There are articles this morning with significant news for the economy as a whole and for the investment community in particular.  First of all, the job market improved more than expected, and is back on the curve it was on earlier this spring, with job creation in the private sector at 176,000 jobs, and new applications for unemployment well under the “magical” number of 400,000. 

Early gold miners wearing Levis. Photo courtesy of andrewhennigan.blogspot.com

Second, and possibly more important, the number of business bankruptcies has fallen and is on track to finish the year at its lowest level since prior to the beginning of the “Great Recession.”  The comes chockablock on top of a truly boffo month of June for consumers, especially people buying cars.

There are storm clouds — European and Chinese wobblies specifically, with interest rates dropping, which is likely to push the value of the US dollar up, making our goods more expensive overseas.  Actually though, two of our biggest trading partners are virtually (but not officially) pegged to the US dollar (Mexico & Canada), and many other economies, such as Australia — resource rich and recessionless — are fairly stable with regard to the greenback. 

So the question is, if we are seeing all these lights at the end of the tunnel — what should we be doing as investors?  We at SmallCapWorld have no answers, no recommendations, because we are not financial advisors,  but we are finding some areas more interesting than others.  Infrastructure continues to be a big agenda item, for instance.  For those with a longer horizon and some patience, homebuilders are looking more interesting.  And an intriguing article in the New York Times last weekend theorized that the electric vehicle market, in spite of the highly publicized obituaries of the lithium-ion battery companies,  may not be dead in the water: http://www.nytimes.com/2012/07/01/automobiles/evs-are-merging-into-californias-traffic.html?_r=1&ref=automobiles.

Many investors look at sectors like these when economic reports are positive, hoping to find bargains like four-leaf clovers.  An article this morning in Motley Fool may be a case in point, for instance: http://beta.fool.com/jonathanyates13/2012/07/05/it-time-togo-sir-john-templeton-european-stocks/6140/?source=eogyholnk0000001.  Heck, even Warren Buffett is out in the weeds looking for something special, buying up newspapers (talk about last century!). 

I’d like to suggest that there is a larger pond to splash about in, and it is not sector-specific: cross-border companies, especially those trading in the USA as ADRs (American Depositary Receipts).  It seems as though ADRs tend to trade at a significant discount to the valuations given their peers on US markets.  That is less true of largecap ADRs, a fast-growing group, by the way, but largely controlled in valuation by trading in their home exchanges.   But it seems to be increasingly true across the board in smallcap ADRs.  After all, what was the biggest success story of the California Gold Rush?  I think it was Levi Strauss, which did nothing more than invent blue jeans for the miners.  Facilitators tend to be ignored at times.

Why would this be so?  Well, maybe it is that they are farther away than US-headquartered companies; they use currencies that may be more volatile these days; they tend not to market themselves well to US investors; they seldom trade on Nasdaq or the NYSE.  In fact, most of them trade in the regulatory twilight zone that used to be universally referred to as The Pink Sheets.  However that may be, there are some very big, very prosperous, very well-known companies now trading on the “pinks” after having delisted from the big exchanges when Congress started tightening the regulatory screws a couple of financial bubbles and several Ponzi schemes ago.

If there are bargains in the ADR world, they will be found eventually — at least that is the theory behind the “if you build it they will come” philosophy that used to be called “build a better mousetrap” or “stick to your knitting.”  And for the Sherlock Holmes types among us, there are all kinds of companies worth looking on the upgraded “pink sheets” listings called OTCQX and OTCQB.  With the not-so-slow decline of the Bulletin Board, these listings may look like the Wild West, but they are not the typical old “pennystocks” that many investors remember.  And the JOBS Act is breathing new life into these small newcomers by suspending a lot of the draconian rules that govern fund-raising for larger companies:  http://www.forbes.com/sites/alanhall/2012/06/28/hearings-on-jobs-prepare-the-u-s-for-expanded-crowdfunding-accelerating-startup-activity-creation-of-jobs/

Anyway, the point of this article is not to pick out stocks in the pink sheets, it is to look for stocks that could benefit from a gold rush pointed at the pink sheets.  The first and most obvious is OTC Markets Group itself (OTCQX: OTCM), the proprietor of the Pinks, the OTCQX and OTCQB.  OTCM, headquartered in New York City (http://www.otcmarkets.com/home) , is chugging along at an increasing revenue rate that looks to be in the range of at least $32 million to $35 million this year, and bringing about 15%  (or $0.12 per share) to the bottom line in the most recently reported quarter.  Just to put this in perspective, the market cap is around $73 million and OTCM is handling 10,000 over-the-counter securities.  The volume of trading in OTCM is under 1,000 shares per day, which puts a bit of a technical barrier up for some people — but it is hard to imagine this part of the market NOT growing.

Another you-never-heard-of-it company that stands to benefit is one of the Fortune 500: INTL FCStone Inc (Nasdaq: INTL).  One of the busiest traders in the market, INTL is said to be the largest marketmaker of cross-border stocks in the US, and they are an increasingly prominent advisor to OTCQX and OTCQB companies under the “PAL” or Principal American Liaison designation.  They are also one of the largest buyers of gold in the world.    The shares are trading at $19.61, not far off their lows; the market cap is $375 million, and the average daily trading volume is 84,000 shares.  This article in SeekingAlpha addresses the value that might be there: http://seekingalpha.com/article/667071-4-undervalued-small-cap-financials-with-analyst-love?source=yahoo

There are some very small dark horses, like San Francisco-based Merriman Holdings (OTC: MERR; http://www.merrimanco.com), which claims to be the largest PAL operation with regard to OTCQX companies.  MERR is quite small and has a recent history of management change and financial distress, but their newswires are busy virtually every day with new OTCQX clients. 

And there are some much larger companies that stand to benefit, like the Australian whiz-kid, Computershare Ltd (OTCQX: CMSQY and ASX: CPU).  Their market cap is well out of our ballpark at $4+ billion, but they have come out of the pack like Secretariat at the Derby, recently taking over the stock servicing portfolio at Bank of New York Mellon.

We own none of the securities discussed in this article.

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