Huadi Internationa (NASDAQ: HUDI) roared up 383% on Friday then fell back 49% after hours. The sensible assumption is that that was that, something we'll actually find out in a few hours as premarket opens. But as with several other Chinese stocks just recently - Top Financial being just one - there's no real reason for such a stock price. Further, there's absolutely no support for the price remaining that high. This is all purely a confusion built upon market mania.
We can check this too. The most recent accounts were in February. Sales were $76 million, gross profit $11.1 million and net income $1.9 million. So in terms of size that's clearly not enough to support the current valuation. But perhaps it's really fast growing? Well, no, sales were up 8.9% and profits actually fell. So it's not being valued as a high growth company simply because it isn't a high growth company. A third and final thought is that it could be in a really sexy business area - wihch it isn't. Sure, stainless steel pipes into the construction industry is a perfectly sensible line of business. But it's not something that's about to change very much. Sure, we might be relieved that China's construction industry as a whole seems to be settling down but still - there's nothing to change the prospects of a supplier by that much.
Huadi International stock prce from NASDAQ
What is happening here is that there's excessive speculation on certain Chinese shares quoted in the US. This has happened with Huadi before of course, back in November, when the price - very briefly - hit $180 a share. The necessary ingredients are a relatively low market capitalisation - so relatively small purchases will move the price. Then a small float - much of the stock is still held by the parent company. Add in a large short position (7% or so, which is large relative to the free float) and all the ingredients are there. Someone starts buying, just because, the price starts moving and it feeds upon itself.
But such manias never last very long. Simply because there is nothing but the mania to support them. As here - we fully expect Huadi to decline back to where it started soon enough.
