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Investing in the Pink Sheets: The Most Speculative & Lucrative Companies on the Planet
by Robert Williams, Associate Investment Strategist, The White Cap Report
Tuesday, April 14, 2009: Issue #978
Editor’s Note: Just over a month ago, Robert Williams, Chief Investment Strategist of The White Cap Report explained investing in the Pink Sheets – an unknown, but lucrative, segment of the market that most of Wall Street doesn’t even acknowledge – to his subscribers. We’re republishing his article below for your benefit…
Roughly 3,000 companies trade on the Nasdaq. Another 2,000 trade on the New York Stock Exchange. And the IPO market adds more companies to the mix each quarter (although the IPO market has been quiet of late).
Together, they represent the entire stock “universe” that most know and search through.
But many investors are surprised to know that there’s an entire market that’s overlooked – and mostly forgotten. A group of companies that may well be the most speculative (and lucrative) companies on the planet – those that trade via the Pink Sheets, where another 9,000 companies live.
Such companies are largely avoided at all costs by Wall Street and individual investors alike because of the specter of less regulation and financial transparency. But ignoring them altogether is not intelligent risk taking.
Investing in the Pink Sheets – Finding Incredible Profit Opportunities
The incredible profit opportunities when investing in the Pink Sheets are just too appealing to ignore.
Many of the companies listed on the Pink Sheets meet all the listing requirements for the Nasdaq, but are simply too small (in terms of market capitalization) to trade there.
There’s no good reason to simply toss them aside. In fact, it’s an area our small cap expert Louis Basenese routinely picks top-performing stocks from.
Granted, a painstaking review of the entire business model, including the financials is in order, but we do that anyway… for every company.
And my experience inside the ropes of corporate finance serves me especially well in this dimly lit corner of the capital markets. In fact, I’m already tracking a few potential opportunities.
But What Is The Pink Sheets?
The Pink Sheets is an electronic quotation and trading system in the over-the-counter (OTC) securities market. OTC securities are unique because they’re traded between two parties, rather than over a formal exchange, like the Nasdaq or NYSE.
- Over 230 financial services firms, including the 10 largest U.S. investment banks, actively make markets in Pink Sheets securities.
- It’s the third largest equity-trading venue in the United States.
- Via the Pink Sheets, investors can trade over 9,000 securities – not listed on the major exchanges – whether it be through their financial institution, online or with a full-service broker.
And although Pink Sheets stocks are considered to be extraordinarily risky, that risk level can be managed quite effectively.
OTC securities carry high risk because many companies are small with limited operating histories. Many aren’t required to file periodic reports or audited financial statements with the SEC, either, making it a challenge for novice investors to differentiate a sound company from one with little under the hood.
For these reasons, the SEC views small cap companies listed on the Pink Sheets as “among the most risky investments.”
My intent is not to scare you, however, but rather to demonstrate how exceptional opportunities exist on this trading venue. Stocks here are capable of 50%- to 100%-price moves in a single day – a pipedream for most of their exchange-traded brethren. So let me attempt to ease any fears that you may have.
For starters, the Pink Sheets helps manage risk by tiering stocks for us.
The 5 Main Tiers of Pink Sheets Investing
Five main Pink Sheet tiers exist – Trusted, Transparent, Distressed, Dark/Defunct and Toxic – with sub-categories within each tier.
- The Trusted tier includes 50 solid companies, many of which meet the financial qualifications for listing on the NYSE or Nasdaq. It’d be downright foolish to exclude such companies from our investing opportunities. Among them are some familiar names, like Adidas, Benetton, Air France and Wal Mart de Mexico.
- One tier down from the top – the Transparent tier – is where we’ll find some absolute gems, like Italian carmaker, Fiat. It’s home to over 5,000 more companies, which regularly submit filings to SEC regulators and are obligated to be current with such filings to maintain their tradable status. These companies are dually quoted on the Nasdaq’s OTC Bulletin Board system, too. Although the regulations here are relaxed, any analyst with proper training and experience can easily traverse this terrain of stocks. (My years as the Senior Analyst for a Forbes top-50 private corporation allow me to identify the best of the best in this tier.)
- I’ll seldom venture down to the next tier – the Distressed tier – unless a company literally jumps off the page.
- And I’ll avoid the Dark/Defunct and Toxic tiers altogether.
Quarter after quarter, a handful of OTC-quoted stocks are able to make the lucrative jump to the bigger exchanges. My experience tracking these securities has taught me one thing – the jump, from OTC to the big boards (NYSE or Nasdaq), is enormously profitable for that company’s lucky shareholders.
I’m very excited about the opportunity to add such companies to our White Cap portfolio. I hope you are, too.
Good investing,
Robert Williams
Editor’s Note: Robert Williams works with Louis Basenese at The White Cap Report in searching for some of the hottest, most innovative stocks on the markets today. It’s this focus that’s given them a 123% return so far this year.
Today’s Investment U Crib Sheet – Debunking a Pink Sheet Myth
Most believe that the stocks that trade over-the-counter, whether it be via the Pink Sheets or the OTC Bulletin Board, are exclusively penny (or micro cap) stocks. That’s unequivocally not true. OTC stocks can trade for hundreds, even thousands, of dollars per share.
Granted, thousands of OTC companies are of the micro- to small-cap genre, but examples of larger-capitalization companies are not hard to find, either. For instance, Absecon Bancorp trades for $160 a share, Brotherhood Bancshares, Inc. trades for $108 a share, Casio Computer trades for $72.20 and Great Lakes Financial Resources, Inc trades for $220 a share. Opportunities abound on the Pinks Sheets.
Trading the Pink Sheets
- Small Cap Stocks: How to Find the Russell 2000 All Stars
- Healthcare Stock Watch: My Short List of Booming (and Busting) Companies
- Wall Street’s Stock Oversights: How to Profit With This Unconventional Investment Strategy
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4 Responses to “Investing in the Pink Sheets: The Most Speculative & Lucrative Companies on the Planet”
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In addition to once being a full-time trader of equities and equity derivatives, Robert Williams has served as the lead financial analyst for a Forbes top-50 private corporation and an analyst for the endowment of a major academic institution. He's also been profiled in such books as Trade with Passion and Purpose and Alexander Green's The Secret of Shelter Island. 
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April 14th, 2009 at 11:22 am
Need recommendation on ESSE
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April 14th, 2009 at 1:11 pm
The recession is suppressing our country from Main Street to Wall Street. Unemployment reached 8.1% last week. We all know it’s bad. It’s covered every minute in the media. Fairly lost in the coverage is the stifling of innovation on Wall Street. USA TODAY reported yesterday “2008 was one of the worst IPO markets in recent history, with just 43 companies going public, down from 272 in 2007, 219 in 2006, 214 in 2005 and 217 in 2004. ” Marvin Rowe of Going Public LLC remains optimistic, “Actually the decline has faded as of late. We’re seeing more companies exploring the self-filing approach as a result of the traditional IPO market’s decline.”
Regardless of whether Mr. Rowe’s information represents a sign of resiliency or optimism, the truth is we have a long way to go and innovation cannot be spared along the way.
USA Today Article:
http://www.usatoday.com/money/companies/management/entre/2009-04-12-companies-long-for-ipos_N.htm
For more information on self-filings or to connect with Going Public LLC:
http://www.goingpublicpros.com
marvin@goingpublicpros.com
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April 14th, 2009 at 1:25 pm
Does a publication exist which contains the OTCBB listings? By mail, I asked the peripatetic Doug Casey several years ago, but, possibly because of his wanderings, I never received a reply.
With thanks in advance,
Derek H. Blair.
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April 14th, 2009 at 7:34 pm
I heard that something like 50% of companies listed on the pink sheets are scams, used by dishonest brokers for pump and dump schemes. I have no idea if that is true or not. any idea’s on this? makes me scared to invest in any at all.
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