I have a lot of questions about penny stocks and whether or not they are good buys. However, my answer is always the same for every stock: “it depends on”.

“Depends on whether?” you could ask Well … a lot. Each share carries its own risks and opportunities. Unfortunately, many people correlate with the “low prices” of Penny stocks with less risk. This couldn’t be further from the truth as every smart investor knows that price and volatility are not the risk in investing.

That being said, I laughed at penny stock investors and thought they were just gambling away their money on the casino, which is an over the counter (OTC) market. I would just sort out all the companies in the OTC, just throw them in the trash can and classify them as “too risky”.

However, this notion is not entirely correct. Yes, bad investors and bad companies are still lurking in the OTC. After doing a lot of research, to my chagrin, I found that there are some good companies out there that appear in the OTC. It’s not the casino I thought it was; It’s just another exchange that lists companies.

My take on the micro / small cap space has really changed after reading it 100 Digger: Stocks That Return 100-to-1 and How to Find Them by Christopher Mayer. I have since learned that there are great opportunities that are considered penny stocks. You just need to know what metrics to look for. This is a strategy that I definitely want to add to my portfolio.

In this article, I thought I’d educate readers a little about the OTC markets and penny stocks, and hopefully clear up some of the misconceptions. I will also show two examples of 10 excavators (and possibly 100 future excavators!) Currently listed on the OTC.

Disclaimer: These are not recommendations, nor have I delved into any of these stocks. These tips are simple examples.

So what is a penny stick?

Google “What is a penny stick?”and chances are you could get back a wide variety of definitions revolving around stocks trading below $ 5 traded on the over-the-counter OTC Bulletin Board (OTCBB).

While these two penny stock requirements are technically correct, as a value investor (who comes across these definitions), this “typical” definition of penny stock (under $ 5 OTC members) should not convince you to that the stock doesn’t. t hold value.

In all honesty, I was quite skeptical of stocks in the OTC markets, thinking that they were only reserved for terrible companies that wanted to deposit and withdraw money quickly. As I mentioned earlier, this is sometimes the case, but there are still plenty of rough diamonds around.

According to SEC rules 240.3a51-1The “typical” definition of penny highlighted above applies. You typically won’t find that Penny is trading above $ 5, and neither is it. not on national stock exchanges like Nasdaq, NYSE or CBOE Futures Exchange (CFE®). However, what most value seekers may not realize is that there are some Exceptions for penny stocksboth under SEC 240.3a51-1 and January 1, 1990 Penny Stock Reforms Act (Rule 15c2-6) that penny stocks may add value – legally, practically and from the standpoint of a great investment idea.

This exception means that a security can be excluded from the “typical” definition of “penny” if it just meets one of the following conditions::

  1. A price of over $ 5 per share
  2. The issuer has had average sales of at least $ 6 million over the past 3 years
  3. The issuer has net tangible assets of more than $ 2 million if the issuer has been in continuous operation for at least 3 years or $ 5 million if it was less than 3 years old.

Translation: Penny may also be found on the Nasdaq or NYSE – and doesn’t need to be traded exclusively on the OTC market. Additionally, a stock trade below $ 5 doesn’t necessarily translate into a penny stock. Shrewd investors may find good value in penny stocks whether or not they pass the test above / below $ 5.

The catch

When investing in small / micro cap stocks in the OTC, you need to be aware of the following: low volume.

In general, there is less daily trading activity in the OTC markets than there is on their bigger brethren. This means there is less liquidity, which can make it more difficult to enter or exit your position at the price you want.

Because of this problem, stock prices have been manipulated and are susceptible to pump and dump systems. This isn’t always the case, but it has happened before and definitely poses a risk specific to penny stocks.

10 Excavator Example No. 1: Roche Holding Ltd (RHHBY)

Source: OTC Markets

Let’s look at Roche Holding Ltd (RHHBY) on the OTC. Roche is a Swiss pharmaceutical company that has been operating since 1896. This name is currently trading in the $ 40 range and is listed on the OTC – a typical domain of Penny and her cohorts.

Although RHHBY is listed on the OTC, it is obviously no longer a penny stock as it is currently trading above $ 40 and has a market cap of nearly $ 300 million.

I’m bringing up RHHBY because at one point (in the 1990s) RHHBY was the epitome of a penny stock – it was trading below $ 5 and listed on the OTC. Since then, this stock has delivered good value to its investors. It has increased at a respectable rate of 8% per year since the early 1990s. Nothing out of the ordinary, but it still managed to become a 10 digger.

So is RHHBY still presenting good value to shareholders? Over the past 5 years, RHHBY has reliably improved gross profit, operating profit and net profit. During this period, the gross margins and the operating margins were also continuously improved.

RHHBY profitability (source: Stock Rover)

10 excavator example # 2: OTC Markets (OTCM)

Source: OTC Markets

This stock is kind of an ironic choice. OTCM is actually the company that runs the actual OTC market that all penny stocks are listed on! Again, it wasn’t a penny stick anymore, but it was when it started.

The company primarily operates the OTCQX Best Market, the OTCQB Venture Market and the Pink Open Market. It has divisions with OTC Link ATS, market data licensing and corporate services. The activities of these businesses include bid and trade news services, a network-based platform, access to market data, a range of market data licenses, and disclosure and information services.

OTCM’s business appears to be operating with excellent growth and profitability, with a ROIC in excess of 50%. This is due to the type of subscription service companies require to be listed on their exchange.

OTCM profitability (Source: Stock Rover)

So here is great business again that turned out to be 10 diggers. OTCM may even have the ability to become a 100 digger one day, who knows?

Best of both worlds

The benefit of investing in penny-type stocks that are listed on and have value to national exchanges such as the NYSE gives investors the best of both worlds.

Above all, it is important to consider many factors (such as profitability and scalability) in order to take advantage of these opportunities. The point here is that, as a smart investor, you shouldn’t refrain from researching investments just because they are listed on the OTC or simply because they are classified as too small.

As long as you are aware of the inherent risks, you may be able to find some bargains that can turn out to be 10 or even 100 excavators.

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