After it first soared in late October, I recommended avoiding Ever-Glory International (NASDAQ:EVK). But, despite this Chinese apparel-maker’s shares being mostly hype (with little substance), EVK stock again surged in early December, going from around $2 per share to topping $5 per share.
Since then, Ever-Glory has given up some of its gains. You can enter a position today at just under $3 per share. But, even with this pullback, there’s no reason to chase what remains a junk stock. More likely than not a pump-and-dump, those who buy today could wind up holding the bag.
Sure, on paper the bull case makes some sense. The rise of China’s middle class bodes well for demand for fashionable clothing. Yet, at a sharp competitive disadvantage against more premium, international brands, don’t expect this relatively unknown company to set the retail fashion world on fire in the coming years.
Simply put, the story behind Ever-Glory hasn’t changed. Still a junk company. Still a likely pump-and-dump. And, trading far above where it was a few months back, there’s only one call: stay away.
Why Did EVK Stock Go Parabolic in December?
With its strong performance in early December, many may have thought a game-changing development happened with Ever-Glory. But the epic surge on Dec. 3 came on no news from the company. Take a look at its recent SEC filings, and all you’ll see as of late is the board election results from its Dec. 11 annual meeting.
So, what drove its parabolic move a few weeks back? To me, this still looks like a pump-and-dump. Those who got in early were able to ride this from under $1 per share, all the way up to its 52-week closing high of $5.25 per share.
But those buying after the pump, such as retail investors? Unfortunately, chances are they’ll be left holding the bag. The enthusiasm’s already peaked with EVK stock. As it cools down further, expect shares to fall back toward not only where it traded back in November (around $2 per share) but around where it was before the hype first took hold (under $1 per share).
Some may ignore this risk and still see opportunity here, namely due to the stock’s exposure to the rise of China’s middle class. But, while in theory that could be a factor in Ever-Glory’s favor, further inspection indicates that isn’t the case.
Bear Case Still Stands for Ever-Glory
The bearish assessment of EVK stock I made back in November still holds. Namely, with premium international apparel brands continuing to discount their wares, this company and its portfolio of unknown brands (La go go, Velwin, Sea To Sky) is at a sharp competitive disadvantage.
Put simply, it makes no sense to believe that China’s middle class, relatively unscathed economically from Covid-19, is going to rush out and choose no-name brands over higher-status luxury brands.
Many investors may be blinded by the “China factor” behind this story. Yes, with the rise of China as an economic superpower, and its pivot toward a consumer-based economy, sectors like apparel retail are set to thrive in the coming years.
But, that doesn’t give it a free pass from the competitive risk mentioned above. Sure, China’s economy is growing at a faster clip than Western economies like the United States. But, just like in the West, fashion is by-and-large about signaling one’s social status in the East.
Perhaps even more so. For now, the best way to show others you have “arrived” is by sporting fashionable apparel from the established global luxury brands. Sure, down the road, brands home-grown in China could garner such cache. But don’t expect any of the brands from Ever-Glory’s “also-ran” stable to rise to this status.
Don’t Waste Your Time (or Risk Your Money)
I can understand the appeal of Ever-Glory stock. With China firmly in recovery mode after Covid-19, it’s headed toward strong growth in 2021. But that alone doesn’t guarantee a blockbuster year for this company’s apparel sales.
Why? As I detailed above, this company has little economic moat. With premium global apparel brands still being discounted, why would resilient middle-class Chinese consumers rush out to buy this company’s stable of no-name brands?
It hasn’t been underlying fundamentals driving this stock since late October. It’s been speculation by retail investors. And possibly, with pump-and-dump operators fanning the flames. Enthusiasm has cooled, as seen from the stock’s drop from over $5 per share, back down to around $3 per share.
But, as the hype continues to fade, expect EVK stock to fall back toward its prior price levels (under $1 per share). As the bear case still stands, my opinion remains unchanged: avoid.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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