And a natural outgrowth of investing in smaller companies is investing in companies that aren’t listed on the Nasdaq or NYSE or don’t file with the SEC. Any true small-cap junkie is likely very familiar with the “filings and disclosures” tab at otcmarkets.com.
So, given how often I use their site and trade through their network, I thought I’d go ahead and check out the stock of the company that runs the OTC markets (named, conveniently enough, OTC Markets Group (OTCM)).
The first thing that jumped out at me about OTCM is no, they are not the cheapest priced stock on their exchange (I can’t tell you definitively who is, but I’ve covered some dang cheap ones!). But that doesn’t mean they're a bad value at all.
Let’s start with a simple little test. NYSE is getting acquired for between 10x and 11x EBITDA (on the higher end) by my quick calculations (side note: Urbana has enjoyed quite a run since then). OTCM is growing faster and would likely have the same percentage of synergies to a larger purchaser, so let’s just say it should be priced at 10x EBITDA. OTCM has done just under $10 million of EBITDA over the trailing 12 months, so let’s just make the math easy and say it would be worth $100 million to a strategic acquisition.
OTCM has some significant net cash on its balance sheet. They did just pay out a special dividend and quarterly dividend at year end that don’t show up on the balance sheet, so once we adjust for that they have over $10 million in cash with no debt.
Put it all together and OTCM would be worth $110 million in this very simple analysis. With under $11 million shares outstanding, that represents a target share price of $10 per share or so.
With shares trading in the $7.50 tp $8.00 per share range, you might think that’s not that big a discount. After all, that analysis included a “control” premium, and most value investors wouldn’t be too keen on pay 10x ebitda for any stock.
But I think there are other positives to this story too. Again, revenues are growing quickly here: They’ve pretty consistently grown over 10% year over year, and they seem set to do that again this year.
And there should be plenty of growth left, as I think there are nearly unlimited growth opportunities for them to tap into in the small cap stock world. Imagine what would happen if they could get every NYSE and Nasdaq firm with a market cap under $100 million to cut some costs and switch over to their market? That’s just one of the many growth opportunities I could see for them.
Best of all, insider ownership is high. The CEO is credited with turning them around and owns approximately 40% of shares outstanding. His interests are clearly aligned with shareholders, as we saw from the special dividend.
So yes, overall, there are tons of positives. However, I am a deep value investor, and this seems more along the line of “(very) solid company at a solid price)” than “mortgage the house, this is the steal of a lifetime” to me.
But a very interesting company to keep an eye on nonetheless!
Disclosure- Long RDI, ASFI