Motley Fool as Contrarian Signal

Includes: FUQI, LIWA
by: Chimin Sang

In the universe of stocks I monitor, I inevitably hold negative opinions of some names. Recently I observed an increasing number of positive headline news from Motley Fool pumping these stocks. Nearly all the headline news employ very little detailed analysis, but rely on some stock screens and/or "CAPS rating", a rating from a supposedly 145,000 member community.

In my view, such a big community is not a guarantee of accuracy. Quite oppositely, no stock market truth can be farther away from the aggregated view of such a 145,000 member community. Maybe we should use Motley Fool as a contrarian signal.

In the past month, Motley Fool produced a jaw-dropping 10 headlines for Fuqi International (OTCPK:FUQI), a Chinese jewelry manufacturer. During this period, the stock went from $20 to $22 and then to $18 at the close of last Friday. I will not be a buyer for Fuqi here. In the last earning report, Fuqi had an irregular item to boost revenue and showed little progress in its expansion into the retail market. The stock was reduced from $23 to $19 after its Nov 9 earning report. In my view, Fuqi now has the famous 'first cockroach' problem. Behind the first cockroach you spot in your kitchen, there is a happy family of cockroaches.

Lihua International (NASDAQ:LIWA) is another example. I wrote plenty on this company's problems already. This company has an unusually short DSO, unusually high assets turnover, and an unusual cash-on-delivery revenue collection practice. The company, we understand from its books, may very well exist only on the books. But surely it is a four star stock in the view of Motley Fool members. 95% of the 117 members who expressed an opinion thought it would outperform the S&P. Why? They are looking at the growth numbers, and the stock momentum. Someone will surely hold pretty flowers when the music stops. Many investors deplore the greed of Wall Street, but it is their very own greed that makes the greed of Wall Street ever possible.

So much for Motley Fool today. I suggest my readers keep caution of Motley Fool's recommendations. If your stock is loved by the mob, it is time to look elsewhere.

Disclosure: No Position in FUQI, Short LIWA

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