NQ Mobile (NQ)

Too much uncertainty has pushed this stock down, and investors have lost faith. It’s time to sell.

NQ Mobile (NQ)

from Unconventional Wealth Updated from ID 756, April 16, 2014

The problem with NQ Mobile (NQ) today is that faith has been eroded. Of course, that lack of faith didn’t just strike the stock like a plague. There’s been a growing amount of smoke.

Muddy Waters analysts have famously accused the company of fraud – misrepresenting revenue, cash holdings and profits.

The SEC just this week opened up its own investigation to see if there’s any truth behind the allegations.

The company’s annual report and final independent audit have been repeatedly delayed – most recently, yesterday morning.

So what happens from here? There are three likely scenarios.

Worst Case: Muddy Waters is absolutely right in its assertions. Whenever NQ has said it’s on the up and up, or that the audit is going swimmingly—it has, quite simply, lied. If NQ really has been lying about everything, all bets are off. The stock is going down, and going down hard.

Middle Case: In two weeks, the law firm of Shearman and Sterling LLP, and accounting firm Deloitte and Touche, give NQ a qualified bill of health. In this case, the worst of the allegations are cleared, but some questions remain. The SEC investigation continues. NQ remains in limbo for an undetermined period of time.

Best Case: The delays in the audit don’t carry extra meaning—the auditor just needed more time. NQ is cleared of all fraud allegations. On the news, shares immediately bounce sharply higher. Short sellers have to buy shares to cover their position, and NQ is in a classic squeeze position. In about a day, it doubles in value—and, after a lull in movement as short-sellers exit their positions, the company just continues to move up.

For a long time, I’ve believed the best-case scenario was on the way. NQ had too many deals with too many major carriers and manufacturers—I just didn’t think the company was pulling the wool over that many pairs of eyes.

But it has been done before. And it’s possible that it’s happened in this case. Certainly, all these delays are a bad sign. While no official reason has been given, delays are usually a sign of problems. This has been dragging on for so long, that some investors will never have faith in NQ again.

All that is worrying enough that I’m moving NQ out of the “Buy” category, and recommending that you sell any large positions. There’s still tremendous upside here. If you want to hold onto a few shares as a potential Moonshot play, I wouldn’t blame you. But there’s huge downside as well.

Ryan Cole, Unconventional Wealth, www.contrarianprofits.com, 888-811-9492, May 16, 2014