I almost bought Focus Media (FMCN) in the Growth Portfolio last month. The stock was at the top of my radar. I was about to buy. But then Muddy Waters said FMCN had been committing fraud because of a significant overstatement of the number of screens in its LCD network. The analyst says Focus Media only has 50% of the screens it states.
Whew, this is a big problem. What’s worse is Focus is also accused of spending money on companies it didn’t actually purchase, then writing down the assets down to zero. So where’s the money?
For the record, I spent a ton of time trying to figure out what Focus Media was doing with its business. My article is here. In December 2008 the company tried to sell the LCD business to Sina, then the deal fell through in 2009. I remember FMCN having two businesses — cell phone display ads and LCD display ads. The cell phone ad division got ditched after the company spammed customers and got in BIG trouble from Chinese authorities. If FMCN sold the LCD business, what would have been left?
One Year Chart
The one-year chart at the right shows a company with awesome numbers and a super low P/E. if Muddy Waters is wrong, the stock is worth $40. If it is right, then FMCN could be on its way to penny-stock status.
For the record, Muddy Waters states it uncovered fraud in China Mediaexpress (CCME) on February 3, 2011. CCME opened at $17 that day, closed at $11 and is now $0.06. Yes six cents. Per share.
Bottom Line
Focus Media stock is scary right now. This issue isn’t going away anytime soon. That sucks because the concept is great.
