Hot investment trend of 2012 a good way to lose your shirt

According to Jim Coulter, billionaire founder of US private equity group TPG Capital, one of the most lucrative investment trends of 2012 will be bringing home Chinese companies 'stranded abroad'.

It may work for him, but ordinary investors should run a mile.

The idea behind the stranded abroad trade is simple enough. There are hundreds of Chinese companies with shares that trade in US markets. A handful are well-known blue-chips like Baidu, Ctrip and Petrochina, all of which are listed on Nasdaq.

But the vast majority are companies few investors have ever heard of. Scores are listed on Nasdaq, and hundreds more trade in the over-the-counter market.

These had a dreadful year in 2011. After short-sellers led by US firm Muddy Waters Research alleged rampant fraud at a series of Chinese companies, most famously at Toronto-listed Sino Forest, investors took fright. Assuming that financial mis-reporting is endemic among smaller Chinese companies listed in the US, and that the whole sector is nothing more than a scam aimed at ripping off gullible American shareholders, investors ditched Chinese stocks indiscriminately.

Today a quick scan through the list of Chinese companies listed on Nasdaq throws up a string of stocks which have fallen by between 80 and 90 per cent over the past 12 months, and now trade on price multiples as low as one or two times their reported earnings, whether or not they have drawn any allegations of malpractice.

Coulter believes that among these companies there are some real gems trading at crazy bargain prices. He scents there are big profits to be made by buying into the soundest, delisting them in the US and re-floating their shares in Hong Kong, where investors are more likely to appreciate their true value.