A few tell-tale signs that you should short a Chinese stock

Dan David has some ideas for Chinese companies looking to do battle with short sellers.

David is the co-founder of Geoinvesting, a research firm that has put out short calls on China stocks. On Thursday he spoke at the Marcum Cronus Microcap Conference in New York.

"Nearly a dozen companies have been delisted off our research," he pointed out to attendees of a panel discussing investing in public Chinese companies. "That's not something we're proud of; it's a shame."

Right now, with the Chinese economy slowing and markets are experiencing wild swings. It could be an optimal time to start looking at which stocks in China are legit, and which are frauds.

So David shared some tell-tale signs market watchers looking to invest in China should keep in mind - signs that show something might be amiss.

The company:

• Has a low-level auditor or legal representative
• Raised funds from disreputable, or relatively unknown investors
• Insiders are selling, which is a surefire sign, David said. The chairman and CEO of Hanergy Thin Film Solar last week shorted his own company leading up to a collapse in its stock price.
• David told conference attendees to also watch out for enormous margin projections. If a company says it has margins that are double its competitors in China and in the US, it could be a sign the stock is too good to be true.

Be careful out there.

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