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Rino International: 6 Lessons for Investors

Once again I disagree with Muddy Waters, but this time I feel the "floor" value of the company could be even lower than cash per share. Why ? Because I have seen it in numerous post-crisis companies. Once investors don't trust the books of a company, they tend to not believe that the cash is all there.

I have seen numerous cases where companies trade at a 10-15% discount to their reported cash value. As a result, I think Rino could trade as low as $2 despite having cash of $2.45 per share. Canacord analyst Michael Deng revised his rating to sell but did not set a new share price target. Rodman Analyst Amit Dayal has the stock under review and has not issued a share price target.

Lesson #6: How to play Rino now

Before the stock was halted, several people recently asked me if there was still a way to play Rino. For the nerves of steel types, I felt that at above $6 there was still enough downside to short it. For the longs, I told them all they can do is sit back and watch the carnage. There may be a short squeeze bounce at some point but timing that is too uncertain. Unfortunately, the stock is halted and will likely gap down as soon as it is resumed.

For the truly obsessive short seller, there may be one strategy. When the stock does resume trading, there will likely be a delay until the press release comes out. A really obsessive short seller could start watching the pre-market every day to see if it begins trading and then go full short, but that strategy is not appropriate for most investors. So this one is probably game over for the typical investor.

There have been a number of high profile frauds and alleged frauds in China stocks this year and the topic has been heavily discussed both online and in print articles such as Barrons. However, in many ways these frauds are like shark attacks or plane crashes; they are very scary and they grab the headlines in a high profile way. But keep in mind that there are more than 500 Chinese stocks that trade in the U.S. (listed and OTC) so even if we see a number of frauds this year, it is still a relatively rare occurrence but one which gets maximum attention.

Also, keep in mind that if you want to see fraud at its highest level, then you should be looking to the U.S. where frauds such as Enron, WorldCom and Bernie Madoff took place right under our eyes --for much larger sums of money and with supposedly world-class auditors and regulators.

As a final thought, I would like to offer my condolences to anyone who got taken down by Rino.

The author currently holds no positions in any of the stocks mentioned.

The author can be reached at comments@ pearsoninvestment.com. This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.
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