🎙️ Penny Stock Purge

😅 What a wild week in stocks — by far the most volatile stretch in years.

Monday was the S&P’s worst day in two years. Thursday was its best day in two years, and Friday’s push higher helped the market post its best two-week advance of 2024. All told, the benchmark ended the week virtually flat, just as earnings season nears its end. The S&P 500 remains up about 12.7% year-to-date.

One strategist told CNBC: “A volatile sell-off and bounce back is just normal August [and] September behavior; thin markets, hedge funds gone wild and irrational moves down.”

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Temu’s rise mints a very wealthy man

• The land of penny stocks

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

🎤 Temu’s Founder Becomes China’s Richest Person

Step aside, wealthy folk. A new king is in town: Colin Huang, a 44-year-old former Google engineer, has become China's richest person, with a net worth of $48.6 billion, according to the Bloomberg Billionaires Index. 

Huang founded Pinduoduo, an e-commerce platform known for its low-cost products and big promotions, in 2015. After a sharp decline in his wealth during the pandemic, Huang's fortune has rebounded thanks to the expansion of Pinduoduo's international brand, Temu — widely considered a cheaper alternative to Amazon. 

Huang’s rise speaks to the rise in e-commerce, changing consumer habits, and an aggressive international expansion strategy. Whether Temu’s goods are of good quality is up for debate. But Temu’s greatest differentiator is its very low prices. In an age of inflation, that’s seen as a win. 

• "In this economic environment, obviously people are looking for great value for their money, people are looking for low prices,” one retail analyst said. “So this is a time to shine for value retailers like Temu.”

Rapid rise: Huang, born in Hangzhou, China, studied computer science at Zhejiang University and the University of Wisconsin-Madison. After working at Google, he returned to China to establish Pinduoduo, which quickly became a major player in e-commerce by offering substantial discounts and a wide range of products. 

Huang's net worth peaked at $71.5 billion in early 2021 but fell sharply after China's regulatory crackdown on the private sector. Yet his wealth has since recovered, making him the richest person in China.

Why it matters:

Nearly all of the world’s wealthiest individuals are in their 60s, 70s and 80s. There are some exceptions, including the third-richest person, Mark Zuckerberg ($180 billion), who is 40, and Warren Buffett ($136 billion), the world’s sixth-richest person, who turns 94 in three weeks.

And then there are brilliant minds like Huang, just 44, who has led an international expansion of Pinduoduo under the Temu brand. Launched in the U.S. in 2022, Temu attracted budget-conscious consumers with low-priced, unbranded products. The strategy helped Pinduoduo report a 90% increase in revenue to 248 billion yuan ($35 billion) last year. 

To be sure, Pinduoduo has faced criticism for its work culture and business practices. Employees have protested against long working hours, and suppliers have complained about low pricing pressures. Temu has also been accused of unethical practices, leading to investigations in South Korea and protests from vendors in China. Some consumers have complained about the quality of its products. 

• Regardless, the market has sent a message, rewarding Temu and Huang handsomely.
  

• "Jack Ma and Jeff Bezos have been corporate leaders in their moments, but the times have changed, and Huang is seeing great success with a different, less visible approach."

Read more about Huang

More Headlines

💼 Weekly jobless claims fall to 233,000, less than expected

📈 Palantir shares close up 11% after announcing partnership with Microsoft

💡A few little ideas and short stories, from Morgan Housel

💰 How wealthy investors find opportunities in stock market sell-offs

❗ JPMorgan says three-quarters of global carry trades now unwound

📉 Bumble shares fall to all-time low after slashing annual revenue forecast

🏠 U.S. mortgage rates fall to 15-month low, with average 30-year fixed-rate mortgage at 6.47%

💸 Nasdaq Tries to Purge Its Penny Stocks

Let the purge of the penny stocks begin. 

Nasdaq is taking measures to address concerns about the proliferation of penny stocks on its exchange. The exchange has proposed new rules to expedite the delisting of companies whose shares trade below $1, a move designed to reduce the number of risky stocks on its platform.

What to know: Nasdaq has been criticized for hosting numerous penny stocks—421, to be exact, up from fewer than a dozen in early 2021.  

• Under the new rules, companies that fail to maintain a share price above $1 for 360 days will be delisted without the option to appeal. Currently, companies can appeal and extend their listing beyond that period.
  

• Nasdaq says the changes are about protecting investors, especially as more people—many younger—have entered the market since 2020.
  

• “Nasdaq believes that such behavior is often indicative of deep financial or operational distress within such companies, rendering them inappropriate for trading on Nasdaq for investor protection reasons,” the exchange said.

Companies that conduct reverse stock splits to boost their share price artificially but fall below $1 within a year will receive an immediate delisting notice. They can still appeal and remain listed for another 180 days.

Case study: Bit Brother, a Chinese blockchain company, exemplifies the issue. It managed to stay listed through reverse splits despite its share price dropping over 99% after adjustments. It was eventually delisted in March.

Virtu Financial has been vocal about the need for stricter rules, citing concerns over market manipulation with penny stocks. They believe the proposed changes are a positive step.

“These are classic penny-stock companies that are often tied to pump-and-dump trading activity and other forms of market manipulation,” the company said.

Why it matters:

Nasdaq argues that repeated reverse splits often indicate financial distress, making such companies unsuitable for listing. Ideally, only financially stable companies remain listed.

Meanwhile, reverse splits have become much more common amid a rise in the gamification of financial markets (think meme stocks, influencer-led stock picks, etc.)  Reverse splits are generally considered a red flag because companies swap multiple shares for one share, which raises the stock price without changing its market value. 

• There were a record 495 reverse splits in 2023 and 249 in the first half of 2024, which reflects the challenges firms face—especially speculative companies—in keeping share prices above $1.
  

• The proposed changes require approval from the U.S. Securities and Exchange Commission (SEC) to be implemented.

Read more

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Quick Poll

On Wednesday, we asked: Do you own Disney, Uber, or Airbnb stock? Why or why not?

— About one-third of readers don’t own any of them. Wrote one investor: “I don´t have faith in the management especially of Disney. Their reputation and communication in recent years are one of the main reasons their stocks have been down over the last 5 years. Airbnb and Uber, I have the impression that they have to diversify their products.”

— One Disney shareholder said, “Great company. Great IP inventory. Low price. It’s Just a matter of time for it to correct.” Added an Airbnb shareholder, “Still believe in the concept and its future growth trajectory.”

See you next time!

That's it for today on We Study Markets!

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