We’re taking a bearish stance on NQ Mobile (NQ) ahead of its scheduled earnings this week. In the fall of 2013, NQ was a momentum darling. The stock had risen from $7 in late June to more than $25 by mid-October. Apparently, traders thought the stock of this Chinese mobile security company was on its way to the moon, as the company appeared to be swiftly gaining market share in China.
Unfortunately for those momentum investors, NQ Mobile came crashing back down to earth at about $8 on Oct. 24 when research firm Muddy Waters accused the company of massive fraud. Apparently, the company didn’t control 55% of China’s security app market, as it claimed, and it wasn’t making money hand over fist. Instead, the company showed in its most recent report to actually have negative cash flow. It’s been a roller-coaster ride for the stock this year, but it’s back down near its June 2013 lows, and we anticipate it will move lower.
NQ Mobile stock dropped on May 15 when the company announced it was delaying its earnings announcement — never a good sign — and we think it will continue to drop before management has said it will finally release earnings on Thursday, May 29.
The best way to play this is with a bearish put option. Buy to open the NQ June 7 Puts at current levels up to a maximum price of $1.20.
The thesis is that NQ Mobile looks like it may have some “bookkeeping problems” and is likely to get a qualified audit opinion. That should send the stock down quickly. However, be careful about an exit because the stock could be halted if the drop starts to accelerate too quickly.
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