Decoding the Cryptic “Pink Sheets”

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Decoding the Cryptic “Pink Sheets”

Over 3,300 companies trade on the Nasdaq. Another 2,800 trade on the New York Stock Exchange. And the IPO market adds more companies to the mix every quarter.

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Together, they represent the entire U.S. stock universe.

But many investors are surprised to learn that another dynamic niche of the market exists.

It’s a wildly overlooked niche — virtually forgotten by Main Street.

I’m talking about the “Pink Sheets,” where thousands of the most speculative companies on the planet live.

Pink Sheet companies are oftentimes at the embryonic stage of growth.

They typically have limited operating histories, too.

Heck, some aren’t even required to file financial reports or audited statements with the SEC.

So the specter of less regulation and the lack of financial transparency cause investors to avoid this dimly lit corner of the market.

With no minimum financial standards, [the Pink Sheets] market includes foreign companies that limit their disclosure, penny stocks and shells, as well as distressed, delinquent and dark companies not willing or able to provide adequate information to investors.


But ignoring the Pink Sheets altogether isn’t intelligent risk taking.

Let me explain.

How to Intelligently Invest in the Pink Sheets…

Many of the companies listed on the Pink Sheets meet all the listing requirements for the Nasdaq, but are simply too small (in terms of market capitalization) to trade on the main exchange.

So there’s no good reason to simply toss these companies aside, right?

Granted, a painstaking review of the entire business model — including the financials — is in order. But I do that anyway — for every company.

As a former Wall Street analyst and a current venture capital analyst, my experience on both sides serves me well in this dark corner of the capital markets.

Although Pink Sheet stocks carry greater risk — the risk can be managed quite effectively.

Plus, the additional risk comes with a rewarding upside…

Stocks here are capable of 100–200% price moves in a single day — a pipe dream for most S&P 500 stocks.

See? My intent isn’t to scare you.

I’m simply shining a light on the exceptional opportunities hiding in this cryptic niche of the market.

The Five Tiers of the Pink Sheets

In an effort to squelch your fears, let’s quickly cover each niche of the Pink Sheets, beginning with the most trusted tier.

Tier 1: OTC Current Information (Trusted)

The “Trusted” tier includes 5,017 companies that are required to file periodic disclosure reports.

These companies must also be listed on another recognized global exchange.

Well-known companies like Isuzu Motors, Panasonic, Tootsie Roll, Nissan Motor, Suzuki Motor, Air China and International Speedway trade daily on Tier 1.

Tier 2: OTC Pink Limited Information (Distressed)

Having financial reporting problems or just filed for bankruptcy?

No worries.

Tier 2 exists specifically for distressed companies to continue trading while management gets its house in order.

This tier is presently home to 176 companies, including World Poker Store, Affinity Beverage Group, 420 Property Management and a slew of natural resource companies and miners.

Tier 3: OTC Pink No Information (Dark)

Did someone turn the lights out? Yes!

Tier 3 is where financial transparency goes out the window.

Companies trading here — 3,023 of them — are not able or not willing to provide financial information to the public.

Still, you can’t throw these babies out with the bath water.

Take Hershey Creamery, for example — a “dark” company listed on Tier 3.

Hershey Creamery is the ice cream arm of The Hershey Co. — the Pennsylvania chocolatier that trades on the NYSE. Hershey Creamery trades for $3,700 per share.

Ocean Spray Cranberries is a “dark” company that lives on this tier, too.

Tier 4: Caveat Emptor (Blocked)

Technically, the last two tiers aren’t officially part of the Pink Sheets.

To be thorough, though, let’s cover them anyway.

There’s no way to invest in Tier 4. That is, because these companies have been blocked by regulators.

Potential reasons for being blocked include spam campaigns, questionable stock promotions, investigation of fraudulent or other criminal activities, regulatory suspensions or disruptive corporate actions.

Tier 5: The Grey Market (Enigmas)

I must confess…

The grey market fascinates me.

It’s hard to even get a quote for 7,872 companies listed on the grey market.

Ample liquidity is a problem here.

Also, lack of investor interest renders the cost of “making a market” not worth it.

Still, plenty of “grey” companies are priced above $10 a share — 1,433 of them, to be exact.

The lists of greys include Country Club of Virginia… vision company Essilor… homeopathic-maker Boiron… and Covestro — a spinoff of material-science powerhouse Bayer.

Dissemination of information (or lack thereof) largely dictates the movement of a stock.

Dow 30 stocks adjust to new information virtually instantaneously.

Grey companies lie at the opposite end of the spectrum.

New information among grey companies isn’t even picked up by the media, let alone by an analyst.

For this reason, investors should never ignore the grey market. It holds the most potential to exploit informational advantages for maximum gains if you’re willing to do the diligence and take the additional risks.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily

The post Decoding the Cryptic “Pink Sheets” appeared first on Wall Street Daily.
By Louis Basenese