Investing/Trading on the Pink Sheets

I know many investment professionals who will never purchase a stock if it trades on the pink sheets or OTC, even if it represents good value. Why? Pink sheets have long been considered the waste bin of the stock market--where companies go to die or be manipulated by stock pools. It is though that no self respecting investor would want to get involved in these kind of stocks. I think this mentality is shortsighted but beneficial to enterprising investors willing to do their own due diligence.

From personal experience I can tell you that there are great companies which trade on the pink sheets for a variety of reasons. Many companies have chosen to list on the pinks sheets to escape the egregious costs of Sarbanes Oxley (especially foreign companies). What makes some of these stocks a good value is that they are under followed by hedge funds and institutions. On account of this, these stocks are often priced inefficiently proving investors an opportunity to exploit.

Below are a few hints and tips for trading these illiquid and unknown pink sheet stocks.

1. Never enter a market order--many of these stocks are illiquid and sometimes go a few days without trading. As such there is a large bid/ask spread (sometimes $15). However it is relatively easy to play around this obstacle. I did this with Limoneira(LMNR) when the spread was $130/145. I simply placed a Good till canceled limit order at $131.01 and waited for someone to finally dump their shares at the market(bid price). It did take a week for the order to be filled but I am very patient. The same strategy can be utilized when selling by placing an order at $144.99. One thing to keep in mind is that you have to trade in round lots (100,200,500,1000,etc) to beat the bid/ask spread. If you enter a limit order for 56 shares I have noticed that the market makers completely ignore your order and your order will not get filled

2. You have to do extra due diligence(DD)--I know I usually say this but when it comes to pink sheet stocks this is more important than ever. These companies do not have to provide audited financial statements like NYSE listed companies. Most provided unaudited financial statements which is better than nothing but not particularly reassuring. The best idea is to check out the company's website and look around. It also helps to talk to a representative from the company and ask for the desired information. The hardest part of DD regarding these kind of stocks is that there are no analysts covering the stock which makes it difficult to estimate future earnings.

3. Don't buy penny stocks on the Pink Sheets--This is where you will see the manipulations and criminal acts. I define any stock under $5 as a penny stock. One other tip off to illegal manipulations is the large amount of volume. You will often see these type of stock trade 40 million shares at .05 cents. These criminals will run up the stock from .01 to .10 based on a fraudulent story hyping the company.

4. Beware a lack of information--There are a few companies who provide absolutely no information for prospective investors. They only send you an annual report if you can prove you own the stock (BWEL and AVOA). I will not invest in any of these companies under any circumstances, even though I know others who have. A prospective company should at the very least provide a webiste with financial data.

Here is a list of stocks I follow which trade on the pink sheets and OTC

1. Limoneira (LMNR.PK)
2. Keweenaw Land Assoication (KEWL.PK)
3. JD Boswell (BWEL.PK)--not enough information on this company. Not even a website.
5. Biloxi Marsh Land Company (BLMC.PK)
6. Farmer's & Marehcant's Bank of Long Beach (FMBL.OB)
7. First National Bank Alaska (FBAK.PK)
8. Avoca (AVOA.PK)--not enough information on this company. No website.

One great blog that covers a few of these type companies is

Black Swan Insights

Legal Disclaimer
I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset. (I know this is a stupid statement but for legal purposes I have to say it. Thanks)



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    1. Great advice pink sheet stocks are the most high risk of all stocks.