The OTCQX exchange is the top tier listing in the pink sheets, but not every investor knows about it because it is relatively new. There are several interesting companies listed here that are generally ignored by investors. In this article we'll examine a pair of potential hidden gems.
Requirements for listing include: a $1 minimum bid, at least 100 shareholders, the company must meet the financial qualifications of a national stock exchange, and it must hold annual shareholder meetings. (These stocks come with added risk; to learn more, see The Lowdown On Penny Stocks and Catching A Lift On The Penny Express.)
Computer Services (OTC:CSVI)
This is a software and services company that sells mostly to financial institution customers. These services include data processing, check imaging, cash management and assorted other services. The company just reported record results for the quarter ending August 31, 2008, with revenue up 4.2% to $36.4 million and net income up 17.5% to $4.5 million, compared to the same quarter last year. Computer Services just authorized a $5 million share buyback and paid 65 cents in dividends over the last 12 months, giving a yield of 2.4%. (Find out what these company programs achieve and what it means for stockholders in A Breakdown Of Stock Buybacks.)
Capital Properties (AMEX:CPI)
Capital Properties has operations in real estate, outside advertising and energy. The company currently trades on the American Stock Exchange, but is deregistering and listing on the OTCQX. What makes this company unique is that rather than develop the land and then sell it off, it leases the land under long-term leases up to 99 years. The lessees then construct whatever building they want on the land and pay an annual rent to Capital Properties. The lessee also pays the real estate taxes.
What this means is that essentially the cost base of the company is dropping every year as the parcels are developed.
Unique Business Model
Capital Properties owns 18 acres of land in 11 separate lots in the downtown area of Providence, RI. It also owns an oil storage terminal in East Providence and a billboard leasing business. Capital Properties currently has seven of the 11 parcels either fully developed or under development. The four that aren't developed are currently used for paid parking. All of the leases have built-in escalator clauses that raise the annual payments by a small percentage every year. One can view the cash flows of Capital Properties as a growing perpetuity with rents increasing in the lower single-digit percent every year, while its costs drop.
The company owns nine petroleum storage tanks on its property in East Providence with a capacity of one million barrels. The company is paid on the throughput of oil, not the price, so revenue here is less volatile than a typical energy company. In the outdoor advertising business, the company has 48 billboards in 25 locations along highways leased to Lamar Advertising (Nasdaq:LAMR). These leases also have built in escalator clauses every year on the rent. Capital Properties also has no debt on its balance sheet. Voting control of the company is held by Robert H. Eder, president, CEO and chairman of the Board, and his spouse Linda Eder. They own 1.72 million shares, or 52.3% of the outstanding stock.
The OTCQX exchange is an interesting place to look for companies to invest in. Ever since Sarbanes-Oxley was passed in 2001, it has become more expensive and burdensome to comply with the various regulatory disclosures. This is especially true for smaller companies like Capital Properties.
When a company deregisters, the disclosure requirements become much less strict. The procedure used to deregister is to initiate a reverse split of its shares and then do a mandatory buyback of the odd lot shares. This will reduce the number of shareholders to below the threshold required to be listed on one of the major exchanges. Investors should be aware that when a company deregisters, it typically makes the stock less liquid, and of course less disclosure is never a good thing.
To learn more, read The Dirt On Delisting.