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Why Did My Stock Just Die?

Rich Duprey
March 31, 2011

Your stock just took a nosedive -- but don't panic. First, let's see whether it had good reason to fall. Sometimes, panic-fueled drops can make excellent buying opportunities. Here's the latest crop of cratered stocks that could provide a possibility for profit:


CAPS Rating (out of 5)

Yesterday's Change

Advanced Battery Technologies (Nasdaq: ABAT  ) ** (42.7%)
KV Pharmaceutical (NYSE: KV-A  ) * (20.5%)
Universal Travel (NYSE: UTA  ) **** (19.7%)

Over the past two days, the stock market has put together back-to-back days of moving higher that pushed the index up 150 points, or more than 1.1%, despite lingering worries about Japan's nuclear meltdown and a still-muddled purpose in Libya. So stocks that went in the other direction by even larger percentages are pretty big deals.

The devil's in the details
Here we go again, another Chinese small-cap reverse takeover stock getting blasted as a scam. The shocker is that this time it's Advanced Battery Technologies, an otherwise profitable company that seemed to be growing based on demand for large-capacity batteries and electric scooters.

Maybe that was actually the warning sign. Considering similarly situated A123 Systems (Nasdaq: AONE  ) , Ener1 (Nasdaq: HEV  ) , and Valence Technology (Nasdaq: VLNC  ) haven't been able to achieve this milestone, Advanced Battery's ability to exceed the prowess of its rivals should have given us a heads-up there was something amiss. It was actually key to one of the charges against it: It produces an admittedly commoditized product (polymer lithium-ion batteries) using expensive materials, yet it's able to produce profit margins far and away higher than any other company in the space. And doing so producing scooters!

An even earlier sign might have been raised back in December when Advanced Battery decided to sell $30 million worth of stock at below the market price and attached warrants, despite not needing the money. It wouldn't have been the first time a company has diluted shareholders when its stock was riding high, but in retrospect maybe we should have been more curious about why it was raising cash.

If the allegations prove true, it would be another egregious breach of trust for investors. As CAPS member HollowMountain had noted, for a review of its financials, it appeared to be the industry's "most stable battery producer." Yet as BuffettJunior1 said, it's looking like just one more example of why investors need to use an excess of caution when it comes to committing cash to a Chinese company.

What a surprise! Another Chinese company in trouble for accounting fraud. I always warn people about investing in China. If a Chinese company looks too good to be true stay away from it!!! The overall business look shady as well, should have picked this to under-perform a long time ago.

Let us know on the Advanced Battery Technologies CAPS page if it will be another example of a stock fraud finally found out.

Similarly, Chinese online travel agent Universal Travel is no stranger to accusations of sham operations either. Its financial statements have been called into question before, and its website has been cited for being useless at best. How travelers might be able to actually make reservations was enough to cause CAPS member goldminingXpert to ding it: "Because non-functional travel websites make for poor investments!"

Yet word that it was delaying filing its annual financial report -- not because of accounting irregularities, it says -- was enough to push the travel site's stock down again. Add it to the Fool's free portfolio tracker if you'd like to book it for further consideration.

Cracks in the foundation