Hong Kong-based fintech company SGOCO Group, Ltd. (SGOC) offers corporate, personal, and mortgage loans in Hong Kong and Australia. As one of the latest meme stocks to attract retail traders, SGOC has gained 951.1% over the past year and 580.7% year-to-date.
Furthermore, SGOC has been one of the best performers in the financial services space over the past month, with 344.6% returns over this period. The stock is frequently discussed on social media platforms Twitter and Reddit.
So, here’s what we think could shape SGOC’s performance in the near term:
U.S. Listing Amid Chinese Crackdown
Hong Kong was brought under the purview of the Chinese government in May 2020. Thus, all Hong Kong-based companies are likely to be affected by the ongoing Chinese crackdown on U.S. listings. The Chinese Communist Party’s Central Committee is fixated on cracking down on illegal securities trading. At the same time, its federal cybersecurity arm has introduced a cybersecurity compliance regime, under which companies are mandated to go through a cybersecurity review before listing in U.S. exchanges.
The threat of potential delisting within the next three years could cause investors to lose out on their capital locked in China and Hong Kong-based companies. Considering these developments, shares of SGOC have declined 11.4% over the past five days and 14.5% intraday to close yesterday’s trading session at $9.87.
Weak Financials
Despite having a $1.14 billion market capitalization , SGOC has generated $4.29 million in revenues over the past year. The company’s trailing-12-month gross loss came in at $3.05 million, translating to a gross margin of negative 70.95%. Its trailing-12-month net loss and loss per share stood at $67.92 million and $0.69, respectively.
SGOC’s ROE, ROA, and ROTC came in at negative 71.42%, 75.36%, and 3.41%, respectively, over the past 12 months. In addition, the company’s 0.04% asset turnover ratio is 94.2% lower than the 0.64% industry average.
Stretched Valuation
In terms of trailing-12-month Price/Sales, SGOC is currently trading at 225.57x, which is 5,149.7% higher than the 4.30x industry average. In addition, the stock’s 45.89 trailing-12-month Price/Cash Flow multiple is 109.5% higher than the 21.91 industry average.
SGOC’s 268.28 trailing-12-month EV/Sales ratio compares with a 4.52 industry average.
POWR Ratings Reflect Bleak Prospects
SGOC has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
The stock has an F grade for Quality and Value, and a D for Growth. SGOC’s negative profit margins and premium valuation justify the Quality and Value grades. In addition, the company’s revenues declined 16.1% over the past year, in sync with the Growth grade.
Of the 71 stocks in the D-rated China group, SGOC is ranked #66.
Beyond what we have stated above, we have rated SGOC for Momentum, Sentiment, and Stability. Get all SGOC ratings here.
Click here to view the top-rated stocks in the China group.
Bottom Line
The substantial retail investor interest in SGOC has allowed the stock to witness a triple-digit gain over the past couple of months despite the threat of potential delisting amid the Chinese crackdown. Furthermore, as global economic growth is expected to decelerate given the rapid spread of the COVID-19 Delta variant, the momentum stock might lose its luster soon as investors focus on non-cyclical defensive stocks to hedge against the current market volatility. Thus, we think SGOC is best avoided now.
SGOC shares were trading at $8.83 per share on Friday afternoon, down $1.04 (-10.54%). Year-to-date, SGOC has gained 508.97%, versus a 18.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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