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Short-Selling China Stocks Is Game for Pros

Stocks in this article: ONP RINO CEU

BEIJING ( TheStreet) -- When you watch a stock like RINO International (RINO) or China Education Alliance (CEU) plummet by 50% to 60% in one or two days, short-selling may look like an attractive game to play.

But in my opinion, the risk vs. reward tradeoff is very unattractive for individual investors.

First, the best you can do is make 100%, and that is only if the stock you short goes to zero. Second, borrowing the stock can be difficult and very expensive. Third, your potential losses are infinite because there is no telling how high a stock can go. Lastly, when shorting, timing is everything. You could have been right about RINO being a fraud and shorted it when it was at $15.00, but the stock still ran to $30.00 and you would have lost 100%. Unless you are a short attack artist who knows the timing of the release of a damaging report about a company, shorting puts you at a distinct disadvantage.

In any event, it seems there is a new short-seller in town going by the name of Kerrisdale Capital. This company recently issued a 28-page report claiming that China Education Alliance is a fraud devoid of students, desks and teachers and that its online Web service (the company's main revenue driver) doesn't even function. China Education Alliance is a NYSE-listed company that was trading at $5.50 before the report's release, giving it a market cap of about $150 million. The short attack caused shares to plummet about 60% to as low as $2.34.

Shares rebounded by as much as 18% on heavy volume Wednesday on no news and closed up 12.2% at $3.03. People keep asking me, "Was that the short cover? Are they gone?" It is difficult to say, but I am guessing the answer is no.

China Education Alliance is scheduled to hold an investor conference call on Tuesday, Dec. 7 to address the report. If the call goes well, shares could rise. But I would expect Kerrisdale to issue a new report rebutting the company's statements on the call and launch a new short attack, driving shares down again.

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