Although Kaixin (NASDAQ:KXIN), which has operated used-car dealerships in China, has some potential positive macro catalysts, KXIN stock is extremely puzzling and difficult to analyze at this point.
In addition to operating dealerships, Kaixin has sold vehicles online and provided financing for auto purchases.
The shares surged about 1,400% in five days last month on no news from the company before losing a large portion of those gains in two trading sessions.
Adding to the mystery, Kaixin was unable to offer even a possible explanation for the huge rally.
Moreover, in August, the company reported in an SEC filing that it had “decided to halt its used-car dealership operations,” Marketwatch reported.
Even more startling was the company’s statement that “it may not have meaningful revenue starting in the third quarter of 2020.”
Kaixin indicated last month that nothing had changed since its August statements.
A Closer look at KXIN Stock
In an Oct. 19 article, InvestorPlace’s Nick Clarkson noted that many of the luxury auto brands on which Kaixin had focused ” have expanded into the world of electric vehicles.”
In September, China’s auto sales soared nearly 13% year-over-year. Just Auto reported that “the gain continues the rapid rate of recovery in China’s automotive market this year and is the sixth consecutive month of year-on-year growth.”
And Beijing recently said that it would seek to ensure that 50% of all vehicles sold in 2035 has some sort of “new energy” component, i.e. they are powered by electricity at least sometimes.
Moreover, as I’ve pointed out for months, with many commuters looking to avoid mass transit amid the pandemic, auto sales should get a tremendous lift.
In the U.S., and apparently in China as well, that trend has indeed begun to materialize.
To the extent that Kaixin sells electric vehicles (EVs), the government’s efforts to tremendously boost sales of such automobiles should help the company and KXIN stock.
Another InvestorPlace columnist, Louis Navalier, made the same point recently, writing, “KXIN stock could benefit not only from growth opportunities in a vast market, but also from an electric vehicle connection.”
He added that Kaixin’s link to companies that sell EVs could be the reason for the meteoric rally of its shares.
Other Possible Explanations for the Surge
Kaixin may have decided to shift to an online-only model without announcing the move.
That, in turn, may have excited some investors who could have thought that KXIN stock would emulate the shares of American online auto seller Carvana (NYSE:CVNA), which have nearly tripled over the past six months.
Alternatively, Kaixin may be on the verge of a deal to start selling a brand that’s popular or becoming popular in China, such as Cadillac or Nio’s (NYSE:NIO) vehicles.
Finally, the company could be negotiating to provide financing for brands that are generating high demand in the Asian country or RenRen (NYSE:REN), which owns the majority of Kaixin’s shares, may have decided to sell Kaixin for a very high price.
The Bottom Line on KXIN
When it comes to Kaixin, I believe that investors are largely “flying blind.” Nobody seems to know why its shares soared and why they came back to Earth.
And with the company’s dealerships apparently still halted, no one seems to know the ultimate fate of the dealerships or how, if at all, the company’s business model has changed.
According to MarketWatch, KXIN is trading at a miniscule price-sales ratio of just 0.19, while its current ratio is just 1.02, indicating that its balance sheet is fairly strong.
Given the huge uncertainties facing Kaixin, however, I believe that it would not be prudent to buy or own its shares at this time.
Instead, investors who are intrigued by the company’s positive catalysts should keep an eye on it and wait for more information about it before buying its stock.
As for those who already own KXIN, I would recommend that they sell their shares and buy a less risky name that also has exposure to the Chinese auto market.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.