RLX Technology: A Hedge Fund Favorite, But Is It a Penny Stock Worth Buying?

RLX Technology Inc. (NYSE: RLX) has sparked investor curiosity as a potential "penny stock" play, fueled by recent hedge fund activity. However, a closer look reveals a more nuanced story: while institutional investors are indeed taking positions, RLX does not qualify as a penny stock. Here’s why—and whether it’s worth adding to your portfolio.

Is RLX a Penny Stock?

First, the facts: RLX is not a penny stock. Despite its low share price of $1.89 as of October 2024, the company is listed on the New York Stock Exchange (NYSE), a major exchange with stringent listing requirements. Penny stocks, by contrast, typically trade on over-the-counter (OTC) markets like the Pink Sheets or OTCQB and often have share prices below $5. RLX’s NYSE listing underscores its compliance with higher financial and regulatory standards, disqualifying it from penny stock classification.

While its valuation may seem small (market cap around $500 million as of late 2024), its structured institutional ownership and regulated exchange status set it apart from speculative penny stocks.

Hedge Fund Activity: Mixed Sentiment, Strategic Moves

Despite not being a penny stock, RLX has drawn significant institutional attention. Here’s the breakdown of recent moves:

Top Buyers:

• Strategic Vision Investment Ltd: The largest buyer, increasing holdings by $40.28 million over two years to 40.3 million shares as of July 2023.
• Perseverance Asset Management International: Added $8.33 million in holdings, bringing its stake to 14.4 million shares by August 2024.
• Vanguard Group: Maintained a $60.7 million position, a +1.9% quarterly increase in Q2 2024.

Notable Sellers:

• SG Americas Securities LLC: Reduced holdings by 94%, dropping from 4.7 million shares to 282,000 shares by October 2024.
• Cubist Systematic Strategies LLC: Cut its stake by 31.2%, to 26,000 shares.
• Nomura Holdings Inc.: Sold 99% of its holdings, nearly exiting its position.

Key Takeaway:

While institutions like Strategic Vision and Vanguard are accumulating shares, others are exiting. The net institutional inflow of $6 million (inflows of $31 million vs. outflows of $25 million over 12 months) suggests cautious optimism, but not a consensus buy.

Why Hedge Funds Are Interested

1. Market Potential: RLX operates in the e-vapor products sector (SEC SIC Code 2111), a niche but growing space as smoking alternatives gain traction.
2. Share Buybacks: The company has a $500 million repurchase program, signaling confidence in its stock value.
3. Diverse Ownership: Top holders include IDG China Venture Capital (60 million shares) and Goldman Sachs (25.7 million shares), indicating credibility.

Risks to Consider

• Volatility: The stock’s price swings (e.g., SG Americas’ 94% sell-off) highlight sensitivity to market sentiment.
• Regulatory Risks: The e-vapor industry faces scrutiny over health and safety concerns, which could impact sales.
• Concentration: A few funds hold over 20% of shares, raising the risk of sudden sell-offs.

Conclusion: Worth Buying for the Right Investor

RLX Technology is not a penny stock, but its mix of institutional support, strategic buybacks, and growth potential in nicotine technology makes it an intriguing play. Key data points:
- 22.68% institutional ownership with top funds like Vanguard and IDG backing it.
- 17.76% annualized price growth since late 2023.
- $500 million buyback program boosting shareholder value.

However, investors must weigh the risks: regulatory hurdles, price volatility, and the concentration of ownership. For those willing to take on these risks, RLX offers long-term growth potential in an evolving sector.

In short, RLX isn’t a “best” penny stock—it’s not a penny stock at all—but it’s a strategic pick for investors focused on emerging markets with institutional backing. Proceed with caution, and monitor fund flows closely.