Rejecting GigaCloud and Several Others

Finding the very best Green Screen stocks for investment is a tall task.

The company has to meet a rigorous array of criteria. It has to have clearly recurring revenue, enough growth potential to drive 10% annual growth for 5+ years (at a minimum), some clear structural competitive advantages ("moats"), a management team we can trust, and unassailable financial metrics - particularly a proven ability to generate cash flow.

Few companies in the world meet those criteria. But that’s ok. We only want to invest in the "best of the best".

On the other hand, it is a much simpler process to weed out Green Screen stocks that don’t make the cut. It only takes a few things looking wrong before we can wave our hand and say "PASS!".

One such example is GigaCloud Technology (GCT).

This is a company that provides e-commerce services for large parcel merchandise (think furniture and fixtures). Most of its manufacturers are based in Asia, and GigaCloud’s services act as a backend warehousing and logistics provider for product resellers. In short, it is a "middle-man" between suppliers and sellers for these large items which historically have not sold well through e-commerce for various reasons.

It seems like a decent business, but a lot of things just look "off" here. Culper Research noted all of these in a September short article. First, there’s the locale. While ostensibly a U.S. company located in California, principal executive offices are in Hong Kong and the firm is incorporated in the Cayman Islands. In accounting circles, a Cayman incorporation has a "shady" connotation. So right away, things are starting to look a little suspect.

This suspicion is only hardened by the fact that GigaCloud uses a little-known Chinese auditor instead of one of the "big 4" (Deloitte, Ernst & Young, KPMG, or PWC). Culper notes a lot of other things that just don’t add up. It is a convincing report.

Look, I’m not saying that this couldn’t be a good investment, or that these concerns are definitely signs of accounting shenanigans. Only that we don’t HAVE to invest in it and there are too many suspicious things going on here for me to trust it with my money. Take it from a guy that got burned 15 years ago in stocks like "China Sky One Medical" and "Harbin Electric"…. just stay away!

3 Others That I’m Rejecting

A few other stocks have slipped in to the Green Screens that fall into buckets we’ve rejected before, so I’m going to go ahead and cross them off for the same reasons today:

NetEase (NTES) - NetEase is certainly a "real" Chinese company, one of the largest online gaming and services firms in the country, but we’ve covered why U.S. investors are just best staying away from China altogether. This is an easy pass.

Mercury General (MCY) - A property and casualty insurer (why we are passing on these).

Erie Indemnity (ERIE) - Another insurance firm, this one for autos and homeowner’s coverage. The same reasons for passing apply as for Mercury General (and all the other insurance firms).