Speculative: Sino-Forest TRE

WARNING: This is purely speculative. I don’t know what’s going to happen.

The Story: Sino-Forest owns timberland in China. They farm the trees, then sell them into the lumber industry for construction. This is generally a relatively stable investment, given that it’s a renewable resource with relatively consistent supply. Demand, however, ebbs and flows with construction.

A few days ago, though, a short-seller made serious allegations against the company. He charged the company with fraudulent accounting, grossly overstating their assets. If the company doesn’t own nearly as many trees or as much land as they claimed, it would be worth far less in market value. However, this would benefit the short-seller, who would profit with a drop in value.

In fact, the market price fell from over $15 to under $5. The company has initiated a law suit against the short-seller and has provided evidence of their holdings, including retaining an auditor.

My View: I’m looking at the best case/worst case scenarios. Having reported earnings (increasing in each of the past three years) of $1.59 per share, book value of $12.93 and a debt to equity ratio of 0.52, a price around $15 seems reasonable. That’s close to the best case scenario. The worst case scenario is that the company overstated their assets and it’s really only worth $5 per share (or less). So if the worst-case scenario is already baked into the market price, it doesn’t seem like there’s much to lose.

I bought a very small amount (900 shares) at $5.77, only to watch the price jump to $7.99, then fall back to $3.84. No one knows what will happen from here, so proceed with caution if at all.