AutoChina Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of AutoChina (Nasdaq: AUTC  ) plunged more than 10% today, after The Forensic Factor called it "the most preposterous Chinese reverse merger yet" and the popular blog Zero Hedge highlighted its report.

So what: The report charged that AutoChina employed suspicious accounting, large related-party transactions, a "labyrinthine" corporate structure, and shady management, among other things.

Chinese reverse mergers have taken a lot of criticism lately. Perhaps most prominently, an August Barrons article cautioned investors about the back-door registration process, highlighting names like AgFeed (Nasdaq: FEED  ) , China Natural Gas (Nasdaq: CHNG  ) , Orient Paper (AMEX: ONP  ) , and China Green Agriculture (NYSE: CGA  ) (of which I own shares), among others.

Now what: Reverse mergers aren't necessarily all frauds, but because they have lower listing standards, investors should exercise a higher level of due diligence.

Furthermore, it's worth noting that the author of the Forensic Factor is short AutoChina, but having an interest in the stock doesn't by itself make his analysis wrong. When investing in emerging market small caps that came public via reverse mergers, it's a good idea to be aware of the risks and position-size accordingly.

Interested in any of these stocks? Add them to My Watchlist:

At the time of publication, Ilan Moscovitz owned shares of China Green Agriculture. China Green Agriculture is a Motley Fool Global Gains pick. The Fool owns shares of China Green Agriculture. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2011, at 9:02 AM, Medicalrecordman wrote:

    Just another day in China small-cap "hit piece" land where short-sellers pay these blogsters to print more B.S., thus allowing these guys to finally cover from deep under water positions. Not so much so with AUTC, but definitely in the case of CCME, CHBT, UTA, BORN, APWR, LLEN and the list goes on and on and on.

  • Report this Comment On February 04, 2011, at 8:42 PM, UJUS wrote:

    Just 30 days ago You Fools ran an article "3 stocks at half price" and included CHNG. Now, you mention the investor has to do his "due diligence" with reverse mergers. Let it be known to your readers that You Fools are NOT considered "due diligence" unless the reader bets exactly the opposite of what your articles propose.

  • Report this Comment On February 23, 2011, at 2:58 PM, JPDemers wrote:

    There is no way to do "due diligence" on these Chinese companies, short of hiring a P.I. (and a forensic accountant) in China. Case on point: CHBT and their 95% non-existent storefronts. CHNG, with their laughably inflated per-outlet revenue and self-dealing transactions (always involving cash going out the door), is another fishy case.

    The best a retail investor can do is compare regulatory filings in China and the US. If the differences are huge, they're lying to somebody -- and US shareholders aren't likely to be the ones getting the truth.

  • Report this Comment On March 09, 2011, at 12:55 PM, JAVEROA wrote:

    ISn't it enough that a reputable US audit firm signs their reports?

    Any company can be a fraud, with reverse merger or having been listed thru the bureacratic channels.

    How many frauds have there been in the US or Europe? IS there anyone out there that believes stocks are not manipulated by certain paries, especially in the US? The problem is xenophobia.

    Remeber Satyam! Are we to call all Indian companies fraud?

    Now who will prosecute these parasites? Long live the Internet

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