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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.
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