Disclaimer: This was going to be part of an article I was working on for SA. Unfortunately, SA did not feel this should be included in my article which is why I'm posting it here for all of my followers and fellow NQ shareholders. FYI, I did add some fun commentary to it since SA wasn't publishing it.
Three weeks ago, MW released a report "alleging" that NQ Mobile was a "massive fraud" and that the stock was a "strong sell". When investors heard those words they took the standard market approach by selling first, and asking questions later.
NQ Mobile quickly responded to these allegations by holding a two hour special conference call, posted copies of bank statements, formed a committee to review the company's finances and published a 97-page rebuttal to allegations made about the Company.
Meanwhile, Carson Block, the founder of MW, was making regular TV appearances on Bloomberg touting his company and the recent allegations they made against NQ Mobile.
While this might not have seemed odd to you, it did raise some red flags with me. If investors have not heard of "short and distort" before, now is a good time to learn. Short and distort takes place when investors spread fear (negative rumors, allegations, etc) about a company in an attempt to drive down the stock price. Did this just happen to NQ Mobile? Yes!
During one of Block's interviews, I noticed he seemed to be a little off his game (Video: 2:35 - 3:04). Stephanie Ruhle, a TV anchor at Bloomberg, told him that after he came out with his report, Bloomberg did some digging and contacted an accountant outside of Beijing who said it seems that NQ's numbers are legitimate. Ouch!
How Does MW Spot Fraud?
Investors long or short have probably wondered what MW typically looks at in companies that could potentially be "red flags." According to an article from CNNMoney, some of the things the Company looks at are how companies respond to criticism, and what they do with their cash (share repurchase programs, etc).
Let's start off with first question as to why does Block looks at companies and how they respond to criticism.
"If a company responds to a short seller's claims by brushing them off and saying that it will continue to run its business and in turn, void any investor concerns, it generally turns out that the short seller is wrong," Block said.
So the million dollar question becomes, how has NQ responded to these allegations and did they pass the test?
During the latest conference call, NQ Mobile responded by saying that it will continue to grow the user base aggressively, and that they are focused on the growth of their users that will further generate revenues down the line. It must be noted that NQ Mobile did not take questions from MW during its recent conference call, in which MW continued to post messages on its Twitter account.
During a recent television meeting with Liz Claman, Co-CEO Omar Khan was asked by Claman "can you say that the muddy waters report is a complete and total fabrication and a lie"? "Yeah, absolutely. It's in our rear-view mirror. For us its about business as usual," said Khan.
So did NQ Mobile brush them off? Absolutely! Did the Company focus on its business? Yes! Did they past the first part of the test? You Betcha!
It looks like Carson will have to eat his words if he believes what he says. Here is what he said again. "If a company responds to a short seller's claims by brushing them off and saying that it will continue to run its business and in turn, void any investor concerns, it generally turns out that the short seller is wrong." Well it looks like Block struck out again. That makes him 0-8 on IPO stocks. Talk about impressive.
Now that we've gotton that out of the way, let's take a look at the second question about companies and share repurchase programs.
"...When a company starts buying back shares, that's not necessarily a positive", Block said. He continued by saying that a share repurchase program only acts as a "Band-Aid" in terms of boosting a company's stock. They also force the company to "squander" a portion of its cash.
So breaking it all down, Block believes there is trouble when companies put together a share repurchase plan after allegations have been made. Block believes it's a temporary band aid and that companies use that to cover up other issues.
So did NQ Mobile pass another one of Block's tests? Let's find out.
On July 3, 2013, NQ made two big announcements. First, that Atlantis Investment Management (one of Hong Kong's largest firms), purchased one million American depositary share's ("ADS") on the open market in June, and would purchase an additional 1.5 million shares directly from the Company. Second, NQ announced a share repurchase plan of $35 million.
As earnings approached, some investors were more interested in hearing about the share repurchase plan more than the actual earnings of the Company. Investors wanted to know if management was going to issue a bigger buyback program in order to support the stock price and get back at shorts who were attacking the Company.
Unfortunately, for short term investors, NQ Mobile did not raise the share repurchase plan and kept it at $35 million. While a larger buyback would have brought cheers for many short term investors, long term investors know the Company should use its cash for other useful purposes.
NQ Mobile did announced that its top executives (President, CEO, CFO and COO) intend to use their personal funds to purchase up to $3M worth of the Company's shares within the next six months.
"We consider the recent drop in NQ Mobile's share price to be artificially created by false allegations and we believe our stock to be currently undervalued. ...The plan to purchase NQ Mobile shares by the NQ Mobile senior management team demonstrates our strong confidence in the company and reflects our commitment to executing our business plan and delivering shareholder value." -Dr. Henry Lin, Co-CEO of NQ Mobile.
The fact that management plans to buy shares with their personal money shows you how much confidence they have in the Company. After all, insiders may sell their shares for a multiple of reasons however, there is only one reason to buy shares.
So did NQ Mobile pass the test? I believe so and here's why. First, the Company issued the repurchase plan long before any allegations arose from MW.
Second, the fact that the Company did not issue a bigger buyback plan shows they are using their cash wisely and for other purposes (acquisitions, etc). NQ Mobile is not desperate to cover up or hide anything as they invite all investors to come and do due diligence.
As we can see, NQ Mobile has passed the requirements with flying colors. All that's left now is for MW to admit they were wrong.
MW Track record
Have you ever wondered how good an analyst was at his or her job? Over the years I've seen some good analysts and some bad ones. Knowing who you can trust in the market is a very big deal.
So what's MW track record over the years? Let's take a look.
|Price Before MW Report||Price After MW Report||Price Now||% Change|
|(NASDAQ:FSIN)||$5.79||$6.10||$9.50 (Taken Private)||+56%|
|(NASDAQ:FMCN)||$25.50||$15.43||$27.50 (Taken Private)||+78%|
* Prices reflect Tuesday's closing prices
** Change % rounded to the nearest whole number
While Block has been right about some companies, you can see that he has been wrong a lot more than he's been right. Looking at the table we can see that Block has done a great job when it comes to reverse mergers. However, when it comes to companies that when the IPO route, he has yet to get a single call right. NQ Mobile went the IPO route, so if history is any indication, Block will strike out again.
For those of you that want to learn more about reverse mergers and the difference of IPO companies, I highly encourage you to an article by Toro Investment Partners who goes into greater detail about it. There is also an article on CNBC that talks about reverse mergers and how Chinese firms tend to be more mature and less speculative than their U.S. peers.
I hope this article has helped you, and like always, I welcome your comments and feedback. Have a great day!
Disclosure: I am long NQ.