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I have been investing in the stock market for a number of years now. I invest mostly in value and growth stocks with a taste of the occasionally momentum plays. Recognized as one of TipRanks 2013 top financial experts. My recommendations have given investors average returns of more than 25%.... More
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  • NQ Mobile Has Responded: Looks Like Muddy Waters Will Be Eating Their Words 15 comments
    Nov 22, 2013 3:41 AM | about stocks: NQ

    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 ReportPrice After MW ReportPrice Now% Change
    Reverse Mergers    
    (DGWIU)$5.48$3.98$0.28(93%)
    (NYSEMKT:ONP)$8.33$7.23$2.50(65%)
    (OTC:RINO)$13.18$11.19$0.01(99%)
    (NASDAQ:SPRD)$12.95$12.49$30.53+144%
    (NASDAQ:SINO)$18.21$14.46Bankruptcy(100%)
    IPO Companies    
    (OLAMSP)$1.66$1.561.55(1%)
    (NASDAQ:FSIN)$5.79$6.10$9.50 (Taken Private)+56%
    (NYSE:EDU)$14.62$9.50$29.17+207%
    (NASDAQ:FMCN)$25.50$15.43$27.50 (Taken Private)+78%
    (NYSE:VIPS)$33.76$31.77$81.61+157%
    (NYSE:QIHU)$40.22$38.53$84.37+119%
    (NYSE:AMT)$74.71$73.87$78.10+6%
    NQ$22.88$12.09$13.37+10%

    * 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.

    Stocks: NQ
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Comments (15)
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  • Tacitusk
    , contributor
    Comments (25) | Send Message
     
    Great article, I believe NQ is using their share repurchase program very intelligently as they are not using it as a means to pump the stock but to acquire shares of their company at these deflated prices. Once the stock recovers they can use these shares for various business purposes such as acquisitions. This allows them to pay essentially half price for these new companies if the stock recovers fully by then. If the prices stay this low in the longer term I fully expect them to extend the buyback but in a way that does not attempt to encourage short term buyers to front run by using a longer time frame and making the buyback conditional.
    22 Nov 2013, 05:29 AM Reply Like
  • Justin Giles
    , contributor
    Comments (1847) | Send Message
     
    Author’s reply » Thanks for the comment. I agree that NQ is using their cash wisely by not upping the buyback right away. If they need to do something down the line they can always extend the program. So far their acquisitions have brought strong growth and revenue with it. I assume it will only continue as well. Take care.
    22 Nov 2013, 11:28 AM Reply Like
  • Bigdaddio45
    , contributor
    Comments (29) | Send Message
     
    Nicely done dude. Interesting but unfortunately not surprising that Sa won't publish this article but feels completely OK publishing some of the BS put out recently by NQ shorts.
    22 Nov 2013, 07:26 AM Reply Like
  • Justin Giles
    , contributor
    Comments (1847) | Send Message
     
    Author’s reply » Biddaddio,

     

    Thanks for the kind words. I was disappointed when I heard the news, but hopefully they won't allow articles long or short that talk about MW now. Seems SA just wants articles focusing on the fundamentals of the company now which I completely understand.
    22 Nov 2013, 11:31 AM Reply Like
  • IamHopeful2
    , contributor
    Comments (159) | Send Message
     
    Good article..you should've addressed reason Block goes after Chinese companies w/exception of AMT..which truly was none event..I consistently see articles about Muddy Waters being right or wrong, and why etc...I want to see someone going after Muddy/Block himself...I want a full on attack of credibility etc...the attack of Muddy/Block has to be done by a neutral 3rd party...why? Because the companies that are attacked are; in damage control mode..also any counter attacks are deemed "typical responses from the accused"...and by the time the thing blows over, the company attacked by Muddy just wants to forget about it...so a 3rd party needs to go after Block, to try and draw him out into an all out street fight...when he uses excuses for things like; "I can't disclose my American address because of death threats"..someone needs to call him a liar and tell him the real reason is because he can't be served papers for a lawsuit if he doesn't have an address..I've seen enough of these "I'm long and he's wrong" articles..
    22 Nov 2013, 07:56 AM Reply Like
  • Trade Star
    , contributor
    Comments (604) | Send Message
     
    I get the sense that SA is barring any articles that comment on the accusers / defenders of NQ. So my guess is any articles criticizing Toro is getting blocked as well. Your article as it stands is great and shows how Carson Block likes to phrase stuff so that no matter what the company does, its following the "fraud" playbook, when in fact, NQ is doing exactly what an honest company does.

     

    At this point, I get the feeling that everything of substance that could have come out from MW has already come out. Its now just a waiting game for the independent audit to come out.
    24 Nov 2013, 07:30 PM Reply Like
  • Justin Giles
    , contributor
    Comments (1847) | Send Message
     
    Author’s reply » tradestar,

     

    Yeah it seems that way. I think the market is putting MW aside as big money is starting to find its way back into the stock.

     

    Also are you talking about the results from what the special committee finds, or from what PWC and D&T (the auditors) come out with?
    25 Nov 2013, 12:11 AM Reply Like
  • Trade Star
    , contributor
    Comments (604) | Send Message
     
    I consider the special committee and D&T the same. Their results will come out before PWC's 12/31/13 audit is done.
    25 Nov 2013, 12:20 AM Reply Like
  • Trade Star
    , contributor
    Comments (604) | Send Message
     
    It looks like MW usually has about 1-2 months of "research" before they run out of things to say. AMT and Olam seem to be a bit more prolonged, but not by much. Aside from the initial article, the follow-up articles by MW seem to be based predominantly on what the company releases in response to MW or to just personal attacks on management. I think its doubtful MW has anything left of substance.

     

    http://bit.ly/1d52qDm
    25 Nov 2013, 12:27 PM Reply Like
  • IamHopeful2
    , contributor
    Comments (159) | Send Message
     
    Ya..I get the feeling Block has a playbook he follows simply to save face, or have plausible justification in case of lawsuit or SEC asks questions...I truly believe that Block doesn't really know(or care for that matter) if the companies he's calling frauds now, really are frauds...it's about the; panic, sell off, cover...there is very little follow up..unless asked, then he gives a half-hearted response ya, but seems to me he has to..after all he's not gonna come out and say: "actually I was wrong about that one" or "that one never really was a fraud I just said that because I was short"...Block knows that people "panic-sell" not "panic-buy"...
    27 Nov 2013, 10:05 AM Reply Like
  • Justin Giles
    , contributor
    Comments (1847) | Send Message
     
    Author’s reply » He has a playbook no doubt about it. Making hundreds of millions off of his calls... why we he change that?. If it ain't broke, don't fix it.

     

    Hopefully somebody steps up because this is getting out of hand and ridiculous. He's taken advantage of many investors with his theories aka "calls". At least investors can look at his crappy track record and benefit for themselves now. Block is on his way to being wrong once again.
    30 Nov 2013, 01:09 AM Reply Like
  • piggybanksdead
    , contributor
    Comments (197) | Send Message
     
    Here is an official stanforford university report about the survival rate of US reverse mergers angainst chinese reverse merger. I bet you are astonish whe you read it:
    http://stanford.io/1aT...
    25 Nov 2013, 03:40 PM Reply Like
  • Justin Giles
    , contributor
    Comments (1847) | Send Message
     
    Author’s reply » Yeah...I posted a CNBC link in my article that talked just about that.
    27 Nov 2013, 12:37 AM Reply Like
  • Justin Giles
    , contributor
    Comments (1847) | Send Message
     
    Author’s reply » Well... like I said, Muddy Waters will be eating their words, and it has finally come to pass. So glad that we can finally get back to business and value NQ on its fundamentals and not on people's opinion's and tweets to scare off investors. Cheers!
    28 Oct 2014, 03:24 AM Reply Like
  • TrendUpTrendDown
    , contributor
    Comments (3) | Send Message
     
    IR Update:

     

    http://bit.ly/1p76JIn
    30 Oct 2014, 01:45 PM Reply Like
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