- Muddy Waters was out with a follow up piece yesterday that echoed my sentiments of thinking NQ's auditor may already be on their way out.
- I was floored to read an article suggesting a major investment or buyout could be coming for NQ.
- I urge traders not to be fooled by the seductive lure of major returns by going long here; there is simply too much risk.
NQ Mobile (NYSE:NQ) released a press release response to Muddy Waters this morning - one that seemed to really be devoid of much content and simply reaffirmed what the company has said in previous press releases. Nonetheless, the stock is gapping up pre-market about 5%.
Maybe you've already lost a little bit of money on NQ Mobile. Maybe you've actually made money riding the massive volatility in the name. Maybe you've just been watching the entire farce from the sidelines, who knows.
What we do know is that the last PR out of the company wasn't anything less than a full scale, four alarm emergency. After the PR came out, I penned this piece, suggesting that things with their auditor, PwC, really seem to be in question. This came after several articles I wrote advising people to avoid NQ, and getting comment after comment from people telling me what a "looser" I was and how wrong I was on NQ. If NQ is eventually proven to be completely fraudulent - which is still yet to be determined - I wonder if there will still be people that defend it. Are there people out there still defending Sino Forest?
Regardless, the audit chair on the board resigned in the middle of the biggest audit in the company's history. Further, the company is only "considering" working with PwC going forward, according to their own press release. What we have is a bona fide setup for the auditor to either resign or be replaced, in QTR's opinion.
I wrote that the biggest thing was tucked away at the bottom of the press release:
In addition, following the June 4, 2014 release of the summary findings of the independent investigation conducted by the independent Special Committee of the Board, the Company's independent auditors, PricewaterhouseCoopers Zhong Tian LLP (OTC:OTC:PWESF), communicated to the Company that it would need to perform additional procedures and expand the scope of its 2013 audit work. The Company's Board and Audit Committee are considering PwC's request. The Company will provide a further update when available.
And then I went on to analyze exactly what I thought that meant:
What this means is that PwC is asking for stuff - stuff that the old audit chair obviously either didn't have access to or didn't want to come up with. The fact that NQ is simply "considering" their request, instead of just doing it says a million things to me:
- It says that NQ may or may not have something to hide.
- It says the audit is a long way off.
- It says the relationship between NQ and PwC is in jeopardy; and so is the audit.
This is the first step to an auditor not being able to complete an audit - you heard it here first.
Yesterday, Muddy Waters was published on SA with their follow up to the events of this past week. They, not surprisingly, share a lot of the sentiments that QTR shares - Muddy Waters took it one step further and accused the company of delaying this last PR so that insiders could dump some stock. Interesting thought - and would certainly explain the "out of whack" trading we saw in the name the week prior, when the stock charged up on major volume due to "rumors." Remember this:
Today's share price movement seemed normal out of the gate until, for seemingly no reason, volume started to pour in pushing NQ almost as high as 20% today. Traders I spoke with didn't seem to have an idea of what the action was about, nor did anyone posting on Twitter/message boards.
I spent the morning watching the stock being pushed up in a buyer's panic, searching Twitter and the web for an explanation as to what was catalyzing the move.
But, that part of MW's argument seems to all be based on circumstantial evidence at this point.
Muddy Waters concluded their piece yesterday on these two points:
- NQ deliberately held back both admissions so that NQ China insiders and their proxies could illegally dump more shares at existing shareholders' expense; and
- NQ is again misrepresenting the true state of its audit and relationship with PwC. NQ's prior statements and actions make clear that it has understood for some time that PwC will never issue an unqualified audit opinion for 2013. The language about PwC requesting a larger audit scope is a misrepresentation designed to keep the passengers on the sinking NQ ship (so that NQ insiders can keep the lifeboats for themselves).
Which is why I was surprised - okay, floored - when I saw an article out a couple of days ago and a "Stocks to Watch" piece out this morning suggesting that there may still be upside for longs in the company's current trading situation.
I mean, I guess there has to be some "contrarians" in the group - hell I consider myself one - but this would never be a time where I would come out and suggest that NQ could be ripe for a buyout or major investment. That's just ridiculous, in QTR's opinion.
The mental gymnastics necessary to convince oneself to go long in a situation like this is actually mind-boggling. And trust me, years ago, QTR was on the opposite end of a couple of turds similar to this one. Sometimes I got lucky, other times I lost my rear end. What you learn from it is important: in this case, there's still risk of total loss (and earning 100% on a short).
Yes, I understand that the price is low - yes, I understand that when stocks are this beaten down with big short interests that they can often result in dramatic turnarounds. Trust me, I get it. I invested in Sirius (NASDAQ:SIRI) days before Liberty injected them with capital many years ago in the pennies. I've done research recently to consider getting behind both RadioShack and American Apparel at these levels. But, there's a fundamental difference that those potential "contrarian" scenarios have with NQ Mobile. That difference is, it's looking like NQ Mobile could just blatantly be fraudulent, and not just a struggling business.
We're still waiting on new short interest data for NQ, which is due out any day now. I'm guessing more shorts to have piled in, as the story becomes clearer and clearer.
I'm not advocating you short the name, but QTR is strongly suggesting not to be fooled into going long here - and putting your money to work elsewhere.
Stay on the sidelines with NQ Mobile.
Best of luck to all investors.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a short position in NQ over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.