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Three 'Probe-Proof' China Stocks for 2011

The longs love it because of its rapid growth and net margins in excess of 50%, as well as its strong cash balance of $170 million. In November, the stock reached a high of $22.30, but has now come off by around 30% to its current level of $15.75, trading on a trailing PE of only around 7x. Very few U.S.-listed small caps seem to consistently hold above a PE in the mid teens, so even with substantial growth, I don't see CCME as being a double in 2011, but getting back into the mid $20s could be quite feasible in the first half.

The main reason I have not yet invested in CCME is that there has been a significant amount of interest and provocation by short sellers claiming that CCME's numbers are too good to be true and that it overstates its competitive position in China. If this were a manufacturing company, completing solid due diligence would be easy. I could simply visit the facilities, take along an industry expert and try to validate (or invalidate) any of the claims made by short sellers.

Unfortunately, due diligence on CCME is made more difficult by the fact that the company runs ads on more than 20,000 buses in over a dozen cities in China that are geographically quite spread out. It is not as simple as a factory visit. It is notable that short interest currently stands at over 10% of the company's market cap (over $50 million sold short), so there are certainly people making big bets on a decline in the share price.

I came across an interesting blog post that describes some of the skepticism toward CCME. It also describes the pain that the short sellers have faced as the stock has risen from below $8.00 in September to over $20.00 in November.

Despite their certainty on the stock, shorts have been largely thwarted by the fact that CCME has a Big 4 auditor (Deloitte), the company recently benefited from a large investment by Star International (1.5 million shares) and most notably, the company recently announced that in 2011, it would begin paying a semi-annual dividend.
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