FleaBagger (34.76)

Who turned the HEAT off?

April 16, 2010 – Comments (3)

Okay, here's this company in China, and they make stuff that makes buildings energy-efficient, and they install them in all the new buildings going up all over the big cities in China. They're called SmartHeat, Inc. (HEAT) and Ultralong picked them a little while back, and when I looked into their numbers - faith and begob! (I don't know Chinese idioms, so you'll have to make do with an Irish one) - they're amazing! Look at those growth rates! Look at that consistently high return on equity, that balance sheet, the low valuation! What a dream come true....

So I buy some (sell puts, actually).

Then, they report strong earnings growth in line with their guidance, and they get massacred because Wall Street had expected them to do even better (though Wall Street hadn't bid them up for some reason, somehow they managed to sell them off without having bid them up in the first place). My puts are in the red, but hey, that's okay. I'll just sell some more puts and wait for the Street to come back to their senses.

Well, HEAT keeps going down (no thermostat jokes, please), and by this time, I'm knee-deep in my margin account shelling out puts to whomever will buy them. So now I'm wondering: "What am I missing?"

Well, Jim Chanos has the answer! I'll look for the video (if I remember to) and post it in the comments section, Lord willing, but the gist of it is this:

China's real estate bubble is about to put ours to shame. They have ginormous, empty skyrises being flipped all the time, and no one in the middle class of their economy can afford any of them, and the super-rich are already overinvested in them as it is. Each tower of steel and concrete and glass is financed by a house of cards.

So I guess if they stop building buildings, the people who sell the energy efficiency crap for those buildings will probably see a sharp decline in their earnings and revenue growth. This reminds me of the time I was investing in the low-P/E BDC's in 2006 because their numbers looked great. 

I may or may not close my RL position in HEAT soon, and I may or may not close my CAPS pick. 

P.S. Invalid ticker: HEAT