Unlike many investors, I don’t have any investment checklist. However, I do have a mental “safety” checklist. If I stumble upon something in this safety list, I immediately write the stock off and move on to the next opportunity. At the very top of that list is Chinese companies. If the stock is located in China, I’m passing every time (for those wondering, two other immediate cross-offs are miners and airlines. Maybe there’s opportunity in those sectors, but I can’t add any value and I don’t feel I have an edge). While avoiding those sectors may cause me to miss profitable investment opportunities (Deswell (DSWL) comes to mind), overall it has saved me from quite a good deal of heartache and huge losses.
All that said, AlphaVulture has proved much bolder than me and stumbled upon an interesting special situation in UTSI. The basics of the situation are simple: funds controlling just under 21% of UTSI shares out have offered to take the company private for $3.20 per share, a premium of over 10% to today’s closing price of $2.81.
The bid shouldn’t be too hard for the acquirers to finance, as the company has $3.60 per share in cash on the balance sheet. If you believe the company is real, then this is an incredible opportunity. I mean, this deal would be so cheap at these prices it makes the AUTO acquisition (where I think the CEO is robbing shareholders blind!) look like the AOL/Time Warner merger. After some back and forth negotiations, the final bid would likely come in at the mid-3s, and investors at today’s prices would be looking at a ~25-35% gain with little to no market correlation and an extremely tight time frame, resulting in an insane IRR and huge alpha.
But is the company real? Maybe, maybe not. If I had to guess, I would say no, but I honestly have not reviewed the accounts. I say that only because I’m biased towards believing all Chinese companies are fake. I also question the reverse split they did earlier this year- a 1 for 3 reverse. That split seems designed simply to keep the stock on the NASDAQ but keeping it held only by retail investors who will provide liquidity for continued insider selling.
Again, I have no basis for believing the company is fake other than a bias against Chinese stocks. And even if they are fake, there’s the chance this acquisition goes through: I strongly believe FMCN is a fraud, but it looks like that merger is going to go through. There are many explanations for why fraudulent companies are getting taken out en mass, but one reasonable explanation is some of the cash on their balance sheet is real (the cash raised from IPOs) and, given they are all trading below book and/or cash value, taking them out is the easiest way for insiders to loot that cash.
Overall, I’m avoiding the stock. But don’t let my bias keep you from checking it out. There is a very real opportunity here, and if you can get comfortable with it, there’s the potential for significant alpha.
One last note- the irony of posting on a potential fraud representing a significant value opportunity on April Fools’ Day does not elude me.
Disclosure: Author is long AUTO and has a small position in FMCN puts.