Related Articles
5 small stocks with big profits just ahead
Related Resources
Stock Research Wizard
Company Focus
Recent articles:
• Beyond Google: 3 Internet stocks ready to rise, 10/27/2004
• Follow the dinosaurs to airline profits, 10/20/2004
• Is BUD still the king of beer stocks?, 10/13/2004
More...
| | Company Focus
Finding gold in the pink sheets
There are big risks in playing easily manipulated pink-sheet stocks. But with careful study and some expert help, you can find bargains among these tiny companies.
By Michael Brush
The pink sheets, a fringe stock "exchange" for tiny companies, have long been off-limits to respectable money managers. Chalk it up to skepticism tainting "the pinks" as a place where unscrupulous companies cook up dastardly acts to rip off the public.
But these days you're likely to be rubbing shoulders with a blue-chip mutual fund shop like Fidelity Investments if you buy pink-sheet shares. Thanks to the economic downturn, accounting mishaps and stricter financial reporting rules that strap a financial burden on tiny companies if they stay on the main exchanges, more and more respectable businesses with decent prospects have migrated to the pink sheets.
In short, there's gold in the pink sheets, if you know how to look.
For help, I turned to experts who know the ropes. My guides include Robotti & Co. Advisors, a New York-based money management firm and brokerage specializing in small-cap value stocks. Over the past 10 years, Robotti has posted annualized gains of 13.2% in private accounts. The firm is up 11.8% this year in a ho-hum market. I also checked in with Geoffrey Eiten, a stock promoter who has also demonstrated a knack for picking micro-cap names. On average, the picks in his OTC Growth Stock Watch newsletter are up 106% since 1992.
A big note of caution
To be sure, there are still plenty of hazards in the pink sheets.
Poor information flow. Robert Robotti, of Robotti & Co., is quick to point out the biggest risk: Pink-sheet companies aren't forced to churn out the steady flow of reports that come from companies listed on the New York Stock Exchange or Nasdaq.
"The only obligation they have is to give you an annual report, and even that is very nondescript," says Robotti. "Once they de-register, the information flow from management changes and the risk that they are stealing from you ratchets up five times."
There's plenty of fraud. As a player in pink-sheet stocks, Robotti often finds himself going up against managers using tricks to try to cheat shareholders. A company might book real estate at a fraction of its value or hold back news so a stock sinks. Tactics like these give managers the chance to swoop in and take a company private on the cheap. "Anything is possible in this market," says Robotti. "A stock can trade at low multiples, but then get taken out at low multiples."
Pink sheet companies are tiny. One company Robotti likes, Liberty Homes (LIBHA, news, msgs), has a post office box for its main address. Eiten's suggestion, Collectible Concepts Group (CCGI, news, msgs), trades for three-tenths of a cent per share. Market capitalizations are often in the $10 million to $50 million range. The bottom line for you is that these stocks are volatile. When a news event, even a column like this one, makes them jump, it's better to wait for the dust to settle before you buy. (Eiten is a paid investor relations consultant for Collectible Concepts.)
Betting on the mobile-home market
Given that the market for mobile homes has been in the tank, it's no surprise that some companies in this sector have slipped into the pink sheets. But two of the negative trends dogging this sector may be on the mend. And that could be good news for a pair of deep-value manufactured housing plays listed in the pinks, Southern Energy Homes (SEHI, news, msgs) and Liberty Homes.
The first trend that could help is rising interest rates. This seems counterintuitive, but it makes sense. When mortgage rates sink, more buyers in the low end of the housing market can afford to trade up to regular housing. So if interest rates keep rising, more homebuyers will have to purchase trailer homes.
Indeed, a good trade for investors looking to play the impact of rising rates on housing might be to sell short regular homebuilders like Pulte Homes (PHM, news, msgs) and buy mobile-home makers like Southern Energy and Liberty Homes. (Selling short involves borrowing and selling shares in the hope that you can replace the borrowed shares at a lower price.)
Second, the industry ran into serious trouble a few years back when finance companies like Conseco (CNO, news, msgs) were too loose in their lending policies. Bankruptcies swept through the sector. Many mobile homes were repossessed and put back on the market at low prices, killing new mobile-home sales.
But now, the glut of repossessed trailer homes may be thinning. "In our independent dealer network, they are seeing fewer and fewer repossessed homes," says Jim Stariha, Southern Energy Homes chief executive. Robotti says he also hears that mobile-home quality at auctions is in decline, a sign buyers may be getting closer to the bottom of the barrel. These trends may help explain why revenue at Southern Energy homes increased 15% in the most recent quarter from a year earlier.
Both of these stocks look cheap, says Chris Sansone, an analyst at Robotti & Co. Southern Energy will have around $150 million in revenue this year, if the first half is any guide. With a market cap of $57 million, that gives it a price-to-sales ratio of 0.38. Liberty Homes has around $80 million in annual sales and a market cap of about $16 million, for a price-to-sales ratio of 0.2.
"We are buying the businesses at a small fraction of what the sales are, and the sales are at a depressed level. So these stocks are really cheap," says Sansone.
Liberty Homes carries a 6% dividend yield, and insiders have a 60% stake in the company. Fidelity was recently the largest shareholder at Southern Energy Homes, with a 12% position. (Robotti's firm owns shares in both companies.)
A cheap way to play a global shipping boom
As manufacturing leaves the United States, not to mention Mexico and Canada, for places like China, the demand for shipping rises. Global economic growth helps, too.
Interpool (IPLI, news, msgs) is a clean play on these trends because it leases shipping containers and chassis used to move them around ports. "The market has improved significantly in the last year," says Robotti. Interpool has about 20% of the container market, and 50% of the chassis leasing market.
Interpool is in the pink sheets because of accounting mishaps and missed filing deadlines. The company is also under investigation by the Securities and Exchange Commission over accounting issues, such as how it has accounted for leases and insurance proceeds.
Despite these clouds, Robotti doesn't think the accounting problems will prove fatal, even though the company isn't releasing any financials to prove the point. First, banks recently signed off on a loan for the company. It's unlikely the bankers, who do see the financials, would be on board with Interpool's 25 cents per year dividend if they were worried about the financial strength of the company. Next, the company has a satisfactory debt rating. And management owns two-thirds of the company.
The stock also looks cheap. Interpool earned about $2 per share the last time it reported earnings in 2003. Robotti estimates it will make $2.50 this year. If so, that means the stock goes for about seven times trailing earnings. Robotti believes the company will get current with filings around March and then re-list on the NYSE.
A small company with big customers
A tiny novelty goods designer in Pennsylvania, Collectible Concepts hopes it may have the next Cheesehead hat or foam rubber finger for sports fans.
Collectible's version is the "fanbana." This is a roll-out sign about the size of a small flat-screen TV that might say "Go Mets!" and sport the logo of an advertiser like Delta Air Lines (DAL, news, msgs). The company also sells a "megaphone hat" made of the same material used to produce soft luggage. Stamped with a team's logo, this item doubles as a sort of dunce hat that can be straightened out for use as a megaphone.
If you think these items for sports fans are just a joke, consider a few points. Collectible Concepts has an exclusive license with the National Football League and dozens of universities. McDonald's (MCD, news, msgs) test-marketed the fanbana in Atlanta with "phenomenal" results, says Collectible Concepts CEO Paul Lipschutz. Delta has placed orders for fanbanas stamped with its name and the logos of the New York Mets, New England Patriots, Cincinnati Bengals and Atlanta Falcons. And 30 universities have ordered Collectible Concepts novelty items.
"Every college that we have approached with the megaphone cap has ordered it," says Lipschutz. He hopes to add another 30 colleges in the next 12 months, and get exclusive rights with other major league sports.
The company also looks seriously cheap. Revenue nearly doubled in the last two quarters to $800,000, and the company expects to do $5 million to $7 million in sales in the next four quarters. If so, with a market cap of just $1 million, that would give the company a forward price-to-sales ratio of around 0.2.
Collectible Concepts also produces wall hangings with team logos, and CD audio books based on children's characters like Arthur with readings by Clay Aiken, Tom Arnold and Kevin Bacon, and music by Ziggy Marley.
None of this guarantees that Collectible Concepts stock, which recently traded for the astonishingly low price of about three-tenths of a cent per share, will reward investors. But at least one change around the corner may help. The company is wrapping up final audits needed to move back to the over-the-counter bulletin board. It says this could happen in the next two months.
|
