About once a month, I run various stock screens looking for my kind of investment — former high-flying companies that are beaten up and currently trade for less than liquidation value. These companies tend to have very little debt and strong balance sheets, They tend to be small-caps, often companies most of you haven’t heard of. Sometimes they pay dividends, but that doesn’t factor into the screen at all. And for the most part, I ignore the mountain of regional U.S. banks, because a) I don’t have the patience to go through all of those and b) I’m not that smart of a bank investor.
By the time I narrow down the list using those criteria, these days there’s barely 500 stocks left over, on both sides of the border. I tend to only glance at the mining companies, since exploration companies trading at 0.9 times book value more common than me ending a sentence with a lame attempt at a joke. After that, it becomes a pretty manageable list.
In 2009 I’d get at least triple the amount of stocks when I’d run the same screen. I truly squandered that opportunity.
Anyhoo, while running a screen about a year ago I stumbled upon a Canadian company called Greenstar Agricultural (TSXV:GRE). Upon first glance, I had to frantically fan myself from the excitement. Here was a company that traded at three times earnings and price to book ratio of 0.25. It traded at $0.80 per share, and had $1.10 per share in cash. It paid a $0.04 annual dividend, practically a 5% yield. I was practically drooling with anticipation, ready to give some stupid seller my money.
And then I took a step back and thought about it. This was obviously too good to be true. I found the most recent annual report and had a look. The company owned a bunch of fruit farms in China, mostly oranges, peaches, and tomatoes (are tomatoes a fruit? Damned if I know.). They harvested the bounty, canned it, and sold those cans around the world, but mostly to China and its neighbors.
There was the problem. It was Chinese.
Flash back to 2011, when YOUR BOY Nelly made the biggest boner (heh) of his investing career. I bought a very similar company that traded on the NYSE called Duoyon Printing. It had the same sort of characteristics as Greenstar Agricultural. It traded at low P/E and P/B ratios, had management that seemed legit, and was located in China, the hot place. Duoyon had fallen some 80% from its high, so I took a small position in the company. If it went relatively well I intended to diversify into other Chinese stocks that were beaten down.
I didn’t get the chance. A few months later it was clearly a fraud, and shares fell 99.3%. They still trade today, on the pink sheets, for 2 cents each. STILL A CHANCE TO AVERAGE DOWN. I still hold this stock in my account because it teaches me a valuable lesson every time I look at it — do your research, you putz.
So yeah. Not my proudest moment.
But still, Greenstar was a little different. It was an IPO that listed on the Venture Exchange, not a reverse take over like Duoyon was (A reverse takeover is when a company buys a super-small NYSE listed stock just so it can have that stock’s listing on the stock exchange without having to go through all the steps to do so). It had a couple of Canadian mutual fund managers on the board of directors, guys who had serious money invested in the name.
I was watching BNN one day in December, and noticed that one of the board members, Jason Donville, was on Market Call. I tweeted in a question about Greenstar Agricultural, just to see if he would touch it. To my surprise he did, but didn’t have much of anything to say. It was a very canned response to the effect that he used to hold a bunch of it but had since moved on, and investors would have to make their own choices.
At that time, Greenstar’s website still listed Donville on the board of directors.
Upon further research, I discovered a couple of things. The company was making an acquisition of a tomato processing facility in Inner Mongolia for the equivalent of $4.3 million Cdn. Even though the balance sheet said the company had something like $15 million in cash, it raised nearly $2 million in three different private placements. Why would a company sitting on that much cash need to raise more money?
That was enough for me to nope out of that investment. I put the stock on my watch list to keep an eye on it, but mostly out of curiosity. At the time, the stock traded between 85 and 90 cents per share.
The company hit a high of $1.10 back in Feburary when it announced that the quarterly dividend was going up to 1.5 cents per share, and started to fall shortly after. The reason? The company never bothered to release its audited financial statements.
Management reassured investors, saying it was just the auditor’s fault, even though one of the directors resigned at the same time. In the early part of May management was barred from trading the company’s stock. In the latter part of May it issued a press release essentially saying “we’re working on this, and we’ll let you know when we’re done.”
Finally in the first part of June, shares officially stopped trading. They were at 41 cents. Investors are still in limbo, with no word from the company since. I just sent an email to the company to see if they have anything to say about it, and will update you guys if they actually respond.
Anyway, three lessons to be taken from this:
- Do your research. On the surface, this thing looked terrific. I only discovered the cockroaches when I started digging
- I hate to say this, but avoid anything Chinese you haven’t heard of. There’s just too much crap out there
- If it looks too good to be true, it probably is.
And that’s how I dodged the Greenstar Agricultural bullet.