Why China XD Plastics Co. Ltd. Shares Popped

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 China XD Plastics Co. Ltd. (NASDAQ: CXDC  ) gained as much as 17% today and finished up 5%, continuing a rally from last week following its earnings release.

So what: The auto-parts supplier hit a 52-week high again today on high-volume trading rally that looks entirely momentum-driven. Shares of China XD have now nearly doubled in the last two months, a run that began with a blowout fourth-quarter earnings report at the end of March, when revenue jumped 128% and net income more than tripled.

Now what: The positive results continued last Wednesday in its 2014 first-quarter earnings report, as China XD saw revenue improve 31% and net income jump by nearly 50% a share to $0.34. At a dirt cheap P/E of 4 and with serious momentum behind it, shares could easily move higher, but such a low valuation can call suspicion to a stock. China XD seems to be cheaply valued in part because it became listed in the U.S. through a reverse merger, a process that companies sometimes use when they cannot become listed through the usual procedure. In the past, several Chinese companies that used this process were exposed as fraudulent. A Morgan Stanley private-equity fund invested $100 million into China XD back in 2011, giving the company additional credibility, and the stock has been traded in the US for several years now without any meaningful concerns. While China XD's growth and valuation look promising, potential investors may want to do some extra due diligence on China XD due to its unusually low P/E and as the recent run-up is likely due in part to traders who are looking for a short-term profit.

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