Throughout 2016 I’ve been going through a list of over-the-counter stocks I screened for at the beginning of the year. I started with an Excel spreadsheet of all OTC stocks listed in America (9,855) and then narrowed it down via the following criteria:
- Only these exchanges: OTCQX, OTCQB, Pink Current (only wanted companies that were up-to-date with their filings)
- Companies based in first world countries
- Removed banks, biotech, pharma, minerals, and oil and gas
- Removed stocks selling for less than $0.05 and companies larger than $500M market cap
This left me with a list of 1,437 stocks that had a total market cap of just $80.6 billion. This is the third time I’ve gone through a similar list of OTC stocks. The first time was 2011 and the second was 2014. Not surprisingly, the 2016 trip through the list has been by far the least fruitful. The first time I went through in 2011 I found quite a few profitable net-nets, and even in 2014 I found a couple. While I didn’t uncover any interesting cigar butt-type investments this year, I did discover a few high quality companies.
OTC Markets Group (OTCM)
As their name suggests, OTC Markets Group operates the actual OTC lists that most OTC companies are listed on (OTCQX, OTCQB, and Pink Open Market). While most investors are probably familiar with their otcmarkets.com website, that is a small portion of their revenue. Most of their money is made via license fees from broker-dealers, subscription fees from companies like Bloomberg that display information on OTC companies, and then fees from the actual OTC companies to list on the various exchanges. You’ll notice a large part of their revenue is recurring in nature which is always a big plus.
Overall, I like this company a lot and I need to get back into it at some point. There are a lot of industry factors affecting them that I don’t fully understand yet. Broker-dealers are consolidating which means fewer clients for OTCM. Obviously not a good thing. If you believe Thomas Peterffy (CEO of Interactive Brokers), he thinks broker-dealer consolidation has a long way to go as too many of them are not competitive with increasing regulatory costs. Another thing negatively affecting their potential client base is how much easier it is for private companies to get funding now-a-days. Angel and VC investing has exploded so there’s less reason for companies to IPO. The fewer companies that IPO, the fewer companies there are to list OTC. Finally, there’s regulation risk. Going through almost 1,500 OTC companies (and I even screened out most of the worst ones) reminded me how many awful companies, pump and dumps, and blatant scams are out there. Maybe I’m just an idealist, but there should not be this many public companies that are solely trying to rip off investors. Hopefully the SEC gets around to cleaning up the pink sheets at some point in the future.
On the other hand, the higher quality OTC markets (OTCQX and OTCQB) have a major cost advantage over NASDAQ and other national exchanges. It’s not a coincidence the high growth these markets have experienced the past few years as small-cap companies (in the tens to hundreds of million range) realize they can list on a high quality exchange without the expenses of a national exchange. A lot are uplisting from lower tier OTC exchanges and a couple have even downlisted from national exchanges to OTCQX. Unless regulations drastically change the current competitive environment, OTCM seems to have a rock solid niche (near monopoly?) for higher quality small companies that can’t justify listing on a national exchange.
Parks! America, Inc (PRKA)
Parks! America operates what I would call a zoo-on-steroids; they call them drive-through safaris (probably a more accurate description). Essentially, you rent a car from them and drive through a 200 acre park while zebras, giraffes and all kinds of animals come right up to your car window and eat food out of your hands. If that sounds fun, check out this entertaining video a couple of guys recorded as they drove through.
I love that something like this is both extremely unique (people are going to travel just to go) and the parks are local monopolies. No one would open a similar park within a hundred mile radius of an existing location. This should create some pricing power as well. I doubt a 1-2% “inflation” increase every year would impact their volume much at all. The negative side of this is limited room for growth. It’s hard to know how many drive-through safaris are in the US, but I’d guess around 20 after some Googling. Are there a couple areas throughout the country that don’t already have one and could support it? Maybe, but I’d guess most future growth would have to come from expanding their own two parks or acquiring others (which they haven’t been good at). Their original park in Georgia has been very successful (consistent year over year growth, >40% operating margins), but their second location in Missouri (acquired in 2008) has struggled and brought down company results. Overall, PRKA is selling for more than what I think it’s worth, but if the price comes down or if they turn the Missouri park around, I may get interested. It’s been on my watch list for a few months now.
(Shout out to one of my readers who pointed out PRKA to me shortly before I came across it in the screen. Thank you!)
Where Food Comes From (WFCF)
WFCF is a third party verification company for food producers. If a food manufacturer makes gluten free food and wants to make sure the public believes it’s 100% gluten free like they claim, it’s a good idea to bring in a third party to verify that. Currently, WFCF can verify over 30 standards (such as gluten free, non-GMO, etc) and is the dominant player in the food verification space. There are a lot of things to like about this business. First, customers tend to be sticky and the revenue is recurring in nature. There are scale advantages as well. WFCF verifies the most standards in the industry and they give bundle discounts to customers that need multiple processes certified. It’s easier to go to WFCF for all your verification needs in one stop as opposed to going to multiple companies that specialize in more specific areas. WFCF has gained a lot of this scale through acquiring small specialty competitors.
Finally, there are two significant (and related) tailwinds that will help WFCF for years to come. Consumers eating healthier is a trend that’s here to stay and both consumers and governments are demanding more transparency and traceability in the food supply chain. From the USDA: “Traceability does not prevent disease, but knowing where diseased and at-risk animals are, where they have been, and when, is indispensable in emergency response and in maintaining disease control and eradication programs.” WFCF can help with this.
In addition to all the positives, there are a few concerns I have. First, I think these types of verification businesses are incentivized to verify as much as possible because they want to please their customers. If something is borderline and WFCF doesn’t give it the go-ahead, WFCF knows that company will go to their competitors. This is one thing I’ve never loved about the credit rating agencies (a la 2008). If they do loosen their standards (or if they simply make a mistake) and something they verify ends up causing disease, what is their liability? I don’t know that answer yet. Finally, I’m always wary of acquisitive companies. Integrating two companies together is not an easy task and I think integration risk is something that’s often glossed over in roll-ups. I wouldn’t quite call WFCF a roll-up, but they clearly state in their 10-K that acquiring competitors has been and will continue to be a core growth strategy of theirs. At least one of their acquisitions (Validus Verification Services) is still losing money three years after they bought it. I just discovered WFCF last week so I still have a lot of work to do on it, but I’m liking it so far.
Armanino Foods of Distinction (AMNF)
Armanino is the only company I’ve purchased as a result of going through the OTC screen (so far at least). I wrote a blog entry a couple weeks ago about why I like it as an investment. Since that write-up, Armanino reported high-level Q2 numbers which were worse than I expected, but I don’t think it changes my thesis much (or at all).
WTF? (no, WTF is not a ticker)
I took note of some funny/random companies I came across during the screen, thought you guys might get a kick out of these:
Blackcraft Cult Inc (BLCK) sells satanic clothing such as “Hail Satan and Drink Coffee Women’s Tee”, “Hail Satan and Eat Pizza Men’s Tee”, and “One Nation No God Snapback Hat.”
Blue Water Ventures International (BWVI) – if you’re looking for a lottery ticket, this may be your stock. Blue Water Ventures explores shipwrecks in the hopes of finding valuable cargo. As a public company all they’ve found is dilution and net losses, but you never know, maybe tomorrow they’ll find one of the world’s greatest undiscovered shipwrecks!
Lingerie Fighting Championships Inc (BOTY) is exactly what you think it is. Warning: their website is NSFW.
As of this writing, Wiedower Capital owns shares in AMNF and IBKR. This is subject to change.