We recently started a series called “Penny Stock of the Day”. These ideas are geared for traders with an extremely high risk appetite.
Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.
Penny Stock of the Day: Kaixin Auto Holdings (NASDAQ: KXIN)
Today’s penny stock pick is the Chinese used car dealership company, Kaixin Auto Holdings (NASDAQ: KXIN).
Kaixin Auto Holdings provides financing channels to its customers through its partnership with financial institutions; and value-added services to its customers, including insurance, extended warranties, and after-sales services. The company is a subsidiary of Renren Inc.
Website: https://ir.kaixin.com/
Latest 10-k report: (20-F) https://sec.report/Document/0001104659-21-067017/
Analyst Consensus: Not covered by analysts.
Potential Catalysts / Reasons for the Hype:
- The company announcing its entry into new energy vehicle business, to become the next player in the EV business following Li Auto, Nio, and Xpeng.
- New about KXIN’s plans to make smaller size electric vehicle (EV) market in China.
- Rumors about possible mergers and acquisitions with a number of electric car manufacturers. The Company is said to have been engaged in negotiations of mergers and acquisitions with a number of EV manufacturers.
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Consolidation Area Breakout: The daily chart shows that the stock was trading within a consolidation area for the past several weeks. This is marked in the daily chart as a purple color rectangle. The stock had recently broken out of this consolidation area with a high volume. Once a stock breaks out from a consolidation area, it usually moves higher.
KXIN – Daily Chart
#2 Bullish ADX and DI: The ADX indicator shows bullishness as the +DI line and the ADX line are above the -DI line, and the ADX line is moving higher from below the +DI and -DI lines.
#3 Price above MA: The stock is currently above its 50-day SMA, indicating that the bulls are now gaining control.
#4 MACD above Signal Line: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.
#5 Falling Wedge Pattern Breakout: The weekly chart shows that the stock was forming a falling wedge pattern for the past several months. These are marked as pink color lines. It has typically taken support at the bottom of the wedge before bouncing back. The stock has currently broken out of the falling wedge pattern, indicating possible bullishness.
KXIN – Weekly Chart
#6 Bullish MACD: In the weekly chart as well, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.
#7 Bullish RSI: The RSI is currently moving higher from oversold levels and is above 50, indicating the strength of the current upmove.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, the ideal buy level for KXIN is above the price of $3.30. However, you can purchase half the intended quantity of shares of KXIN above the price of $3.05.
Target Prices: Our target prices are $4.50 and $6.00.
Stop Loss: To limit risk, place a stop loss at $2.40 (for entry near $3.05) and $2.65 (for entry near $3.30). Note that the stop loss is on a closing basis.
Our target potential upside is 36% to 97%.
- Entry near $3.05: For a risk of $0.65 our first target reward is $1.45, and the second target reward is $2.95. This is a nearly 1:2 and 1:5 risk-reward trade.
- Entry near $3.30: For a risk of $0.65, our first target reward is $1.20, and the second target reward is $2.70. This is a nearly 1:2 and 1:4 risk-reward trade.
In other words, this trade offers 2x to 5x more potential upside than downside.
Potential Risks / Red Flags:
- The company has a history of losses. KXIN had incurred net losses of US89.5 million, US$69.1 million, and US$5.3 million in 2018, 2019, and 2020, respectively. The company also had negative cash flows from operating activities of US$9.7 million, US$4.7 million, and US$3.9 million in 2018, 2019, and 2020, respectively.
KXIN – Annual Report
- The company has a history of discontinued operations. In May 2016, Kaixin terminated its Renren Fenqi business, a financial platform providing credit financing to college students in China for making purchases on e-commerce platforms on an installment payment basis. In December 2018, Kaixin completed the transfer of its Ji’nan Dealership, which is primarily engaged in new car sales, to an affiliate of Renren, along with related assets.
- KXIN was formerly CM Seven Star Acquisition Corporation. CM7Star was formed as a blank check company for the purpose of entering into a merger. Kaixin was founded in 2015 by its corporate parent, Renren Inc. The Renren Network, in turn, has a history of a name change. It was formerly known as the Xiaonei Network (‘on-campus network’). In 2018, Renren’s parent company Beijing Qianxiang Wangjing agreed to sell all tangible and intangible assets of renren.com to Beijing Infinities Interactive Media, for $40 million worth of shares in Beijing Infinities, a $700 million firm that owns one of China’s major IT news sites DoNews.
- Renren Inc. was known as the ‘Facebook of China’. As per InvestorPlace’s Mark R. Hake, Renren (NYSE: RENN) is “a sort of failed social media company in China.” The loss-making company Kaixin is supposed to have brought in 95.7% of Renren’s revenue in 2019. When Renren filed its F-1 with the SEC, Renren claims explosive active user growth over the last 3 months to the end of March 2011, after two years of sluggish growth (Dec 2008-Dec 2010). The company then had to change its F-1 filing a week later. According to the revised filing on April 27, the company’s monthly unique log-in user base grew by only 5 million, or 19 percent, in the first quarter of 2011 — not the 7 million, or 29 percent, it reported in its first filing.
- The company had received a delisting notice from The Nasdaq Stock Market LLC, which informed the Company that, absent an appeal, trading in the Company’s warrants (KXINW) will be suspended from The Nasdaq Capital Market at the opening of business on June 11, 2019.
- Early in November 2020, a private Chinese company known as Haitaoche took a majority stake in Kaixin. Haitaoche is an e-commerce platform for luxury cars including BMW, Mercedes-Benz, and Land Rover. The transaction happened through a reverse merger. Before the reverse merger, Renren owned about 79% of the company. However, the company saw so much value in the transaction that it allowed Haitaoche to grab a 51% stake. It is unclear how Haitaoche, founded in 2015, managed to land a 51% stake in Kaixin with no money down. Barron’s study of the most seasoned 158 China reverse mergers shows that in the first three years of each stock’s trading, the median among them underperformed the Halter Index by a dismal 75% reverse takeovers.
As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!
Happy Trading!
Trades of the Day Research Team
READ BEFORE TRADING PENNY STOCKS: The allure of penny stocks lies in their potential to deliver massive gains in a short period of time. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.
Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment. Nevertheless, we do our best to identify short-term trade opportunities in this exciting space because we know some of our readers are looking for high-risk, high-reward ideas. We just urge you to make sure you fully understand the risks before making any of these trades.
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