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Given the stock's recent run, traders are expecting an enormous earnings beat tomorrow, and anything less could mean a big correction, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
Can you say “volatility”?
The New York-traded ADRs (American Depositary Receipts) of the Chinese company are down 4.7% today as of 1:10 p.m. Yesterday, August 7, they were up 6.5%.
From the July 24 low of $16.86 through yesterday’s close, the ADRs were up 36.6%. That’s in two weeks.
The Wall Street consensus is that the operator of China’s largest group of budget hotels will report earnings of 31 cents a share. That would be a 19.2% increase from the second quarter of 2011, and would mark a huge improvement on the loss of 9 cents a share that the company reported in the first quarter.
I think the huge surge in the last two weeks was a bet that the company will meet or exceed those expectations. After all, even with the loss last quarter, the company reported 66% revenue growth year over year and beat Wall Street projections for revenue by a little more than 12%.
After a surge of 37% in two weeks, it wouldn’t surprise me if the stock sold off after the earnings report on anything less than a miraculous beat. I think the drop today is an early indication of trader inclinations to do just that.
If the company does report as expected, and if the ADRs fall on that news, I would look to be a buyer here. The ADRs offer good exposure to the domestic Chinese consumer market, and that’s the part of the Chinese economy I’d like to own over the next six months or longer.
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