Larry Isen’s “Greatest Short Squeeze of All Time”

By Travis Johnson, Stock Gumshoe, March 9, 2011

To be honest with you, I had never heard of Larry Isen before — apparently, he edits a newsletter called Emerging China Stocks, and he has been focused on small cap names in China for at least a year or two, based on his claims of past performance.

The reason he came to my attention today, though, was that a bunch of my readers wrote in asking me who the heck Larry Isen is talking about when he teases the “Greatest Short Squeeze of All Time” and tells us that the Chinese stocks he’s singling out are unfair targets of smear campaigns, with the expectation that they will be the beneficiaries of dramatic “short squeezes” in the weeks ahead.

If you don’t know what a short squeeze is, that’s basically when a large portion of a company’s shares are “sold short” by investors, and the share price then goes up quickly enough that these short sellers are forced (either by brokers or by their own portfolio rules) to cover those short positions and cut their losses.

(More detail: If you don’t know what short selling is, it’s a bet that a company’s shares will go down — you borrow the stock from someone else and sell the shares at the market price today, in hopes that you can “cover” your short by buying them back at a lower price in the future, repaying the loan with those cheaper shares. Holding a short position carries obligations, including the fact that you have to pay any dividends due on those shares, and whatever fees or margin payments are required to hold your short position — and if your broker sees the value of your short position falling, meaning that the stock is going up, there can effectively be a margin call that forces you to buy back the stock).

Short squeezes are real, and there are a fair number of investors who focus on trying to find them — and it is, of course, a fairly risky proposition. If you’re specifically speculating on a short squeeze, that means you’re buying a stock that a large number of investors are convinced is going to collapse. Isen seems to be indicating that the stocks he’s picking are not the targets of the big and institutional short sellers like David Einhorn or Jim Chanos, instead he indicates that they’re the target of small-time amateur shorts who are running internet smear campaigns and trying to drive the shares down.

And though I’d never heard of Isen, he has certainly seen the dramatically improved performance that newsletter teaser-meisters have gotten from using video “presentations” instead of plain ol’ sales letters, so yes, your intrepid Gumshoe has been forced to sit through yet another audiocast for you. Woe, oh woe is me — never doubt, dear readers, that I love you.

So what follows are the notes that I took when listening to his video ad — the quotes might not be exact, but I tried to capture the point of his talk and the specific clues he threw out to entice us about his favorite pick:

Isen tells us that since late last year there’s been a dark cloud of a “cyber smear” campaign about accounting problems and fraud at small Chinese companies, even though, he says, most of those allegations have been proven false. These are campaigns by unsophisticated short sellers, he says — the great short sellers don’t need to manipulate investors to drive the price down, they actually hope to get the price higher so they can sell more shares short.

And when he gets into the clues about his specific pick, he tells us that there is …

“One stock that can break the back of the short sellers sometime between the middle and end of March.”

The other clues? This stock has an earnings release due out in March, and they use Deloitte Touche as their accountant.

And Insiders have been buying — he specifically notes a $1.5 million buy by the CFO at prices that were 10% higher than today’s price, late last year.

Remember how I noted yesterday that Forbes seems to have so many “best” list for companies that it can seem difficult to find a company who’s not in the “best” rankings for something? Well, this stock is apparently atop one of those Forbes lists of best small and medium size companies in China.

The company apparently has a $40 million investment from one well known investor, he doesn’t elaborate on that much.

He tells us that “professionally trained analysts” have refuted the claims of the short sellers.

And that, as of February 15, nearly 50% of the float was sold short.

So … who is Isen telling us will be the “greatest short squeeze of all time?” Toss that into the mighty, mighty Thinkolator and we get our answer:

This mus be China MediaExpress Holdings (CCME)

I don’t think I’ve ever written about this one before, but it’s one of the Chinese advertising companies that focuses on owning networks of TVs in outdoor, public and transportation space and selling ad space on those networks — you may have heard of the giant in this business, Focus Media (FMCN) or of others like Vision China (VISN) or AirMedia (AMCN), each of which claims a different niche. CCME’s niche is running TV ads in inter-city buses, the Chinese equivalent of Peter Pan or Greyhound lines, and they have indeed been the subject of many claims of fraud by investors, and of many negative reports from short-focused analysts.

And yes, they are a match for the clues — the CFO, Jacky Wai Kei Lam, bought 100,000 shares on December 9 at $15, so that adds up to $1.5 million … and the price is roughly 10% below $15 now at just over $13. In