Warren Buffett's $10.7-billion (U.S.) move on International Business Machines Corp. might not have done much for IBM shares since the investment was made public last week. But check out Carson Block's influence on the market: The head of Muddy Waters research firm, and the man who skewered Sino-Forest Corp. earlier this year, issued a bearish report on Focus Media Holding Ltd. on Monday.
Result: Share price instantly skewered.
Admittedly, comparing Mr. Buffett's big-cap IBM move (market cap: $214-billion) with Mr. Block's negative report on Focus Media (market cap: $1.9-billion) isn't entirely fair. Still, it underlines the amazing influence Mr. Block now has on a specific area of the market – Chinese companies listed on U.S. exchanges.
That influence is so large that it overrides overwhelmingly bullish views from established Wall Street analysts, even as U.S.-listed Chinese companies are facing intense scrutiny over their operations and financial reporting following some high-profile shenanigans.
Focus Media, a Chinese digital advertising company that trades on Nasdaq, is followed by 12 analysts, according to Bloomberg. Ten of them have some version of a "buy" recommendation on the stock. On Monday, JPMorgan reiterated its "overweight" recommendation, with a $39 price target. On Friday, Goldman Sachs reiterated its "buy/neutral" recommendation, with a $45 target.
Against these impressively bullish views, Mr. Block asserted in a lengthy report that Focus Media was a "strong sell" at $25.50. Although he did not include a price target on the stock, the shares promptly fell 60 per cent in the matter of an hour, suggesting that investors weren't going to debate with the man.
"Muddy Waters believes that many of the items we discuss in this report are symptomatic of a highly troubled enterprise that is run solely for the benefit of insiders," Mr. Block contended in his report. "The problems we have uncovered are likely the tip of the iceberg .... "
Mr. Block believes that Focus Media has overstated by about 50 per cent the number of screens on which it beams its advertisements through its network, calling into question the viability of the business.
He also argues that the company has deliberately overpaid for acquisitions before writing them down, and that is it has acquired, written-down and disposed of companies that it never purchased in the first place. As a result, he questions the integrity of reported results.
These are big assertions, to which Focus Media has not yet responded (the report was published outside normal business hours in China).
Like other short-sellers, Muddy Waters makes money when shares fall, so there is no question that the firm stands to benefit financially from uncertainties about a company's viability and integrity. Unlike other short-sellers, though, the market's reaction is rarely so swift, and violent.