In a perfect world, a stock's movement would make sense - good news pushes 'em higher, and bad news pushes 'em lower. SmartHeat Inc. (NASDAQ:HEAT) is part of a perfect world though. This Chinese plate heat-exchanger (for HVAC) manufacturer saw its shares soar more than 20% on Tuesday after.... well, that's just it - after no news, and no particular sociopolitical event that would have put it into a more encouraging situation. More than that, 1.6 million shares of HEAT traded hands on the way up yesterday - a multi-month record.
So what gives? It's worth knowing, since it's the first sign of life HEAT has seen since July (and that was a failed rebound effort).
In lieu of real news, it's - incredibly enough - the message boards that hold the answer. That doesn't make anything said on them about SmartHeat Inc. the truth, mind you, but as long as other traders hold them to be true, that's all that matters. The only 'truth' is that the following rumors have been getting traction:
- HEAT is set for a reverse split.
- A short squeeze is on.
- Traders wanted to wait until the new year to step in.
- The stock truly is undervalued, and the market now realizes it.
Of the four most-talked-about possibilities, a grand total of zero of them make any pure, superficial, logical sense. The reverse split possibility is just speculation. The short squeeze is always a possibility with any stock, but with a short float of only 4.5%, how much of a squeeze could there be? There were only 1.08 million shares held as a short position as of the middle of December, and more than that were bought yesterday. Waiting for the new year to buy into SmartHeat has no strategic advantage (selling it, yes, but buying it, no).
So, assuming the message board-following traders are smart enough to realize most posts on message boards are nonsense, we actually have to give the nod to choice #4... that perhaps HEAT really is being seen as undervalued - a questionable idea following months and months of losses. Why now, all of a sudden? [We did not find any paid pumping efforts, but if you are aware of one, please chime in with details below.]
It wouldn't be too much of a stretch to see the market warming up to SmartHeat Inc. It's a $15 million company (after the runup) that's done $73 million in sales for the past four quarters. It still posted a loss of $7.8 million for that period, but by small cap standards in this discouraging environment, that's still fairly encouraging. But is it worth $0.39 per share? That's not for this reporter to decide. This company has been profitable before though, and it does appear now that the worst case scenario has been more than baked in.
That doesn't mean the losses won't continue. In fact, HEAT expects to take more losses in 2012. For investors though, it's all relative. Maybe the stock really is undervalued based on revenue strength and deserving of some advances for a change.