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The stock price of China Marine Food Group (OTCPK:CMFO) has been trading down since the beginning of June when an anonymous short by the name of China Company Analyst (CCA) began publishing a series of articles claiming the company was fraudulent. As I discussed yesterday, I believe most of CCA’s claims are irrelevant and/or lack sufficient evidence, and as a result I believe the risk/reward profile currently favors owning CMFO stock. My goal is not to rehash the shorts’ thesis, but rather to ask who has been selling CMFO’s stock since CCA and other shorts began expressing their concerns.

Looking at recently released short interest data, it appears the number of CMFO shares sold short only increased from 242k on 5/28/10 (the day before CCA’s first Instablog was published) to 379k on 6/30/10 (which represents the most recently available data). If sophisticated, institutional investors really thought CMFO were a fraud, I would have expected the number of shares shorted to increase by more than 137k during this period.

Furthermore, I would have expected the total number of shares shorted to increase to more than 379k, which represents less that 1 days trading volume and more importantly only a small percentage of CMFO’s public float. What these data points tell me is that very few people who are sophisticated enough to short stock were actually convinced that CMFO was a fraud.

However, CMFO’s stock has clearly gone down a lot since the end of May. As a result, I believe that most of the sellers of CMFO stock since the beginning of June were retail investors who got scared by the articles published by CCA and other shorts. After all, how many retail investors really feel comfortable evaluating a company like CMFO? How many of them have ever spoken with CMFO management or have ever been to China? In a turbulent market like the one we are in now, it is not surprising that some retail investors would sell first and ask questions later.

While it is hard to determine if any institutions also sold stock (not to be confused with shorting it), two institutions we know weren’t selling stock were CMFO’s two largest investors (the Chairman and Jayhawk Capital), who recently disclosed they have been buying CMFO stock. The lack of a large short interest doesn’t necessarily prove that the shorts are wrong about CMFO… but it should make you think about whether the shorts are really right and wonder why the Chairman and Jayhawk have been buying more stock.

Disclosure: Author is long CMFO

Source: Who's Really Been Selling China Marine Food Group Stock?