If you invest in microcap stocks on the Over The Counter (OTC) Markets, you have probably at some point been met with skepticism from other investors when you have pitched them one of your bullish microcap stock ideas. Many will probably quip that all microcap stocks are just frauds and too illiquid to invest in.
While it would be stupid of me to argue against the fact that there are a lot of fraudulent companies on the OTC, it does not mean that tier one quality microcap stocks do not live on that venue. Furthermore, there are a good deal of stocks on the major exchanges that I am sure you would agree are uninvestable after universally applying strict criteria across all market cap sizes. A savvy investor’s job is to navigate through all the bullshit to find high quality companies. So, what better places are there to hunt for opportunities than those that most investors are ignoring?
As far as the “OTC stocks are too illiquid to invest in” stereotype goes, that mindset could make sense if you run a large fund that is putting billions of dollars to work. But, I bet most of you reading this are not investing billions or hundreds or millions of dollars worth of capital. If you are a typical investor, I’d venture to say you will easily be able to build your position in a stock that is otherwise considered to be illiquid by larger, uninterested investors.
Even if you are managing a mound of cash, the extra alpha you can get from investing in microcaps could still be beneficial. It’s laughable that “big money” investors run their mouths about seeking alpha when they can’t even match the market returns and are unwilling to put a little money to work in a proven area where real alpha can actually be earned.
As far as exiting your position…sure, liquidity could be an issue if you’re trying to exit positions into market panic or bad news on your stock, but this could be the case with any stock at any market cap. The solution to that problem is simple:
don’t panic and don’t be wrong!
As I’ve referenced in past conversations and articles, LinkedIn is a good example of this last point. On Feb 5, 2016 at the market open, The company’s stock fell 45% to $103 on guidance that was weaker than analyst estimates. When the company was acquired by Microsoft Corporation (NASDAQ:MSFT) shortly thereafter, the price shot right back up.
And by the way, liquidity in the microcap universe has exploded as more money is being devoted to stock picking as opposed to passive investing, led by an army of 10 million new and growing investors entering the stock market since the beginning of 2020.
Finally, it is not out of the question to find liquidity for your stock by way of executing private transactions where other investors or even management buy your shares from you. I actually used this tactic during the 2008 recession when I sold my shares of Conrad Industries Inc (OOTC:CNRD) in a block transaction at around $6.00 to an investor the company put me in touch with. I was clearly the greater fool in that case as the stock eventually exploded to hit a high of $42.00 in 2014. Its trailing revenue currently stands at $245 million. Let’s just put that thought to bed 🙂
As a matter of fact, during the carnage of the 2008 recession, my illiquid OTC stocks (including CNRD) held up incredibly well and two of them were acquired at a nice premium over their pre-deal prices.
You might not have known that a good amount of high quality OTC microcaps once traded on a major U.S. exchange. Sometimes, they voluntarily delist themselves. Other times, it may be related to short-term business challenges. In the end, it didn’t detract from the fact that these were still good, fundamentally sound, companies.
YoCream is a great example of a very legit OTC company that I owned. In the early years of GeoInvesting, we covered and wrote about this stock. I bring it up because the company had once been a NASDAQ listed company and had substantial revenue. It was acquired by Danone in 2010:
“YoCream sells its frozen yogurt products in 17 countries which represents approximately 4% of the company’s net sales for 2010. Sales are estimated at approximately $58 million. Luestti said with Danone as its new owners the company will expand its product offering internationally throughout Asia and Europe.”
While we are talking about getting acquired, there is nothing better than owning microcap stocks that get acquired to provide you with liquidity to sell your stocks, and it happens all the time with Tier One OTC companies.
GeoInvesting model portfolio selection Rand Worldwide Inc (OOTC:RWWI) shares have increased over 500% since it voluntarily delisted from the NASDAQ in 2015 at around $2 per share. RWWI is a top reseller of Autodesk, Inc. (NASDAQ:ADSK) software and is generating over $200 million in annual revenue. You can see a report we published on RWWI here.
Dan Schum (@NoNameStocks) reaped the reward of investing in an OTC stock when he purchased shares of HemaCare at around $1.00. It went on to be acquired by Charles River Laboratories Inte (NYSE:CRL) at $25.40. Even 1000 shares of this illiquid stock would have made you $25,000.
But what I really want to talk about is the darkest of the dark. These are companies most investors will shy away from. I am going to devote more time to sharing my experiences in the coming weeks along with juicy stats to support why I am an advocate of investing in Tier One microcap stocks, especially those that trade on the OTC. Stay tuned!
If you want to be alerted to follow up articles on this topic please provide us with your email or stop being lazy and join GEO investing today. Sorry, with microcap stocks taking off these days I just could not resist :). The GeoTeam has been at this for 14 years, and we are at the peak of our craft. We offer annual, bi-annual and monthly memberships that you can learn about here.
~Maj Soueidan, Co-founder GeoInvesting
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