How to spot a fraud from a value play
February 03, 2011
– Comments (40) |
RELATED TICKERS: CCME
, CHBT
, SA
Interesting discussion going on over on another CAPS blog (http://caps.fool.com/Blogs/how-can-you-tell-a-company-is/534030) in the wake of the recent cratering Chinese phantom-company stocks. As CCME, CHBT, RINO, CVVT and others flutter toward zero, it's worth examining what we can and can't know as small investors. I am pretty useless when it comes to Chinese stocks, as I don't know any Mandarin or Cantonese, and their businesses are far too opaque to be understood without being their and speaking their language. I occasionally recommend Chinese stocks when I have some reason to believe they are somewhat credible (analyst coverage, news coverage in Western media, verifible deals with Western firms, etc.) However, in most cases, there simply isn't enough information for uninformed American dupes such as ourselves to figure out whether the company's are taking our investment dollars and buying luxury homes in California with them (Hello, RINO International).
Here's my thoughts (specifically about CCME, which dropped 33% today as it was clearly revealed to be a probable fraud):
After you've analyzed enough companies, you start to realize what is normal and what just can't make sense. Why should CCME trade at such a low valuation compared to the real Chinese advertising firms such as Focus or Vision China? Why don't analysts cover CCME when lots of analysts cover their smaller competitors? If the company were real, the real professional investors would be interested in it. Just like SeaBridge, the fake gold company in Canada that claims to have a huge deposit but can't get a single reputable analyst to discuss it.
They real way to succeed at value investing is to find companies who are followed but disliked by the analyst community along with a catalyst they are missing. I started my long and successful campaign pushing Western Refining at 6 bucks because I saw potential while the analysts were screaming bankruptcy. (there was in fact a "$0.00" price target on WNR from one analyst when I said it was a screaming buy.) The reason WNR was a good deal was not because it is was an obscure company no one had heard of, but rather because it was a company that everyone thought was dead. I analyzed their business and debt and said, well, the analysts are wrong. Now WNR is at $14.
But in CCME (and many of these phantom Chinese NYSE-listed tout jobs), the numbers are so good because they are entirely fictional. No one audits them, no one calls their alleged customers, no one visits their "factories," no one can even speak Chinese who pumps these stocks. When an actual researcher visits (hello Citron), they find a fiasco and tell people the company is a fraud. Stock collapses, as it should. Short way to avoid danger -- don't buy stock in tiny companies who are ignored by analysts.
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