Sliding Stock Prices, Scandal Boost Listings on Pink Sheets
By JEFF D. OPDYKE
Staff Reporter of THE WALL STREET JOURNAL
The stock market's woes have pushed millions of investors into a little-known and lightly regulated corner of the financial markets: the so-called Pink Sheets.
Enron, WorldCom, Global Crossing and Kmart are among the former highfliers that ran into financial problems and were dropped by the major stock exchanges. As a result, investors in these companies are forced to buy and sell their shares in the Pink Sheets, a nearly 100-year-old stock-quotation service once printed literally on pink paper.
In the past year, some 300 companies have joined the Pink Sheets, now home to 3,300 stocks. Some are troubled companies kicked off the New York Stock Exchange or the Nasdaq Stock Market. Others are new companies without the wherewithal to join the bigger exchanges. An estimated $75 million a day trades in Pink Sheet issues. That is still tiny compared with the $41 billion in trades averaged by the New York Stock Exchange in December, but for many companies the Pink Sheets is the only place where you get a buy or sell quote.
Now, Pink Sheet stocks are getting more scrutiny from some Wall Street pros who see unrecognized values here. Hill Thompson Magid, one of the larger market makers -- meaning they pair buyers and sellers -- in Pink Sheet names, is getting more and more calls from closed-end mutual funds and hedge funds that want to invest in obscure companies with attractive valuations, says Nick Ponzio, president of Hill Thompson.
The Pink Sheets, owned by a privately held New York company, Pink Sheets LLC, has long been notorious for distressed companies and dubious penny stocks. But it is also home to hundreds of financially solid companies. Some are old-line firms like Anderson-Tully, a Memphis, Tenn., forest-products company that has been in business since 1889. In addition, some well-known foreign companies, such as Switzerland's Nestlé SA, trade in the Pink Sheets so they don't have to meet the financial-reporting requirements of the major exchanges in the U.S.
Still, trading in the Pink Sheets adds a definite layer of risk for investors. Corporate financial information is unusually scarce, sometimes nonexistent. Stocks may trade only a few times a month or not change hands for a year. Analyst research generally doesn't exist, so investors must do their own homework. There is so little trading in some stocks that exiting from a position can be very difficult. In the case of troubled companies like WorldCom, share prices can move in excess of 100% in a day. To top it off, there is far less regulatory oversight of Pink Sheet stocks, meaning investors need to be especially vigilant for stock-market scams.
For some investors, however, it is that very lack of oversight that makes the Pink Sheets attractive. Because financial data and research are so scarce, Pink Sheet stock valuations can be more attractive than on the major exchanges, where thousands of investors and analysts pick apart each company. Investors "can find plenty of quality companies trading at less than 10 times earnings, half their book value, paying nice dividends and that have good management," says Andrew Berger, editor in chief and owner of Walkers Manual of Unlisted Stocks, which publishes research on 500 little-known publicly traded companies, many of them Pink Sheet stocks.
Trading Pink Sheet stocks is best done through market makers like Koonce Securities, in Bethesda, Md.; Robotti & Co. in New York; or Pittsburgh's E.E. Powell & Co. All are well known in the business. Because few regulations exist regarding whose order must be filled first when two competing orders come in, it is generally best to go to a market maker that is routinely buying and selling in the Pink Sheets, as opposed to one that is there only occasionally.
Pink Sheet veterans say Charles Schwab Corp. customers are often successful at getting to tough-to-buy Pink Sheet stocks. Schwab says that is because it keeps an inventory of stocks in thousands of different companies, including many Pink Sheet names.
Pinksheets.com (www.pinksheets.com) is beginning to post selected companies' quarterly and annual reports. Many companies, even though they don't report to the SEC, post financial data on their own Web sites, or will send it if you call.
Many of the most-active shares on the Pink Sheets fetch just pennies apiece, and sometimes fractions of a penny. Lifeline BioTechnologies recently traded more than 25.23 million shares, landing in the top three among volume leaders for the day. The cumulative value of those shares, worth 1/100 of a cent apiece: $2,523.
At the other end of that spectrum: Anderson-Tully, for which investors currently are bidding $175,000 a share. Because it has fewer than 500 shareholders, Anderson-Tully doesn't file financial reports with the Securities and Exchange Commission. The company shares financial information only with shareholders. "We aren't going to distribute the information publicly" to anyone who calls up and asks for it before they invest, explains Chip Dickinson, Anderson-Tully's president.
For investors interested in the Pink Sheets, here is a sampling of some companies that Mr. Berger, of Walkers Manual of Unlisted Stocks, says are worth a look:
Computer Services, a 35-year-old provider of information-technology services to largely Midwestern community banks. "The company has been growing tremendously for over a decade," says Mr. Berger. The stock has risen to $32 a share from $10 a share during the bear market. The company's stock trades several times a week, and the company Web site, csiweb.com, posts a wealth of investor information.
Old Fashion Foods, the largest independent vending-machine company in Georgia. The company has always been profitable, Mr. Berger says, and its book value of around $11 a share exceeds the last quoted price of $7. The shares traded once in January, once in December and once in October.
Palmetto Real Estate Trust, which pays out the vast majority of its earnings as a dividend. Currently the shares, at $1.55, yield in excess of 20%. In most cases, such a yield is a sign of trouble. "But that's not the case here," says Mr. Berger. "It's real." The problem is getting shares; the stock has traded only three times since October.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com
Updated January 21, 2003 |
