As the world’s second-largest economy with a middle class that’s still significantly expanding, China represents an investor’s dream market. Frankly, without the country, many companies would cease to exist because they were originally tied to now-matured sectors. But the allure of China is also its pitfall. As an investor, you must be careful to avoid junk companies like Ever-Glory International Group (NASDAQ:EVK). I’ll get right to the point: EVK stock is most likely a pump-and-dump.
On the surface, Ever-Glory is an apparel maker that specializes in fashionable clothing at a great price. Its primary market is in China and surrounding Asian countries. Further, the company appeals to younger women, who may not have the funds to splurge on designer fashion, but still want to look trendy. The concept of looking fashion-forward for cheap really resonates with consumers in that region who are relatively price-sensitive.
However, the timing for EVK stock couldn’t be more off. When the novel coronavirus pandemic hit China, it shut down a thriving economy for several weeks. Gradually, society returned to normal. But for struggling retailers, the path to survival was obvious: throw in discounts and worry about profitability later. Through enticing offers, the Chinese consumer returned, engineering a remarkable comeback.
But that’s also a huge problem for EVK stock. Because well-known premium brands were on sale, the incentive to buy no-name apparel diminished. Here, it’s not so much about the price proposition but the value. Why go with generic apparel when you can get something that you really cherish for much cheaper?
Moreover, the Wall Street Journal notes that similar to the U.S., China’s white-collar workers were able to ride out the crisis through work-from-home initiatives. Thus, while pricing for premium products declined, purchasing power remained roughly the same. Again, this helps retailers of internationally recognized brands, not junk like Ever-Glory.
EVK Stock Is Not Aligned with Consumer Interests
Just as importantly, modern Chinese consumer culture emphasizes the importance of social and economic status. More than likely, this mentality affects younger consumers, who are prone to peer pressure. Take a look at what Harvard Business Review contributor Rui (Juliet) Zhu had to say on the issue:
“Although this seems to be a puzzling mix, the price-sensitive but brand-conscious Chinese consumer reflects an important duality. Price wars occur on a regular basis. This is clearly hurting companies, but nobody can afford not to participate in a price war, as price is often the determining factor for Chinese consumers when making purchase decisions.
“At the same time, the Chinese are very brand conscious, as is shown by their fondness of luxury brands. According to Bain & Co., the luxury sales market in greater China is expected to grow by 6-8% this year, to exceed $35B — making it second only to America.
“Why are the Chinese price sensitive and brand conscious at the same time? The key to understanding this puzzle is to appreciate the Chinese culture, where face and social status are crucial. If a brand can signal a higher social and/or economic status, Chinese consumers would be happy to pay a premium. If it doesn’t, they become very price sensitive.”
In other words, EVK stock might be irrelevant. Perhaps if work-from-home wasn’t an option, an extended recession would drive revenue toward Ever-Glory. However, that’s not what happened — quite the opposite. China was the first country to be impacted by the coronavirus, but it’s also one of the first to recover decisively from it.
This bounce back has benefited premium retailers, which again have stolen market share through attractive pricing. On the other hand, the Wall Street Journal notes that retailers “catering to mass-market consumers [are] finding it tougher to return to growth.”
That’s hardly surprising because, as Zhu explains, the Chinese consumer will gladly pay more for premium products, especially if they’re on discount. Unfortunately, that leaves EVK stock out in the cold.
The Technical Chart Is the Biggest Warning
If you needed more convincing that EVK stock is trouble, just pull up its technical chart. Out of nowhere, shares jumped from $1.08 to $3.05 between Oct. 21 and Oct. 27. Then, almost as quickly, EVK entered into a death spiral. At time of writing, shares are trading hands at $1.88.
If 2020 has taught us anything, it’s to recognize the signs of an emotionally driven pump-and-dump scheme. For one thing, there’s nothing unique or distinct about Ever-Glory’s business. It sells cheap clothing. Big whoop. Any company can come in and disrupt this business.
Second, there’s no compelling brand that would appeal to sophisticated Chinese consumers. Indeed, Ever-Glory is brandless in a way. Nobody outside of Asia has heard of this company.
Finally, EVK stock is all over the map. About the only way to make money from it is if you know ahead of time when the pump is going to begin. It’s just an ugly situation all around, one that investors should simply 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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