FreeMarkets (99.28)

FreeMarkets Initiates Coverage of SmartHeat

February 17, 2011 – Comments (4) | RELATED TICKERS: HEAT

Equities genius FreeMarkets has initiated coverage of SmartHeat (NASDAQ: HEAT) with a SELL Rating.  This may shock the investment community as only 2 months ago, on December 16, 2010, analysts at Barclays Capital (NYSE: BCS) initiated coverage on shares of SmartHeat with an “equal weight” rating and a $6.00 price target on the stock.

FreeMarkets price target is 87¢ by the end of 2012, with a potential bankruptcy filing before then. 

Here's what FreeMarkets like about the stock.
1) Undervalued according to book value
2) Undervalued according to P/E for its sector
3) Excellent top level revenue growth
4) Barclays Capital initiated coverage on Dec. 16, 2010 (two months ago) with a neutral rating and a $6 price target (30% premium to the $4.55 premarket price).

Here are the stock negatives:
1) Floating nearly 6 million additional shares late last year with no specific reason for why they needed the money.
"SmartHeat intends to use the net proceeds from the sale of the common stock for general corporate purposes and potential acquisitions, although no specific acquisition candidate has been identified to date."

2) Barclays Capital was the sole bookrunner for the new shares, so that negates the #4 positive statement above.

3) The closing of the acquisition of Gustrower Warmepumpen concludes at the end of February. and price is tanking into that purchase.  FreeMarkets can only speculate that they may have paid too much or their are liabilities with that purchase we do not know about.

Sadly there is NOT more information on this company, which makes it even more of a sell.  As with many Chinese stocks, this has a 25% chance of being a completely fraudelent company. I'm not saying the stock will go to zero right away, but it will get there eventually.

Oddly, FreeMarkets wrote this entire blog in the 3rd person.