I first started slamming China Finance Online (NASDAQ: JRJC) on October 3, when I asked How can China Finance online possibly not be overvalued?

To me -- and Citron Research -- there was no possible way that the stock wasn't heinously overvalued. But for some odd reason, the Wall Street analysts just couldn't get enough of it. Brean Murray slapped a $35 target on the stock, while the more conservative JPMorgan valued it at $29, which is the same target as Standard & Poor's. What are/were they thinking?

Now the stock has pulled back to $13.28 from its high of over $47 a share -- which was reached, incidentally, the day that I first mentioned the company. Now investors who bought into the hype are left wondering what happened. Is China Finance Online a buy now? I seriously doubt it. The market cap is still around $300 million on pretty tiny revenue: $25 million in 2007. More than 10 times sales for a company that sells stock newsletters in China using a sales force of telemarketers. Is that a joke?

With China's stock market down more than 17% this year, you have to think that the enthusiasm for stock pick newsletters will be waning after the stock market mania that enveloped the country last year. Playing the stock market has a way of becoming less fun when you're losing money hand over first.

Even after the precipitous drop, I'd still give China Finance Online wide berth.

As Peter Cohan recently wrote, Warren Buffett believes that the Chinese stock market has overheated.

So how can investors profit, with possibly more upside than shorting the index? First, an analogy:

If you were in California during the late 1850s, and received a tip from the foremost gold expert in the world that the California Gold Rush was about to end, how might you seek to profit from it? If possible, I would try to find companies to short: the cottage industry of shops selling shovels and picks to would-be miners would be a prime target, if I could find such a publicly traded company.

This brings me to China Finance Online (NASDAQ: JRJC), a high-flyer trading at about 662 times trailing-twelve months' earnings. The company markets stock-tip newsletters to Chinese retail investors, through a really (not) innovative distribution system: telemarketing. Why that business is worth $700 million is beyond me.

The catalyst for the company/stock's decline could be a softening of the market. Everyone's excited about stocks because the market is up big. But if people start losing money, how many are going to want to cancel their subscription and find a new hobby? A lot.

The sort of financial information we all take for granted in the west is not quite so universally available in China. A leader in the business of correcting that condition is headquartered in Beijing.

China Finance Online (NASDAQ: JRJC) provides online financial data and analytics to customers in the People's Republic of China. The firm serves individual users and institutional clients with subscription-based packages that integrate financial and listed company information from multiple sources. Users can obtain financial news, research reports, real-time stock quotes and historical financial information for China's listed stocks, bonds and mutual funds. Database operations include search, retrieval, delivery, storage and analysis functions.

The stock popped in late September and early October on several instances of positive analyst commentary, word of a financial database development agreement with Tsinghua University, and a company announcement of favorable guidance. Management expected Q3 revenues of $7.1-7.5 million, versus prior guidance of $6.7-7.1 million and Street consensus of $6.75 million. The firm also anticipated FY08 revenues of $45-51 million, versus consensus of $40.87 million.

Citron Research, formerly known as StockLemon.com, brings to our attention China Finance Online Co. (ADR) (NASDAQ: JRJC), which sells a series of stock tip newsletters in China. After taking a look at the company, I have to agree with Citron's conclusions: This stock is heinously overvalued.

First a quick look at the numbers. This publisher of newsletters trades at more than 65 times sales with a price/earnings ratio of 873. Given that the company's business model is selling stock tip newsletters with an army of telemarketers, I can't even imagine what the company's barrier to entry is that makes it worth such an astronomical valuation -- a market cap of $925 million dollars.

As Stock Lemon points out, this is all on projected revenue of about $20 million for 2007: "Comparatively speaking TheStreet.com (NASDAQ: TSCM) generated $57 million in revenue and has a market cap of about 1/3rd this name."

Why is JRJC trading so high? It probably has something to do with investors' desire to find something that is tied to the Chinese stock market's rapid growth. But at this valuation, whatever it is, it sure as heck has nothing to do with rational thought.

JRJC looks like a pretty good short here.

No one would be particularly surprised that Chinese stocks traded on U.S. exchanges did well in the third quarter. The Shanghai Composite has doubled so far this year, and many stocks like Baidu (NASDAQ: BIDU), the China search engine, have made stunning gains.

In the third quarter, China Eastern Airlines (NYSE: CEA) moved up 112%. China Finance Online (NASDAQ: JRJC) ran up 282%. It is hard to imagine that the Chinese market can keep up this momentum, but analysts say that every quarter.

No one would find it odd that home builders and mortgage lenders were among the big losers in the quarter. Beazer Homes (NYSE: BZH) fell 66% to $8.25. Fremont General (NYSE: FMT), which has a subprime lending operation, fell 63.4% to $3.90. Mortgage lender Novastar Financial (NYSE: NFI) was down 68% to $8.87.

As retail sales fell, specialty store operations took a pounding. Gottschalks (NYSE: GOT) fell 63.5% to $4.34. And, Sharper Image (NASDAQ: SHRP) dropped 63.7% to $4.13.

The toughest part of the quarter is the realization the retail, housing, and mortgage shares could actually go lower during the October to December period.

Douglas A. McIntyre is a partner at 24/7 Wall St.