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Wednesday, March 16, 2011

Part 1: 584% Return? Buyer Beware

A problem most small companies face is getting investors to notice them. Rather than growing their business and achieving more analyst coverage the honest way, some companies take the easy way out.

Issuer Paid Coverage is a fairly simple concept that appears to get the job done.

Company A pays Research company B to write a report.

Everybody wins right? Company A gets more coverage and company B makes some money?

Wrong.

First off, company A's shareholders are poorer as a result (company B won't work for free!), but the major drawback is... the objectivity of the research report is biased due to a conflict of interest.

Company A won't keep paying company B unless they issue favourable reports (ie. valuing the company above where its trading)

Here is a stunning example of a massive bias in action.

CIBT Education trades under the clever symbol of MBA on the TSX. The investor relations section lists a number of reports from "Fundamental Research Corp". (http://www.cibt.net/research.php)

Usually these types of research reports have their recommendation prices 20 or 30% higher than where the stock is trading. However, CIBT trades for 37 cents and the buy rating is for $2.53! That's a 584% return.

This seems especially hard to believe given the company has never made more than 1 cent per share in its best year.

I will be putting a call into Fundamental Research Corp tomorrow to hear their view of the 'fundamentals'.

I will post a follow up as soon as I can.






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