1-Star Stocks Poised to Plunge: Harbin Electric?

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, Chinese electric motor maker Harbin Electric (Nasdaq: HRBN  ) has received the dreaded one-star ranking.

With that in mind, let's take a closer look at Harbin's business and see what CAPS investors are saying about the stock right now.

Harbin facts

Headquarters (Founded)

Harbin, China

Market Cap

$484.7 million

Industry

Electrical components and equipment

Trailing-12-Month Revenue

$424.8 million

Management

Chairman/CEO Tianfu Yang

CFO Zedong Xu

Return on Equity (Average, Past 3 Years)

17.3%

Cash/Debt

$122.8 million / $111.9 million

Competitors

Emerson Electric (NYSE: EMR  )

General Electric (NYSE: GE  )

Nidec (NYSE: NJ  )

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 13% of the 541 members who have rated Harbin believe the stock will underperform the S&P 500 going forward. These bears include tallenuk and All-Star liszewski, who is ranked in the top 0.5% of our community.

A couple of months ago, tallenuk highlighted a few red flags surrounding Harbin:

Chinese RTO. Too good to be true. SAIC filing are completely different to SEC filings. Margins are far too good to be true considering they're a motor company in China and only 'deal' within the Chinese market.

In fact, Harbin's three-year average operating margin of 24.2% even dwarfs that of much larger competitors Emerson Electric (16.4%), General Electric (9.5%), and Nidec (11.6%).

CAPS All-Star liszewski elaborates on the Harbin bear case:

The only thing keeping the price from collapsing is this phantom $24 buyout offer from the CEO Yang. Just a ploy to squeeze shorts in my humble opinion. I doubt it ever materializes. He will have great difficulty securing financing and I suspect he knows more about the company than I do. ... The financials sound the alarm on this one. How are they able to post 35% [gross] margins in a low-tech commodity manufacturing business? This is absurdly above the industry average. ... There is a reason the company constantly reports good numbers while the stock price continues to meander. There is a reason why no insiders have touched this company at much lower prices than the miraculous buyout offer stipulates. Stay far away.

What do you think about Harbin, or any other stock for that matter? If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Emerson. 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 Fool's disclosure policy always gets a perfect score.


Read/Post Comments (2) | 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 June 14, 2011, at 2:41 PM, PurringCat wrote:

    This is a good reason why I would never rely on the Caps Community of supposedly all star performers. They are as clueless as everybody else.

    Margins for HRBN are higher than Emerson or GE because they have much lower labor costs.

    Caps all-star liszewski states about CEO Yang, "He will have great difficulty securing financing". Sorry Mr. All Star, he already has secured the financing from Abax and the China Development Bank.

    It is merely a matter of time before the buyout takes place. Even if it doesn't, HRBN is still a stellar performing company in a rapidly expanding economy.

  • Report this Comment On June 16, 2011, at 12:28 PM, TSIF wrote:

    Getting a "note" for finance is not the same as getting finance. Anyone can write a note to a golfing buddy with "intent" Do you really think they will give him a loan on his good name.

    You are also "assuming" the books are correct for thier business. That remains to be seen.

    Regardless, none of the company's that went public via RTO that have come under scrutiny, even the couple disproven, have had any rebound in stock. Rightly, or wrongly, they will remain tainted and investors should factor it in accordingly.

    If CEO Yang who has been talking buyout for six months now has financing, he should just buy on the open market, because it's clear the market doesn't believe him.

    Even taking him at face value and factoring out 100% of the "noise" , the receivables and inventory should be enough to scare anyone away from this

    Good luck. I think the slight chance you may be right and the market wrong isn't worth the risk/reward on this play, but if they do get a buyout deal to work, there is definitely a large upside.

    TSIF

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