It is real easy to read a clever headline and get sucked into buying a stock based on what sounds like a great story. When I find myself lured into such a scenario, my first instinct is to skim ahead to find the symbol of the stock and take a look at the chart. The company I will be making a case for is RenRen ($RENN). Before you look at the chart below, I will tell you it is one of the ugliest charts I could find right now. In fact I will further admit that I usually lose money when I buy stocks that are in such an obvious downtrend. Intrigued?
Known as “The Facebook of China” Renren ($RENN) was a much ballyhooed IPO in May of 2011. The companys shares were offered to the public on May 4, 2011 at $14.00. The first day of trading saw the stock open at 19.50 and trade as high as 24.00. That is as high as the stock has ever traded. For the next seven days in a row, the stock closed lower before trying to stabilize. The stock could not recover, the decline continued and the stock traded as low as 3.21 in the final days of 2011 before finishing the year at 3.55. For those who bought on the IPO and held, they had a loss of 74.6%. RENN was one of the worst IPOs of 2011.
Apparently their business isn’t as robust or promising as people originally thought, or perhaps investors got caught up in the frenzy of wanting to own a piece of a social media company in the most populated country on Earth. People seem to have bought the “sizzle” without looking at the quality of the steak. I skimmed a couple of articles to get a feel for their business and, while revenues were up 57% for their most recent quarter, the company is not profitable and one area of their business (Nuomi) has analysts concerned that the company is not focused on their core market.
I’m not really interested in the company Renren, but the stock appears to be a good “January Effect” bounce candidate. First, let’s understand how the January Effect works. Stocks which are down significantly at year end often experience further pressure as investors give up on the company and decide to sell the loser in order to offset gains they may have already taken in their account. Offsetting gains with losses allows investors to purge their losers and avoid paying some or all of the capital gains they may have already taken. It is also common for funds to sell their position in a stock like RENN so they don’t “look bad” for owning such a piece of shit in their yearend holdings disclosure. This is known as window dressing, they try to make their portfolio look good for investors.
Read the rest of the article and SEE THE TERRIBLE CHART HERE