12/28/2009

NEP is one of the Biggest Bubbles, Ever!

You can see my previous posts about NEP here. As you can see, I’ve been wrong about where NEP’s rally will stop. These have been short term calls, so I believe I will be vindicated in the longer-term price action. I am going to prove to you that NEP is the biggest bubble ever, and that after the kind of move that we've seen in the stock price over the past 3.5 years will likely be followed by some years of stagnation, regardless of where this current spike peaks. The question will be whether you can sell in time to lock in your profits.

Let’s begin by examining NEP’s price action for the past 3.5 years (see the chart below which shows NEP’s weekly price candles).

122809_nep_weekly

The first aspect to which I’d like to draw your attention is a revised wave count. After reconsidering my previous wave count analysis, I believe we’re actually in the final thrust of a 5-wave sequence that began in 2006. This makes more sense, because the triangle from which we just broke out is normally a terminal pattern, meaning any rally is often fully retraced.

The second aspect deals with NEP’s raw price performance. In mid-2006 (7/17/06), NEP bottomed at $.17. Today, NEP closed at $9.16: a 5,288% return in just under 3.5 years, or 210% annualized growth for 3.5 years straight. No big deal, right? Many great companies out there have seen these kind of returns in their early years, right? This kind of growth should be possible, shouldn’t it? Let’s look at some facts: here is a list of great companies followed by their best lifetime stock performance, as well as their best 3.5y performance:

Company

Max Lifetime Gain

Time Period (y)

Best Annualized Gain

Best 3.5y performance

Amazon (AMZN) 9,187% 12.5 43% 1,503%
Hovanian (HOV) 1,042% 13 18% 1,437%
Research in Motion (RIMM) 9,283% 9 63% 1,397%
Apple (AAPL) 7,273% 25 18% 1,254%
Wal-Mart (WMT) 122,940% 27 30% 1,011%
Microsoft (MSFT) 59,538% 14 59% 693%
Barrick Gold (ABX) 10,946% 23 23% 686%
Proctor & Gamble (PG) 10,460% 38 13% 205%
China Northeast (NEP) 532%* 6 28% 5,288%

*(Note: NEP’s lifetime gain is so low because the stock started trading at $1.50, significantly above it’s lowest price of $.17, 3.5 years ago)

To be fair, I looked to see if AMZN did have similar growth over a smaller period. In fact, in the first 2.5 years after going public, AMZN did appreciate by 5,423%! But there are two key differences between AMZN and NEP: 1) this performance occurred at the height of the tech bubble; 2) AMZN was introducing a revolutionary service that warranted being rewarded with faster stock appreciation, while NEP is a simply drilling oil (what’s the big deal?).

Thus my conclusion from this data is that NEP’s 3.5y price performance has been ABSOLUTELY EXCEPTIONAL AND ABNORMALLY HIGH, given the un-uniqueness or lack of novelty in the business that would normally spur bubble-like performance.

My next thought related to price performance is that perhaps since it was a penny stock, such a massive move is not out of the ordinary, as you’ll often find 1000%+ moves in pump/dump stocks. Here are a couple such bubble charts that came to mind immediately (JRJC and MXC):

122809_jrjc_weekly 122809_mxc_weekly

Notice the typical reaction is long-term downtrend, and these stocks only rallied 1,000%-1,500%. Now let’s compare these charts to a non-log NEP chart, and tell me if you don’t see a similarity:

122809_nep_daily

NEP has been profitable since 2006/07. How is it possible that the market has mispriced this company so severely? An Oil-drilling company especially? What is so amazingly unique about this company that the market misjudged its profit potential at the beginning? How could it have been discounted this low? How is it possible that NEP was so underpriced to begin with that early shareholders have enjoyed 210% return per year for 3.5 years???? Has the market really been so inefficient, or is there something else going on?

Therefore, if you’re a long-term investor, ask yourself if buying at this point, after such a massive run over a relatively short period of time, makes sense. Sure, with the momentum of this move, it could double again, but this wouldn’t really change things much in the longer-term picture. When a stock goes parabolic, it will often retrace to the beginning of the parabola before starting a new run up. This indicates a retrace to $4-5.

In conclusion, make your NEP decisions knowing that history does not reward these kind of rapid moves over the next couple years. Ask yourself where the market went wrong such that it allowed the company to be so undervalued to begin with. Or, on the other hand, maybe you are part of the most obvious 10-bagger in the world (everyone has been touting NEP for a long time, well done!!). One thing I’ve noticed is that the market never rewards the obvious point of view in the long run.

Everyone, please find flaws in my logic, I'm all ears. Thanks for reading! I am wishing everyone best of luck in being able to sell their stock at high prices and booking the 'profits' that everyone has been bragging about! GOOD LUCK!

P.S. You can tell me all about P/E, valuation, etc. but I believe raw price performance will be the final factor in determining supply/demand, as history has shown in many other cases!

15 comments:

Aurelien said...

I just thought of a great example this morning. Check out PLM. It went up over 100 times from its low in less then 3 years, and thats with no earnings whatsoever.

I'll be working on a post in the next couple days with the valuation.

Narayana said...

What happened for the next couple years after PLM made those returns? Dropped back to the beginning of the bubble period wiping out all returns.

Dr Claude Windenberger said...

I am enjoying the technical analysis vs Fundamental Analysis match between the 2 market brothers. Both of you are making great arguments whenever I talk to you and I go back and forth. I wish I had your kind of smarts to come up with the analysis myself in the first place. In any case, I am a proud dad of 2 very smart kids. Keep it up, sons.
Daddy

symboltrader said...

Narayana, you make a good argument. Though I don't think it's the biggest bubble in the world, it's a classic parabolic run and these almost always end badly, with a euphoric blowoff top. Is that happening at this moment? The stock is gapped above the upper weekly Bollinger band, which is entirely impossible to sustain for long.

Psychologically I'm seeing changes in the NEP board at Yahoo, some of which I've frankly stoked to see where peoples' minds were at. The euphoria there is exceptionally high, with only the most level headed posters still posting that they are taking profits or are nearly ready to do so. A lot of posters there seem to believe the move will keep going straight up for an extended period of time, which is very unlikely. Actually I see most of the big orders on the ask, being hit at market price. This looks to me like big traders selling to the little guy, which the massive volume after this big run also implies. There will be a lot of shell-shocked posters there soon when it has a breakdown. I suspect that will come when oil has a big pullback, which it eventually always does. Watch for the anger that will be flowing, especially directed at both anybody who sells and even the people who keep pumping for higher highs. Isn't that always the way?

Time to buy back in when the stock goes flat and anger turns to depression, then apathy.

Symbol

shane said...

I know this comment is little late, but i was just introduced to your blog today. Narayana, i found your index of "great performing stocks" interesting. However, i think it is important to compare apples to apples. Oil stocks need to be compared to oil stocks in order to draw meaningful conclusions, because oil has made explosive moves up or down over the past few years. Therefore, the performance of a high growth oil stock is leveraged in a way that companies, such as Wal-Mart and Amazon, never were. I feel this is an important consideration you overlooked in your evaluation.

Narayana said...

Thanks for your comment.b

shane said...

I'm assuming that the little tongue your responded with is meant as a sarcastic dismissal of the comment i left. If you disagree, perhaps you could try offering a reason. It might also better serve your purpose to show some respect if you intend for your blog to build a following.

Narayana said...

Please give me some examples of oil stocks that rallied 6700% in 3.5 years.

Then, please show me what happened to their stock price in the subsequent years. I think you will find over the next few years, most of those stocks either consolidated or lost quite a bit of their value.

Thus I continue to believe my hypothesis that NEP will have relatively poor return over the next few years, as it consolidates the extraordinary gains.

shane said...

I understand the basis of your conclusion and the logic that underlies it. However, comparing an oil growth stock in a commodities bull to the patterns of stocks in an unrelated industry is meaningless. To really know whether there are other oil stocks that have sustained such gains in a three and half year period and continued to perform well in subsequent years, would take a tremendous amount of research. I haven't researched how other junior oil stocks have performed in a bull market (and don't have the time). Have you? However, here is an example of a silver stock that i own that sustained a 13,600% gain in a three and half year period and continued to grow in subsequent years. Sivercorp Metals(svm) traded at .10 cents a share on Jan 1, 2003. By June 1, 2006 they traded at $13.60. On 6/1/2007 they traded above $17, on 6/1/2008 $22.50(when factoring out their 3 to 1 split), and are currently at $19.80(again, when factoring out the 3 to 1 split). There are many more examples of commodities stocks that have these trends.

I really don't know how rare it is for oil stocks to perform as well as NEP has, but i doubt it is as uncommon as you suggest, especially considering the boom in oil prices over the past six or seven years. These types of commodity bulls provide a crazy amount of leverage to growth stocks, particularly if the stocks growth cycle coincides at just the right time as NEP's has.

But the unique nature of the oil boom is why it is important to compare apples to apples and the list of stocks you listed aren't relevant to the analysis you are looking for.

Narayana said...

Thanks for your reply. I looked up SVM on 5 different charting platforms, and couldn't find one that corroborated your recollection of its price action. Could you link me to a chart of this data? The largest gain I see is from 1990 to 1998, rallying about 10x from $2.50 to $25.

I actually have researched other stocks, I created a spreadsheet that lets me easily find out the percentage gain for a stock over a period. I was not able to find many stocks that have performed that well.

Finally, you mention the oil boom; well now it has gone bust. You seem to agree that oil was in a bubble; if you look at any bubble charts (gold in 1970s, DJ industrials in 1929, Nasdaq in 2000, Nikkei in 1990s), you'll see that the high prices are never seen again for 5-15 years!

I don't know if the evidence you listed invalidates my argument, because I couldn't even see the evidence.

shane said...

Narayana,

First, you seem to be ignoring my central point, which is that it makes no sense to compare the stocks you did to a junior oil stock. A meaningful comparison to NEP would comprise other junior oil stocks of a similar market cap that emerged under similar market conditions. There are hundreds of junior oil stocks. Have you really taken a look at these and graphed their growth? I doubt that you have. And graphing Google, Wal-Mart, Apple, etc. provide meaningless information for your analysis for reasons i mentioned previously.

Incidentally, it remains to be seen if oil has "busted." Commodities bulls are wild rides. See this ten year silver chart for evidence: http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

After it's highs near January 08, silver lost more than half of it's value before recovering nearly a year later. Oil is even more extreme. Prices were as high as $130, dropped to $30 and now sit around $80. Only a crystal ball can tell what the future holds for oil in US$.

As far as Silvercorp Metals, the chart i referenced was one i got from TD Ameritrade, which i cannot link you to. For some reason Yahoo and Google finance do not provide historical prices past 5 years(at least not that i could find). But i can still link you to the run. First look at the price of SVM - .10 cents - on 9/14/2004: http://www.nasdaq.com/aspx/historical_quotes.aspx?symbol=SVM&selected=SVM

Second, look at the closing price - $17.82 - on 4/19/06. Then notice it falls to $12.17 on 5/18/06.

Third, look at the price - $31.50(adjusting for 3 to 1 split) on March 3 08: http://finance.yahoo.com/q/hp?s=SVM&a=00&b=2&c=2008&d=03&e=2&f=2008&g=d

The stock has basically tracked the price of silver since then.

This is an example of a commodities stock whose gains exceeded those of NEP in a period shorter than 3 and a half years, then lost %33 of its value for about a year, then almost doubled it's previous high a couple of years later.

Relating back to my central point, to know how unusual this gain is for a silver stock, or an oil stock for NEP, you would have to compare them to other silver or oil stocks.

You've stated that "NEP is one of the biggest bubbles ever," but haven't actually done the research.

shane said...

Whoops! Here is the chart showing the price of Silvercorp Metals in April of 06. http://finance.yahoo.com/q/hp?s=SVM&a=00&b=2&c=2006&d=05&e=2&f=2006&g=d

Narayana said...

Ok, I see now. The only think you failed to mention is that according to that NASDAQ data, SVM ultimately dropped from $11 to about $1. So, yes, while SVM did double after reaching an interim peak in 2006, 3 years later it was trading at $1.

And that was my main point. Regardless of fundamentals or sector, there is a limit to the returns of an investment. The fact that any investment returns a massive percentage gain in a short period indicates that over the next few years, it will probably witness very poor returns.

You're comparing SVM in 2006 (when it reached around $6) to NEP when it reached $9-11, saying that it could still double, etc. Well, if you held on to that investment that you bought in 2006 for 3-4 years as a 'good old long-term investor', you'd have about 0% gain right now. That's not the best return.

Thanks for the conversation.

shane said...

Actually, no. You examined the percentage gain of NEP, compared it non-industry stocks, applied a non-industry limit to what NEP's gains could be erroneously stating NEP"S gains are unprecedented, and now assert that industry specific factors should not be considered when pinpointing NEP's bubble.

If you had advised someone to sell SVM after it gained 5000% in '04 based on the historical performance of Amazon, but ignored the fundamentals of silver, that investor would have sold for $5 a share. The investor would have lost the opportunity to sell near it's high 600% later, and the buy back opportunity would have been virtually non-existent when factoring in the 3 to 1 split. Thus, an investor in SVM who took similar advise to what you are giving NEP holders now would have missed out on massive profits.

This leads me back to my original point. You must compare historical performance of oil stocks to that of other oil stocks under similar market conditions in order to draw meaningful conclusions. If the price of oil continues to rise and the DOW maintains itself or increases, then NEP could continue to make massive gains. If you do not believe these things are going to happen and this is your basis for advising to sell NEP, then you are making a fundamentals argument and not one based on the charts.

Thank you too for the conversation.

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