There's an intriguing growth story in China right now that you need to be following — particularly one specific play that could help you take advantage of a powerful new trend before it catches fire. This growth market is so compelling, in fact, that it's making me rethink my long-standing prohibition on Chinese ADRs.
But before I get into the details, let me explain why I've been so reluctant to take a serious look at any Chinese stock, even those trading on major U.S. exchanges…
For almost a year, I've honored a self-imposed ban on the purchase of any Chinese stocks. I haven't touched a single Chinese ADR since my ban — and I haven't recommended a single one to my readers.
The saga began last year with a small Chinese travel stock called Universal Travel Group (NYSE:UTA). Back in September 2010, I recommended shares of the small-cap Chinese travel company to my readers, pinning hopes on a dirt-cheap valuation and breakneck growth in the Chinese travel industry. But the morning after I sent out the recommendation, a short seller published a report detailing why UTA was a fraud and why he was actively betting against shares. The stock opened for trading down 30%, and we quickly sent out an alert for readers to sit tight before buying while we investigated the claims.
After some digging, I felt the claims boiled down to a misunderstanding of the company's business. Every argument for UTA being a fraud looked incorrect. Luckily, we were able to take advantage of the situation, re-issue the buy recommendation — and even ended up booking gains on the investment.
Even though we did well on the UTA investment, we were concerned about the power that unknown short sellers could have over Chinese ADRs. While there had been some rumblings about the abundance of fraud in China, UTA was one of the first major short attacks on a Chinese stock.
Then the floodgates opened. Fraud allegations appeared left and right. And short sellers eventually targeted another one of my recommendations, Advanced Battery Technologies (PINK:ABAT).
ABAT was a Chinese battery stock I recommended back in March 2010. It was up as much as 21% early last year — but that was before another short attack shoved shares more than 40% lower in a single trading day. I ended up closing the position for a loss — but was spared the 90% drop that eventually crushed the stock.
That's when my ban went into effect. Even if Chinese fraud wasn't truly widespread, the risks of a short attack were just too real to justify buying any of these ADRs — no matter how rosy the growth picture may have been at the time. Investors were eating up every fraud report that hit the web.