I hardly felt it was necessary. At Bronte we have been short Gulf Resources (GFRE:Nasdaq) on behalf of our clients for most of the last year.
Its a bromine and industrial salt producer. Bromine is ugly stuff - highly reactive: in this wikipedia page the bromine is pictured encased in perspex. It will oxidize almost anything.
I knew it was suspect and you could tell off the balance sheet and the P&L. You see in the 2009 annual filing on form 10K Gulf Resources show as having $650,322 in inventories. They had sales of $110,276,908.
In other words they turned their inventory stock over 169.5 times per year. I can't imagine how active a plant would need to be to turn over toxic and dangerous bromine that many times - let alone low value industrial salt.
It didn't seem right to me so we shorted the stock.
But if you are the kind of person that needs a comparable have a look at the last 10K of Great Lakes Chemical. Great Lakes was a super-high quality operator (mostly and originally a bromine producer) with Berkshire Hathaway and Warren Buffett as large shareholders. This was a mighty fine company as Jeff Matthews relates:
I recall the CEO of a Great Lakes competitor telling me, with awe, about a visit to Great Lakes’ bare-bones corporate office, where the lights in the conference room were operated by an old-fashioned light timer, like the timers that control heating lamps in hotel bathrooms.
These guys you see were hard-driving operators - likely to manage inventory better than almost anyone in the business.
Now we know what arguably the finest bromine maker ever in North America did: we can look at their last 10K. In their last year (2004) inventories were $324 million. Sales were $1604 million.
The company turned its inventory stock under 5 times.
Gulf Resources claim to turn over their inventory 169.5 times per year looks doubly suspect- and if it is suspect then the accounts are suspect.
I could be wrong of course. Gulf Resources may indeed be able to turn its inventory over 34 times faster than the best American operator. They may. An otherwise obscure Chinese company might be that good and the short might be stupid.
But as a shortseller that is a bet that I was willing to take without any further due diligence.
I admire the effort in the Glaucus report. But for us - we just keep it simple.
PS. There are several high profile asset management firms that hold large positions in this stock led by Fidelity. As stated you only needed to look at two pages of the annual filing to smell a rat: the balance sheet and the P&L. Then the inventory turn jumped out.
Did Fidelity even look at those two pages? Really?