The dizzying rallies that puzzled traders and once sent some little-known Chinese stocks to sky-high market values are back, for now.
(Bloomberg) — The dizzying rallies that puzzled traders and once sent some little-known Chinese stocks to sky-high market values are back, for now.
A slew of small- and micro-cap Chinese stocks soared in US trading Friday, led by online brokerage Top Financial Group Ltd., which soared as much as 1,182% before paring gains to 441% after triggering at least 27 halts for volatility.
The raucous rally drew the company to put out a statement urging investors to rely solely on statements and filings with the Securities and Exchange Commission and said it doesn’t intend to make further statements on the matter.
Wild moves aren’t limited to Top Financial. Shares of Magic Empire Global Ltd., a Hong Kong-based financial services firm that had just nine employees as of December, more than quadrupled from Thursday’s record low of less than $1. Golden Sun Education Group Ltd., a school operator and education service provider, jumped as much as 91%. All these companies were listed on US exchanges within the past 12 months.
The retail crowd rushed into some of these stocks on Friday, making both Magic Empire and Top Financial among the seven most bought assets on Fidelity’s platform with buy orders outpacing those to sell. The demand mirrors optimism on day trader chatrooms for similar stocks as investors tried to guess which companies could be the next to surge. Top Financial, Huadi International Group Co Ltd., which soared 383%, and Top Kingwin Ltd., which rallied as much as 91%, were trending on StockTwits. While over on Reddit’s WallStreetBets AMTD Digital Inc., up 8.8%, was among the most mentioned tickers.
“A saying that keeps me safe in markets is if it looks too good to be true it’s probably manipulation,” said Matthew Tuttle, chief executive officer at Tuttle Capital Management. “You only make money getting in before the pop. People getting in after are just exit liquidity.”
The spikes — and likely tumbles — are a product of tiny firms with a small pool of shares available for trading that are mostly held by insiders. That means eye-popping rallies can be fueled by a handful of traders who spark some broader interest from the likes of retail investors. Magic Empire, Top Financial and Top Kingwin all have less than 40% of their outstanding shares available to be traded, according to data compiled by Bloomberg.
Such mysterious rallies have occurred in the past. In August, financial firm AMTD Digital surged more than 32,000% to briefly surpass Goldman Sachs Group Inc. by market value. However, gravity has since set in and sent shares tumbling more than 90% from its August peak, serving as a example for caution among investors betting on these stocks.
The outsized gains have attracted attention of Nasdaq Inc., which stepped up scrutiny of initial public offerings by small-cap companies last year. Securities and Exchange Commission Chair Gary Gensler said in August that the agency keeps tabs on sudden stock swings, but declined to comment on eye-popping gains in AMTD Digital and Magic Empire. Nasdaq declined to comment.
Many of these companies share the same underwriters. Network 1 Financial Securities Inc., a brokerage based in Red Bank, New Jersey, brought Magic Empire and Golden Sun Education to the public market. The bookrunner’s listings often produce stunning first-day rallies, with sharp plunges that came immediately afterward.
For the companies to go public in the US this year, the smallest IPOs are popping less frequently than usual. Just 3.9% of them climbed by 50% or greater during their debut session — the lowest in at least five years and a steep decline from last year’s rate of 14%.
–With assistance from Drew Singer.
(Updates share movement, adds Top Financial comment in third paragraph.)
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