Stock #6 SHZ – China Shen Zhou Mining & Resources Inc. – 1-year gain = 562% (as of 2/4/2011)

Stock #6 SHZ – China Shen Zhou Mining & Resources Inc. – 1-year gain = 562% (as of 2/4/2011)

Mining – Metal Ores

Although not listed in the States very long, this stock has made quite a move in a short period of time. The stock was around $8 in early 2008 before collapsing to a penny stock by the March 2009 bear market bottom. The stock would breakout in mid-2009 on high volume to get above a dollar a share, then formed a base for about 15 months going into the fall of 2010. From that point on, it was all about 3 words: China Rare Earth.



A stock bottoming under $1 and forming a long base after the initial break out of a bottoming pattern is similar to the other stocks studied thus far. The long 15-month base on SHZ yielded 4 tradable breakouts between October and December 2010 before the stock retreated to its 50-day line in January 2011.

The breakouts:

1. 10/8/2010 – The stock broke out of a month long base within the larger 15-month base on very high volume. The stock was up 12% on the day on $325k dollar volume. The stock rallied for 4 days for a total move of 50% from the breakout point. The stock was at $1.65 at the peak, then had a quick 3-day pullback that yielded the next breakout.



2. 10/19/10 – The stock spiked up on no news I could find…stock was up 65% on the day on big jump in dollar volume to $3.5M. The stock gapped up big the next day on even bigger volume for a total two-day move of 178% from the breakout point. This was too much too fast and the stock pulled back about 50% and formed a double-bottom base along its 50-day average into early December 2010. The company announced earnings during the pullback but it did not breakout.

3. 12/3/2010 – The company raised sales guidance for 2010 and 2011, showing 245% and 162% growth respectively. The stock was up 25% that day on $16.7M dollar volume. The stock drifted upward over the next 7 days for a total move of 87% from the breakout price. It then drifted downward for about 7-8 days on low volume, forming a handle-like pattern near the high of the double bottom base.



4. 12/27/2010 – The stock started to move on China supply concerns along with the other stocks in its sector. The stock was up 10% on $10M dollar volume that day and added a 21% day the following day on $53M dollar volume. After the third day the stock had made a 125% move in 3 days from the breakout price. It slowly rolled over the next few days and again retreated for a test of its 50-day average. As of today the stock has bounced weakly off the 50-day and it is yet to be seen if it can hold it.



Here’s some tidbits on the stock:

1. The stock had neglect going into the rally with no estimates and no analyst coverage.

2. The company had good earnings and sales growth in the September 2010 quarter announced in November, and then raised earnings guidance in early December. The company was not consistently profitable in prior years, but that appeared to be changing as sales were rising at a triple digit clip in June and September 2010.

3. Sector RS was 99, so SHZ’s sector was likely a factor – any company both in China and in rare earth group did well ending 2010. Other strong stocks in the group (with low eps ratings) were REE, MCP, NAK, MSB.

4. The stock’s float was 5 million. Average daily volume is 4.1M.

5. The stock has a P/E of 19 and no debt. ROE is 25% and p/b is 10.

6. IBD Ratings: EPS 66, RS 99, Composite 98.

7. Fund trend is flat – one single fund owning stock since at least March 2010.

8. The stock’s trend intensity was at 111, 151, 135, and 163 at the breakouts, respectively.

So why did SHZ go up 500% plus in a year?

SHZ had several factors – neglect, low price/float, sector catalyst, good earnings guidance. Other than the institutional and technical neglect preceding the move, the strongest factor appears to be a combination of positive earnings guidance and the strong sector, especially in late 2010. Its fundamentals were okay except the company was still losing money for the most part until September 2010 quarter. Sales were growing at a triple-digit rate and the company was just above break-even, so it appears that the sales numbers were driving some speculation in the stock in hopes of longer term profitability around the corner. This stock, as the others studied, really took off in price and volume once it got to the $4 range and broke out. The move from there was about 145% within 7-8 days. The breakouts were very good setups for the most part, moving in bursts of 2-3 days and pulling back in an orderly fashion to set up the next breakout.