Selling stocks means it’s time to put the brakes on

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Li Auto (LI) is an electric vehicle (EV) manufacturer in China. I am neutral on the title.

When a company buys back its own shares, it’s usually a good sign. This often means the company is confident in its own future – something executives might assert in press releases and conference calls, but as the old saying goes, “Put your money where your mouth is.”

What is the opposite of self-confidence, then? This may be self-pessimism, and when a company divests large blocks of its own stock, it could signal major problems. Questions can be raised: is the management of the company detecting problems that they are not disclosing to the public? If they are doing large-scale stock sales, why should investors stay on the long side of the trade?

There are no easy answers here, but these questions seem to apply to Chinese automaker Li Auto. It’s confusing because the company seems to have so many benefits. Additionally, there is positive news for Chinese stocks in general, so the mood should be overwhelmingly positive – yet the sour mood surrounding Li Auto stock indicates savvy traders are keeping their distance for now. .

On TipRanks, LI scores a 10 out of 10 on the Smart Score spectrum. This indicates high potential for the stock to outperform the broader market.

An auspicious start to summer

By all indications, Li Auto should thrive as a business. There may be a shortage of technology components, but there is no shortage of positive developments in the early summer for Li Auto.

For example, Li Auto’s May delivery update offers plenty of fodder for the bulls. That month, Li Auto shifted into high gear by delivering 11,496 Li ONE SUV models. That’s pretty impressive for a relatively small automaker, and it’s only for a month. Moreover, on an annual basis, this result represents an improvement of 165.9%.

This does not mean that Li Auto works smoothly. Li Auto co-founder and chairman Yanan Shen acknowledged that his company’s manufacturing base in Changzhou “has not yet returned to its normal production level, which has caused delivery delays for some of our users”. Whether this is bullish or bearish for the company is up to you. Still, delivering 11,496 Li ONEs in May 2022 is quite an achievement, given the difficult circumstances.

More good news came when Li Auto unveiled its six-seat full-size flagship SUV called the Li L9 a week ago. This vehicle looks amazing and can accelerate from zero to 100 kilometers per hour in 5.3 seconds. Additionally, the Li L9 has a lithium battery with “longer range in EV mode of 215 kilometers CLTC range and 180 kilometers WLTC range” – not too shabby.

To top it off, Li Auto recently revealed that it has taken over 30,000 orders for the Li L9. Believe it or not, this milestone has been reached in just 72 hours since the Li L9 became available for reservations.

The rules are relaxed, but the shares are sold

As for macro-level development, the Chinese government has reportedly eased the country’s COVID-19 quarantine restrictions. Apparently, China has shortened the quarantine time for international travelers as well as travelers who have been in close contact with COVID-19 patients.

Along with this, the Chinese government is relaxing its testing requirements for those in quarantine. Additionally, China’s COVID-19 testing requirements will only mandate testing by throat swabs rather than lab tests.

The implications of these developments cannot be overstated. China-based companies and their shareholders now have reason to celebrate a less restrictive environment for travellers. Of course, some businesses will benefit more than others, but the country’s economy should be boosted, which is bullish for businesses in general.

So, it shouldn’t be too surprising that the Shanghai Composite and the Hang Seng Index rose after the announcement of the easing of travel restrictions in China. What is surprising, however, is that Li Auto stock fell 6% even as major Chinese indices were up for the day.

Considering all the aforementioned positive news, what could possibly dampen the mood of Li Auto stock traders? Most likely, it’s the company’s announcement that it has filed a prospectus supplement to sell up to $2 billion worth of Li Auto’s American Depositary Shares through a public offering program. shares in the market.

As of Monday’s closing price, that dollar figure was nearly 5% of Li Auto’s market capitalization. In other words, Li Auto sells a large number of its shares. First, it is potentially problematic as it could raise equity dilution issues. Second, as we have already mentioned, it is not necessarily encouraging for a company to be a large-scale seller instead of a buyer of its own shares.

The Taking of Wall Street

According to TipRanks analyst rating consensus, LI is a Strong Buy, based on six unanimous Buy ratings. Li Auto’s average price target is $46.60, implying an upside potential of 25.71%.

Takeaway meals

Li Auto’s stock market offering program is not the end of the road for the company. However, this is clearly cause for concern, and the investment community does not seem happy with Li Auto’s mega stock sale.

Certainly, there is also positive news to watch, both for China’s macroeconomic environment and for Li Auto in particular. Nonetheless, cautious investors should consider pausing trading in Li Auto shares, as the company’s massive stock sell-off could be a sign of deeper issues that have yet to be uncovered.

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