Crouching RTO, Hidden Earnings?
- Posted by Danny
- on May 19th, 2011
Chinese reverse mergers have been nunchucked to hell and back recently, but some killer plays may be lurking in the shadows.
It’s no secret that reverse takeovers (RTO’s) have been DOA or MIA for investors over the last six months or so. We have certainly taken our lumps on paper recently on a few Chinese names in the space. Question is, are all reverse mergers frauds? I doubt it. Sure there are some real tricksters out there, but what about those that may have legitimate business models? Only time will tell as the hammer has come down on one and all without an ounce of mercy.
Companies like $CCME, $CBEH and $RINO have been slaughtered and/or delisted from American exchanges for their financial shenanigans, but there are other intriguing names within the group that just may survive the culling. For potential buyers of RTO’s, it’s all about the real earnings and a real balance sheet. If any of them are able to get up off the mat one day with a legit stamp of approval, investors may step back in.
Granted, one must have a stomach of iron and a bit of a riverboat gambler mentality to cope with all the twists and turns as the longs battle the shorts. For most we’d recommend just staying on the sidelines until the dust settles, but if you’re willing to take a flyer on a name or two, here’s a few potential dark horses that currently pique our interest:
- Gulf Resources ($GFRE) – specialty chemical maker that reported earnings this past Tues.
- China Sky One Medical ($CSKI) – medicinal products. Earnings were on May 10.
- Telestone Technologies ($TSTC) – networking solutions. Earnings were on Mon.
Each of these companies made our BeanScreen top 40 for May. On the surface they appear to have great overall fundamentals and trading at attractive valuations, but it all comes down to whether you believe the numbers and figures that they report. The chart below shows how they’ve faired over the last year….not good.
Investing in China especially can be challenging, but many would say the same for the U.S. over the last decade. To quote one of our favorite “follows” @wsmco while discussing Chinese stocks earlier today with @upsidetrader, “…don’t forget all the chinese frauds in total dont = 1% of madoff, stanford, enron,wcom cntrywd”. Now I’m not certain what the exact percentage is, but you get the drift.
Again, knowing what’s real and unreal with RTO’s can be hard to decipher in the current environment, and that in itself may be reason enough to avoid them all together. For the few we own though, we’re thinking that what doesn’t kill them may only make them stronger…and us richer.
sources: wikipedia-reverse takeovers
disclosure: we currently own shares in GFRE, CSKI and TSTC
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Daniel Miller and Jason Robinson are self taught investors based in Daphne, Alabama, and are the co-founders of the WallStreetBean. Neither one of them are professional investors - just two regular guys who want to share their investing ideas and thoughts with others. More
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