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Singapore: Olam Doesn’t Want to Get Muddy

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Singapore stocks lost ground this week, with the Straits Times Index (SGX: ^STI) down 0.3%. Several other major Asian markets also recorded losses, with the prominent exception of Japan, where the Nikkei responded very favorably to the Bank of Japan’s unveiling of an aggressive plan to jumpstart inflation:

 

Weekly Gain (Loss)

Price-to-Earnings (Apr. 5)*

Nikkei 225   (INDEX: ^N225)

+3.5%

16.2

Hang Seng Index   (INDEX: ^HIS)

(2.6%)

13.0

Shanghai Stock   Exchange Composite Index

(0.5%)

20.9

BSE Sensex

(2.0%)

16.7

*Normalized earnings per share  Source: S&P Capital IQ

Olam declines to get Muddy

Two weeks ago, I highlighted commodity trader Olam International (SGX: O32) as the standout performer within the Straits Times Index. This week, Olam shareholders weren’t as fortunate, as the stock was the worst performer in the index, with a 3.2% decline.

On Friday, the company announced that, on the advice of shareholders, it would not pursue the suit it had filed against short-sellers Muddy Waters. Olam’s shares had dropped as much as 22% after Carson Block, Muddy Waters’ research director, alleged that the company had questionable accounting and was at risk of insolvency at an investment conference on Nov. 19. On Friday, Olam’s shares closed at SG$1.665, just 4.3% below their Nov. 19 closing price.

Olam did not disclose which shareholders it had spoken with on the matter; the company’s largest investor is state investment firm Temasek Holdings, with a roughly 22% shareholding. As I see it, dropping the suit is actually a show of strength. Typically, the companies that pursue short-sellers most vigorously are those that are more concerned with promoting their stock rather than building their business (indeed, in some cases, promoting their stock ­is their business, as there is no legitimate enterprise to begin with!) Managements that are focused on creating value over the long term, on the other hand, are not usually concerned about short-sellers, as they are confident that business fundamentals will speak for themselves over time.

Furthermore, from what I understand of Muddy Waters’ modus operandi, their research is sufficiently careful and they do not practice outright libel, so that winning an action against them would be no simple matter. In sum, by dropping the suit, Olam is effectively putting an end to an episode that the market appears already to have put behind them. On with the business!

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This article was written by  Alex Dumortier, CFA . Alex Dumortier is a Fool.com contributor.