Avoid These Stocks!

I write a Resource Prospector blog post every day, and some days I only receive one or two emails in response.

Other days, I receive hundreds of responses, and they’ll come trickling in over weeks and months.

Typically the latter group of folks has some angry (and sometimes, profane) words in response to my writing.

I wrote an article about small cap Chinese companies this past April – and by far, I received the most mail in response to this piece.

Many people were extremely angry that I besmirched their pet Chinese stock. Now, here’s a sign that you’re too emotionally invested in an asset: if you jot off angry emails when you perceive any kind of negative sentiment about it, then you’re too emotionally invested.

If anything, these folks should have been thanking me for writing something negative. If you truly believe in an investment, then you should be thrilled anytime you get to buy it at a lower price.

And if you read the article closely, you’ll note that I simply do not place any faith in the financial statements from Chinese companies. Many Chinese companies have had their financial paperwork come under scrutiny. Many of them have been found to be fleecing their American shareholders.

Some Chinese companies may or may not have done anything wrong.

But the point of my piece was to say that legitimate Chinese companies listed in the US will likely be painted with the same brush as the crooked ones.

So until there’s some kind of reformation of Chinese financials, there’s simply too much market risk to buy even the best of China – that is, unless you have the time and knowledge to travel to China and do the due diligence for yourself.

I do believe there will be a time to buy Chinese stocks- but there’s no rush. China will eventually be the investment of the century, but right now I just don’t like the risk-reward scenario.

So, today I’d like to respond to one of the ONLY positive emails I received in response to my China stock article. It came into my inbox yesterday, a mere 6 months after I wrote it.

Reader DA (finally) wrote in to say:

"Thanks for the heads up on these China stocks. And specifically CHNG. Which I almost bought. But thanks to your story on being careful with Chinese stocks, I have backed off. Ironically I just got a very nice news portfolio in today’s mail regarding THE OPPORTUNITY to invest in China stocks.

-DA"

DA – thank you for writing.

Right off the bat, I’m going to say to disregard Kirin. At first I thought it might be the brewing company, in which case it might be worth some closer inspection. Commodity investor Jim Rogers always looks to buy breweries in emerging markets, because they tend to be safe and reliable companies.

And honestly, I believe I could probably write it everyday, and it wouldn’t be enough – but most investors should absolutely avoid stocks if they trade on the pink sheets (.pk) or the over the counter bulletin boards (.ob).

These companies almost always go belly up. A small minority get uplisted to a real exchange like the NYSE or the Nasdaq – but until they do, there’s no good reason to buy these stocks. Sure, some big gains will be made when you buy before they get uplisted, but if the company is legitimate, there will be plenty of upside left if you wait until they’re on a real exchange.

On the other hand, General Steel Holdings is on the NYSE.

I’d caution anyone before they buy this company as well – but for different reasons. It’s a tiny company of less than $100 million market cap. It currently has very little earnings to speak of, and so it sells for more than 60 times earnings.

Unless you can really dig into the financials of this company – and you have the added benefit of knowing that they’re entirely legitimate – it’s really not a great idea to buy a company that’s so richly valued.

Of course, I could be wrong. Both of these companies could blow up and become huge success stories.

But at this point, I think your money is best put into safer companies that you already know about. Some of these companies are still trading at great valuations despite the last week’s 10%+ stock market run up.

If you want to gamble on these companies, don’t put more than a few hundred dollars into them with the understanding that you’re buying the equivalent of a few hundred dollars of lottery tickets. But honestly, I think you should probably avoid them.

Good investing,

Kevin McElroy
Editor
Resource Prospector