Postcards: How to Spot a Fraud

The intersection of baseball cards and Wall Street tells us to avoid this stock.

Dear Fellow Expat: 

Look at these two baseball cards. 

This is the 1934 Goudey Lou Gehrig #37.

If a company like PSA graded a ‘34 Gehrig Goudey in poor condition (the lowest possible), it’s still worth $2,100. 

The next is the 1951 Bowman Mickey Mantle. 

This is the first Mickey Mantle card - his true rookie card. 

This card isn’t graded, either. 

But even if it got a PSA 1 grading - the poorest condition - it’s still worth at least $5,000 at auction.

Here’s the thing… 

One of these cards is real - an iconic, rare jewel in our family collection. 

The other is completely fake - a literal forgery that could con a willing eBay buyer out of hard-earned money. And you know what?  99% of people can’t distinguish the real from the fake one.

Each card meets the eye test. Neither glows under a Black Light (a common sign of a reprint). Both have wear-and-tear and rounded corners common to their error. Each has identical printing markers on the back to their original cards - and no erasing of “reprint” from later-year set inserts. 

Can you tell the difference? 

Well, I’ll show you a shortcut. 

And once you learn how to spot forgery in my little baseball card hobby, I’ll show you the shortcuts to identify fraudulent companies in the stock market, too…

Show Me The Light

This morning, I approached a man in Starbucks and asked him to help me show readers the real forgery. But I needed something from him—his cellphone. 

He guessed that the Mantle was the fake - largely because of the Gehrig’s wear-and-tear.

 “It looks more authentic,” he said. 

We turned on his cell phone flashlight and turned his phone upside down. (I can’t turn on my light and take pictures, of course). 

Baseball cards from the vintage era used thicker card stock. The multiple layers of the card stock made it practically impossible for a flashlight to shine through the card. 

So, a simple trick to determine if the card is real is to hold a flashlight up to it. 

Here’s the Mantle… 

No light passes through. 

Here’s the Gehrig.

Notice the flashlight coming through his smile. That red glow… 

The Gehrig is the forgery. 

This is stunning, given the lengths the forger went to make this look real. The scuffing, the creases, the corner rounding– all intentional.

Both cards are among the most commonly forged in the world. I bought the Gehrig on eBay for cheap after asking a guy to do the light test. I often show this to card enthusiasts as a warning. 

The customer shook his head, amazed. He turned to me: “Are you a professional card collector?”

“No,” I said. “I’m a stock market analyst and former forensic accountant.” 

“What’s that got to do with baseball cards?” he asked.

“I write a newsletter about things like this… I’m tying this into spotting frauds in the market.”

How to Spot a Fake in the Market

Every few years, it appears we have a major accounting scandal. 

And for reasons - no one can see them coming. Think Super Micro Computer (SMCI), which just saw its auditors resign due to concerns about heavily manipulating its finances. 

SMCI was an AI darling, a stock that surged from $200 to $1,000… and back again.

Finding a company that’s likely to manipulate the numbers is easy. 

The real challenge is timing when the trouble will surface… 

Sometimes, financial manipulation goes untouched - leading to strong momentum in a specific stock that takes it higher and higher - while short-sellers get crushed. 

Here are three powerful tools to help you sniff out companies that might be fudging their numbers:

1. The Beneish M-Score Weirdly, this is called the M-score when the founder's last name was Beneish. However, his first name is Messod (which explains the M), and he created a fascinating tool using eight variables to detect earnings manipulation. These variables are Days Sales in Receivables, Gross Margin Index, Asset Quality, Sales Growth, Depreciation, SG&A, Leverage, and Total Accruals to Assets. For example, a decreasing gross margin can signal aggressive cost-cutting or accounting manipulation to sustain earnings. The range is a bit crazy, but here's what you need to know - if you see any number equal to or higher than -2.22, be worried about manipulation.

2. The Montier C-Score If you think a company is cooking its books, you'll want to watch the Montier model. It follows six key factors: cash flow from operations to total assets, receivables growth, gross margin growth, asset growth, sales growth, and depreciation. Each one receives a point. High receivables growth can indicate revenue recognition issues, inflating profits without cash support. On a scale of 0-6, a score of 4 or higher signals the likelihood of overstated profits.

3. The Ohlson O-Score Back in the 1980s, Dr. James Ohlson developed this nifty financial algorithm that measures the likelihood of bankruptcy within 24 months. It provides a logarithmic examination of nine variables: size, financial structure, performance, leverage, liquidity, working capital, asset turnover, funds from operations, and interest coverage. For example, low working capital signals insufficient resources to cover immediate liabilities. This increases the risk of financial distress.

If the value hits above 50%... it signals a high probability of financial distress or bankruptcy risk. This company could be facing severe stress - especially in a period when liquidity is set to tighten.

Avoid This Stock Now

I ran a screener this morning using these three metrics… plus two enhancements to identify working stocks (a little secret sauce). The company with the worst performance and highest signs of manipulation above $5 per share?

Amaresco (AMRC). 

I had not heard of it. But boy - post-election - they’re in trouble. 

Ameresco is a company that has positioned itself as an energy efficiency expert and renewable energy pioneer since 2000.

They’re a one-stop shop for anyone looking to make their buildings and operations more sustainable. 

Need to upgrade your facilities to use less energy? That’s their business. 

Want to switch to solar power? They do that, too. 

They even stick around to manage and operate these energy systems once they're built.

Clients include government buildings, schools, hospitals, and businesses. 

With Trump in office - their business might take a hit … 

At a time when their accounting looks very sketchy. I turned to Uncle Stock, a stock screener, to get the full readings on this name. 

• The M score is at -2.22.

• The O Score is 58.67%.

• The C Score is a 4. 

And other bankruptcy and balance sheet metrics I analyze are also quite weak. 

Earlier this year, the company reportedly faced liquidity and solvency issues, with creditors telling it to raise more money and address a huge debt. 

Shares are down sharply from $92.35 in November 2021 (the height of zero-interest rate, post-COVID frenzy). It’s now (somehow) at $28.00.

If the numbers prove true (and the market prevails), there won’t be any bailout. 

This looks a lot like balance sheet manipulation. 

I’m shocked it's still trading in the 20s.  

Avoid it at all costs.

We’ll talk about how to find better-quality names in the coming week. 

Stay positive,

Garrett Baldwin