Most anyone who has been whale watching finds beauty and grace in their movements. Watching whales jump and swirl, it is easy to forget the violent activity usually hidden under the surface.
Watching the great Orcas play in their natural habitat is nothing less than inspiring. They have no natural predators. They are highly social, passing lessons learned to new generations, and they are no threat to humans.
The same cannot be said for the whales you may sight at SEC.gov. These whales constantly battle each other, as well as the sharks (shorts) and smaller fish (retail), for their position in the natural order of the markets.
Both variety of whales have one thing in common though: the smell of blood rouses them into feeding frenzies that send most people (retail) running for cover with their eyes averted. So while whale watching can be inspiring, most will miss the true beauty to be found in the violence below the surface.
Below the surface with NQ and the whales
Few can argue that the whale named China Rock Capital Management (CRCM) has been long NQ for… well… a really long time. SEC filings show how they added millions of shares on dips in 2014. They were swimming amongst the sharks, with nary a care in the world, until one day when something changed.
Before we explore this violent activity further, to be clear, SR is not saying CRCM is short or speculating on their current position at all. Let’s instead focus on potential intent and mindset.
Curiously, CRCM was not frightened away by the waves of bad news that belted the NQ shore last year. They fed happily on shares, while other whales, sharks, and fish abandoned the NQ hunting ground
Even after the 20F was filed on October 27th, this CRCM whale leaped into the air with a 13G indicating they added even more shares by November 14th. Extrapolating from a chart, one may surmise they bought the quick post 20F dip, seeing an opportunity to feed on the blood they smelled. One may also surmise that the other whales, sharks, and predatory fish saw this lone whale, abandoned by other whales in it’s pod (per earlier SEC filings), as vulnerable, and decided to take advantage of it’s lonely state by dumping shares via options and shorting to CRCM.
This we know for certain, CRCM then spent the next month after, selling shares to other whales, sharks, and predatory fish at a cheaper price. In fact, it appears CRCM was in such a hurry to leave the NQ hunting ground, they left tons of easy prey behind!
- significant expansion of the planned share buyback to $80 million
- an immediate purchase by the company and one of the founders
- an additional two-year, voluntary lock-up of insider shares, and a 10b5-1 plan to buy more (link)
- announcement of a reverse merger that NQ promises will unlock significant value in FL Mobile, with an estimated completion of the RM by late February/early March, and a filing on the HK exchange a few months after
- possible near-term catalysts, including completion of the 20f and 2015 guidance
It sure seemed like not just a few dolphins, but an entire school, were heading toward the CRCM whale. Sharks beware!
Keep in mind, while the SEC filing dates may mislead one to think these dolphins arrived long before CRCM started selling, NQ actually released the PR informing shareholders on January 6th and CRCM filed January 7th.
Those who follow my tweets and twits know that SR’s new position was sold that day for a .30 to .60 profit per share. Yes, SR is a fish and not afraid to admit it. It’s good to know your place in the food chain, especially when there is danger of becoming lunch for the seemingly friendly sharks, whales, and other predators. Sometimes it is best to swim away and return for another meal later when the danger has subsided.
Now back to our whale story.
CRCM had plenty of time to file that 13G, yet chose to file right after the school of dolphins showed up! Why?
Had the whale gotten away to let time heal it’s wounds? No, they still showed half of their position intact.
Was the whale still trying to get away from the feeding frenzy? No, why let your predators know that you are still in the hunt. That tends to attract even more predators.
Maybe the CRCM whale didn’t retreat at all, but rather after sitting full and content on it’s meals, and not seeing much profit in swimming idly, it went swimming for it’s next feeding ground and actually went short! Maybe the whale didn’t see the school of dolphins swimming toward the area.
Finally, it’s possible the whale had simply been scared off by the Barts of Wall Street with planted rumors of co-founder Henry Lin being jailed and insiders planning massive sales of shares? Remember, the sharks were roiled into a feeding frenzy with blood in the water, and this whale was swimming alone.
But back to this school of dolphins arriving. Did CRCM change it’s mind when it saw the school of dolphins–but too late! An early filing, false admission of defeat, to attract the more passive fish and any smaller predators that always lurk on the outskirts of the feeding frenzy– looking for a quick and safe meal? Playing dead just enough, to attract it’s next meal.
No one will know for sure until the CRCM whale files again. What we do know is that anyone who took a logic class in college, would find no truth table capable of handling: 1) a whale that still owns over 7mm NQ shares 2) divulging early that they sold, if they intend to continue selling.
The result of a lower share price would not help the remaining positions. So the logical outcome is the CRCM whale wants to re-join the feeding frenzy by share re-purchase or covering a short position.
We also know that previous whales, Morgan Stanley and Capital Ventures International have filed their new positions and may be circling for more. Other 13Fs were filed and show a mish mosh of buying and selling so far. Oberweis Asset Management filed but it is a non-event as the divestiture of that position was publicly stated many months ago. In fact, that public announcement was a week after SR’s post and Jim cited, “sometimes one has to consider the opportunity cost of waiting around to be proven correct” . Well Jim, SR was on the same page around the $8 to $10 mark back then, and took profits the same as your firm. But now? In the low to mid $3s? There may be opportunity knocking, an NQ share feeding frenzy may be about to commence.
A few thoughts here. It is always best to question the motives of a whale that files and divulges positions so quickly. Even if you don’t know their exact motives, there is value in evaluating potential motives. Also, once these whales realize they are all whales, stop competing with each other, form a new pod, and turn their attention to the sharks, NQ share price should move up dramatically.
Being a fish, and a scavenger fish this time, SR re-established a position in the low to mid $3s. At less than half the price of shares sold by SR, we may just join the NQ executives and lock these new shares up until December 2016. Time will tell… and the ball is with NQ’s school of dolphins to show they will stay around fending off the sharks with their next filing.
At this writing, SR is betting on NQ and the dolphins. More important, SR is betting that NQ management has learned enough over the past painful months, to encourage the whales and dolphins, instead of aggravating them to the point they left for waters where their presence was more appreciated.
One thing is certain. NQ is a whale of a tale!
(SR Update: Did anyone else notice that SR’s article discussing the error of Seeking Alpha’s authors, has now been confirmed by those same author’s source? Carnegie Mellon’s vulnerability report now correctly identifies Yahoo’s Flurry library as the weak link. “Web Content Flurry” was added to the NQ row of their spreadsheet. )