Stocks with Low Volume

[Blake Hampton]

How do you feel about issues that trade with very low or even zero volume?

[Blake Hampton]

This was kinda low effort, so I'll explain a little further. I'm looking at a very illiquid OTC stock right now that seems to have great characteristics regarding value. Their financials are audited and everything seems to be in order, including a strong balance sheet, good earnings, good management, and a decent runway for growth. Additionally, they have bought back 40% of the company in the preceding three years. Of course, their stock is also selling at a low price relative to my perceived value. My dilemma is that this stock seems a bit too niche maybe for others to ever come around to buying it. Without a dividend, I don't how I would ever hope to make any money. Thoughts?

[Malmqky]

Does a single shareholder own like 50% of shares outstanding?

Edited November 27, 2023 by Malmqky

[ValueArb]

Historically the cheapest stocks are the ones with the least liquidity, and they tend to offer the highest long term returns according to academic studies. But when picking individual stocks, catalysts matter. What you've described as your catalyst is buybacks, if they continue to buy back shares you almost hope the price doesn't increase. The cheaper they buyback shares, the more equity your shares gain in the value of the company. Eventually one day the market will wake up and you'll see it reflected in price, it happens a lot faster if they are growing faster.

 

But to also echo @Malmqky,  governership matters too. If management/founder/single shareholder controls the company you want to make sure they'll continue to treat other shareholders well.

[Blake Hampton]

34 minutes ago, Malmqky said:

Does a single shareholder own like 50% of shares outstanding?

So the company hasn't actually filed with the SEC since 2013. There seems no way to figure it out outside an email to the company itself, I'll try that.

[gfp]

If there is no liquidity and the stock rarely trades, how is the company going to continue repurchasing a meaningful amount of stock?  Private deals with insider's shares?

[Blake Hampton]

On 11/27/2023 at 3:08 PM, gfp said:

If there is no liquidity and the stock rarely trades, how is the company going to continue repurchasing a meaningful amount of stock?  Private deals with insider's shares?

Ok so I looked into the stock again and figured some stuff out. Back in 2006 they filed a form 15 with the SEC to discontinue being publicly traded, they now only trade OTC. Chair and CEO is the daughter of the founder, and is included in a trust consisting of approx 60% of the company. I’m assuming that there are private transactions considering this thing literally sits with zero volume daily. Even with that, they have bought back 20% of the company in the last 4 years.

Edited January 25 by blakehampton

[Blake Hampton]

They are selling for nearly a third of book and 7x earnings.

 

Seems super cheap but still makes me nervous. I haven’t seen a dividend and I’m sure that management could easily just milk compensation or options. Very few shares outstanding and no real incentive to relist on an exchange.

[Morgan]

Care to share the name? 

[Blake Hampton]

8 hours ago, Morgan said:

Care to share the name? 

Not yet but I will once I decide and have a full position

[Fly]

What is the exit plan for a stock like this? Yes hold forever as long as valuation supports it… but what if that changes and it is no longer is a hold? Can you realistically exit at a price reflecting your thesis on the stock? 

[ICUMD]

I've reflected on some equities and investments with this scenario.  I think they are better left alone.

 

You end up tieing up capital with no forseable exit strategy.

 

Exit occurs only if:

• Owner buys you out.. but why would they when they can use your capital for free?
• Dividends - in piecemeal (but no guarantee if principles take salary or special dividends)
• 3rd party buyout.

Share price trading OTC never results in meaningful price discovery in low volumes. Usually a marginal holder dumping shares because they are frustrated.

 

If you are willing to tie up capital for a long time, the chances of one of the three above scenarios improves, but still not guaranteed.  

[Junior R]

fairfax india has the lowest volume some days 100 shares moves the stock 5%+

[ICUMD]

51 minutes ago, juniorr said:

fairfax india has the lowest volume some days 100 shares moves the stock 5%+

A great example.  High volatility and heavily discounted to BV. 

[Blake Hampton]

1 hour ago, juniorr said:

fairfax india has the lowest volume some days 100 shares moves the stock 5%+

I set the price for this stock yesterday. Put in an order for 5 shares at a tiny premium and ended up getting filled at about a 3% discount on where they were initially trading. Funny thing is I already owned 7 shares so I gave myself an unrealized loss.

[Spekulatius]

On 1/25/2024 at 6:51 PM, blakehampton said:

They are selling for nearly a third of book and 7x earnings.

 

Seems super cheap but still makes me nervous. I haven’t seen a dividend and I’m sure that management could easily just milk compensation or options. Very few shares outstanding and no real incentive to relist on an exchange.

Based on what I am reading, the stock may not be that cheap. Trading at 1/3 of book at a PE of 7 means that if it traded at book, the PE would be 21 or the ROE a bit less than 5%. That would like a value trap to me. the only mitigating factor is that they bought back their own shares in size, which most microcaps don’t do.

 

I guess the important facts are in the detail, but just based on what you wrote, the stock could well be a value trap.

Edited January 27 by Spekulatius

[schin]

15 hours ago, blakehampton said:

I set the price for this stock yesterday. Put in an order for 5 shares at a tiny premium and ended up getting filled at about a 3% discount on where they were initially trading. Funny thing is I already owned 7 shares so I gave myself an unrealized loss.

 

The spreads are terrible when I worked with microcap stocks. It takes forever to get into positions.. and when you want to get out... you will depress the market on that day/week by 10-15%...  If you are a large shareholder, getting out requires a lot of people to take your shares..... and then, they wonder if there is something wrong with it... so, it gets depressed more.

 

At 7 shares, it better be trading at 3k-30k per share.. because if it's penny... with commissions, illiquid/bad spreads... to get 1% of your portfolio.... it's a lot of work for that juice... I would recommend marrying into the family for the position. 

 

The academic literature says there is alpha there.. but, I call bullshit on most microcaps... the spreads are bad.. the market makers are crooks... and any sell takes days to find the buyer.. and if you need to get out during COVID, GFC, any bearish market, you're cooked.... minus well scream fire in a crowd theatre.

 

You're the last person the market maker wants to deal with.

[Masterofnone]

These companies only work in a few scenarios. A very few of them actually do have shareholder friendly management and dividend out excess cash.

Otherwise, there has to be a catalyst such as a potential uplisting or sale. I've had both of these work once, and each time it took longer than anticipated.

Those really successful in this space have the resources and energy to become significant % owners of a company and force management to unlock value.

This route works in cases of lazy or incompetent management but not if they are crooks. Very tough space but some do it well as full-time managers with the willingness to barge in and make changes.

[Spekulatius]

I have bought and sold my fair shares of these  nanocaps that trade for 50c on the dollar. most of my sales were out of frustration and be sued yo lost patience. They require lots of patience and may not work for a decade (I am not kidding here) . They are also not hard to find at all. The hard part is finding those with decent management or a catalyst. Thats probably no more than 10% of the population. Knowing what management is up to is absolutely critical, much more so this if your discount to fair value is 50% or 2/3 of fair value.

[ValueArb]

10 hours ago, schin said:

 

The spreads are terrible when I worked with microcap stocks. It takes forever to get into positions.. and when you want to get out... you will depress the market on that day/week by 10-15%...  If you are a large shareholder, getting out requires a lot of people to take your shares..... and then, they wonder if there is something wrong with it... so, it gets depressed more.

 

This is absolutely true about the spreads. They are a benefit to the patient, and a tax on the impatient.

 

10 hours ago, schin said:

 

At 7 shares, it better be trading at 3k-30k per share.. because if it's penny... with commissions, illiquid/bad spreads... to get 1% of your portfolio.... it's a lot of work for that juice... I would recommend marrying into the family for the position. 

 

Yesterday I picked up 2,860 shares bottom fishing a few hundreds over the bid on a 33 cent/39 cent spread, so almost $1,000 of stock for a $9.62 commission (interactive brokers), so about 1%.

 

On monday I picked up 40,000 shares using same technique on a 3.5 cent/4.5 cent spread, so again about $1,400 in stock for $12.80 in commissions, just under 1%.

 

1% sounds like a lot for a transaction cost, and it normally is, but I have a lot of confidence the first stock is worth over 40 cents and second is worth around 5 cents. So in the first case I gave up about 5% of my gain of estimated value to commissions, and in second case about 2%. Double those for commissions on the way out when they get close to full value so commissions average a 5-10% "tax" on my gains when I'm buying penny stocks. 

 

When I'm buying stocks above $1, my commissions are a lot lower. I bought 5,000 shares of a $3 stock last week for $26, or 0.2%, so total in/out transaction cost of about 1/3 of 1%. So I get to keep 5-10% more of my gains, but the problem is it's a lot harder to find opportunities as profitable above $1 as below it. I'd much rather make a 20% profit and give up 5-10% to commissions leaving me with 18-19% profit than make a 15% profit with zero commission.

 

This is all in my short term trading portfolio where I'm betting on catalysts within the next 3-6 months. If I was buying for long term holding, the commissions and the spreads matter even less. 

 

10 hours ago, schin said:

 

The academic literature says there is alpha there.. but, I call bullshit on most microcaps... the spreads are bad.. the market makers are crooks... and any sell takes days to find the buyer.. and if you need to get out during COVID, GFC, any bearish market, you're cooked.... minus well scream fire in a crowd theatre.

 

You're the last person the market maker wants to deal with.

 

You forgot to also add that there are many more scams and plain terrible boards and managers who treat the company as their own private possession and sometimes, piggy bank. 

 

But I've never been able to figure out why the market maker hates me. I think I see it sometimes when bid is 100,000 shares at 33.31 cents and I put in a 10,000 share bid at 33.4 cents, and fairly quickly someone will buy 100 shares for $3.34, clearly trying to jack up my commission costs thinking my broker is going to charge me $5 just for that one transaction. It doesn't really bother me as IB just charges me 34 cents for that order, so while it's not very profitable for me its not costing me money. 

 

So while market makers apparently dislike me, I don't see how they can cheat me as long as I'm always using limit orders. I'd like to better understand what's going on behind the scenes to be sure about that though, what they do all day is pretty much a black box to me. 

[schin]

On 1/27/2024 at 2:45 PM, ValueArb said:

When I'm buying stocks above $1, my commissions are a lot lower. I bought 5,000 shares of a $3 stock last week for $26, or 0.2%, so total in/out transaction cost of about 1/3 of 1%. So I get to keep 5-10% more of my gains, but the problem is it's a lot harder to find opportunities as profitable above $1 as below it. I'd much rather make a 20% profit and give up 5-10% to commissions leaving me with 18-19% profit than make a 15% profit with zero commission.

 

I'm on Interactive Brokers myself and the commission is reasonable... but, then, you have contend with spread. If you're patient, you can build a position.  But, let's say it takes you 3 months to get into a position.... how long will it take you to get out of that same position without crushing the Buy/Sell balance. 3 months? For those 3 months, you were probably the market and picking off small buyers... Getting out as a non-controlling shareholder is hard....

 

What is the margin of safety you're looking for? I mean how much of a net-net does it have to be for you to be that patient. Even Warren Buffett in the early days tried to get on the board to generate the catalyst.

 

It's a perfect stock with great management trading at 50% book...  but, it's closely held. Again, at a low market cap, why don't they just take it private and not deal with the disclosures and reporting?

 

Again, I find most people that want to start microcap/nanocap funds...are just stock manipulators... they know they can uptick at the final bell of the month/quarter to make their performance look amazing.. They're a big fish in a little pond... but, their funds cannot scale and ultimately, they outgrow the market. 

 

 

 

[ValueArb]

12 hours ago, schin said:

 

I'm on Interactive Brokers myself and the commission is reasonable... but, then, you have contend with spread. If you're patient, you can build a position.  But, let's say it takes you 3 months to get into a position.... how long will it take you to get out of that same position without crushing the Buy/Sell balance. 3 months? For those 3 months, you were probably the market and picking off small buyers... Getting out as a non-controlling shareholder is hard....

 

What is the margin of safety you're looking for? I mean how much of a net-net does it have to be for you to be that patient. Even Warren Buffett in the early days tried to get on the board to generate the catalyst.

 

Getting out requires a catalyst, and I can't get on boards. So I pick carefully from net-nets that have already announced a catalyst, or I think are likely to announce one shortly. The second category was very painful for me in 2nd half 2023 however, and I've mostly pulled back to first category. 

 

When a sale is announced usually volume spikes and spreads narrow substantially, and even if they don't you can just wait for close.

 

12 hours ago, schin said:

 

It's a perfect stock with great management trading at 50% book...  but, it's closely held. Again, at a low market cap, why don't they just take it private and not deal with the disclosures and reporting?

 

Going private transactions are one of my favorite catalysts. Even if its an outright theft where management is only paying 60% of book, that's still a 20% gain in 6-9 months if it closes.

 

12 hours ago, schin said:

 

Again, I find most people that want to start microcap/nanocap funds...are just stock manipulators... they know they can uptick at the final bell of the month/quarter to make their performance look amazing.. They're a big fish in a little pond... but, their funds cannot scale and ultimately, they outgrow the market. 

 

 

 

 

There is likely a lot of truth in what you wrote here. I get paid quarterly and could abuse my clients by throwing a little cash at the ask at the end of day on last day of quarter to show better results.

 

But besides being blatently unethical and wrong, now do I have to do it end of every quarter just to stay even? And if the business gets sold for below that ask price, I've just manufactured a loss. Its hard enough to beat the market why also juggle a bunch of lies and manipulated prices on top of that for a short term gain.

 

So while I do not do any manipulation, I find significantly higher return opportunities in nano and micro caps. If I'm able to outgrow them I'll be very excited because it will mean I have hundreds of millions under management. And the skills I apply here are applicable to larger caps, the returns will just be a bit lower.

Edited January 31 by ValueArb

[Blake Hampton]

12 hours ago, schin said:

 

I'm on Interactive Brokers myself and the commission is reasonable... but, then, you have contend with spread. If you're patient, you can build a position.  But, let's say it takes you 3 months to get into a position.... how long will it take you to get out of that same position without crushing the Buy/Sell balance. 3 months? For those 3 months, you were probably the market and picking off small buyers... Getting out as a non-controlling shareholder is hard....

 

What is the margin of safety you're looking for? I mean how much of a net-net does it have to be for you to be that patient. Even Warren Buffett in the early days tried to get on the board to generate the catalyst.

 

It's a perfect stock with great management trading at 50% book...  but, it's closely held. Again, at a low market cap, why don't they just take it private and not deal with the disclosures and reporting?

 

Again, I find most people that want to start microcap/nanocap funds...are just stock manipulators... they know they can uptick at the final bell of the month/quarter to make their performance look amazing.. They're a big fish in a little pond... but, their funds cannot scale and ultimately, they outgrow the market. 

 

 

 

So with the particular case that I'm referencing here, they actually delisted so that they don't have to report to the SEC anymore. Their disclosures are okay? They have an annual report with simply audited financials, and the notes to them, on OTC Markets, they don't do quarterlies on there. On the news section of their website, they report both quarterly and annual results that have less detail but include messages from management.

Edited January 31 by blakehampton

[schin]

11 hours ago, blakehampton said:

So with the particular case that I'm referencing here, they actually delisted so that they don't have to report to the SEC anymore. Their disclosures are okay? They have an annual report with simply audited financials, and the notes to them, on OTC Markets, they don't do quarterlies on there. On the news section of their website, they report both quarterly and annual results that have less detail but include messages from management.

@blakehampton - Gotcha. If they delisted and they have a heavy discount, I would reach out to management and see what they expect to realize value for smaller shareholders like yourself. You're a minority shareholder and they can just jerk you around.  They probably don't institutional investors, so I don't know who is holding the other side of your buys... People that are feed up?

 

Again, prior to them delisting.... because they were at a discount... did they do any shareholder friendly acts, such as share buybacks? How are they doing to close the gap? Again, they shouldn't be that big to ignore you. Give them a call and see if they are responsive. If not, you're a nat... that's not a shareholder community I want to be with.... They might use it as their piggybank...

[schin]

On 1/27/2024 at 2:45 PM, ValueArb said:

 

This is absolutely true about the spreads. They are a benefit to the patient, and a tax on the impatient.

 

 

Yesterday I picked up 2,860 shares bottom fishing a few hundreds over the bid on a 33 cent/39 cent spread, so almost $1,000 of stock for a $9.62 commission (interactive brokers), so about 1%.

 

On monday I picked up 40,000 shares using same technique on a 3.5 cent/4.5 cent spread, so again about $1,400 in stock for $12.80 in commissions, just under 1%.

 

1% sounds like a lot for a transaction cost, and it normally is, but I have a lot of confidence the first stock is worth over 40 cents and second is worth around 5 cents. So in the first case I gave up about 5% of my gain of estimated value to commissions, and in second case about 2%. Double those for commissions on the way out when they get close to full value so commissions average a 5-10% "tax" on my gains when I'm buying penny stocks. 

 

When I'm buying stocks above $1, my commissions are a lot lower. I bought 5,000 shares of a $3 stock last week for $26, or 0.2%, so total in/out transaction cost of about 1/3 of 1%. So I get to keep 5-10% more of my gains, but the problem is it's a lot harder to find opportunities as profitable above $1 as below it. I'd much rather make a 20% profit and give up 5-10% to commissions leaving me with 18-19% profit than make a 15% profit with zero commission.

 

This is all in my short term trading portfolio where I'm betting on catalysts within the next 3-6 months. If I was buying for long term holding, the commissions and the spreads matter even less. 

 

 

You forgot to also add that there are many more scams and plain terrible boards and managers who treat the company as their own private possession and sometimes, piggy bank. 

 

But I've never been able to figure out why the market maker hates me. I think I see it sometimes when bid is 100,000 shares at 33.31 cents and I put in a 10,000 share bid at 33.4 cents, and fairly quickly someone will buy 100 shares for $3.34, clearly trying to jack up my commission costs thinking my broker is going to charge me $5 just for that one transaction. It doesn't really bother me as IB just charges me 34 cents for that order, so while it's not very profitable for me its not costing me money. 

 

So while market makers apparently dislike me, I don't see how they can cheat me as long as I'm always using limit orders. I'd like to better understand what's going on behind the scenes to be sure about that though, what they do all day is pretty much a black box to me. 

@ValueArb -  I feel you. I just found plenty of bargains in the small and mid-cap space where market caps are in the 5-50B... plenty of liquidity... and I still get the doubles/triples I am looking for.  Nano/Microcaps like SODI can get me those types of returns, but it can either go well or badly.. and you must trust the management a lot because it's like marrying the mob.. you can't get out easily other than the witness protection program.