Chinese Stealth Champ's Cover Blown

08/31/2009 1:00 pm EST

Focus: OPTIONS

Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer's Investment Research writes that ShengdaTech is now far too popular for its shares' good.

In "4 Chinese Stocks Under the Radar," the Motley Fool points to China as the country expected to lead the global economy back to higher ground. Though overseas investing is risky, the author deems the Chinese market "hard to ignore," considering the country is home to 1.3 billion people, making it the world's most populous nation. Against this backdrop, the article highlights a few in-the-shadows, small-cap Chinese companies that could be "worthy of your investing dollar."

One such company is chemical concern ShengdaTech (Nasdaq: SDTH). Though the firm's revenue declined by 34% to $26.3 million in the latest quarter, the Fool claims "there is more … than meets the eye." Justifying the perishing profit, the author argues that the numbers were skewed by a governmental rezoning in October, which resulted in the loss of a chemical plant. In fact, the columnist says the year-over-year comparisons will become obvious following the company's October anniversary of its plant closure, reinforcing his opinion that ShengdaTech could be a "growth company" to watch.

Contrarian Takeaway:
Technically speaking, the shares of SDTH have added 69% since the start of 2009. However, the stock remains challenged on the charts by a couple of different barriers.
 
First, the equity is battling resistance from its 80-week moving average, which has capped all of SDTH's recent rally attempts. On that same note, the stock's 20-month moving average is lingering just overhead, and hasn't been toppled on a monthly closing basis in a year. Furthermore, with the shares currently hovering in the $6 region, any rally attempts could be contained by resistance in the $7-to-$7.50 neighborhood, which played the part of support during most of 2008, and could switch roles to act as resistance.
 
Despite these potential challenges, however, most of the Street shares the aforementioned Fool's bullish opinion of SDTH. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.15 implies that call open interest significantly outweighs put open interest among near-term options. What's more, the security's SOIR rests in the fifth annual percentile, suggesting that short-term option speculators have been more optimistically aligned toward SDTH only 5% of the time during the past 52 weeks.
 
In addition, Thomson Reuters pegs the average 12-month price target on the equity at an ambitious $8—in a region SDTH hasn't explored since September 2008. From the stock's closing price of $5.94 on Wednesday, the shares would need to soar about 35% higher in the next year in order to meet this lofty goal.
 
Should any of the potential technical barriers smack the security lower in the near term, the bulls could abandon ship. A reversal in sentiment in the options arena, or a plethora of price-target cuts, could place additional selling pressure on the stock.
 
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