LJ International: You're So Jaded

I recommended shorting LJ International (JADE) earlier this year for a 17% gain. I recommended to cover too soon but my short recommendation was ultimately a smart recommendation. JADE’s stock price rose as high as $13.15 earlier this year but it has now dropped all the way to $2.52 (at yesterday’s closing price).

So what happened to LJ International and is the company worth a buy at the current price?

The problems started for LJ International when they didn’t report their fourth quarter earnings report for 2006 (they were supposed to report near the end of March). In a show of complete disregard for the investors in their company they didn’t even issue a press release stating why they didn’t report earnings. For some reason this didn’t deter investors in the company and the share price of JADE kept going up.

A couple of months later LJ International didn’t report their first quarter earnings report for 2007 and once again they did not provide a reason why. Incredibly, JADE continued to trade near its all time highs.

LJ International finally issued a press release at the end of June stating they were changing auditors and they were going to have to delay filing their annual report until July 16. They missed that deadline and the stock price has been declining ever since.

So is LJ International a good buy at the current price? I would have to say no for a few reasons.

First, LJ International is no longer in compliance with Nasdaq’s listing requirements due to the delay in filing its annual report. The company is currently in danger of being delisted and has until December 31 to file its annual report.

Second, LJ International issued a press release in September stating they were probably going to miss their fourth quarter 2006 guidance. This resulted in a number of shareholder lawsuits being brought against the company,

Finally, the actions of LJ International cast serious doubt about the company’s integrity and credibility. In October, LJ International announced the resignations of the three independent directors comprising its Audit committee. The company said the resignations were for personal reasons and primarily related to the class action lawsuits that were brought against the company. I find it troubling that the directors would resign because of the lawsuits and the timing of the resignation also raises questions.

Also, earlier this month LJ International announced it dismissed KPMG and engaged Gruber & Company LLC as its accounting firm. The previous auditor KPMG is one of the big four accounting firms and is a respected well known firm. I had never heard of Gruber & Company LLC so I did a Google search and found that its clients are companies that trade over the counter and on the pink sheets. Companies that trade over the counter and on the pink sheets usually are not the most reputable companies so the change in auditors is very disturbing.

In light of all the events that have transpired over the last year I think it would be foolish to invest in LJ International. I don’t think LJ International’s financial results, whenever they are finally reported, can be taken with any credibility. Due to all the issues surrounding JADE I think it would be wise to invest your money elsewhere.

Disclosure: I have no position in JADE.

Comments

[Iraken]

CHCG.OB for example

[focus]

a much better China pure-play on jewelry both manufacturing and retail is the recent Fuqi International IPO on NASDAQ FUQI