As promised in our last post, here below some comments from our visit to this seminar.

Our general impression from the speakers is that finding "deep value" stocks has become more difficult than a few years ago. The suggested ideas show a smaller margin of safety compared to earlier years. However, it is important to avoid value traps. This is important for us being mechanical value investors.

Sahm Adrangi of Kerrisdale Capital Management

One of the interesting presentations was about Chinese scams companies exposed by Sahm Adrangi of Kerrisdale Capital Management, a value-oriented and special situations fund based in New York. In recent months, Kerrisdale has shared in-depth research with the investment community on fraudulent U.S.-listed Chinese companies, including China Education Alliance and Advanced Battery Technologies. Mr. Adrangi is a leading expert on Chinese stock scams, and his work has been discussed in Bloomberg, Businessweek, and The Wall Street Journal. His Long short fund was one of the first funds to investigate all the reverse Chinese mergers. In June last year, they wrote anonymously, and over the past year and a half, identified a lot of shorts and took an active role in exposing them.

Kerrisdale compiled two reports on Chinese frauds, China Education Alliance and Advanced Battery Technologies. This work has been mentioned by numerous media outlets, including The Wall Street Journal, BusinessWeek, and the Financial Times. Find more details here.

Gulf Resources

A new short idea is Gulf Resources; Gure- Kerrisdale thinks it should be trading under $1. Gure is a manufacturer of bromine and bromine derivative products

The company went through RTO in 2006. The stock has gone down due to all the RTO news but is still trading at $12. Gulf- claims to own assets which it does not own. It is only held by the chairman; the publically traded company does not own them. Subsidiaries have the same numbers, same addresses. Their largest customer, which appears to be owned by the Gulf chairman, has the same address, phone number, and fax numbers as the company. The margins are irrational; 90% of bromine is produced in Shandong, the competitors and service providers know each other well. The company is a commodity business, but revenue growth is 30-50%. Many consulting firms provide reports for commodities. Kerrisdale's fund purchased a report that list the top 30 producers, and their production was ½ of what they claim in SEC fillings. They have talked to other competitors, and Gulf is not a major player, and some even said they think GURE is a fraud.

Conclusions for us at MFIE.

It's not that we want to shorts these particular companies, but the above tips and ideas are useful to know how to avoid fraud.