Over-the-Counter Stocks 101

OTC Stocks Can Be Bargain Buys

TL;DR

Over-the-counter stocks are securities that aren’t listed on major exchanges in the U.S. — like the NYSE or Nasdaq — and are instead traded via a broker-dealer network. They don’t get the attention they deserve despite being capable of providing investors with tremendous returns.

Unless you’re new to Earth, we’re sure you’ve heard of over-the-counter (OTC) drugs: medicines you can buy without a prescription. 

From allergy pills and eye drops to nasal sprays and ibuprofen, they’ve found a place in medicine cabinets across the world. 

But unlike OTC drugs, OTC stocks are generally lesser-known and often stigmatized in investing circles. That stigma, however, is largely unwarranted and getting to know why can open opportunities for your portfolio. 

Removing the Stigma

Stocks are often listed as OTC because the companies are small or, for some other reason, don’t meet the criteria to be listed on major exchanges. 

For example, being listed on the NYSE costs $250,000 and being listed on the Nasdaq costs $173,500 — price tags that are prohibitively expensive for some small companies. 

In other instances, OTC companies are well-established but simply don’t want to bother filing the requisite paperwork and undergoing the audits necessary for being listed on major exchanges. 

For some, that’s because doing so would have little to no impact on their reputation and growth. Take, for example, Volkswagen (VWAGY), the German automaker that got its start 87 years ago and is now a household name. 

Its stock is OTC. By no means are we endorsing VWAGY as an investment, particularly since it was founded by the German Labour Front, a Nazi organization, making it one of dozens of enormously successful companies with ties to the Holocaust

See also: Adidas, Allianz, Audi, Bayer, BMW, Bosch, Chanel, Chase, Deutsche Bank, Ford, General Motors, Hugo Boss, IBM, L’Oréal, Mercedes-Benz, Merck, Porsche, Puma, Shell, Siemens and a host of other companies that used the 21st century’s greatest atrocity to create fortunes.  

Nazi roots aside, Volkswagen shares never recovered from the company’s 2015 emissions scandal and are down -3.56% and -24% over the past six months and one year, respectively. The stock does pay a dividend currently yielding 4.85%, but that doesn’t offset the losses … or its fascist backstory. But to each their own. 

There are over 12,400 publicly traded companies that are available OTC. Importantly, these stocks are still subject to some SEC oversight, so even though they aren’t listed on major exchanges doesn’t mean they’re bypassing regulation. 

But before we provide an example of one that’s worthy of your attention, here are some things you should understand first … 

Lower Liquidity

Trading volume is an indicator of liquidity, or how quickly shares of a stock can be bought or sold without the stock price substantially changing.  

OTC stocks are infamous for having lower average daily trading volume (ADTV), or the number of shares of a particular equity traded within a day. That’s particularly true when comparing OTC stocks’ ADTV to those of their counterparts on major exchanges, and in part due to the nature of the transaction: 

Why’s that a problem? Lower liquidity can mean an inability to offload shares, which might be an issue after a weak earnings report or negative news coverage. It can also create a larger spread (the gap between an equity’s bid and ask prices).

Lastly, public information for these companies can be harder to come by. However, that’s changing as access to earnings for publicly traded companies of all sizes — listed on public exchanges or not — is now the norm rather than the exception. 

Fees

When you log into your brokerage and place an order for a company listed on a major exchange, there usually aren’t any commissions or fees. (And if there are, you might want to look for a new brokerage.) 

But OTC stocks carry buy and sell fees on nearly every major platform. For example, Schwab charges a flat fee of $6.95 to buy and sell OTC stocks. 

While $6.95 isn’t necessarily a dealbreaker for buy-and-hold investors, for more active traders, it can be a deterrent. 

One Promising Example

So while many OTC stocks have lower liquidity and all incur fees when trading them, that doesn’t mean there’s no place for them in investors’ portfolios. 

Foremost, they present enormous upside potential that is less frequently found in stocks listed on the major exchanges. 

Note: The riskier the asset, the greater the chances for outsized gains … and losses.

Additionally, OTC stocks are generally affordable (and often highly speculative). And while we would never endorse penny stocks at Rise & Hedge, there are companies trading OTC that have lengthy track records of positive earnings and sound executive leadership.   

One example is Bermuda-based BW Energy (BWEFF), an upstream oil and gas exploration company founded in 2016 that analysts at InvestorPlace say has the potential to provide 10x returns by 2028. 

BW Energy operates exploration sites in Brazil and Gabon. As of 2023, the company reported combined proven and contingent reserves of 580 million barrels. According to the company’s investor relations page, it expects production to double by 2027.

Profitable Company, Discounted Shares

In Q1 2024, the company had net production of ~27,300 barrels per day (bpd). And while that may not seem impressive to Big Oil, it stands out because it includes the first oil from BW Energy’s Hibiscus South site, which was discovered just five months prior. The company also began drilling its second well in Hibiscus South during Q1. 

Net production for that quarter was ~1.66 million barrels, or 18,260 bpd, up from just 5,400 bpd in Q1 2023, marking a 238% year-over-year increase

The company closed Q1 with a $120 million cash position. Why’s that important? It means BWEFF is already profitable, something that many companies that are much larger and get a lot more press have failed to do (e.g., Reddit, Lyft, Blue Apron, etc.). 

For the first quarter, BW Energy posted: 

  • $185 million in operating revenue (which is 184x greater than the former president’s clown car of an IPO, which saw Q1 revenue of just $770,500).
  • Pre-tax profit of $61.1 million.
  • And net profit of $47.4 million. 

Extrapolate those results across four quarters and the company’s on pace for $740 million in annual revenue, $189.6 million of which would be net profit in 2024.

Shares are up 13.5% so far this year and 12.55% over the past year. The stock is trading around $2.69/share despite a ridiculously cheap forecasted 12-month price-to-earnings ratio of 3.69 and estimated earnings per share growth of 58.07%.

Are we saying you should go out and buy shares right now? No. But we are saying that among the ~12,400 companies trading OTC, not all are worthless penny stocks. With some research, you can find the needle in the haystack.

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