Fraud has been a key investment theme in 2013. Short-sellers and bears have pointed to a number of overvalued or downright criminal companies as great short ideas. In 2013, the most famous short ideas have been Lumber Liquidators (LL), Herbalife (HLF), and NQ Mobile (NQ). While the jury is still out on the first case, Herbalife received recent exoneration from auditors. Even more recently, a hint that NQ is going to receive a similarly clean bill of health caused the stock to soar.
To understand this stock, we need to understand two things. The first is the chart itself:
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NQ was one of those growth momentum stocks, not unlike LL and HLF, that was doing extremely well as growth-oriented investors poured into the name. Then in October Muddy Waters released its report, alleging fraud and misconduct and asserting that NQ shares were worthless. Muddy Waters has made a lot of money in the past undercovering fraudulent Chinese companies, so the report was taken seriously by many investors. Over half of the stock’s value was erased in days.
A quick recovery followed by a slow decline in November yielded what technical analysts call a “rising wedge”—with steady highs and higher lows, a breakout looked inevitable, until a long valley in the <$12 range in December seemed to signal trader exhaustion in the name.
The breakout finally came just before the end of 2013—a bit too late for many traders, showing that patience is a virtue. On Monday, Dec. 30, Morgan Stanley disclosed a 5.2% passive stake in NQ Mobile. The $110 million holding was sizable enough to suggest that this was a hint that NQ was about to be given a clean bill of health by auditors, especially coming as it did shortly behind the announcement that NQ had formed a partnership with Ingram Micro (IM) to distribute NQ’s mobile apps in the EMEA regions.
NQ is not out of the woods by any means, and bulls on the stock still need to wait until its revenue streams are confirmed and greater clarity about its customer base emerges. Plus, economic headwinds in China are a risk factor that seem more permanent than many investors had hoped earlier in 2013. It is by no means a guarantee, but there is enough hope behind the name now to move the needle—and as the debate continues, the stock will surely exhibit tremendous volatility in early 2014 until an audit reckons a judgment, which will help the stock reach new heights—or new lows.