Weibo Corp (ADR) (NASDAQ:WB) and SINA Corp (NASDAQ:SINA) have been on a tear in 2016. WB stock is up over 140% year-to-date with a 46% run in the last 30 days. SINA stock is up 57% year-to-date with a 30-day return of 40%.
Both WB stock and SINA stock are plays on digital media in China. However, Sina is a traditional web portal company akin to Yahoo! Inc. (NASDAQ:YHOO) while Weibo is often referred to as the “Chinese Twitter” since its microblogging platform is very similar.
The companies are interrelated, with SINA stock owning (right now, anyway) a significant amount of WB stock.
So, what has made these relatively small stocks explode lately, and will the rally last?
WB Stock Riding a Short Squeeze
On the surface, it’s the same old story of a momentum stock. SINA Corp gapped up in early August thanks to better-than-expected results for Q2 2016 and boosted guidance. This resulted in a strong analyst response, with Citigroup initiating coverage at “buy” and JPMorgan more recently resuming coverage at “overweight.”
What’s adding fuel to the fire — particularly in WB stock, which has more than doubled in 2016 — are bears who have been very wrong on the stock and are racing to cover their shorts.
Click to Enlarge Just take a look at this short interest data provided by Nasdaq. At the end of 2015, WB stock saw very low volume but a modest amount of short interest. By the end of July, the shares held short had increased five-fold even though volume hadn’t really budged!
After a strong earnings report, those short sellers have been scurrying for the exit in a rush to create a classic short squeeze.
Sina stock has been caught up in the currents, too, but the outsized gains in Weibo are a tale of this dynamic.
What’s Next for WB Stock and Sina Stock?
Anyone who has witnessed a short squeeze knows that is an inherently short-lived phenomenon. So what’s next?
Well, Sina — the “parent” in this corporate relationship — just announced that it will be distributing Weibo stock to its shareholders.
Today we learned that investors will get one share of WB stock for each 10 ordinary shares in SINA stock. According to reports, Sina’s stake in Weibo will drop from about 54% currently to 51% after the move.
On the surface, this share dilution should weigh on WB stock, even if only in a small way. The short squeeze dynamics are hard to counteract right now, but watch for the effect of this move in the future.
However, it’s worth pointing out that for all the hand-wringing about Chinese accounting opacity and the risks of this state-controlled media market, Sina has been seen as a legit company for a while. Way back in November 2015, some analysts were calling this battered pick a tremendous value that had merely been tarnished by disappointments at Alibaba Group Holding Ltd (NYSE:BABA) and the Chinese economy in general.
That turned out to be a hell of a call.
I don’t pretend to know where any tech stocks will be in five years, let alone Chinese internet players. However, the momentum is dramatically to the upside. Traders could do worse than simply buy high and sell higher as both WB stock and SINA stock ride strong earnings and a short squeeze to new 52-week highs.
Just keep your finger over the sell button, because when the momentum ends, it may end fast.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
