OTCM - OTC Markets Group

[Guest Schwab711]

What growth are you projecting for the other companies if this is 6% long term?

 

To add, your paper glosses over a 33% price increase to their best customers! They just raised prices in 2014! Yet they have more listed now then at 2015 year-end. Could you imagine your reaction if you got a 10th of that at the businesses you mentioned?

[60North Investments]

What growth are you projecting for the other companies if this is 6% long term?

 

To add, your paper glosses over a 33% price increase to their best customers! They just raised prices in 2014! Yet they have more listed now then at 2015 year-end. Could you imagine your reaction if you got a 10th of that at the businesses you mentioned?

 

The ones I just mentioned are all quite different from OTCM, in terms of what kind of companies they are and how I view them as investments. For example Texhong can probably grow at a nice clip for many years, while I'm not even that interested in Future Bright's or Wilhelmsen's growth or lack of it as the cases rely on other things.

 

I agree that I should've brought that up more clearly and discussed it more than the sentence or two that I did. That price raise will provide nice growth in corporate services even if the other two segments fail to grow materially.

 

How do you view the risk of someone else coming to OTCM's bread and butter? As I've mentioned, I have no clue for example of the possibility that the SEC might allow non-SEC registered companies to be listed on NYSE. Thoughts? What makes you comfortable that these guys won't be disrupted?

[frommi]

 

The ones I just mentioned are all quite different from OTCM, in terms of what kind of companies they are and how I view them as investments. For example Texhong can probably grow at a nice clip for many years, while I'm not even that interested in Future Bright's or Wilhelmsen's growth or lack of it as the cases rely on other things.

 

I learned the hard way that i will never again put money into something like Texhong again that has no moat, pricing power or customer lock-in and is a clear commodity business regardless of a low P/E multiple or P/B multiple. A DCF that goes 5 or 10 years out on such a business is just a waste of time.

The only exception is when it is a true netnet or NCAV stock, but i think its the wrong time for these stocks so its not my hunting ground at the moment. (Maybe wrong on the timing thing here)

 

How do you view the risk of someone else coming to OTCM's bread and butter? As I've mentioned, I have no clue for example of the possibility that the SEC might allow non-SEC registered companies to be listed on NYSE. Thoughts? What makes you comfortable that these guys won't be disrupted?

 

While i can imagine that the SEC does that, whats the incentive for such a move? The SEC surely wants more regulation not less and the market itself is too small for the NYSE at the moment to be of interest.

[60North Investments]

How do you view the risk of someone else coming to OTCM's bread and butter? As I've mentioned, I have no clue for example of the possibility that the SEC might allow non-SEC registered companies to be listed on NYSE. Thoughts? What makes you comfortable that these guys won't be disrupted?

 

While i can imagine that the SEC does that, whats the incentive for such a move? The SEC surely wants more regulation not less and the market itself is too small for the NYSE at the moment to be of interest.

 

Not to derail this thread, I'll DM you and perhaps we can continue discussion of other things over there?

 

I could imagine the big exchanges wanting to have the large non-U.S. companies on their lists that are not SEC-registered. Could they lobby it? Don't know. Bigger threat I think is if someone pursued OTCM's market space. Is OTCM far enough to have a durable advantage due to being the biggest, only relevant player in the space now? AFAIK they don't have any technological edge, so it's mostly that they "own" the OTC space in the U.S. and no one is really competing with them. Is that going to effectively guard them against others trying to enter the space? Also, I imagine more and more of future growth should come from start-ups. Will OTCM be the one winning in that space, or is someone else going to capture it?

 

For better informed people these questions may be no-brainers, for me they're currently questions that are really putting down my appetite to pay what seems like full price for the company.

[60North Investments]

Q1 out and a decent set of results I thought. Notes I wrote down: Link ATS hurt by -24% trading volumes, consolidation of BDs. Market Data +30% non-pro users YoY (interestingly no rev growth). CS 44% growth entirely due to QB sales going from $1m to $2.3m (40% increase in corporate clients). Net sales +11%. Opex +8%, due mostly to comp & IT.

[Jurgis]

This shouldn't affect OTCM much, but just for general info: Fido no longer allows opening positions in OTC Pink "No Info" stocks:

 

Effective on March 29, 2016, National Financial will no longer permit correspondents or their customers to effect new purchases of additional categories of securities. Specifically, the current prohibition regarding Caveat Emptor securities is being extended to cover OTC Pink-No Information and certain Grey Market securities. NFS is taking this action as a result of its regular review of internal policies in an effort to ensure that they are consistent with evolving industry standards and regulatory requirements.

[frommi]

This shouldn't affect OTCM much, but just for general info: Fido no longer allows opening positions in OTC Pink "No Info" stocks:

 

Effective on March 29, 2016, National Financial will no longer permit correspondents or their customers to effect new purchases of additional categories of securities. Specifically, the current prohibition regarding Caveat Emptor securities is being extended to cover OTC Pink-No Information and certain Grey Market securities. NFS is taking this action as a result of its regular review of internal policies in an effort to ensure that they are consistent with evolving industry standards and regulatory requirements.

 

Thanks, i have seen this with other brokers, too. But ask yourself would you stop trading OTC stocks or simply switch over to another broker? This is a good argument to be long IBKR. :)

[Jurgis]

Thanks, i have seen this with other brokers, too. But ask yourself would you stop trading OTC stocks or simply switch over to another broker? This is a good argument to be long IBKR. :)

 

First of all OTC No Info trading is likely very small percentage of OTCM revenues. So far I know only two nanocap stocks that are OTC No Info. Both also have negligible volumes.

 

Second, I will not switch to IBKR for any reason. I've already said multiple times that IBKR is really crappy broker with brain damaged user interface and no care for customers. Avoid.

 

So, yeah, I just won't buy OTC No Info stocks. If I cared enough, I'd email the company to tell them that they are screwing their shareholders by providing no info. But so far I don't think I care enough.

[Guest Schwab711]

Somewhat related, but I feel like Mr. Coulson has been preparing for this since ~2014 with OTCQB. OTCM's strategy to create OTCQB (and enhance OTCQX) seems brilliant to me. As more companies up-list within the OTC markets, the companies left on the OTCBB/Pink sheets are further associated with awful companies (in general, to put it politely). As an example, just in the past week I believe 25 companies up-listed to the OTCQB. Up-listing within the OTC is becoming an everyday occurrence. This continues the trend of OTCM insulating itself from a potential revival of the Proposal QCF.

 

I think Jurgis is right. This is a trivial loss of revenue. Just another example of killing the OTC markets and forcing companies towards the VC or P-E route.

[Jurgis]

Yeah, any extra SEC reporting / regulative costs for exchange listed companies make moving to OTC (OTCQB or OTCQX) more attractive. I don't know how many companies choose VC/P-E vs. OTC, but OTCM is definitely trying to get some of that business. Also don't know if the trend has (mostly) run its course or if we have way more in front. This could make OTCM bull/bear cases. :)

 

The push from the bottom (Pink -> OTCQB or OTCQX) is more pure money for OTCM. Maybe not huge, but there.

[Guest Schwab711]

Yeah, any extra SEC reporting / regulative costs for exchange listed companies make moving to OTC (OTCQB or OTCQX) more attractive. I don't know how many companies choose VC/P-E vs. OTC, but OTCM is definitely trying to get some of that business. Also don't know if the trend has (mostly) run its course or if we have way more in front. This could make OTCM bull/bear cases. :)

 

The push from the bottom (Pink -> OTCQB or OTCQX) is more pure money for OTCM. Maybe not huge, but there.

 

Just several thousand more companies have to choose whether to go dark or up-list. Look at the growth of OTCQB. There's a pretty large runway if you look at potential up-listers by revenue (not the greater method but it'll do). OTCBB/Pink will be extinct at some point, if the current trends continue.

 

I believe KC Life Insurance was one of the few that choose to down-list to OTCQX (which is nearly equivalent, regulatory-wise, to NASDAQ). I don't think it makes sense for a lot of NYSE/NASDAQ small caps to be on a NMS exchange anymore. OTCM is going to be significantly larger in 5-10 years, imo.

[Guest Schwab711]

http://www.businesswire.com/news/home/20160617005897/en/J.G.-Wentworth-Company%C2%AE-Trading-OTCQX-Market-Ticker

 

OTCQX/OTCQB are by far the best value for companies with market caps between $10m and $1B. They have tremendous pricing power based on the value gap between them and NASDAQ. It looks like OTCM is going to blow results out of the water this year (again).

[Guest Schwab711]

We continue to sharpen our focus on retaining OTCQB companies and expanding the new sales pipeline for both OTCQX and OTCQB. For OTCQX, we’ve raised the annual fee for new companies this year to $20,000 a year. Existing companies that comes in at the beginning of next year. So what it shows is the new fees are sticking in new sales because we’re not seeing the fee as a blocker. We’ve added value across and we’re looking by the end of the year when the fees kick in, we will have added more value for OTCQX companies because we want to be less than half the cost of NASDAQ’s lowest fee and that’s a real competitive price to be in, but deliver most of the value up for public trading with a lot less of the pain is one of the key pieces we added with Morningstar research reports. And it’s a data driven research model and it shows stars based on valuation and we show the report and the stars for OTCQX companies and for OTCQB companies we show the stars and the report is an optional upgrade service.

 

http://seekingalpha.com/article/3997081-otc-markets-groups-otcm-ceo-cromwell-coulson-q2-2016-results-earnings-call-transcript?part=single

 

“The single most important decision in evaluating a business is pricing power,” Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel last week. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

 

-WEB

[Jurgis]

Cromwell Coulson talks good talk, but I'm somewhat concerned about the numbers in Table 1 on page 11 of the quarterly. Pretty much everything is down Y-over-Y. OTCQX number of securities is the only one number up significantly y-o-y. I guess it's possible to argue that OTCQB and Pinks will continue to convert to OTCQX at rapid clip, but it's not necessarily the consistent direction.

 

And unlike See's candies OTCM can't raise prices without limit (well, See's can't either): they will start losing companies to national exchanges if they double the prices again.

 

I guess the Blue Sky future is the optionality of this company. Without it, it seems to be a cash cow that could get squeezed.

 

Disclosure: I own some OTCM.

[Guest Schwab711]

The push from the bottom (Pink -> OTCQB or OTCQX) is more pure money for OTCM. Maybe not huge, but there.

 

https://seekingalpha.com/pr/16820687-otc-markets-group-announces-first-quarter-2017-financial-results

 

It is really interesting to see the magnitude of this shift.

 

Quarter Summary:

* OTC Link revenues slightly down (as expected since no info trading was allowed at most brokers during 1Q16)

* Market Data Licensing up slightly but this is a fairly mature business line

* Corporate Services up 14% y/y (slightly higher than I had expected - Good to see listings stabilize for the moment)

 

As a result, net revenue up 5% y/y, operating expenses up 2% y/y, and operating income up 12% y/y. There's obviously some variability in these numbers but I think this should be the overall trend over the next 5 years or so. Operating margins could get into the high-30s eventually.

 

My only complaint is I wish they would change the label of "Adjusted diluted earnings per share" to Adjusted EBITDA.

 

It's nice to see listings at least momentarily stabilize. Resource companies usually make up a large portion of listings so any sustained pickup in energy/commodity prices should help. It will be interesting to see the next quarterly in/out report of listings to see if many AIM-listed companies have moved to OTCQX/B or if there are other trends out there.

[Jurgis]

Crickets on this thread.  ;D

 

I'm wondering if OTCM is just Cromwell Coulson's cash cow. I.e. pay divvie from cash flow and live on the income happily ever after.

 

OTOH, it's tough to say what he should do. Diworsification is not advisable and the niche is pretty fully served. You'd have to have some creative ideas on how to grow this without diworsifying...

[Jurgis]

Looking at http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/best-broker-for-otc-stocks-i-need-a-recomendation/10/ ... it seems that on one hand this may benefit OTCM if companies continue to switch to OTCQX. On the other hand it may hurt it if the broker no-trades goes past no-info stocks.

[Guest Schwab711]

I almost posted this the other day Jurgis. Looking back, I was just a tad bit over-optimistic on the pace of this trend  8).

[Jurgis]

I almost posted this the other day Jurgis. Looking back, I was just a tad bit over-optimistic on the pace of this trend  8).

 

Still another good pick of yours.  8)

[My Own Personal Hedge Fun]

Looking at http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/best-broker-for-otc-stocks-i-need-a-recomendation/10/ ... it seems that on one hand this may benefit OTCM if companies continue to switch to OTCQX. On the other hand it may hurt it if the broker no-trades goes past no-info stocks.

 

Brokers don't want to limit too much trading. They're just looking for an easy way to avoid liability, and they pay OTCM for the "no buy" lists so OTCM is making money either way.

 

I'm starting to see where one could play the short-term game on this one (inside of a tax advantaged account) buying on dips such as the current one (I just bought some yesterday) and selling after it runs up a bit. But I do have a core holding and OTCM is one my favorite buy-and-holds.

 

Part of my personal thesis is that over the coming years more companies will issue stock through Reg A+ filings and a good number of those securities will trade OTC, or OTCM could make some acquisitions in the Reg A+ space (Seed Invest comes to mind, or one of the real estate crowdfunding marketplaces). I'm not counting on anything there, but I see the potential.

 

Most of their trading volume comes from large cap non-US securities and marijuana. The marijuana stocks will eventually peeter out. But it seems reasonable to expect a steady growth of revenue as more companies in India, China, Africa, etc. go public and start trading OTC. That could be an overlooked source of growth, and OTCM gets that automatically by just doing what they already do.