We recently had the pleasure of interviewing up-and-coming value investor Sahm Adrangi, founder of Kerrisdale Capital Management.
Sahm is the chief investment officer of Kerrisdale Capital Management, a private investment manager that focuses on value and special situations investments. Prior to founding Kerrisdale Capital Management, Sahm was an investment analyst at Longacre Fund Management, a distressed debt credit fund. Sahm holds a Bachelor of Arts in Economics from Yale University.
MOI Global: What led you to focus on U.S.-listed Chinese companies and how have you gone about separating the frauds from the legitimate companies?
Sahm Adrangi: In early 2010, when I was looking at this space, there were dozens of companies showing abnormally high margins and growth rates that were trading at unusually low valuations. This struck me as unsustainable. Either these companies were reporting accurate figures and their stock prices deserved to trade several times higher than their current market prices, or the companies were fabricating their financial statements and the managements needed to be investigated by the SEC. We decided to immerse ourselves in the sector to figure out what was going on and share our detailed granular research on whether these companies were severely undervalued or severely overvalued.
Either these companies [U.S.-listed Chinese stocks] were reporting accurate figures and their stock prices deserved to trade several times higher than their current market prices, or the companies were fabricating their financial statements and the managements needed to be investigated by the SEC.
In terms of how we’ve separated the frauds from legitimate companies, we’ve relied on investigators, financial filings in China, and common sense. Some of these businesses are reporting irrationally high margins, growth rates and returns on capital despite operating commodity businesses. These too-good-to-be-true situations have led us to dig deeper on whether these companies are misrepresenting themselves in their filings.
MOI: How have you typically structured your bearish positions? Could you walk us through a typical timeline and mechanics, perhaps using an example that has already played out?
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