Yongye Shares Popped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese fertilizer manufacturer Yongye International (Nasdaq: YONG  ) were surging today, gaining as much as 64% in intraday trading on heavy volume.

So what: Yongye has been one of the many Chinese reverse-merger companies to have come under fire from short-sellers alleging impropriety. Today, however, investors got a huge confidence boost as the company issued press releases saying that Morgan Stanley's (NYSE: MS  ) private equity arm will be investing $50 million in the company, while Yongye's CEO said he will purchase up to $3 million in Yongye stock.

Now what: Investors are betting today that Morgan Stanley did the due diligence on this investment, something that eluded Goldman Sachs (NYSE: GS  ) with the IPO of Longtop Financial (NYSE: LFT  ) , Hank Greenberg's Star Investments when it took a stake in China MediaExpress, and the overseas branches of the big four auditing firms when signing off on the books of a variety of now-foundering companies. The confidence that both Morgan Stanley and Yongye's CEO are showing through these investments may be the primary ingredient in the stock's jump today, but investors shouldn't overlook the fact that the $50 million that Morgan Stanley is pumping in will give Yongye significant resources to continue to expand its business.

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Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (5) | Recommend This Article (15)

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  • Report this Comment On May 31, 2011, at 2:53 PM, buffalonate wrote:

    I am one of the ones who told people to stay away from this stock until they bought shares. I also said if they ever do buy shares to feel free to load up. They finally bought back stock. This pretty much legitimizes this company so why is the p/e ratio still so low? I have to think with its growth and low p/e ratio that this stock will go up 200% to 300% before long.

  • Report this Comment On May 31, 2011, at 3:01 PM, cattywampus wrote:

    I got a little short of breath when I saw that chart this morning. Wonder what the price of a ticket on that ride was? Luckily, I've never purchased an option let alone shorted a stock. I guess they can't revoke your soul for trying.

  • Report this Comment On May 31, 2011, at 5:22 PM, Gonzhouse wrote:

    I am truly happy for YONG but even happier that I've sworn off Chinese small caps. Investing is difficult enough without the seemingly ever-present threat of fraud allegations (true or otherwise) to contend with. Life is too short to deal with the noise.

    Congrats to all YONG holders and wishing you continued success; just excuse me if I don't participate.

  • Report this Comment On May 31, 2011, at 11:21 PM, jekoslosky wrote:

    I'm in the same boat as Gonzhouse. Just blogged yesterday about why I bailed on China and Yongye on This is great news for Yongye investors, but i think I'll be wary of China for some time yet.

  • Report this Comment On June 02, 2011, at 8:56 AM, john795806 wrote:

    I'm not sure what more anyone could ask of Yongye at this point. They indicated some time ago that they would take actions to defend shareholder value, and this move is about as definitive as one can make. Fear is what short investors try to drum up; it's kind of like chanting "weapons of mass destruction" which never existed to get people drummed up to go to war.

    The fact is, none of the short accusations never had solid footing--and being in China right now was simply bad news due to the shenanigans of other companies.

    Should you invest in Yongye? I would say yes (I'm long on Yongye by way of options)--but like ANY stock, you don't want to put a huge portion of your portfolio into it. However, at its current price and given the management moves, there's a fairly reasonable shot of the stock doubling in a year, which one must weigh against the increasingly dim prospect of the company going under altogether. So to me, it's a good investment. Just keep your position small enough so you don't have a heart attack should things go south, and be prepared for some volatility.

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