A tale of two China stocks
Turns out that the Muddy Waters report hit the nail on the head. Sino-Forest lied about their assets, income, and debt in a disgusting statement of fraud. The company was essentially a giant Ponzi-Scheme and you took the bait. Sino-Forest stock was suspended from trading on August 26, 2011 by the Ontario Securities Commission. – Sino-Forest Long-Term Investment Outcome.
In my Revolution Investing class that I used to teach at Seton Hall and here on TradingWithCody.com, I talk about why I rarely, if ever, invest in non-US securities. Put simply, I know how hard it is to stay on top of and to believe in the numbers that the companies based in the US actually publish in their filings that to think I could successfully do so in most any foreign-based company is rather insane. On the other hand, when I see someone like Muddy Waters’s Carson Block target a company like NQ Mobile out of China, it piques my interest, because I do think there’s money to be made finding companies who are pushing the envelope overseas.
Block, as Marketwatch explains in today’s Muddy Waters: Stay out of China stocks, is the founder of Muddy Waters Research and the man who became famous in the investing world two-plus years ago when a research report he wrote help set in motion the collapse of Sino-Forest Corp., a Toronto-listed firm that managed forest land in China. In my book/game, Stock Market Events That Mattered, we use Muddy Waters attack on Sino-Forest as a lesson. It didn’t end pretty for those who ignored Muddy Waters’ warnings that time.
I don’t necessarily like the idea of shorting a Chinese tech stock without having a long-pairing for it. And in this case, I think an $NQ short paired up with a Baidu long might be a good mid-term to long-term way to play China tech. Baidu’s been a long of mine in the past because it’s building platforms for the Chinese consumer.
Three years ago, when Baidu (and Yahoo!) were a small fraction of today’s prices, I wrote an article called, “Investment themes and stock ideas from new trends on the Internet and explained that, “There are now 1.7 billion people who use the Internet on planet Earth. That’s up an impressive 18% over 2008. The order of the user base in hundreds of millions: Asia at 738, Europe at 418, North America at 250, Latin America at 179, and Africa, Middle East and Australia at 67, 57, and 21 respectively. Baidu and Yahoo! are two plays on this Asian/Global Internet user growth trend.”
More to the point, NQ Mobile’s not ever going to become a de facto standard platform, like Baidu has and which is key to Revolution Investing. I’ve been highlighting my own Scutify platform in part because it fits in so perfectly with the Revolution Investing platform approach I’ve written about so many times, including highlighting Baidu’s own platforms in Trade Alert: Two new platform buys and a closed pair trade.
I also think that Baidu’s established itself as the “Google of China” as I have called it for years and I’m not nearly as leery about believing that company’s financials as I am, say, NQ Mobile.
In general, I totally agree with Block in that most investors should totally stay away from not just China stocks, but most any non-US stock. If you want to short $NQ, I suggest pairing it with a $BIDU long. I’m not pulling the trigger on this paired myself just yet, but wanted to get the analysis out to you guys anyway.
