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Scrutinizing Prescience Point's Short Attack On Amira Nature Foods

Summary

Prescience Point has accused Amira Nature Foods of fraud, and has slapped a $0 price target on the stock.

Reviewing the two reports laid out by Prescience, there are questionable aspects which raise doubt as to the quality of the analysis.

I believe a fair value on the stock is $7.50-10 until the dust settles on the fraud accusations.

Amira Nature Foods Ltd. (NYSE:ANFI) is an international company with origins in India that is engaged in the processing, distribution, and marketing of packaged specialty rice. On the surface, that may sound like an uninteresting stock, but ANFI has been absolutely hammered from $12 to less than $3, before rebounding since the start of August amid fraud allegations led by Prescience Point. Investors have feared that there may be some truth to this research firm's claims, as the company recently changed auditors for the second time in a couple of years. The value proposition on ANFI is obvious, as the company's price-to-earnings ratio sits at only 2.7 at a $3.75 stock price. Calming investor concerns over the fraud allegations would lead the stock to having 2x-5x upside, as it has turned into a deeply discounted value play. KRBL Limited (KRBL.NS) is the largest player in the Indian rice industry, and currently has a P/E of 11 and P/S of 1.2. As some investors sell their shares at all-time lows out of fear, others such as myself have picked up shares in hopes that the fraud allegations turn out to be baseless or greatly exaggerated.

I believe that the research from Prescience Point misrepresents the problems inherent with ANFI. Prescience Point has used a touch of reasonable and insightful analysis and added fear mongering and questionable research tactics to that to paint a picture of a company on the brink of collapse. As a short seller, it has worked in its favor, but also has provided investors like myself a chance to load up at low prices. The firm's research and credentials have not gotten nearly the level of scrutiny that you would expect for a report responsible for crashing a stock. I will attempt to do so here. The two reports I will refer to are the February 2015 initiating report on the firm's website, and then, a follow-up report in July.

Who is Prescience Point, and why the misleading comparables to Chinese RTOs?

A good place to start when scrutinizing this report is figuring out exactly who or what Prescience Point is in the first place. The firm's website doesn't say much, mentioning no names or qualifications outside of having 25 years of combined experience, but reviewing Amira's lawsuit statement and Prescience's

, you will find the individuals behind the report easily enough.

The first red flag for me when reading the February report was on page 6, where Prescience makes a direct comparison of ANFI to A-Power Energy Generation Systems, Ltd. (OTC:APWR) and Advanced Battery Technologies, Inc. (OTCPK:ABAT), two Chinese RTOs outed as scams several years ago, which the firm covered at that time. First, it wrongly compares ANFI to Chinese RTOs, and second, it portrays Prescience as a company that has an expertise in finding Chinese frauds by cherry-picking two results.

According to Prescience, ANFI has a dozen commonalities to the Chinese RTOs, including the inflating of revenue, high management team compensation plans and undisclosed related-party transactions. It makes no mention of the biggest difference of them all - that ANFI is an IPO. IPOs come under much more intense scrutiny before listing, thus making fraudulent operations much harder to conceal than with reverse takeovers. On page 5, Prescience points to the JOBS act and its less strict disclosure requirements for an IPO of an emerging growth company as ammunition for fraudulent behavior and to set the tone for the rest of the report. However, ANFI disclosed in its IPO filing that it "irrevocably elected not to avail ourselves of this exemption", which Prescience did not mention in its report.

In the company's 2014 20-F filing, the wording has been changed so that it no longer explicitly states it doesn't take advantage of this exemption, but for the purpose of setting up a story by trying to compare Chinese RTOs to an Indian IPO and using JOBS as the ammunition, this story doesn't hold, as at the time of the IPO, JOBS exemptions weren't used.

Prescience misrepresents its expertise by cherry-picking two of its picks in the past that had severe business or accounting weaknesses and lost most or all of their value. Reviewing the firm's past research shows that it has several extremely bearish calls, including Yongye International (NASDAQ:YONG), another Chinese small cap which was conveniently left out of the discussion. Maybe it was due to the company being privatized at double the price of the stock when the report came out. Did it also have all the signs of fraud, according to Prescience? The chart below summarizes the performances of all the Prescience picks made on its website, including the date, price of the stock the day before the report came out, the price after and the closing price as of August 21, 2015, along with the performance of the pick the day after the report until today and the % the pick has been off of the target.

Looking at this data, we see two very good picks in Chicago Bridge & Iron Company N.V. (NYSE:CBI) and United States Antimony Corp. (NYSEMKT:UAMY), two very bad picks in Active Network (NYSE:ACTV) and Yongye, with several picks in between. CBI and UAMY were very good calls, but have more to do with Prescience calling business weakness rather than accounting fraud. Active and Yongye were both bought out. So Prescience was either dead wrong on them, or someone overpaid a substantial amount to stop a fraud from being revealed.

If we look at TipRanks for a small sample size of four stock picks from Prescience Point and another nine for related account Prescience Investment Group, we see two accounts in or near the bottom 10% of the entire universe of experts, with a combined return of over -30%. TipRanks is not a perfect method for judging one's stock picks, and it is missing some of...


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