Stockbroker Jordan Belfort made millions in the 1990s by hard-selling worthless stocks to gullible clients. He became known as the Wolf of Wall Street for a scam that hyped the prospects of companies quoted on America’s over-the-counter (OTC) markets.
More than half of the US stock market universe is made up of OTC stocks, but many of them are micro caps that are financially stricken or have broken business models. It’s a market that demands great care on the part of the investor, but one that can produce spectacular results. After all, Wal-mart claims to have been an OTC stock in 1970 before going on to become one of America’s biggest and best known companies.
Applying rules to OTC stocks
In Scorsese’s recent blockbuster film The Wolf of Wall Street, Leonardo di Caprio (playing Belfort) uses a story driven sales pitch to lure his victims into a stock called ‘Aerotyne International’, describing the company as “a cutting-edge tech firm out of the Midwest, awaiting imminent patent approval on a new generation of radar equipment”. The scene cut to a tiny ramshackle wooden shed as Aerotyne’s only asset with predictable consequences for investors.
To avoid the fate that has awaited so many OTC investors, it’s best to check that any story driven investment pitch is backed up by a genuine business and sound fundamentals. These days, with the growing availability of good quality financial information on the web, it’s much easier to ensure that companies have a genuine financial history, and the recent launch of Stockopedia’s US Edition provides possibly the best X-Ray into US OTC stock fundamentals available on the web.
We’ve decided to dig a bit deeper to pan for OTC gold by taking the opposite approach to Jordan Belfort. Instead of starting with the story, we’ve started with the numbers by screening the OTC Market. Instead of building a screen with lots of rules, we’ve relied on the Stockopedia StockRank which includes a large array of the most effective Value, Quality and Momentum metrics. We’ve screened with the following rules:
- Every stock must have a StockRank above 80.
- Every stock must qualify for at least 1 GuruScreen.
- Every stock must have a minimum $20m market cap.
The following OTC stocks listed in Table 1 are the top qualifying stocks ranked by the StockRanks.
Table 1 - Screen available
