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U.S.-Listed Chinese Stocks - Gravely Mistreated & Far Undervalued (Part 1)

Preamble:  Despite the fact that Seeking Alpha has recently published many articles from short-side authors that were obviously biased and shoddily researched (and did a lot of unjustified damage to the portfolio value of long-side investors and some unjustified damage to the companies being unfairly criticized), they declined to publish this article—in its current state at least.  I believe that Seeking Alpha, and/or its editors, are a part of the problem which I describe within this article under Part 1, point [4].  In addition, I am concerned that people within Seeking Alpha and/or people affiliated with Seeking Alpha personnel may be shorting the stocks that are being unfairly criticized within published articles prior to article publication.   I am posting this article as an Instablog.  If you have any suggestions as to another place(s), other than Seeking Alpha, where I can post this article, please share them with me.  Also, I join with those who advise others to be very skeptical about the information published by Seeking Alpha, especially if the information is short-side stock information.

More-and-more, we are seeing written articles, web blogs, message board postings, and television segments in which U.S.-listed Chinese stocks, especially the ones that came into being via a reverse merger, are characterized as far more risky and/or frauds.  These characterizations have occurred ad nauseam.  Sometimes these characterizations have been made regarding the stock segment as a whole, sometimes they have been made in regard to individual stocks within the segment, and sometimes they have been made in regard to the segment as a whole and an individual stock(s) in conjunction.

In brief, these characterizations are almost entirely false.  Like in any stock segment, occasionally, a stock like RINO International is found.  (RINO International appears to have overstated their past revenue since two contracts for which they reported receiving revenue were never finalized.)  Despite the very bright spotlight thrown on this stock segment for an extended period, there is not reliable evidence that these stocks are far riskier; and it is becoming clearer and clearer over time that, entirely or almost entirely, the underlying companies are not frauds.

In fact, since the prices of these stocks have been beaten down to such a ridiculously low level based upon almost-entirely-false information, they represent a fantastic buying opportunity for individual investors.  Normally, this kind of buying opportunity is limited to venture capitalists and the like.  In this segment, individuals have a venture-capitalist-like opportunity.  Like a venture capitalist, though, you need to do your due diligence to separate the truly great opportunities from the overstated opportunities and the occasional fraud.  In this way, it is just like investing in U.S.-or-Western-European-based companies; but it has far greater upside potential.

What has been happening is this:  People know that they can easily make money in this segment by shorting the stocks and, then, often with or via collaborators, communicating a series of lies, exaggerations, and/or misrepresentations that will drag the stock price down.  One of these many lies, exaggerations, and/or misrepresentations may hit on what proves to be, in part if not in whole, a true flaw regarding the investment.  Almost always, they hit on nothing or nothing significant.  It doesn’t matter much, if at all, to the shorter if any of the lies, exaggerations, and/or misrepresentations hit.  The stock price still goes down, at least for a while.

Is this unethical?  Yes, of course it is.  Will this continue?  Yes.  How can it be stopped?  Via multiple measures.

(1) The impacted companies are just now starting to speak out well in response to these attacks.  This trend must continue and strengthen.  Generally, they should not be silent regarding any unfair criticisms that largely affect the stock price, even if the affect on the stock price is temporary.  Also, if when a legitimate, significant question is raised that the company has not answered or answered well enough before, they should always answer the question publically.  (A criticism can, potentially, be valid.)

(2) The companies should always consider legal action as a potential course of responsive action.

(3)  U.S. regulatory authorities need to address the situation.  It is an outright embarrassment that we have done nothing regarding the grave mistreatment of the companies in this stock sector.  It is also rather humorous that we have done nothing, in the context of all the unfounded or exaggerated claims about how relatively untrustworthy these companies are because they are Chinese.  It appears that they can’t trust us, not the other way around.

(4) The more-reputable, and supposedly more-reputable, U.S. news sources should stop covering this story in a biased and/or unprofessional manner.  Barron’s and CNBC seem unlikely to do this.  All of us who are knowledgeable regarding the news realm know that, often, what passes for news is simply a part of someone’s and/or some institution’s agenda.  It is clear that, for the time being at least, people at these institutions want to get us to invest in U.S. companies, even though these investments are relatively much less attractive.  Expectations are higher for places like Bloomberg and The Wall Street Journal; yet Bloomberg recently published an article on Waldo Mushman without doing proper investigation.  If they had investigated properly, they would have readily seen that the Mushman, as is standard for short proponents in this stock space, is regularly inaccurate in his criticisms and does not issue retractions.  In fact, they would have found things like this:  “The management of China Sky One Medical reminded investors that Waldo Mushman was misleading investors by counterfeiting SAIC documents and posting them on its website and other blogs.”  (Source:  I hereby challenge the U.S. and other business news services to do unbiased, high-quality investigative journalism regarding the point-by-point accuracy and integrity of the short proponents in this space.  If and when they do, the results will be shockingly (to many people) unflattering.

(5)  The many well-known and reputable individuals and institutions in this space as long-side investors should be more involved.  It may be too difficult or time-consuming for a news service like Bloomberg to go through all of the more-recent major SEC filings, visit locations in China, et cetera, related to a company(s) that has been unfairly criticized.  These bigger investors have already strongly vetted these investments.  They are a resource via which the many unfair short-side contentions can be more-readily debunked.  They should also consider legal action as a potential course of responsive action.

(6)  The bigger, more-renowned brokerages, et cetera, should initiate coverage on some of these stocks—and not simply for newer issues for which they may have helped with the financing and/or listing.  Some of them are far better investments than the vast majority of stocks that are currently covered.

If/when any of the many short-side people who lie, exaggerate, or misrepresent respond to this article, I may simply ignore them.  It is only worth spending a limited amount of time responding to falsehood after falsehood after falsehood.  If, on the other hand, you are not one of these people, and you think I was significantly inaccurate with something I wrote above, you think that something I wrote above should be enhanced, or the like, please do point this out to me.

Disclosures:  I am long YONG and HRBN.  Otherwise, I do not have a position regarding any of the companies mentioned in this article.

Disclosure: I am long YONG, HRBN.