NEW YORK (TheStreet) -- A fierce public debate over the legitimacy of China-based small cap companies is wreaking havoc on share prices and costing unaware investors billions of dollars.
On one side are professional investors who take short positions in stocks. They make money if share prices go down, so, of course, their analysis is almost purely negative, striving to point out what's amiss at the companies they've shorted. On the other side are pros with long positions, who often overflow with optimism in defense of their investments. Frequently there is no neutral arbiter, no balanced and objective view.
Orient Paper (ONP) is a good example. Either the company is a fraud, working with obsolete equipment, or it's a nascent industrial giant, destined to grow rapidly as the Chinese economy develops an appetite for paper products; the answer depends on whom you believe, longs or shorts. There are no known regulatory problems or formal charges of fraud against the company; the argument is all opinion on the Internet. The company has roundly rejected the charges of the shorts, and has mounted an energetic defense. Still, controversy has triggered some huge moves in the stock.In June, before the shorts attacked, Orient Paper stock traded as high as $9.12. In the weeks that followed the first attack, the stock slid steadily, finally bottoming at $4.08 on August 31. As the company's defense has taken hold, the stock has recovered to a degree, holding above $6.00 in recent weeks. A good many other Chinese reverse-merger companies have been whipsawed by the back-and-forth claims and counterclaims of the shorts and longs in much the same way. Take China Sky One Medical (CSKI). When it became the subject of controversy in the spring of 2009, shares of this maker of traditional Chinese medicines fell 35%, to less than $11. The stock rocketed up at at the end of last year, to more than $25, but has been in steady decline ever since. It trades today at about $7. Universal Travel (UTA), an online travel agency, was attacked by the Australian fund manager John Hempton in September. The company called the charges "unfounded." Its stock lost more 40% of its value between August and October, before recovering later in the fall. It now trades about at $6.50, a long way from its all-time high near $17, touched in August 2009. China Marine Food (CMFO), a seafood processor, was publicly criticized by short-side bloggers this past summer. Its shares slid by more than 40% to a low of $3.07 before rallying a bit this fall. Trading recently just above $5, the stock remains well below its all-time peak of $8.44 in January 2010.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
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.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
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.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV