Pink sheet companies have always fascinated me. It’s this large universe of mostly very crappy companies that virtually all investors will not touch with a barge pole. Rightly so for the most part. I’d say at least 95% of them are not even remotely interesting. Many are just shell companies with no operations. Others are being used as a vehicle for pump and dump schemes in a hot sector; medical marijuana companies are a recent example among these.
The companies in the remaining few percent of the pink sheet universe can be absolutely fascinating though and there are certainly some great bargains among those. The most mysterious ones are companies that do not publish financials at all. They have “gone dark”. Investors have different definitions for the term going dark. To me it means a company that is deregistered from the SEC and that does not publish financials on their website.
Every once in a while I stumbled upon one of these dark companies and thought it looked interesting. For it to qualify as interesting it has to trade at a share price that is more than just fractions of a penny, which disqualifies probably a few thousand companies right of the bat. The company also has to be active in an industry that seems legitimate and somewhat understandable. A few years ago I started buying a single share in some of the ones that fascinated me. My hope was that I would receive some financial information from these companies that allowed me to make a more informed investment decision.
One of these companies was Temco Service Industries which traded on the pink sheets with the ticker TMCO. Temco offers facility support services. They can offer janitorial services for office buildings, but also more specialized services for schools and colleges where bacterial and dust particle counts are being made and analyzed.
I originally bought my share for a total cost of $38. Unfortunately I did not receive any information from Temco in the time I owned it. So the share just sat in my account for about one year. A few weeks ago I noticed that the bid price for the stock had suddenly jumped up to more than $50. I checked Temco’s website and found out the company was being acquired by Atalian International, a privately owned company from France that is active in the same industry. I e-mailed the company for some financial details about this transaction, but received no reply.
Friday I was cashed out of my share at a price of $59.72. So I made a whopping $21.72 on this one, but 57% certainly sounds a lot better in this case, so let’s use that instead. 🙂
This post serves as an example both to illustrate that there is apparently value out there among those mysterious dark companies and that the way I’ve been going about it investing in them up until now is probably not the way to do it. I’ve just sat around passively hoping to catch one or two companies that voluntarily mailed their shareholders financial information, but I have not received anything from the dark companies that I own just one, or a few shares of.
Perhaps it is still worth doing it this way, because my sample size is very small. I now think though that if you want to find out financial information about these companies, you will need to really pursue it. You will need to contact management, often by phone and try to get them to send you information. I think it might not even be worth doing from Europe where I’m situated, because the management can just keep stonewalling you. American shareholders can be more effective and make a stronger demand for information. With them the management has to be at least a little worried that they will use the court system to make a demand to get access to financial information of the company.
I do wonder if shareholders can share financial information about dark companies with other shareholders. I know there are situations where shareholders have to to sign a non-disclosure agreement (NDA) before they even get financial information from the company. But in conventional situations where one simply knows more than the other? I think US based investors have a much better chance of getting information from the management of dark companies than I do as a European. So I would be interested in sharing information with a small, private US based investor about some dark companies if it is legal to do so. Anyone have an idea if investors are allowed to share financial information in this way?
I have never got the idea that a company is afraid of the courts as far disclosing information. Not that I have that much experience. I have not found that I have any advantage by being in the US. It seems to me that some companies and managements are just more willing to talk than others, and if they’re unwilling then you are just out of luck. I do agree that with these tiny dark companies you have to contact them for info, in some cases you can learn a lot that is not included in any report.
If they are not SEC filing then I don’t think they’re required to give out any info and I’ve been told as much by some. I’ve never been asked to sign an NDA. I have been told to keep all information to myself after interviewing management. I’ve also been promised over and over that more info is coming then it never comes (QDLC…). ADDC sends a report to shareholders but will not publish info anywhere as they want financials hidden from competitors.
I don’t know about legality but I’m inclined to say screw them. If you own shares then you’re an owner and should know all the info. But if you’ve signed an NDA which carries penalties then…
I’m always interested in sharing information
Thanks for sharing your experiences with these companies. Perhaps it is not a disadvantage to be outside of the US. I certainly could change my approach and try to speak with management more. It’s not something that really appeals to me, but it might be the only way to be successful in this area of the market.
I don’t really see a problem with sharing information personally, but I don’t want to go anywhere near the line if it is considered controversial somehow. If I’m a small private investor who just wants to passively own a few shares in a cheap business, I don’t think that companies would mind. I can see it could be different if they think you’re organizing shareholders and acting as a group to influence or change things at a company, but I’d just be a small passive owner. Obviously after signing an NDA it becomes a very different situation.
I don’t always talk to management but pretty often I do. Depends on the situation. Sometimes I’ll ask questions thinking there’s no way I’ll get a response and yet they answer. I have been surprised by how much they are willing to talk in some cases. And sometimes they just give a one word useless answer. You never know until you try. Many times I come up with a list of questions as I’m researching some stock and I’ll email that out to them
I’ve had a similar trouble except I always call them. I am thinking of getting more and more annoying and calling them every day until they just give me a report to make me go away.
I wouldn’t ever feel bad for causing a stir by asking for information. If you don’t want people meddling in your affairs then you should have stayed private. Once you start raising capital you have people to answer to. But they get away with it because they know it is not worthwhile for small shareholders to spend the money fighting them.
I’m ranting a little because I am tired of the attitudes on some of these guys. But I really believe we are the ones in the right here. I really liked seeing people band together like they did on solitron.
Love the rant. They also get away with it because the SEC lets them
You’re right, they do have the obligation to inform their shareholders and we should not feel bad for asking information. That’s the consequence of being publicly traded. These companies are not “private” even though that is what the most secretive companies often like to call themselves.
I’m not sure what really can be done when you have a company that refuses to provide information. I think some of these people will only respond to (the threat of) a court ruling and like you said, that’s simply not a path that small shareholders are able to take.
I also liked what happened at Solitron and it was a victory for shareholders. It also showed how tough it is to get someone (Saraf) to do something that the company is clearly required to do (hold an annual meeting) and to get them to act more shareholder friendly in the future. It took non-stop pressure from activists to get to where we are today and still much is left to be done. And this was a company that was filing with the SEC during this time, so at least it was pretty clear that there was value to pursue in the first place.
There is a lot of valuable information that can be found, I’m sure. After all, the publisher of Walkers Manual of Unlisted stock was able to publish a book of a few hundred pages that also included the financials of many dark companies. I do think that they exchanged information with other people who were experts in this space.
It just takes a more active approach and more creative thinking, like Nate did with the information he gained from a Belgian subsidiary.
Btw: here are two very old, but cool articles about investing in pink sheet companies:
* Hunting for Gold in the ‘Pink Sheets’ (1987): http://www.nytimes.com/1987/09/06/business/investing-hunting-for-gold-in-the-pink-sheets.html
* Going for the Green in the Pink Sheets (1996): http://www.businessweek.com/1996/34/b3489114.htm
The first article includes a nice story about Lawrence Goldstein investing in Belridge Oil in the 1970’s. Charlie Munger also made a lot of money on this one, I believe.
I’ve actually had some of them tell me they were private, or that they sold out to 3m or something like that, when I am sitting there holding shares, or watching them trade on otcmarkets. It’s almost like something out of Monty Python.
I looked into this one a while ago, held shares as well I believe, maybe a grand or two worth.
There was a backdoor to their financials. They had a Belgian subsidiary and I found that all companies in Belgium are required by law to file their financials with a central government group. I was able to pull the subsidiary’s financials from this site. The issue was the financials were in Dutch, and I can’t read Dutch. I knew someone who could and they gave me a very rough translation of the financials, enough to know what they were.
I held for a while then ended up selling to purchase something else. The strategy was to wait for the CEO to die, he was in his mid-90s. Nothing ever happened and I gave up. Looks like there was value there after all. I think I purchased in the $30s, not sure if that’s accurate or not. Would have been a double in under five years, a nice return.
Hi Nate,
Fascinating to hear about the Belgian subsidiary! I probably should have dug deeper on this one, but I would have never come up with the idea of checking into a Belgian sub. That was a great insight.
I understand that you eventually gave up on this one. There are usually other opportunities out there and this one could have taken a lot longer to work out. Still, it’s good to find out that you were fishing in the right pond and that there really was value.
Great blog.
What made Temco pop out in your screening ?
Lawrence Goldstein has a blog and answers back to e-mails.
Thanks Danton.
There is no real screener for finding companies like this, because the financials are not available. A few years ago I just looked at a long list of companies on the pink sheets and went through them A-Z. Among these were a number of dark companies that looked interesting. Temco had a share price above $30 and a few trades that were executed around those levels. That and their website suggested that this was a real company with a substantial operation and made me want to learn more about their business.
Can you tell me where Goldstein blogs? I can’t find his blog with Google.
It’s called overlookedorignored.net
If you want to be driven batty by obstructing management, check out this lawsuit:
http://www.potteranderson.com/delawarecase-484.html