Below the Radar: A How-to Guide to Pink Sheet Profit

By Steve Waters

Most investors have heard the term “pink sheets” as a reference to stocks. But how many know what they are. Pink sheets are companies that are traded over-the-counter and that aren’t part of any major stock exchange. But that doesn’t mean they are any less valuable than traditional stocks, exchange-traded funds (ETFs) or mutual funds.

In fact, expanding your portfolio with pink sheet companies can be extremely lucrative, but you have to make the right moves to rake in the big profits.

Let me explain…

Pink Sheet Basics

Pink sheets began as listings on an electronic database provided by Pink Sheets LLC, and are so called because the quotes were originally printed on pink sheets of paper.

Companies that are involved in this kind of over-the-counter trading fall just outside of the many regulations that restrict the activities of the major stock exchanges. That means they don’t adhere to many of the time-consuming accounting and finance regulations of the U.S. Securities and Exchange Commission or the National Association of Securities Dealers (NASD), which helps the companies run more efficiently.

Also, some companies list in the pink sheets as a first step to getting listed on a bigger exchange. And that alone can result in some price appreciation, as it may attract buyers that were previously wary.

However, first be advised that a transparency can also leave investors in the dark. These companies do not have to disclose as much about their business, and there is no one knocking on their door asking to see their figures.

Of course, that does not mean they are something to be completely avoided. The fact that companies in the pink sheets are not regulated by any major institutions can be nerve-racking to some, but it is overly cautious to think of this kind of trading as the “Wild Wild West” of the financial world. Keep in mind that fraudulent misrepresentation of financials is a Federal offense.

Also, in the past year, Pink Sheets LLC created a new classification system to help investors assess the legitimacy of the companies in their roster. These classifications range from the highest, “PremierOX” – which are priced at least $1 per share and meet the requirements of the major exchanges – to the lowest, “Caveat Emptor” (literally “let the buyer beware” in Latin). The complete hierarchy can be found here at the Pink Sheets Web site.

The problem with these stocks is simply that they are not badgered by any institutions to provide financial data on a regular basis. Instead, a wise investor who knows not to jump into shallow waters headfirst must approach them.

Despite not being obligated to, some of these companies still offer limited information on the Pink Sheets Web site. This information can be very useful to draw on as you research companies you’re interested in.

The next step is to request information directly from any company you might be interested in buying. Whether by phone or email, get in touch with the company and find out any information they can send you, whether it be about their finances, their products or even the state they believe their nation to be in (as many of these companies are overseas). Risk assessments, future opportunities – anything you need to know to be sure of a company’s potential.

As a side note, some of these companies may not be very forthcoming with their information, and have even been reported to be hostile with researchers. Be wary of companies that will not consider treating the interests of their minority shareholders as their own.

Buy and Hold

Once you have thoroughly researched your stock of choice and purchased it through your broker or online, be prepared to treat it as a long-term investment. Because these stocks are smaller companies and are not constantly watched by analysts and regulators, they can sometimes go days without even a single share changing hands.

This will no doubt make some of the nail-biters out there anxious, because they won’t be able to check their favorite stock at every smoke break, but most intelligent investors find it liberating to be able to ignore the roller-coaster ride that is the short-term market and focus on growth potential over the course of a company’s natural life.

Now that we’ve given you the know-how to get started with pink sheet stocks, take the time to explore and research them carefully before you buy. And make sure you’re prepared before you decide on a purchase.

Source: Below the Radar: A How-to Guide to Pink Sheet Profit

That’s why here at Money Morning we’re more interested incompanies that can secure a lot of smaller contracts on a consistent basis – and that can transform those deals into predictable, double-digit growth.

We refer to these modest-contract specialists as the “Masters of the Small Bid.”

Let me explain…

As we’ve stated, the companies we’re targeting aren’t characterized by headline-grabbing mega-contract wins, but by their proven ability to land smaller, more-stable deals. You see, by spreading their risk across many smaller deals rather than just swinging from the heels every time, the companies we follow are able to generate a consistent stream of earnings – despite a slowing economy, a wrenching credit-crisis and damaged investor confidence.

In short, our “masters” have kept themselves in front of paying customers at a time when other firms are simply worried about having customers.

Let’s look at several strong examples.

A Sample of Strong-Bid Masters

It’s no coincidence that our first example – defense-contractor and aerospace expert Lockheed Martin Corp. (LMT) – has been around for decades, and is a proven survivor. Remembered as the designer of the P-38 Lightning fighter of World War II fame – an aircraft so deadly that Nazi leaders ruefully dubbed the twin-boomed airplane “The Fork-Tailed Devil” – Lockheed Corp. went on to build the graceful Lockheed Constellation airliner in the 1950s and the cutting-edge F-117A Nighthawk Stealth Fighter in the 1980s.

A disastrous foray into commercial jetliners – in which only 250 airplanes were sold, even though the program lasted from 1968 until 1984 – would have likely bankrupted many companies. But Lockheed’s been a survivor. Indeed, back in the 1990s, to keep pace with a wave of defense-sector consolidations that created a smaller group of bigger players, Lockheed linked up with Martin Marietta Corp. to form Lockheed Martin.

Lockheed Martin re-established its fame with the so-called “Skunk Works” advanced-technology unit, and even today remains a defense-sector heavyweight. But it’s also a Master of the Small Bid. For proof, just look at some recent deals.

Lockheed roared into April, landing a $50 million contract for the U.S. Navy on April 1, and a $234 million Air Force contract on April 2. A week later, the company landed a deal a day for four straight days, in the process rolling up $725 million in total business from the U.S. Army, the Turkish military, and Japan’s Mitsubishi Heavy Industries Ltd.

The rest of the month saw still more action as the Navy signed on Lockheed for a one-year, $15.5-million contract for continued program management and engineering services for the United Kingdom’s Trident II D5 Fleet Ballistic Missile (FBM) program. The company closed the month in a decisive manner with two more major deals on April 30. The National Aeronautics and Space Administration (NASA) signed a $39.5 million contract modification with Lockheed Martin Space Systems to implement an employee-retention program, while the Navy supplied a contract boost worth up to $190 million to supply tooling and special test equipment for its new F-35 Joint Strike Fighter.

Not a bad month’s work. And it’s certainly representative of how Lockheed generates a predictable earnings stream. Because of deals such as these, the company’s share price rose nearly 8% in the month of April alone. In May we’ve been seeing even more deals, and the stock is advancing again.

Clearly, small deals can have a big impact on a company’s bottom line.

The Gamer That Doesn’t Play Games

At a time when other gamers are worrying about the next best thing, Japan-based Konami Corp. (ADR: KNM) retooled one of their most successful releases, Metal Gear Solid, adapted it for mobile phones, and then built up a lot of buzz as they pushed it out to customers of the Verizon Wireless unit of Verizon Communications Inc. (VZ).

Not only did Konami save a lot of money because it wasn’t developing a new platform from scratch, it also kept its audience smaller to produce bigger returns per person.

While the pumped-up adolescent males soak up this stealth shooter game, Konami hasn’t forgotten to take care of the over-moneyed and under-served teenage-girl market with its recent new game, “Diary Girl.” The Nintendo Co. Ltd. (OTC ADR: NTDOY) Nintendo DS game provides girls of all ages the ability to interact with friends, while also organizing a calendar and address book in their own, password-protected electronic journal.

A month ago, Konami announced an agreement with Win Systems International Holdings Inc., to use Konami content in certain of Win’s pending lottery and gaming projects in Europe and Latin America.

Deals like this have caused Konami’s shares to seek higher ground. With a 19% gain over the past three months, the only thing that could help this company even more is if it had a highly awaited Sony Corp. (ADR: SNE) PlayStation 3 game coming in the near future – which just happens to be the case. Metal Gear Solid 4, the highly awaited PlayStation 3 game, will debut June 12.