From the WSJ: What's in a Name: If It's 'China,' a Pick-Me-Up

If a broker says "China," do you hear "ka-ching"?

Dozens of tiny companies have gotten big stock-market boosts simply by adding the word "China" to their names. While the total dollars at stake are small, the trend is reminiscent of the Internet bubble's heyday, when a company could launch its stock price to the moon merely by tacking ".com" onto its official name.

Intelligent Investor: The Name Trap
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Columnist Jason Zweig talks with Kelsey Hubbard about the significant influence that a name can have on attracting investors.
.It is also a reminder that for all too many people, investing remains like a word-association game. Stockpicking is often driven by resemblance instead of reality; a catchy name or vivid image can fill investors' heads with dreams of a bright future that mightn't be supported by the facts.

I asked Wei Wang, a finance professor at Queen's School of Business in Kingston, Ontario, to study the returns of the 82 companies that have adopted new names containing the word "China" since late 2006. The list includes 18 last year and four so far in 2010.

Prof. Wang looked at returns from 20 trading days before the announcement through 20 days after. He found that the average stock that added "China" to its name outperformed the overall market by 31 percentage points over that period. The results held up over shorter and longer periods and after Prof. Wang removed the most extreme cases.

Golden Green Enterprises Ltd., a steel producer, became China Gerui Advanced Materials Group Ltd. on Dec. 14. Over the 40 days surrounding the switch, the shares went from $5.01 to $6.88 on the Nasdaq Global Market, a 37% gain even as U.S. and Chinese stocks were generally flat.


Heath Hinegardner
.Edward Meng, China Gerui's chief financial officer, says the name switch was meant to reflect the company's "core competency, product-offering orientation and its association with Chinese companies listed in the U.S. markets." He adds: "We did get feedback from investors that they liked the new name. But it's hard to tell if the name change impacted the share-price movement."

Many China-syndrome stocks are created in reverse mergers with "shell companies." In this maneuver, a firm with a thinly traded stock, and often without viable operations, absorbs a more-marketable business whose shares mightn't have traded at all. The company is then renamed.

Consider Apogee Robotics, a company with no revenues or assets. It merged into a firm called Advanced Swine Genetics last Sept. 30, immediately renaming itself China Swine Genetics Inc.

The company didn't announce the name change until Oct. 13, however. The next day, the stock went from $8.40 to $15.60, an 86% gain. Then it collapsed. Last week, a mere 100 shares changed hands at $4.50 on the OTC Bulletin Board.

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.Executives at China Swine, which is based in Honolulu, didn't respond to requests for comment.

The rechristened "China" companies have a total market value of only about $8 billion. Most are unlisted on a major exchange, typically trading on the OTC Bulletin Board, where brokerage costs can be high. On China Swine, the "spread" between buy and sell prices (part of the cost to trade) exceeded a piggish 40% last week.

This is far from the first time that investors have fallen under the spell of greed-by-association.

In the early 1960s, many small stocks grabbed the market's attention with names evoking the promise of the Space Age, like G-W Ameritronics (a seller of truck bodies) and Techni Electronics (a maker of massage equipment). Many of the "tronics" companies went on to lose more than 90% of their value.

In 1999, Internet-obsessed traders drove Computer Literacy Inc. up by 33% in a day on word that the stock's name would change to fatbrain.com. In 1998 and 1999, the average company that added ".com" to its name outperformed other technology stocks by an average of 53 percentage points. Scads of them later went to zero.

Between 2004 and 2007, as the price of crude oil soared, companies in the U.S. and Canada that added the words "Oil" or "Petroleum" to their names got an instantaneous 8% boost to stock performance. Then they faded.

The bottom line: In the long run, cute names don't make money; only good businesses do.