If you follow growth stocks, small-cap stocks, China stocks, or some combination of the three (small-cap China growth, anyone?), chances are you noticed that VisionChina Media is down some 70% in the past six months.

Now I know what you're thinking: Aren't all China stocks down these past six months? This is true. China stocks listed on the U.S. exchanges are down an average of 14% over the past six months.

VisionChina, however, has done the worst. This is a remarkable achievement given that it had to beat out Fuqi International (Nasdaq: FUQI), which has copped to internal controls and accounting issues; Xinhua Sports & Entertainment (Nasdaq: XSEL), another company not known for its corporate governance; and Yucheng Technologies (Nasdaq: YTEC) and its massive receivables issues and exposure to Chinese banks.

Personally, I wouldn't touch any of those three, but VisionChina got my attention. Rubbish-diving, after all, can be a very profitable activity, provided the company is not deeply troubled. So what's the outlook for VisionChina Media? And is it a buy?

Meet our contestant
VisionChina distributes television content and advertising to buses and subways in China. Its business was once appealing to investors for a number of reasons.

First, it was fast-growing. Sales rose more than 250% in 2008, and more than 70% through the first half of 2009. Second, it was light on capital, with operating expenditures checking in at less than 20% of sales in 2008. Third, it had a strong balance sheet with more than $100 million in net cash. Finally, it was wildly profitable, with better than 60% gross and 40% operating margins in 2008.

All of this propelled the stock up to more than $20 per share. Then, however, the advertising market in China began to weaken and Vision's results began to suffer. The stock was trading for $12 at the beginning of the year, and it closed yesterday at less than $3.

What happened
As advertising rates drop in China, Vision's sales are slowing and profit margins are narrowing. In fact, sales were up just 3% in the fourth quarter and the company's gross margin dropped to 45%.

This problem was compounded by the company's decision to purchase DMG Media, the operator of digital mobile TVs in the Shanghai subway system, for $160 million in cash and stock. That move dramatically increased the company's fixed costs and weakened its balance sheet, at a time (the present) when it doesn't look prudent to have done either of those things.

All of this resulted in the company issuing first-quarter 2010 guidance of "no less than $22 million" in sales. In the end, the company delivered $23 million in revenue, but a dramatically lower average revenue per broadcasting hour -- just $472.

So is it a buy?
The problem now is that it is going to be very difficult for VisionChina to recover from that magnitude of a decline in pricing. We all know advertising is a cyclical industry, but $472 was well below both expectations and past results. It also stands out because other companies that rely on advertising spend, such as SINA (Nasdaq: SINA) and Baidu.com (Nasdaq: BIDU), are planning for and posting much stronger relative results in the first half of 2010.

As for VisionChina, its problems may actually get worse this year. With expansion taking place in China's tier 2 and tier 3 markets, where consumers have less discretionary income, advertising rates presumably are lower. Thus, it's unclear where rates will settle out as the advertising environment rebounds in China, given the potential revenue-mix shifts.

While VisionChina's networks in Beijing and Shanghai are premium assets that should command premium prices, revenue and margins will be down if growth largely takes place in tier 2 and smaller cities such as Harbin and Chengdu.

Yet the magnitude of that drag is difficult to know, and any valuation of VisionChina will vary widely, depending on our ad rate assumption. If we believe in the Chinese consumer, and that Chinese companies and multinationals will try to build well-known nationwide brands in China, then we would forecast a brisk advertising recovery in all markets. By that logic, we should buy VisionChina stock at today's prices, even if we have to ride out a rough first quarter.

If, however, we believe that it will take a much longer time to bridge the gap between China's rich and poor, then VisionChina's stock still doesn't quite look like a bargain.

There are no called strikes in investing
I'm holding off on VisionChina for now, and continuing to gather information. My thesis is that the best-performing part of China this year will be rural China, and that tier 2 and tier 3 cities will continue to struggle, given all of their excess capacity in real estate. That would mean a rough ride for VisionChina, its ad rates, and its investors.

If, however, I got your attention with my rural China thesis, then I encourage you to check our Motley Fool Global Gains special report "The China Rural Boom Basket: 5 Ways to Play the Fastest-Growing Niche in China." It's free to download from our website with a free, 30-day Global Gains guest membership. Just click here to get started.

This article was first published March 26, 2010. It has been updated.

Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. Baidu is a Motley Fool Rule Breakers recommendation. SINA is a Stock Advisor choice. The Motley Fool often anthropomorphizes its disclosure policy, but that hurts its feelings.