This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
$1 buys you full access to ALL of TheStreet's Subscription Services! Learn More

Fuqi Fall Highlights Risk in China Small-Caps

Stocks in this article: FUQINEWN.OBCSGH.OB

In July 2009, Fuqi International (FUQI) raised $105 million from institutional investors via reputable investment banks, all of whom presumably conducted substantial due diligence given the size of the deal.

In addition, Fuqi has research coverage by several well-known investment banks that have presumably done substantial due diligence and maintained an ongoing dialogue with the company and continued to monitor and analyze the company's financial condition.

Finally, Fuqi is listed on Nasdaq, meaning that it has an independent audit committee and has adopted a code of ethics and continues to meet all of Nasdaq's corporate governance standards.

In short, as far as China small-cap stocks go, Fuqi is as "safe" as it gets, and yet Wednesday shares of Fuqi fell by more than 37% (to $11.90 from $19) in one day when the company announced that fourth-quarter results would be delayed, estimates would be missed and past results would be restated. Multiple lawsuits came rolling in within hours.

This time last year, shares of Fuqi were trading at around $3.65. Within six months, the shares hit a high of $32.68 -- a trough-to-peak return of around 800%. Returns like these are the reason why people invest in China stocks. But the Fuqi incident serves to highlight why these returns are possible, namely the greater degree of risk involved.

While the risk level on China stocks as a whole can be considered high, the risk level on OTC stocks should be considered "astronomical." From a corporate governance standpoint, many OTC stocks don't provide even remotely the same level of comfort that Fuqi did. There is often a chairman who happens to be CEO and there are no independent directors and perhaps even a no-name auditor who isn't overly sophisticated and less likely to challenge his client for fear of losing the business. Furthermore, it is often the case that the company hasn't raised capital in years, meaning no outside due diligence has been done.

With these thoughts in mind, I thought it would be appropriate to offer a few suggestions on how to at least minimize your chances of stumbling on the next big loser.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,814.94 -2.96 -0.02%
S&P 500 2,067.03 -2.38 -0.12%
NASDAQ 4,758.2520 +3.36 0.07%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs