OTC Markets Group Inc. (OTCM)

[JAMESMLEVY]

PINK.PK and the Pink OTC Markets on SeekingAlpha Post by James Levy on 27 December 2009



Learning to Love the Pink Sheets...Not Just Penny Stocks Anymore (pink.pk)

One of the few advantages of reaching middle age is beginning to have real first hand historical perspective on events and developments. An example for me is the pink sheets, that is, the broker quoted electronic trading system in the U.S. for over-the-counter, or OTC securities. The pink sheets is not a stock exchange, and companies do not have to meet SEC listing requirements to have bid/ask prices listed on the pink sheets by participating brokers. Until the year 2000, these prices were listed on pages of pink paper by the National Quotation Bureau. I recall perfectly these pink sheets in my younger years as a Merrill Lynch stockbroker (even before we became ¨financial consultants¨) and the aura of bottom-of-the-barrel scam companies and penny stock pump and dump schemes which made the pink sheets forbidden territory for serious investors.

Times have changed. Today the printed pink sheets of my youth are replaced by the Pink OTC Markets Inc, headquartered in New York City, which operates the third largest U.S. equity trading venue with over 9,000 companies. Pink OTC Markets offers widespread electronic access to all U.S. broker-dealers, enabling investors to trade these securities through their institutional, online, or full service brokers. They offer an excellent website at www.pinksheets.com which provides a wealth of free information on the companies as well as subscription value added services.

I would like address some the common misperceptions concerning pink sheet listed shares.

Aren´t the Pink Sheets the place for penny stocks pumped and dumped by shady characters working from boiler rooms?

Pink OTC Markets Inc. has divided the over 9000 companies into six categories or tiers to inform investors whether an issuer has made adequate public information available in a timely manner. The tiers run from the highest level of compliance and transparency in the top category to a crossbones warning for the companies in the lowest category. Many global companies of the highest quality such as Nestlé (NSRGY.PK) or BASF (BASFY.PK) are listed in the top tier, as the Pink OTC Markets offer an American stock listing without having to comply with the very expensive and tedious requirements of the Sarbanes-Oxley Act.

What about the rest of the shares that aren´t ADRs of respected, well established foreign companies? How can you recommend that private investors invest in shares which don´t meet SEC disclosure requirements?

When I left Merrill Lynch in 2003, the share was at $70, and many of my co-workers had almost all of their retirement savings in the form of Merrill shares in their company-sponsored retirement accounts. Several years later, their savings where decimated in the aftermath of the financial collapse of 2008. Merrill Lynch, Lehman Brothers, Bear Stearns…these firms filed their financial statements in full compliance with the SEC in a timely manner. Many of these companies were highly rated in glowing ¨sell side¨ Wall Street research reports until the day before they filed for bankruptcy. My point is that neither SEC filings nor brokerage research reports provide fool proof protection to investors, and may at times even provide a false sense of security. How many of those who scoffed at the idea of investing in a share with a price below one dollar later found themselves among shareholders of Citibank, which reached 79 cents without missing a SEC filing?

What opportunities do you find on the Pink OTC Markets?

Personally, I think that the Pink Sheets provide a very fertile hunting ground for retail investors who are ready and willing to do their own due diligence, and know how to use internet to further this end. When a company is not covered by any research analysts, the investors have to become their own analysts. There has never been a better time than now to carry out this task. Of the thousands of companies listed here, running the range from large cap blue chips to nanocap startups, some will be the success stories of tomorrow. Many are led by entrepreneurs who are trying to live the American dream, building and growing a company which provides an innovative product or service, or is about to break into the marketplace with an edge of this kind.

How do you do your own research on a Pink OTC Markets listed company?

My first filter is the company business segment itself. I don´t invest in mining or biotech stocks, as I don´t feel capable of evaluating them. I focus on companies that provide a very specific service, or manufacture a specific item, which can be analyzed by an interested investor. A good example is Nanologix (nnlx.pk) which I have covered in a earlier instablog. It is certainly true that it is easier to understand a small company with a single product or service than a huge company with thousands of ¨moving parts¨. The company website is a primary source. How is the information presented? Do investor relations respond to requests for additional information? Who are the directors and managers? What information can you gain by internet searches of their names and biographical information and even social network sites? What SEC filings are available? What do investor message boards say about the share? In some cases I have actually purchased myself the product or service provided by the company under consideration before investing, in this way evaluating customer service at the same time.

In short, the internet age serves to give a more level playing field to the active individual investor who no longer needs to rely on often self-serving broker recommendations or research reports. The markets are not efficient, and an individual investor can gain useful (and profitable) information to guide investments decisions through self directed research of the kind I describe above. This is especially true for shares on the pink sheets which are not followed by institutional investors.

Finally, I would like to recommend the share of Pink OTC Markets Inc. (pink.pk) as an excellent investment in itself. The company has recently listed on the pink sheets, as it was a privately held limited liability corporation prior to 2008. I quote form the most recently quarterly results:

¨Pink OTC Markets Inc. announced consolidated earnings results for the third quarter and nine months ended September 30, 2009. For the quarter revenues of the company totaled $5.7 million, an increase of $0.7 million, or 13.4%, compared to the prior year's third quarter results of $5.1 million. Operating income in the third quarter rose 143.0%, or $1.0 million, to $1.6 million compared to $0.7 million in the third quarter of 2008. The growth was attributable to greater revenues across the three main businesses and lower operating expenses. Net Income for the third quarter of 2009 rose 143.5% to $1.0 million from $0.4 million in the third quarter of 2008. Net Income per weighted average basic share increased 138% to $0.093 and net income per weighted average fully diluted share increased 136% to $0.092, respectively, compared to the third quarter of 2008 of $0.039 per weighted average basic and fully-diluted share. Income before provision for income taxes was $1.6 million against $0.7 million reported last year. Revenues for the nine months ended September 30, 2009 totaled $16.0 million, an increase of $1.1 million, or 7.3%, compared to $14.9 million in the first nine months of 2008. Operating income raised $1.2 million, or 48.2%, to $3.8 million for the first nine months of 2009 compared to $2.6 million for the same period last year. Net income for the first nine months totaled $2.2 million, an increase of $0.7 million, or 47.1%, compared to the pro-forma net income results of $1.5 million for the first nine months of 2008. Net Income per weighted average basic share increased 45% to $0.218 and net income per weighted average fully diluted share increased 45% to $0.215 compared to the first nine months of 2008 of $0.151 per weighted average basic and $0.149 per weighted average fully diluted share. Income before provision for income taxes was $3.7 million against $2.5 million reported last year. The company also announced that its Board of Directors authorized a quarterly cash dividend on its Class A common stock of $0.04 per share. The dividend is payable on January 8, 2010 to stockholders of record on December 22, 2009. This dividend payment represents an increase in the quarterly cash dividend of $0.01 per share, or 33% from the prior dividend rate of $0.03 per share.¨


Apart from the rapid revenue and income growth, what particularly impresses me about this company are the repeated dividend increases. This company is not likely to risk its reputation (and by association, the reputation of the pink sheets) through financial mismanagement or misleading the public with incorrect information concerning its own share. I am confident that the Board of Directors of Pink OTC Markets Inc. is increasing their quarterly dividend in this aggressive manner because they are confident of continuing revenue and income growth in the coming quarters. Additionally, the fast growth of this company with a market capitalization of less than 40 million dollars could very well attract a takeover bid in the future.



Disclosure: The author is long PINK.pk and NNLX.pk common shares