WHAT ARE THE “PINK SHEETS”

The following article, was published by the Wall Street Journal on February 22, 2003 and answers the questions about Pink Sheets.

‘MORE BLUE CHIPS HIT THE PINK SHEETS
BY Jeffrey D. Opdyke

In the past year, some 300 companies have joined the Pink Sheets, now home to 3300 stocks. Some are troubled companies kicked off the New York Stock Exchange or the Nasdaq Stock Market. Others are new companies without the wherewithal to join the bigger exchanges. An estimated $75 million a day trades in Pink Sheet issues. That is still tiny compare to the $41 billion in trades averaged by the NYSE in December , but for many companies the Pink Sheets is the only place where you get a buy or Sell quote.

Now, Pink Sheet stocks are getting more scrutiny from some Wall Street pros who see unrecognized values here. Hill Thompson Magid, one of the larger market makers - meaning they pair buyers and sellers - in Pink Sheet names, is getting more and more calls from closed-end mutual funds and hedge funds that to invest in obscure companies with attractive valuations, says Fonzio, president of Hill Thompson.

The Pink Sheets, owned by a privately held New York company, Pink Sheets, LLC, has long been notorious for distressed companies and dubious penny stocks. But it is home to hundred of financially sound companies. Some old line firms like Anderson-Tully, a Memphis,, Tenn., forest Products Company that has been in business since 1889. In addition, some well known foreign companies, such as Switzerland’s NESTLE, SA trade in the Pink Sheets so they don’t have to meet the financial reporting requirements of the major exchanges in the U.S.

Still trading in the Pink Sheets adds a definite layer of risk for investors. Corporate financial information is unusually scarce, sometimes non-existent. Stocks may trade only a few times a month or not change hands for a year. Analyst research generally doesn’t exist, so investors must do their own homework. There is so little trading in some stocks that exiting from a position can be very difficult. In the case of troubled companies like WorldCom, the stock can move in excess of 100% in a day. To top it off, there is far less regulatory oversight of Pink Sheet stocks, meaning investors need to be especially vigilant for stock market scams.

For some market investors, however, it is that very lack of oversight that makes the Pink Sheets attractive. Because financial data and research are so scarce, Pink Sheet stock valuations can be more attractive than on the major exchanges, where thousands of investors and analysts pick apart each company. Investors “can find plenty of quality companies trading at less than 10 times earnings, half their book value, paying nice dividends and that have good management.” Says Andrew Berger, editor in chief and owner of Walters Manual of Unlisted Stocks, which publishes research on 500 little known publicly traded companies, many of them Pink Sheet Stocks.

Trading Pink Sheet stocks is best done through market makers like Koonce Securities, in Bethesda, Md., Robotti &Co in New York; or Pittsburgh’s E. E. POWELL & Co. All are well known in the business. Because few regulations exist regarding whose order must be filled first when two competing orders come in, it is generally best to go to a market maker that is routinely buy and selling in the Pink Sheets, as opposed to one that is there only occasionally.

Pinksheets.com is beginning to post selected companies quarterly and annual reports. Many companies, even though they don’t report to the SEC, post financial data on their own Web sites, or will send it if you call.

Many of the active shares on the Pink ‘Sheets fetch just pennies apiece and sometimes a fraction of a penny. Lifeline Biotechnologies recently traded more 25.23 million shares, landing in the top three among volume leaders for the day.

At the other end of the spectrum: Anderson-Tully, for which investors currently are bidding $175,000 a share because it has fewer than 500 shareholders... Anderson-Tully doesn’t file financial information with Securities and Exchange Commission. The company shares only financial information with shareholders. “We aren’t going to distribute the information publicly” to anyone who calls up and asks for it before they invest, explains Chip Dickinson, Anderson-Tully’s president.