GRE - Greenstar Agricultural

[Patmo]

Hi everyone, I'm a new investor. I always had an interest in investing (I read Learn to Earn by Lynch when I was 12-13 years old, always thought about when I would invest in the stock market or specific companies when it came up in the media, etc) but never pulled the trigger until the end of last year. Mostly because I never had enough cash to invest lol. At first I bought into the ETF craze, but made a small bet on BBRY. My reasonning was crude and pretty speculative (good balance sheet, people oversold) but turned out right, for a 70% gain in 1 month. I said "I can do this. I get better than the vast majority of people at things that interest me. In a few years I'll become really @#$@#ing good!" ::) I naturally gravitated toward fundamental/value investing due to the logic behind it and my "don't give a @#$^ what anyone else thinks, my opinion is right" mentality which complements it well.

 

Anyway, enough of an introduction. I want to run by all of you one of the 3 ideas I bought into so far (looking to get up to 10 within a year). If it generates some good discussion, I might try to do a write up on the 2 others. Be forewarned that my investments are not very popular, even for value investors. Here it is:

 

Greenstar Agricultural (GRE) greenstaragricultural.com

I bought this company at $.85, around 2.5 P/E3. They are a minusculecap Chinese fruits and vegetables company that reverse-mergered onto the TSX-V. Most of their revenues come from canned tomato paste, which they sell in China and abroad. Given how cheaply the company is valued by the market, it is important to look at the risk factors surrounding the company to determine whether this valuation is warranted or not.

 

Most Chinese microcaps have been painted with the brush of fraud due to, well, a lot of them committing fraud. That's great for us value investors since we can cherrypick the good ones from what's left. Chinese microcaps are all trading around 2.5P/E. Some of those left are still frauds, but I believe this is not the case for Greenstar. The most important evidence in my opinion is that all the key players are invested in the company, including the CEO. More importantly, they INCREASED their ownership stakes after the reverse merger. Fraudsters typically don't buy shares after the reverse merger since if they plan on going dark, they're simply wasting their cash since they'll keep control either way. Further, most of the board of directors and many staff (all the way up to CFO) are Canadian, who are also significant shareholders. See the website for pictures of a visit to the company by significant shareholders. Note that one of them is now heading the search for a Canadian distributor (they are currently in talks with one, nothing concrete yet).

 

Additionally, the company has paid dividends last year of .04 a share (.01 quarterly) and increased to .06 (.015/quarter) for 2014, with the first quarter already declared. Chinese frauds usually don't pay dividends, rather they hoard/report tons of cash, sell their shares if they can then go dark. It would be hard to pay a dividend if the company misreported its cash. It would be possible, but difficult and unnecessary. Although I feel the increased ownership stakes of key players is a more important factor, the dividend payment adds additional legitimacy to the company.

 

Finally, I did not find any accounting gimicks. I am not good at this though, so I would love input from more qualified people.

 

Although the company may not be a fraud, the risk of total loss is still real. In order to trade on a foreign exchange, Chinese companies need to have a VIE corporate structure which is not deemed legal (it's created specifically to circumvent foreign investment laws). There is regulatory risk here since the government could simply pull the plug and it's GG no re, nothing for us. However, this risk is not specific to the business and, for the most part, needs to be assumed if one wants to invest in China in the first place.

 

Now, what about the company? One of the reasons that I purchased shares in this company is that while it trades at a similar level to other Chinese microcaps, it appears legitimate AND the quality of its business appears superior to others. The company has a simple, defensive operation (canned goods) that should perform well in any economic environment. It has an excellent balance sheet, with 33mil in current assets and 6mil in total liabilities. This amounts to a NWC of 27mil, or 1.8 a (undiluted) share. It's not free money due to the previously-mentioned regulatory risks, but it's pretty cool anyway. The company is pretty well managed considering they posted a ROA over 20% each of the past 3 years. There doesn't seem to be too much credit risk regarding AR as the company supplies many customers of a variety of sizes.

 

The company has purchased a plant that will boost tomato paste production up to 4-fold, and has already leased the land to provide the tomatoes necessary for it as part of its vertical integration strategy. It is also doing work to add a second production line at its current facility. This is great news, because this company can appreciate over the next 3-4 years by both renewed investor confidence AND increased earnings. So if investors are as confident in the next several years as today (aka not at all), the company will trade at 2.5x the new earnings which will still provide an increase in share price.

 

Additionally, the company is currently in talks to acquire a Canadian distributor, which is expected to be paid for using internally generated funds. There is not much information about this yet. Maybe the company could keep the cash from this operation in a Canadian bank, which would obviously be pleasant for us foreign shareholders. I won't hold my breath for that, but it is still an additional expansion opportunity for Greenstar.

 

Overall, the fact that I pay dirt cheap for a pretty good company made the upside potential vs. Risk of total loss good enough to warrant a position. It's probably a better bet as part of a 20 or 30-position basket. However since I'm a new investor it's one of only 3 positions I currently have (The only 3 I felt were high quality enough ideas to be comfortable buying into. Funnily they all came up on the same screen). I'm looking to add more in the future, and sit around 10 total. I have a universe to learn still, so your comments are all welcome.

 

[matts]

Don't know much about the business, but when I googled their auditor I saw that they may have been involved with previous reverse merger deals of Chinese companies. I get a sense that it's a small group of people that have been involved in these types of frauds so I would be careful here.

 

http://www.newswire.ca/en/story/1079749/class-action-lawsuit-commenced-against-schwartz-levitsky-feldman-llp

 

 

[ItsAValueTrap]

You need to look at past Chinese frauds:

 

QXM/XING - The cell phone business was probably real and insiders increased their ownership stake dramatically.  The CEO ran off with the operating business and all the cash.  Francis Chou invested in this.

Sino Forest - Paid a dividend, most of the people on the board were Canadian, etc.

etc. etc.

 

Most Chinese frauds had very high insider ownership and insiders did not report insider sales.

 

2- I'd be incredibly surprised if Greenstar Agriculture wasn't a fraud.  The overhead of a public listing in another country is probably huge for them.

 

3- Almost all of the stocks on the TSX Venture are sketchy.  (*Many of them are your garden-variety junior mining BS stock.)

[Patmo]

It feels unjust to call it a fraud just because others were a fraud, so I don't really care about other companies. For one, I have a hard time believing that paying out a dividend increases its odds of being a fraud. Do you see any gimmicks in the FS? Any red flags specific to this company?

 

There has to be a (or several) Steve Madden among Chinese smallcaps, and I don't see any reason why Greenstar specifically needs to be ruled out yet. As of now I'm still more worried about the Government pulling the plug, but it needs to do so within a 3-4 year window for my idea to break.

[yader]

Trying to break the dividend thesis.  If you have cash on the B/S why not pay out a 6 or 7% dividend, have new investors come on board, run up the price for a year or so, and then issue stock at inflated levels.  After doing so, run off with the proceeds.  Seems easy to me, and only for 6-7% of the cash on the B/S! 

 

Now if they had been paying a dividend for 5-10 years that would be something else.

[Patmo]

That makes sense. The stock ran up from .5 to 1.5 last year and the company stuck around. If they didn't grab their cash bags and run at 1.5, they would need to look at 2+ if that is their intent. Assuming they would only go dark after reaching this point, I would only need to sell half my holdings to get a relatively free bet at whether this company is a fraud or not. Obviously that's not how it works in the real world, but it's cute to think in those terms. I still feel the "asymmetric bet" is worth it.

 

We'll see how it plays out in 3-4 years, I have tons to learn still and it's better for me to test the limits of value investing early rather than make a stupid mistake for big money years down the road. I only invested $5k in this company by the way, just for information purposes.

 

Thanks for your replies all.

[ItsAValueTrap]

Trying to break the dividend thesis.  If you have cash on the B/S why not pay out a 6 or 7% dividend, have new investors come on board, run up the price for a year or so, and then issue stock at inflated levels.  After doing so, run off with the proceeds.  Seems easy to me, and only for 6-7% of the cash on the B/S! 

 

Now if they had been paying a dividend for 5-10 years that would be something else.

 

Well technically even then you still aren't safe.  Some Ponzi schemes have lasted for a very, very long time.  How long did Madoff's Ponzi last?

 

In general, here's what I would do to avoid fraud and other bad things happening:

 

1- Avoid shady and unethical people.  This is the #1 thing you can do.  You need to do your due diligence on the people involved.

By this metric, you would stay the hell away from Steve Madden (and everything else that Stratton Oakmont IPOed). 

 

Shady people will eventually find a way to line their pockets.  Or, they may do something inexplicably stupid.

 

2- Does what they're doing make business sense?  Making high returns on capital in the shoe business makes sense.  On canned goods?  I'm not sure.

 

The other angle is to look at whether their capital allocation strategy makes sense.  By listing onto the TSX Venture, they will have overhead of around $200k/yr (maybe more) just to be publicly listed.  This is a huge headwind.  They might have higher overhead because they don't have good English and are in a super-awkward time zone.  There might also be complex legal issues.  And I don't know if the structure is tax-efficient.  Did they really go public just so that they could pay $200k/yr and return capital to shareholders via dividends???

 

3- Look for evidence of fraud.  This is time consuming.  And some frauds are really hard or impossible to figure out if (A) they are faking cash and (B) there is a real business involved.

 

I learned my lesson the hard way from doing what you are trying to do.  I know that this might be difficult to believe but it's possible that 99%+ of Chinese reverse mergers are frauds.

[craigatk]

Don't take it too hard that people are jumping on your idea as potentially fraudulent despite the fact that you addressed that early on in your post. Good for you getting into value investing and starting by reading and researching. It's just that most people myself included are extremely skeptical that there is any value at all in Chinese reverse-merger equities. Perhaps that's why there might be value but what edge do you have in discovering it? Do you speak Chinese? Have you been over there to see what is happening on the ground? Do you have friends that are over there to check things out for you? Do you know that most Chinese companies routinely keep several sets of books and do all kinds of things that we might be thrown in jail for? (they usually don't have an issue but every once in a while the government cleans things up a bit and executes some people...)

 

For me it's just way too hard of a problem to ever overcome. I'd much much rather stick to the thousands of listed equities in jurisdictions where fraud is pretty rare and government risks are (hardly ever?) never a factor.

 

Buffett's 20 ticket punch card came to mind. There will be better opportunities. Sometimes it's better to just watch and wait while continuing to read and read and read. I think he suggested 500 pages a day.

 

See: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/warren-buffett's-20-ticket-punch-card/

[ItsAValueTrap]

TORONTO, ONTARIO--(Marketwired - Feb. 28, 2014) - GreenStar Agriculture Corporation ("GreenStar" or the "Company") (TSX VENTURE:GRE) today announced it has engaged CHF Capital Markets to provide media relations, effective immediately. CHF Capital Markets Inc. is a subsidiary of CHF Investor Relations, a highly regarded Canadian investor relations firm headquartered in Toronto and operating under the same management for the past twenty years.

http://app.quotemedia.com/quotetools/newsStoryPopup.go?storyId=66099005&topic=GRE:CA&symbology=null&cp=null&webmasterId=500

 

This is a massive red flag.  The company is highlighting the fact that it will hire an "investor relations"/"media relations" firm to basically pump the stock.  They're pretty much saying that they've went out and used shareholder money to hire shills.

[thepupil]

In the 9 months ended 9/30/2013 they made 8.6MM on 30.4MM of sales??? Are they selling iphones?

 

Look at the net margins of Campell's, Kraft, , Chiquita (branded food sellers) : 8%, 15% , Nil

 

Or maybe some packaging names (I don't know packaging co's of the top of my head, but I will presume they don't make 28% net margins). 

 

they don't have to run off with the cash to make it a fraud. they can do things like buy a tomato paste production plant from their friends for too high a price or just use sharheolders money to buy real assets. a negligible dividend doesn't change the fact that this company looks and acts like a fraud and probably is one.

 

 

[ItsAValueTrap]

I'd much much rather stick to the thousands of listed equities in jurisdictions where fraud is pretty rare and government risks are (hardly ever?) never a factor.

 

In my opinion, fraud is everywhere.  All countries have unethical people who will commit fraud.  And of course, honest people are everywhere too.  There are some incredibly honest people in the world who will become whistleblowers, who would do something to try to prevent genocide, etc. etc.

 

There are certain areas of the market where fraud is much more likely:

- TSX Venture and other junior exchanges

- Oil and gas, pharma, mining

- Penny stocks

- Reverse mergers

- SPACs (Greenstar Ag is the product of a SPAC)

- Companies listed on foreign exchanges

 

The level of fraud in Canadian mining stocks right now is rather extreme.  Almost every technical report is inflated.  The simplest and best way to avoid fraud is to avoid unethical people.

[yadayada]

we should have a sticky on those chinese things that trade at a PE of 3. I think iv seen like 3 or 4 posted already.

[thepupil]

"only investing $5K" in something that ends in a zero can be disastrous. I lost a similar amount on the first stock i purchased before i knew anything. my subsequent stocks (and the market) did very well.  If i had that money that i lost in the summer of 2008, I'd be worth significantly more because of the subsequent success.

 

Losing 100% (which is a strong possibility here) on a significant portion of your net worth (I'm assuming $5K is significant for you, maybe i'm wrong) is very detrimental in the early parts of your investing career.

 

  It compounds. Put $5K and 40 years at a given return in a compound interest calculator. Let's say you take yoour enthusiasm and energy and plow that into a successful 40 year investing career in which you make 9% above inflation (which I would regard as extremely successful). Your $5000 is a future $157,000.

 

At 5% it is a still significant $35,000.

 

 

 

[Patmo]

Don't take it too hard that people are jumping on your idea as potentially fraudulent despite the fact that you addressed that early on in your post. Good for you getting into value investing and starting by reading and researching. It's just that most people myself included are extremely skeptical that there is any value at all in Chinese reverse-merger equities. Perhaps that's why there might be value but what edge do you have in discovering it? Do you speak Chinese? Have you been over there to see what is happening on the ground? Do you have friends that are over there to check things out for you? Do you know that most Chinese companies routinely keep several sets of books and do all kinds of things that we might be thrown in jail for? (they usually don't have an issue but every once in a while the government cleans things up a bit and executes some people...)

 

For me it's just way too hard of a problem to ever overcome. I'd much much rather stick to the thousands of listed equities in jurisdictions where fraud is pretty rare and government risks are (hardly ever?) never a factor.

 

Buffett's 20 ticket punch card came to mind. There will be better opportunities. Sometimes it's better to just watch and wait while continuing to read and read and read. I think he suggested 500 pages a day.

 

See: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/warren-buffett's-20-ticket-punch-card/

 

No worries, it's what the board is here for. I don't feel personally attacked or anything, if all I wanted was cheers and applause I would have posted about a less controversial holding first! As I mentioned a few times already, I have lots of room for improvement in my investing process and I will make blunders. Unless there is crushing evidence, I probably won't change my mind. There are good and bad things that come with being hard headed, I'll own up if the need comes.

[thepupil]

Don't take it too hard that people are jumping on your idea as potentially fraudulent despite the fact that you addressed that early on in your post. Good for you getting into value investing and starting by reading and researching. It's just that most people myself included are extremely skeptical that there is any value at all in Chinese reverse-merger equities. Perhaps that's why there might be value but what edge do you have in discovering it? Do you speak Chinese? Have you been over there to see what is happening on the ground? Do you have friends that are over there to check things out for you? Do you know that most Chinese companies routinely keep several sets of books and do all kinds of things that we might be thrown in jail for? (they usually don't have an issue but every once in a while the government cleans things up a bit and executes some people...)

 

For me it's just way too hard of a problem to ever overcome. I'd much much rather stick to the thousands of listed equities in jurisdictions where fraud is pretty rare and government risks are (hardly ever?) never a factor.

 

Buffett's 20 ticket punch card came to mind. There will be better opportunities. Sometimes it's better to just watch and wait while continuing to read and read and read. I think he suggested 500 pages a day.

 

See: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/warren-buffett's-20-ticket-punch-card/

 

No worries, it's what the board is here for. I don't feel personally attacked or anything, if all I wanted was cheers and applause I would have posted about a less controversial holding first! As I mentioned a few times already, I have lots of room for improvement in my investing process and I will make blunders. Unless there is crushing evidence, I probably won't change my mind. There are good and bad things that come with being hard headed, I'll own up if the need comes.

 

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right. - Benjamin Graham

 

Am I being obnoxious with the Graham quote, yes.

 

But I am hard headed with respect to these reverse mergers. they are guilty until proven innocent and the association with a tainted auditor, ridiculously high margins, method of company formation and all the issues that ValueTrap pointed out scream this thing is more than likely a fraud.

[Patmo]

"only investing $5K" in something that ends in a zero can be disastrous. I lost a similar amount on the first stock i purchased before i knew anything. my subsequent stocks (and the market) did very well.  If i had that money that i lost in the summer of 2008, I'd be worth significantly more because of the subsequent success.

 

Losing 100% (which is a strong possibility here) on a significant portion of your net worth (I'm assuming $5K is significant for you, maybe i'm wrong) is very detrimental in the early parts of your investing career.

 

  It compounds. Put $5K and 40 years at a given return in a compound interest calculator. Let's say you take yoour enthusiasm and energy and plow that into a successful 40 year investing career in which you make 9% above inflation (which I would regard as extremely successful). Your $5000 is a future $157,000.

 

At 5% it is a still significant $35,000.

 

Fair point.

[ItsAValueTrap]

Unless there is crushing evidence, I probably won't change my mind.

 

Look- I don't even know you but I don't want to see you get scammed.  This will end badly for shareholders.

 

The company has come out and stated that it is spending money on stock promotion.  And at the same time, they are returning capital to shareholders via dividends.  Why would they spend money on stock promotion if they don't need to raise capital???  Do I need to spell this out for you???

[abitofvalue]

Unless there is crushing evidence, I probably won't change my mind.

 

Look- I don't even know you but I don't want to see you get scammed.  This will end badly for shareholders.

 

The company has come out and stated that it is spending money on stock promotion.  And at the same time, they are returning capital to shareholders via dividends.  Why would they spend money on stock promotion if they don't need to raise capital???  Do I need to spell this out for you???

 

This is good advice.

[yadayada]

Don't take it too hard that people are jumping on your idea as potentially fraudulent despite the fact that you addressed that early on in your post. Good for you getting into value investing and starting by reading and researching. It's just that most people myself included are extremely skeptical that there is any value at all in Chinese reverse-merger equities. Perhaps that's why there might be value but what edge do you have in discovering it? Do you speak Chinese? Have you been over there to see what is happening on the ground? Do you have friends that are over there to check things out for you? Do you know that most Chinese companies routinely keep several sets of books and do all kinds of things that we might be thrown in jail for? (they usually don't have an issue but every once in a while the government cleans things up a bit and executes some people...)

 

For me it's just way too hard of a problem to ever overcome. I'd much much rather stick to the thousands of listed equities in jurisdictions where fraud is pretty rare and government risks are (hardly ever?) never a factor.

 

Buffett's 20 ticket punch card came to mind. There will be better opportunities. Sometimes it's better to just watch and wait while continuing to read and read and read. I think he suggested 500 pages a day.

 

See: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/warren-buffett's-20-ticket-punch-card/

 

No worries, it's what the board is here for. I don't feel personally attacked or anything, if all I wanted was cheers and applause I would have posted about a less controversial holding first! As I mentioned a few times already, I have lots of room for improvement in my investing process and I will make blunders. Unless there is crushing evidence, I probably won't change my mind. There are good and bad things that come with being hard headed, I'll own up if the need comes.

 

Imo a better aproach is, if there are some red flags then run. Where there is smoke...

 

The best thing you can do with investing is say next. There are 10's of thousands of stocks out there. So why not go for the perfect one. Or close to perfect in most cases. Not like there isn't enough choice..

 

If your a movie star, why go out with the girl with the adam's apple if there are loads of other hot girls willing? I think most people would be rational in that situation (rarely see movie stars with ugly girls), while with stocks I see alot of people often be very stubborn on bad stocks.

[bz1516]

If you run a screen looking for inexpensive stocks you are going to come up with this name.  i certainly have. 

 

In lots of different business situations you want to look for enriched environments and avoid adverse environments.  Chinese reverse mergers is an adverse environment, an environment enriched with people that want to steal your money.  That's all there is to it.

 

How do I know that?  I've spent 10 years doing business in China.  Fraud is endemic in the mainland culture.  Sounds like a generalization, but it is the kind that will save you money.  Are there honest people in Wenzhou?  Sure, but the Chinese have a saying, "Never trust anyone from Wenzhou".  So as a westerner do you seek out a business partner from Wenzhou?

 

How would you know this company is not a fraud?  There are people who could make that determination, but they would be Chinese or employ Chinese.  if you're not convinced reading all these replies I wish you luck with Greenstar.

 

 

[Patmo]

Unless there is crushing evidence, I probably won't change my mind.

 

Look- I don't even know you but I don't want to see you get scammed.  This will end badly for shareholders.

 

The company has come out and stated that it is spending money on stock promotion.  And at the same time, they are returning capital to shareholders via dividends.  Why would they spend money on stock promotion if they don't need to raise capital???  Do I need to spell this out for you???

 

OK OK take it easy my friend... I guess I'll have to heed all the warnings and sell but I'll keep an eye on it. I'll have to do a writeup on another company and see if it'll get shut down as hard. I'm a bit dispirited now lol.

[DTEJD1997]

OK OK take it easy my friend... I guess I'll have to heed all the warnings and sell but I'll keep an eye on it. I'll have to do a writeup on another company and see if it'll get shut down as hard. I'm a bit dispirited now lol.

 

I invest in Chinese companies and most of the reverse mergers are just frauds.

 

Whenever you see something that has incredible metrics, be EXTRA cautious.

 

Also, look to their competitors financial metrics.  Canning vegetables and fruit is typically a VERY low margin business.  Some USA companies might be PARF, SENEB, and of course CPB, and the other mega giants.  Margins on just vegetables run in the LOW single digits, 1%, 2% and such.

 

This company is in China, so perhaps they make a higher margin as canned tomatoes might be a "novelty" and interesting idea.  They might also very well have excellent management...but a net margin of 20%+? 

 

That seems so far out of the realm of possibility....

 

There are cheap stocks out there, no doubt.  The cheapest stock I ever bought was about a 1 P/E.  It was selling for about 15% of book value.  less than 1x cash flow.  This was for a US listed stock.....While that was very unusual, I have often invested in US/Canadian companies for 3,4,5 P/E's.  Sometimes they even have good balance sheets and pay good dividends. 

 

The real trick though is to get yourself in position BEFORE earnings start to recover/increase.  If you can do this, you might be able to get into a stock for $1.50 that is earning $.75/share 2 years later.

 

It takes a lot of work and a lot of experience to get good at this. 

 

If you stick around this board, you will find yourself in good company!

 

Hang in there! 

 

 

 

[ItsAValueTrap]

Unless there is crushing evidence, I probably won't change my mind.

 

Look- I don't even know you but I don't want to see you get scammed.  This will end badly for shareholders.

 

The company has come out and stated that it is spending money on stock promotion.  And at the same time, they are returning capital to shareholders via dividends.  Why would they spend money on stock promotion if they don't need to raise capital???  Do I need to spell this out for you???

 

OK OK take it easy my friend... I guess I'll have to heed all the warnings and sell but I'll keep an eye on it. I'll have to do a writeup on another company and see if it'll get shut down as hard. I'm a bit dispirited now lol.

 

To be fair I don't think that it is easy to figure out by yourself.  The whole point of a fraud is that these guys try to get away with it undetected.

[craigatk]

I for one don't want you to be discouraged and I look forward to reading your next write up. It's clear you have put a lot of effort into this one. If you really want to learn, study the writings of Graham, Buffett, Klarman etc.  You don't need to invest in every idea you come across. Be very skeptical and try to work within an circle of competence that is as narrow as it needs to be. Be quick to throw out ideas at any red flags or unusual signs. There were several things mention by smart posters in this thread. Try and remember them and apply them to other ideas. Take your time, there is no rush as the market will be around for a long time and time is your friend.

[ItsAValueTrap]

Crazy... an institutional investor owns this.

http://www.alphanorthasset.com/app/Uploads/fund-docs/alphanorth-resource-fund-115.pdf