Pink Sheets may sound like part of a bedding sale. More often, though, they can be found on a broker's desk. And they offer one channel for making money - or losing it.
These Pink Sheets are printed compilations of more than 20,000 US publicly held companies, most of which are not listed on major stock exchanges. They are actually printed on pink paper.
Some of these firms are hidden treasures in terms of potential investment return. One well-known Pink Sheet firm, Chicago mapmaker Rand McNally, more than doubled its share price in the two-year period ending last December, for example. Less well-known Ash Grove Cement, of Overland Park, Kan., soared from $61 to $112 per share in the same period.
These two companies are not alone. Many of the firms, says Pink Sheet expert Harry Eisenberg, have equaled or exceeded major market indexes in recent years. Some firms have extremely low share prices relative to earnings and book values. Lancaster National Bank, in Lancaster, N.H., was trading at just four times earnings and 58 percent of book value at the end of 1995.
Mr. Eisenberg sees investment opportunities in banks, among other Pink Sheet companies. But he cautions that anyone investing in unlisted companies should undertake all possible "homework" on the company before making a commitment to buy its stock. And investors shouldn't assume that valuation and trading patterns that apply in bigger stock markets will apply in thinly traded Pink Sheet firms.
How do you learn more about these stocks?
It isn't easy. The typical Pink Sheet company is tucked out of investors' view - often because the company wants to avoid the scrutiny or paperwork involved in a major-exchange listing. It is traded "over the counter" at brokerage houses, but most likely not on stock markets such as Nasdaq.
A few Pink Sheet firms are listed on stock exchanges or in the reporting services of the National Association of Securities Dealers (NASD), including the OTC Bulletin Board, an electronic listing of small-company stocks. Many Pink Sheet companies are regional businesses seldom noted in national newspaper reports. Few are monitored by investment-house analysts. If you were to call a stock broker about one of these firms, he or she might be hard-pressed to quote you a price (unless he thought of the Pink Sheets), much less discuss its investment merits.
The Pink Sheets are published daily by the National Quotation Bureau Inc. in Cedar Grove, N.J. The cost of the sheets, which are sold to brokers and traders, not private investors, is $852 a year.
On Monday, July 1, about 13,000 companies were listed, says John Condon, marketing director for the National Quotation Bureau. About 4,000 of these companies are "unique to the Pink Sheets," not being listed anywhere else, he adds. All told, the listings are a small packet of 160 pages. The sheets measure 5-1/4 inches in width and 14 inches long. The Bureau also publishes a semiannual National Stock Summary on 25,000 public companies, updated monthly.
Only a relatively small cluster of investors and dealers specialize in the companies listed on the Pink Sheets and Summary. Trading volume, therefore, tends to be very thin, and usually among aficionados or others somehow in-the-know about a particular company.
To buy a stock in one of these firms, contact a broker. The broker will usually turn the request over to his firm's trading desk, which will turn to the OTC Bulletin Board or the Pink Sheets to find the "marketmaker" - that is, the person or company that deals in buying and selling that stock. After contacting the marketmaker, your brokerage house will obtain the best price it can for you. If you want the shares at that cost, the brokerage house will complete the deal.
But all this does little for the small investor, in terms of access to useful information about Pink Sheet companies. Eisenberg and his wife, Cindy, are helping to crack the wall of obscurity with a new book that will surely set a number of brokerage-house phones ringing. "Walker's Manual of Unlisted Stocks" (Walker's Manual LLC, $75) is full of useful information and surprises for investors interested in Pink Sheet companies.
In checking through some of the companies listed on the Pink Sheets, former accountant Eisenberg realized that there was virtually no printed research information available about them. Sometimes, he found, that had been a deliberate decision. Companies, for example, need not issue annual or quarterly earnings reports if they have less than 500 shareholders. Some of the companies, moreover, are often considered privately held, an impression that, for whatever reason, they often encourage. Take Rand McNally. Eisenberg, based in Lafayette, Calif., called up the mapmaker. He was told that the firm was privately held. But within 10 minutes of that call, he says, he had purchased a share of Rand McNally stock for $400.
Eisenberg's book lists financial information on 500 companies. He has avoided penny stocks (risky stocks generally selling for less than $5 a share) and bankrupt companies. Firms that he examines include such familiar names as Kohler Company, King Kullen Grocery Co., R.L. Polk & Co., Benjamin Moore, A.D. Makepeace, and Boston Sand & Gravel. To inquire about his book, which he expects to update annually, call 800-932-2922.