TOP Financial Moves, yes, but why?
TOP Financial (NASDAQ:TOP) was quite the little mover last week. By the time this is published I expect it to be rapidly approaching its starting point. This particular market mania being too silly to survive more than a few days. Around noon on Friday the price was $241. Which is a heck of a jump from the $6.72 on Wednesday. Such share price moves do happen, of course they do, but the bigger question is whether they’re sustainable.
TOP Financial itself.
At that peak TOP was valued at well over $6 billion. So the most obvious question to ask is whether that could even possibly be a supportable valuation? The answer is not. Really, just no.
Last reported revenues – revenues – were around the $5 million mark. Sure, that’s a 63% improvement from the earlier period but still. Even if the margin were 100% (and it’s not) that wouldn’t support that sort of valuation.
But perhaps there’s some massive change that would support it? A drug research company could well have that sort of growth rate if the FDA granted an unexpected licence. Or maybe some subsidiary just lucked out. Or an investment worked well? You know, Peter Theil’s 401(k) did pretty well out of Facebook one time.
But even the possibility of that means looking more at how TOP works.
“Our Operating subsidiaries generate revenues primarily by charging commission fees on futures transactions at a flat rate for each futures transaction contract. Currently our customers are mainly high volume and frequency trading institutional and individual investors primarily residing in Asia and we are currently focusing on expanding our customer base to Southeast Asian investors.”
Ah, no, they’re not acting as principals
The only other way – that I can think of at least – that the business might leap in value is if they were acting as principals. As many of the contract for difference “brokers” do. So, money lost by the clients becomes money made by the company. Such CfD brokers are really working much more like bookmakers than they are brokers. Or, another way to say much the same thing, the trade is passing across their own internal books rather than their being just a conduit into the wider markets. Whereas someone like Schwab is a broker, (although there will be internal trade at times, as with all brokerages). But if they’re not acting as principals then that can’t be the case.
The other revenue source will be – as happened at MF Global – that any margins required by trades will be deposited with the firm. Which can then net them off against the totality of their trade book. This will produce a sum which is then invested on behalf of the company. As also happened at MF Global except of course they then lost it all.
However, such margin investment is near always in short term money markets and so gains a percentage point or two on an annual basis. It’s nice to have cash but it’s – again – not going to be enough to support that sort of $billions valuation.
So, no, there’s nothing here
Well, there’s a perfectly acceptable and growing nicely futures broker of course, but it is just a futures broker. Working on fixed fees. Income will only increase by greater volume throughput. This is an important job, part of the nuts and bolts of the financial system and someone’s got to do it. But it’s just not the sort of thing that suffers radical changes and so wild price swings in the brokers themselves.
So, what’s happening then?
Well, this from Seeking Alpha itself gives us a good flavour. For some reason TOP goes wild. Maybe a few folk just decided to buy into a low cap and low float company to see what would happen? What we might call a “ramp”. Or perhaps it’s a pump and dump. The difference, in the slang of my market at least, being that the second is planned and criminal, the first is just one of those things. A Pump and Dump deliberately sets out to hoodwink unsophisticated investors into buying at the top which is what creates the profits for those dumping their stock. A ramp, well, really that’s the rise without the definite intention and plan of defrauding those innocents.
It’s also possible that this is a short squeeze. The short position was some 6%, but there’s a very low float so that could indeed be squeezed. A planned and group attempt to create a squeeze is also market manipulation. One single buyer causing it is not.
So here’s the thing
For us outside all of these plans, whatever they were or are, the difficulty is in knowing what to do. For any of those plans rely upon triggering some market mania for them to become sustaining. OK – but how long will the mania last? For while we can all see the joy of buying at $12 and selling at $200 what’s to say that we’ll end up buying at $100 and that’s as far as the plan was aimed at anyway?
The same is true of taking a short position. Say that all of the above is obvious, that this cannot possibly be sustained. So, we go short at $150. That further leap to $240 would be very painful indeed, unless we had very deep pockets we’d get sold out and crystalise our losses.
Myself I think naked shorting isn’t a useful tactic for us retail investors anyway. But that’s perhaps my problem – I just don’t see the risk/reward ratio working out for us.
The other HK financial stocks
Well, obviously, and as SA tells us here, one small cap HK financial stock goes wild and all the others are tempted to. Magic Empire for example, but perhaps we all had enough of that after the IPO itself. And I’ve muttered about the AMTD Twins before. My assumption is that this is merely contagion from what’s happening at TOP Financial.
My view
My real view is that this is all intensely annoying. If we’re trading – as distinct from investing, that longer term idea – then price volatility is the very thing we crave. But we do have to understand why the price changes are taking place to have any opportunity of forecasting where they’re going to go next. Without that we’ve no hope of getting on the right side of that volatility.
Why TOP Financial? Well, quite. There’s no compelling story here at all. Other than low float, small cap and large short compared to free float. But we can’t lay our bets right across the market on everything with those characteristics. And if we create a group to make it happen then we’re guilty of market manipulation. The result of which would be having to pay back any gains we made so that doesn’t seem worthwhile.
Further, if we don’t know and just try to follow the momentum then it’s us being manipulated – which isn’t a great way to try and make money.
But I do end up sticking with that. If we don’t know then we shouldn’t be trading. Betting maybe, as with a lottery ticket, but that’s just not the same thing as investing at all.
The investor view
Unless we’re one of that putative group running this investment into TOP Financial then we’ve simply not got the information to be able to know what happens next.
A very good assumption is that the vast leap fades away pretty quickly – it’s already more than 50% down from the tippy tops – but we just don’t know. Given that we don’t know the risk ratio just seems too high.
All we can really say is that in time TOP Financial is highly likely to go back to where it was last week. But that’s not enough for a decision because how long and where to in between now and then?
Read the full article here
