When will value be realized?
The biggest concern I think most readers have with unlisted stocks is that they'll buy into a company and then their money is "stuck" and they'll be unable to liquidate their position when they want, or at a good price. The fear is even stronger when the company has a strong insider ownership, many readers feel like they'd be locking up their money eternally.
These are perfectly valid fears especially for an investment professional who's performance is graded on a yearly basis. An individual investor's performance isn't graded on such a short time window, but most individual's have patience that lasts about two years at the most.
Warren Buffett talks about selecting companies that investors would be happy to own if the market was closed for 10 years or more. I know a lot of people theoretically agree with the statement, but I doubt many people would actually commit to buying a stock if they knew they couldn't sell it for 10 years or more.
I did a very unscientific study using the two Walkers Manuals (discussed below) that I have. I own a copy of the Unlisted Stocks manual, and the 2nd edition of the Penny Stocks manual. For this simple experiment I just looked at whether a company was tradable and had shares trade in the last year, at the time of writing all of the stocks in both books were trading. The idea behind this is to get an idea of what a holding lifespan might be for some of these stocks. Here are the results.
Unlisted stocks from 2003 (9 years)
Out of 400 listed companies 206 are still tradable.
48.5% of the unlisted stocks had some sort of value realization event either positive or negative.
Penny stocks from 1999 (13 years)
Out of 167 listed companies 63 are still listed.
62.2% of the penny stocks had some sort of value realization event either positive or negative.
The results are interesting, it would seem that an investor who wants an external event to realize value would be better served buying exchange traded stocks and avoiding unlisted and pink sheet stocks altogether.
So what are some of the ways value was realized for these companies? I didn't follow up on all of the companies that I had marked as no longer trading, it would have taken too much time. I did follow up on some, of the 194 I probably followed up on 30-40 companies. Most of the time I found their fate through a simple Google search. Here are some of the terms I jotted down in relation to their final fate: liquidated, bought out, went private, bankrupt, purchased by parent.
One company that I think encapsulates the unlisted stock spirit, and at times absurd valuation and value realization is Western Lime (WLIC). When Walkers dug up this company in 2003 they were trading for $721 a share and described as a company who was engaged in the manufacture and sale of various lime products. The manual had the P/BV at 33% with book value per share at $2171. Book value had grown from $1681 in 1998. Western Lime would have probably caught the eye of a value investor back in 2003. It would have also attracted the skeptic who would have said that the discount to book was permanent due to illiquidity or insider ownership or the way the stars aligned in October.
Western Lime's shares rose from $721 to around $6000 a share in 2008. I don't have details for the intermediate period, but they did eventually rise to book value and above. This is where things get interesting, the price languished for the next two years before jumping to $12,000 on the news they were going to be acquired. The company was acquired for $25,000 a share in March 2012. Even the person who purchased at $12,000 doubled their money!
Maybe Western Lime is an extreme case, over the past 9 years they grew at a 48% compounded rate due to the buyout. If the buyout never happened and they were still trading at $8000 that would be a 30% compounded growth rate.
Even a 30% annual rate of return seems incredibly high, but it's not and here's why. While Western Lime was only earning 8.72% on it's equity an investor buying at a 67% discount to book was earning 26% on their investment. Over the ensuing nine years Western Lime continued to execute as they had in the past. The investor buying at such an extreme discount was able to realize a consistently high rate of return. You don't need to buy a great business that compounds at high rates, just a consistent business at a considerable discount.
Here's the longest chart I could find for Western Lime, if anyone has a longer chart email me and I'll replace this one:
Edit: A reader sent me an updated chart, WLIC opened at $29 a share and sold for $25,000 a share, almost a 1,000 fold gain, truly incredible. A big thanks to the reader for the following chart.
Side note on finding unlisted stocks
A close followup to the first question I've received is how do I find these companies? There was a publication called the Walkers Manual that compiled unlisted and penny stocks into a book format yearly. The authors had a value bent, and a talent for finding peculiar and unusual stocks. The company that published the book went out of business sometime in the middle of the decade and the 2003 edition of the Unlisted Stocks manual is the latest copy.
I purchased both of my copies used on Amazon, and they're old library editions. The supply appears low on Amazon, but it was never that high to begin with. When I purchased my copies there were only a few used editions available.
If you can't locate a used copy for sale the next best place to look is the public library. I did a search in the library system near where I live and multiple locations have the Walker Manuals from differing years. You can't mark up a library copy (well maybe you can, no one else will probably ever look at these books), but the information is available.
A second way to find unlisted stocks is by screening at otcmarkets.com. They have a very basic screener where you can specify the type of listing. Use the tab "Caveat Emptor Securities" and then search for "No Information" "Limited" and "Grey Market" securities. These are the companies where you'll need to put in a lot of work to get information. Most of the time the companies are marginal, but every once in a while you find a Western Lime. You don't need to find too many Western Limes to do well for yourself.
Talk to Nate
Disclosure: Wish I would have owned Western Lime...