By Alexander Moschina

You probably remember the agri-boom a few years back.

As grain prices rose to astronomical figures, it triggered an increase in food prices across the board.

Wednesday after the close China Green Agriculture (NYSE: CGA) reported its fiscal fourth quarter and annual results followed by a conference call discussion with the analysts following the company. Notably absent from the call was anyone asking tough questions or demanding management provide a detailed response to the due diligence findings of the International Financial Research & Analysis Group (IFRA) that I summarized and linked to earlier this week.

Yesterday my friend uploaded a copy of IFRA’s latest update. You can download a copy for yourself here.

China’s CFLP Manufacturing PMI for August increased slightly to 51.7 from 51.2 – the first increase in 4 months. The uptick was in line with my forecast based on the historical seasonal pattern. Although the PMI is still above the critical level of 50, indicating continued growth in the manufacturing sector, the growth is weak and sub-par to previous years, excluding 2008 and 2009 as a result of the debt and liquidity crisis (click to enlarge).

Today I want to discuss how short sellers are spreading what I consider to be rumors about Chinese microcaps for their own profit.

By definition, an undervalued company is a company that the market hasn’t valued correctly for whatever reason. I want to illustrate two examples of how investors can systematically short undervalued companies, do perfunctory research, and continue to do so until they decide to cover their shorts and disappear, in most cases. I also wanted to discuss ways that companies can combat this, as it is fairly easy to deflect but imminently damaging if not combatted head on.

China Sunergy (NASDAQ: CSUN) is the smallest of the US listed Chinese solar companies and currently only operates in cell production vertical. At face value, their Q2 earnings (see earnings call transcript here) were quite good. Revenues soared 107% year over year and 23% sequentially to 117m. Earnings were also up significantly as gross margins expanded to almost 20%. Earnings on a per share basis totaled .33 on a diluted EPS basis, compared to .18 EPS reported last year. Not bad for a four dollar stock if they can keep these levels of earnings stable over a longer period.

The advantage of operating in a single vertical is that during boom cycles, CSUN’s level of earnings can look extremely good as they leverage their lower cost structure to meet periods of high demand. The disadvantage of operating in a single vertical is that during down cycles, margins may compress because they don’t have direct control over end sales. CSUN will always rely on the ability of their customers who produce modules to do well. Higher integrated module producing peers have more direct control over costs as well as end demand exposure. As a result, even during down cycles, the level of their business doesn’t fluctuate as wildly as for CSUN. In recent years, CSUN’s quarterly earnings have swung from one extreme to another while some peers have kept their earnings more on a consistent level. The company is in the process of acquiring their sister module manufacturers CEEG (Nanjing and Shanghai), but has experienced delays in completing the merger. If and when this deal is closed, CSUN will operate more as a two vertical module manufacturer much like their larger peer Suntech Power.

Alloy Steel International (AYSI.OB) is a nano cap company headquartered in Australia that uses a high tech, proprietary process to manufacture protective wear plates for mining equipment. Essentially, the company is a picks & shovels play on the mining industry (particularly iron ore and coal mining, currently), an industry which has of course benefited from the demand for industrial commodities by China and other emerging economies.

Alloy Steel was the subject of a few posts here by Seeking Alpha contributer Michael Alexander, including (most recently) this post from last February, "AYSI's disruptive technology leads to record growth and earnings". Since then, the stock has dropped by more than two thirds. Much of that drop occured after the company's most recent quarter showed lower earnings than shareholders (including me) expected.

Strong economic performance in developing countries will not only benefit the 5.6 billion people who reside there, but will also impact the likelihood of a double-dip recession in advanced countries.

As GDP growth in advanced countries slows sharply, emerging economies are set to help sustain the global recovery. Though growth in emerging markets has moderated from torrid post-crisis rates, it remains high. In addition, it has grown more reliant on domestic demand, and is broadening across sectors. This high rate of growth can help mitigate a sharp slowdown of domestic demand in advanced countries, but cannot compensate fully for it.

The old tech bellwethers of the 1990s failed to meet the unrealistic expectations investors had of them. The stocks have fared poorly since the market peaked in 2000, but revenues and earnings have generally grown reasonably well. The result is that these stocks, so overpriced a decade ago, can now be considered value stocks. In addition to having low P/E ratios and decent growth, most of these companies have strong balance sheets with plenty of cash.

There is now a new crop of tech favorites. Many of them are expected to profit from the rise of “cloud” computing, and no doubt some of them will. But the lesson from a decade ago is that the big winners are hard to spot ahead of time and if they are all priced for perfection, the safest bet is probably to stay away from them altogether, or perhaps even take positions against them.

By Brandon Clay

August was ugly for most market sectors – the dollar may have been the only safe place. One group of stocks bludgeoned in a particularly nasty way was U.S. for-profit education stocks.