How I find companies to invest in

I don’t like to invest in stuff other investors are in. I’m a contrarian by heart. Do the opposite of the crowd to get different results.

This contrarian nature has led me to invest in unusual investments, illiquid stocks, and hated industries most investors won’t touch.

I have searched far and wide through the dark corners of the internet to find these companies. Because when you invest in stocks no one else is looking at you have to do unusual things to find your investment ideas.

I have been in the game for over a decade, so I have a pretty in depth “researched” list of stocks I have already done a full due diligence process on. So, when a stock that I have already researched falls to a price level I think is attractive I don’t have to do all the original research all over again. Tighten up the models and do some “maintenance” due diligence and call it a day.

This research list speeds up the process to find these unusual and obscure investments and is less time consuming than when I first started.

I also have a great network of other successful investors that I respect. I get top notch investors pitching me ideas all the time. When a great investor pitches you a top idea its usually worth it to do some research on that name.

But when your research list isn’t spitting out great ideas and you haven’t heard of a good idea from an investor you respect, sometimes it’s time to go back to the basics.

In this letter I’m going to show you one of my favorite ways to find really obscure and unusual stock ideas. But before that, a word from our sponsor….

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Let’s get back at it.

Look, if you want outsized returns, you can’t be investing in the same stocks everyone else is investing in. If you are buying stocks in the S&P 500 you are probably just going to have the same long-term results that the S&P 500 has. So if you want to potentially outperform the S&P 500 its time to start searching in the dark corners of the markets. Welcome to OTC Land.

What is an OTC stock?

An OTC stock is an over-the-counter listing of a stock. These stocks are highly obscure, illiquid, sometimes fraudulent, extremely dark, and hard to find information on. Are you still interested?

Investors can find the best information on OTC companies on the OTC Markets website.

So why do I like searching through the OTC Markets for investments? Because literally no one on Wall Street does this.

Most of these companies are so illiquid and dark that it would be impossible for anyone managing more than $10 million to buy a meaningful position. There isn’t much information on these companies so if you have to do original research to get an edge. And combing through the list of crappy companies on here takes some serious time.

Let me be clear.

90% of the companies on the OTC Market are absolute shitcos. Most of these companies are non-revenue producing companies that will eventually go to zero. So, to find the really interesting ones that are not total zeroes, you have to do some digging.

And let me be clear, not all these companies will yield great results. But when you find one that no one is looking at, its possible to do very well. As an example, I found Destination XL (“DXLG”) while scrounging around the OTC lists. That stock went from $1.00/share to now over $5/share in less than one quarter.

Here’s how I found DXLG and other stocks on the OTC Markets.

First I go to their stock screener.

When I’m on the stock screener I filter by OTCQX and OTCQB. The OTCQX and OTCQB are stocks that provide their financials and are listed.

After that I filter by type of security. I basically only focus on common stocks so I am only going to click on that.

Then I filter by country. Since I only invest in U.S. listed stocks I filter only by stocks in the United States.

After all of these filters I now have a list of 516 stocks from the original list of 17,148 to search for. At the top left in the screen you can download this data into an excel file.

The excel file looks something like this.

To filter down this list I like to sort by price. In OTC land the smallest priced companies are typically the worst and the highest priced ones sometimes are the best value stocks out there. Here is a list of the stocks with the highest priced stocks first.

Let’s take a look at the first one one the list, Farmers & Merchants Bank of Long Beach (“FMBL”). This one is pretty interesting because the stock price is $8,175/share.

From just a quick look, FMBL is a small community bank in Long Beach, CA. They are trading under book value (great value metric for a bank) and seem to make decent money.

There is also some research on this company on Seeking Alpha titled: Farmers & Merchants Bank of Long Beach Is Significantly Undervalued.

According to that Seeking Alpha article they state that FMBL is one of the most undervalued banks but also consistently profitable and steady ROA over a full economic cycle.

So far so good. In a couple of steps we have found an undervalued bank that seems higher quality. Let’s try something else.

Another way I have found companies in the past is by just going through their names one by one. If a company has anything to do with bitcoin or biotech I automatically skip. If I see a company with an interesting name I like to dig in. Here is an example.

Nobility Homes (“NOBH”) seems like a cool name, especially since the housing market is booming. When looking at their financials it looks like they have over $30 million in cash, no debt and an enterprise value of only $70 million. Even better they make money, and a lot of it. What do they do? They manufacture and sell mobile homes in Florida.

With $6-7 million in operating profit and an enterprise value of $70 million you are buying this business for around 10x. Not too bad given that peers are trading around double that valuation. Definitely one I will have to look into sometime.

One final way I like to sort these stocks out is by volume of shares traded. A lot of these stocks are so illiquid it can be a pain to buy any shares. So if you sort by volume traded you can instantly find the less illiquid ones that other investors are interested in. Scrolling down through the list I came upon Meritage Hospitality Group Inc. (“MHGU”)

According to MHGU’s website they own and operate Wendy’s franchise restaurants. Even better, they have seen a crazy amount of growth in the past ten years that has translated to meaningful EBITDA contributions.

With a market cap of only $143 million and enterprise value of only $279 million, this looks like a high quality company I am probably going to dig into.

So there you have it. Three ways to find interesting stocks to research while using the tools on the OTC Markets.

Let me know if you guys find anything interesting or if I should be looking at any great stocks.

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