Illiquid Stocks for Outsized Returns?

Value based opportunities listed on the often very illiquid OTC can as a group produce outsized future gains. Some investors (mostly academia) view it as getting paid a fee to wait and endure the emotional turmoil of holding an illiquid, information scarce stock with a no guarantee of above average capital return.  They believe the ultimate on average outsized market beating returns with certain identifiable groups of stocks (illiquid, value, low p/b, and others) as not market anomalies but instead a fair exchange. The seller must sell the stock at a discount to compensate the buyer for risk, time and uncertainty of holding these stocks. The seller receives immediate cash although discounted from the long term expected value without bearing the risk of uncertainty and liquidity concerns to the buyer with more flexibility, time and possible understanding or risk tolerance.  The level of market efficiency and the reason for pockets of identifiable inefficiency has been debated for years by market practitioners and academics. Efficiency will never be quantified as there are too many variables.
On Friday 01/11/13 I made an effort to find investable possibly overlooked opportunities on the OTC. Each OTC venue was superficially reviewed, OTCQB, OTCQX International, OTCQX International Premier, OTCX U.S., OTCX U.S. Premier, OTC Pink current, OTC Pink Limited, OTC Pink no information. There were over 18,000 stocks in total so I wanted to narrow the list for this post. Some countries were excluded and my financial criteria and started with YOY revenue growth, positive EBITDA for the TTM, enterprise value to market capitalization less than 1.30 (margin of safety), and market capitalization greater than 10 million. There may have been one exception to my filter for this post. I also did some qualitative review before listing the stocks. For example I made sure the financials were annually audited. My work was somewhat superficial and needs more effort if you’re considering investing. Not for this post but what is interesting as most of you already know you can buy many premium foreign companies that will dual list on the pink sheets. So purchasing these foreign stocks is now possible through online accounts like Ameritrade using the OTC (pink sheet) symbol. You may want to take a closer look at listed companies on these venues; not all are fraud, bankrupt or garbage as in years past. The cost of compliance (i.e. Sarbanes–Oxley) to list on the NASDAQ and the other large exchanges may be one motivating factor to list on the OTC.
For now I’m only going to look at a two smaller subsets of the +18,000 by focusing on two venues, OTCQX and OTCQB.
OTCQX U.S. Premier:The OTCQX marketplace is the premier tier of the U.S. Over-the-Counter (OTC) market, providing investors with an objective measure to distinguish the best OTC-traded companies.”
No particular order for any of the symbols listed.
CPTP (real estate, high earnings yield, near 52 week low)
Capital Properties Inc. (CPTP): Price = $6.69, This stock is off its 52 week high of 12.17 partially due to the extra ordinary dividend at year end.  Market Cap = 44.15M, Enterprise Value = 44.30M, EV/EBITDA = 9.61
CPTP engages in leasing and petroleum storage businesses in Rhode Island.
They may be holding real estate assets on the books at costs significantly below market value.
“The Company owns approximately 18 acres in the Capital Center consisting of 11 individual parcels. As of December 31, 2011, it leased 6 developed parcels that consist of a 13-story office building; an 8-story 225-unit residential building; a 4-story office building; a 10-story office building; a 17-story and a 19-story residential building containing 193 units, and a 10-story office building; and 330-car public parking garage. This segment also owns and leases an undeveloped parcel of land adjacent to the Capital Center for public parking purposes on a short-term basis; and leases certain outdoor advertising locations along interstate and primary highways in Rhode Island and Massachusetts. Its Petroleum Storage segment owns leases a petroleum storage terminal with a capacity of approximately 1,000,000 barrels and the Wilkesbarre Pier located in East Providence, Rhode Island to Global Companies, LLC for the storage and sale of petroleum distillates.”
OTCM (High profit margins, moat, modest growth, statistically cheap)
OTC Markets Group Inc (OTCM): Price = $7.71, Market Cap = 81.27M,Enterprise Value = 67.60M,EV/EBITDA = 6.95, YOY revenue growth = 6.20%, ROA = 22.92%, Profit margin = 14.89%
OTCM : “OTC Markets Group operates the OTC marketplace for equity securities. direct interaction between broker-dealers that provide liquidity and execution services. It offers OTC Dealer, a software-as-a-service application,which enables broker-dealers.”
Now on to the OTCQB venue where there were over 3,500 ideas that I filtered compared to the tiny group listed on  OTCQX U.S. Premier venue. It’s important to realize the importance of waiting for your price as most of the OTCQB stocks although current in their filings are very illiquid. Many may be current but the financial have not been audited. I only included companies with current audited financial statements.  Not an easy task on the OTCQB venue.
 OTCQB is the “venture marketplace for companies that are current in their reporting with a U.S. regulator. There are no financial or qualitative standards to be in this tier”. Remember my list have audited financial statements but many of the stocks don’t report audited statements.
NSSI: (Patent troll, significant cash,  earnings, strong BS )
Network-1 Security Solutions Inc. (NSSI): Price = $1.19, Cash Per Share 0.88 , Current Ratio =36.41, Book Value Per Share =1.15, EBITDA (ttm) = 5.23M, Total Cash = 22.76M, % held by insider = 54.34%, % held by institutions = 1.00%
Network-1 Security Solutions, Inc. “engages in the acquisition, development, licensing, and protection of intellectual property rights related to various telecommunications and data networking technologies in the United States”. The pejorative term for some of their work is patent troll.                                 
TNRK : (Cheap, historically solid management, below book, close to negative EV), at 52 week low, reduced margins from Chinese competition)
TNR Technical Inc. (TNRK): Price = 9.00, Market Cap =  2.76M, Enterprise Value = 579K, Price/Book = .31, EV /Sales = .07, EV/EBITDA = 1.13, 52 week return = -16.59%, Qtrly Revenue Growth (yoy) – 7.90% (exception to my filter),
TNR Technical, Inc. founded in 1979 designs, assembles, and markets batteries to industrial, commercial, and retail markets in the United States. “Its batteries are used in various applications, utilities, personal watercraft, photography, power tools, watches, instrumentation, laptops, CNC, airsoft, surveying equipment, radio control, mobile radios, alarms, U.P.S., door locks, and emergency lighting, as well as various other consumer products. TNR Technical, Inc. sells its batteries and/or battery packs to electrical distributors, electronic wholesalers, battery assemblers, resorts, municipalities, police and fire departments, hospitals, churches, hotels, surveying companies, contract houses, and original equipment manufacturers.”
IBAL: Darn I wish I never sold, back in 2010 the stock was below .50, real estate, exceptional recent growth from Mexico, when I owned it went days with no trades
International Baler Corporation IBAL: Price $1.95 Friday’s close, Market Cap:11.66M ,Enterprise Value: 7.35M, Enterprise Value/Revenue:0.43, Qtrly Revenue Growth (yoy): 64.00%
IBAL is a tiny company that has recently reported excellent profitable growth with a growing back order.  IBAL owns building and property located in Jacksonville, Florida with 8 acres of land. The property has no mortgage.
IBAL was founded in 1975 and designs, manufactures, and sells baling equipment used to compress various materials into bales for handling, shipping, disposal, storage, and recycling.
ELST (Deep value , tiny, below net cash with growing revenues)
Electronic Systems Technology Inc. (ELST): Price = .37, Market Cap:1.92M, Enterprise Value: -226.74K,Price/Sales (ttm):  1.00,Price/Book :  0.67,  cash per share .41, Qtrly Revenue Growth (yoy):  13.10%, Total Cash: 2.14M, Revenue (ttm):  1.92M
ELST is a tiny deep value idea selling below net cash with growing revenues.
Electronic Systems Technology Inc “engages in the research and development, manufacture, and marketing of wireless modem products and accessories primarily in the United States, Mexico, Brazil, Peru, and Canada. It also provides repair and upgrade, professional, site survey testing, system start-up, and custom engineering services. Products are used in various applications and industries comprising agriculture, airport lighting, automotive, enterprise networking, entertainment, factory floor networking, federal, marine, material handling, metals, power, public safety, oil/gas, solar energy, water/wastewater, and wind power. “
There are many other ideas that are worth a closer look. So I thought it would be useful to list symbols that have a reasonable capital structure, growing sales, financially sound balance sheet, and recent audited financial statements and still listed on the illiquid wild west of the OTCQB.


vijourney said...

Fantastic information and work thank you, will have to look into some of these. What screener do you use to filter stocks in the OTC markets? The only one I know of is extremely basic and only lets you filter results by price, volume, and a couple other things.

ShadowStock said...

Thanks for the comment! I just found your blog. It was just added to my list. Now that looks like great investing information! So I’m looking forward to reading. Also, I just noticed I was following you on SeekingAlpha. I found you when BOBS came up on my list of stocks to buy. I found BOBS on the OTC. Never purchased, too bad it was up over 5% today.
As far as screeners I create my own.
One other item I just noticed, your section on ultimate goals. I’m impressed with your sincerity and desire to make a difference in any small way you can. Lastly you mentioned waiting for your “health get better”. I hope that works out for you and the ultimate goals.I've also been dealt a health blow, oh well.

vijourney said...

Thanks for the compliment. Always nice to see other value bloggers who like the work you do, especially someone like you who is very well regarded in value circles. My latest article will be published on Monday if you are interested in nano cap insurance companies at all.

Too bad you missed out so far on BOBS as it has already gone up around 20% since I published my article and bought into them. Still think there is a lot of upside too.

That is impressive, did you go through the companies one by one before you sorted through them?

I believe what Klarman and Buffett have both said about what people should do after they become wealthy and I have always wanted to help people. Although I do not agree with Buffett that taking (taxing more) is the solution, people should have the desire to do that kind of work not have it forced on them. At one point before my health issues started I was actually going to teach English in either Vietnam or South Korea to help people out over there. Now my new mission after making some money for me and my family and friends is to help other people learn how to manage their finances better and even teach them how to invest to help themselves as well. Education on how to manage money is pretty non-existant in schools which shows by how too many people manage their personal and business funds later in life.

My health has been getting better slowly over the years and hopefully this year will finally be THE year (been almost saying that for 9 years now) I am back to normal, or at least my new normal whatever that may be. Sorry to hear you have dealt with health issues as well. Unfortunately that seems to be a problem with some of the other value bloggers I have had contact with. Maybe we all have some kind of genetic disease that not only causes health issues but leads people to be predisposed towards becoming value investors, lol.

Anyways thanks again. Shoot me an email anytime as well.

Student said...

Great effort sifting through the OTCs. Funny to see OTCM itself on the list :)

I am looking forward to the next installments.

ShadowStock said...

I appreciate that comment! At first my attitude was there is not one person interested in the OTC. But the further I look I do believe opportunity exists. The prior comment was by “vijourney” he runs a value blog and writes for Seekingalpha. One OTC that I came across was BOBS.OB a restaurant chain in Brasil. Long story short the stock was and is deep value cheap. Unfortunately I never pulled the trigger but did stubble upon the work of Jason Rivera/vijourney.


So yes companies like BOBS.OB that list on OTC should be considered. I’m convinced there are many more.

ShadowStock said...

“did you go through the companies one by one before you sorted through them?”

No, I created my own solutions but did get the +18k symbols off otcmarkets.com; I need to explore other options they have to find new ideas.

You’re right taxing is not the solution. The government is the worst allocator of capital; Buffet is on record for saying that. If government effectively allocated tax payer capital we could create so much benefit, like high quality jobs, education and plenty to help those that need assistance. Govt worker’s pension bomb is real scary.

vijourney said...

Thanks for the plug I appreciate it.

However, I cannot take credit for finding $BOBS. Red over at The Red Corner Blog, http://quinzedix.blogspot.com/ mentioned that I should take a look at them.

The analysis is all mine, but if Red would not have mentioned them to me I would have never found them.

I agree, I wish there was some kind of OTC stock screener that was even somewhat intuitive. I know nothing about making websites or building databases so I have no idea how long that would take to do though.

Aarav Sharma said...

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