By Jeff Clark
Thursday, November 3, 2011
On September 2, Silvercorp Minerals (SVM) – a large silver mining company headquartered in China – announced it had received an anonymous letter alleging the company was a fraud.
Specifically, the letter accused SVM of fudging the numbers on its income statement to make it appear more profitable than it was, falsifying its silver reserves, and overstating its cash balance.
The stock dropped 30%.
This was particularly concerning to me since only three weeks earlier, I had recommended SVM as part of a covered call strategy to subscribers of my conservative, income-producing newsletter, Advanced Income. Instead of owning an easy trade on its way to generating a 20% gain in just four months, my subscribers were staring at a 14% loss.
To its credit, the company addressed the fraud allegations head-on. It posted its bank account statements – showing a large cash hoard – on its website. It re-published the latest geological reports verifying its silver reserves. And it presented copies of its tax receipts as proof of the company's profitability.
The stock price started to recover. I reiterated my confidence in the company and in the stock. I even went so far as to tell subscribers that selling uncovered puts on SVM – a lower-risk, income-generating strategy than owning the stock outright – at such inflated premiums was like "Christmas in September."
Then it happened again. Two weeks later, SVM got hit with more allegations of fraud. This time, it was problems with the company's accounting procedures, conflicts of interest, improper activities by the company's CEO, etc. SVM was getting hit with every allegation in the book.
And the stock got clubbed... again.
All the allegations have since been proven false. SVM is trading higher now than it was before the accusations surfaced. My subscribers are making money. And I'm feeling good about sticking to my own research rather than doing what most of Wall Street does when a Chinese company gets accused of fraud – sell first and ask questions later.
But I may have missed a bigger idea...
Has investor sentiment toward China gotten so bad that it's now time to buy Chinese stocks?
Think about it. Reaction to an anonymous letter was bad enough to knock 30% off the share price of one of the world's premier mining companies. That probably wouldn't have happened to an American firm. But since SVM is a Chinese company – and sentiment toward China is so bearish – investors panicked and dumped their shares at bargain prices. This happened even after SVM addressed each false fraud allegation point by point.
It's hard to imagine investor sentiment getting much more bearish than that. Of course... if it can't get much more bearish, it has to get a little more bullish. And as investor sentiment improves, so will the price action in Chinese stocks.
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