stocks RedChip represents were disregarded, leaving readers to wonder why he does not list the following RedChip stars, which investors have made significant profits from investing in over the last two years. Traveller instead lists a handful of companies out of hundreds that have participated in RedChip conferences over the years, many of which RedChip did not represent in any long-term capacity. This is not to say that RedChip has not conducted Investor Relations operations for companies whose stocks have ultimately suffered, which is the case with any rating agency, research publication or investor relations firm with a track record of any length. The point is that there is a plethora of stocks that have witnessed long-term success, which for some reason the author neglected to include in his list of past RedChip clients. The author points out apparent inaccuracies on RedChip’s “Top Performer” list, which clearly states that the percentage gains displayed represent each individual stock’s peak appreciation while under RedChip coverage.

Moreover, one must question the integrity and the agenda of a blogger who fails to mention any of the dozens of stocks RedChip currently represents and has represented over the last two and a half years. Plainly, the data is manipulated and inaccurate simply based on the fact that many companies with strong performances are omitted. Many of the companies that are overlooked have been clients of RedChip for 12 month terms or longer.

For example, he shows RedChip representing PUDA at $21.00 in 2006. Actually, RedChip represented PUDA around $3.00 in 2006. We represented LPH at $0.25; LPH closed on Friday 2/11/11 at $2.49 and reached a new high of $3.95 in late November of 2010. When DHRM became a RedChip client midway through 2010, the stock traded in the $3.50-$3.70 range; it reached $7.50 in November. When LLEN became a client the stock was trading in the $0.70-$0.90-range and reached a high of $14.75 in March of 2010. Today LLEN trades just under $8.00, still representing a huge upside from when RedChip initiated coverage. Here is a brief list which includes only RedChip’s China Stocks under coverage from when RedChip initiated coverage to the peak price appreciation under coverage - CHGS: $0.80- $4.35; CTXIF: $0.40-$1.99; CELM: $4.60-$9.88; CECX: $3.00-$5.06; BEST: $0.92-$1.69

The list of RedChip winners goes on and on….


BEST, DHRM, LLEN, LPH, CECX, LTUS, WKBT, CWS, CHGS, AMCF, NIV

Best regards,
RedChip Companies, Inc.

 
At February 14, 2011 7:20 pm , Anonymous Anonymous said...

Red Chips is a joke, but Trading China is one to talk. Take a look at how well JADA and HFGB have done in recent months, for example, after your scorecard ranking of 16 for the former in November, and 17 for the latter for the past couple of months.

 
At February 14, 2011 8:43 pm , Blogger The Traveller said...

Dear RedChip,

I have picked a random date (late August) for 2006, 2007 and 2008 and checked the performance of your featured stocks since those dates. You are very welcome to submit a list of all your past clients, incl. the exact dates you "initated coverage", as that information is missing on your website (at least I couldn't find it anywhere).

I also find it questionable that you intend to measure your success as an investor relations firm by using "peak price appreciation under coverage". Isn't it that those companies hire you to make a value proposition, tell their story, and get them a long-term investor base that will hopefully lift their multiples to at least the market average? We both know why CHGS exploded to $4.35 last November. And how does it matter for CELM or its investors that it briefly scratched the $10 mark when it is now close to $4 and below your starting point of $4.60? Is this really how you want to measure the success of your work?

As you refer to the Trading China scoring system, I would advise you to read Score Cards Explained where you can see that the score is automatically generated, based only on financial statements filed with the SEC in a quarterly or annual report. There is no editorial opinion involved, and it is clearly stated that the score "should not be seen as a recommendation to buy or sell a security."

That brings us back to investor relations. The score is directly related to price per share. If the company's fundamentals are sound (assumed the numbers filed with the SEC are all correct), and the stock has a high score, then it is trading at a very low price, valuation and multiples. This is where your work is required, getting this stock up to where it belongs according to its cash flow, earnings power, growth prospects.

You can not possibly be satisfied with the share price of client companies like LPH and LTUS. Both stocks are trading far below even the currently depressed average multiples for Chinese small caps. It is hard to present this as a success story.

Kind regards,
Rames.

 
At February 14, 2011 8:45 pm , Blogger Chickenpookie said...

Too funny, the SEC needs to be constantly looking into corporate financial statements and record keeping so we don't have these issues in the first place.

Fire Schapiro if she can't find a way to get the job done, the SEC would have plenty of funding if only they'd shake down a few of these shysters, seize their assets, and put them in crossbars motel.

Mary, how about stepping up to the plate and doing your job instead of someone else's?

 
At February 15, 2011 1:02 am , Anonymous Tim said...

Beautiful consolidation of info here. This is just damning, no matter the few good returns. Based on this overwhelming evidence, it's likely that RedChip is merely taking money from these sucker Chinese companies, spending a quick minimum on flash and bang, and then cutting out.

A side note: it's great that you leave up all comments posted below articles. That shows the work of an honest individual who feels able to defend him or herself.

 
At February 15, 2011 11:08 pm , Anonymous Anonymous said...

Oh no; CNBC and Greenberg have kidnapped Rames!

 
At February 16, 2011 8:38 pm , Blogger The Traveller said...

RedChip Companies' response to this post has been quite promising so far. I would even call it positive, and I believe their selection criteria have changed in the past 2-3 years. I will update this article with new data (if I then receive them) which will hopefully prove that their current list of clients is of much higher average quality than back in 2006 or 2007.

After all everyone who is not buying the "all Chinese reverse mergers are fraudulent" story the short sellers are trying to establish, should work together and help distinguishing the quality companies in this space from the RINO's out there. Most of it depends on the companies themselves, but RedChip and websites like this one can help as well. But we all have to apply much higher standards now, even higher than for the normal U.S. small cap company. 2010 was the wake-up call and 2011 will be the decisive year.

 
At March 12, 2014 6:46 am , Anonymous Certified Financial Planning said...

Tomorrow blue chips becomes pink... Because after seeing the client reaction towards the business and the financial planning. 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. That is how the financial business planning has been done.

 
At February 22, 2017 11:59 am , Blogger Steven A. Galaz said...

I don`t think that I would run for the shares of this company. Besides my knowledge in the field of Economy isn`t so bad. The only thing that I needed research paper writer it so. Cuz I have some problems with the clarity of presentation of ideas. But otherwise, I analyzed the performance of these investments is quite correct.

 

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