Small-Cap Quality Stocks: OTC Markets Group

In September, Quality Compounding released a post titled “20 undervalued small cap quality stocks.”

It’s a really good starting point for small-cap quality stocks.

One stock, in particular, caught our eyes: OTC Markets Group (OTC:OTCM) — the operator of several over-the-counter exchanges and data providers.

Some background info: For US investors, many of the major stocks you trade are likely on the New York Stock Exchange or NASDAQ.

• Then there’s the over-the-counter (OTC) market — the wild west, where penny stocks run freely.
• OTC stocks are seen to be riskier — as listing on the OTC markets is much cheaper with fewer restrictions.

Popular trading platforms like Robinhood and Public don’t offer trading of OTC stocks. But there are certainly many hidden gems in the OTC market.

The market has also become increasingly popular among foreign firms — with major international companies like Volkswagen (OTC:VWAGY) and Tencent (OTC:TCEHY) listed here.

Foreign companies want access to US investors

In recent years, more and more foreign companies are listing in the US OTC markets — given the easy access to US investors. The number of retail investors holding OTC stocks has also grown.

Above is a list of the exchanges operated by OTC Markets Group and how listings have grown in the past five quarters.

This brings us back to OTC Markets Group — which provides the tech and services to list on the exchange and sells the market data.

• To list on the OTC Market Group’s exchanges, companies pay a one-time application fee and a recurring annual fee (we love recurring revenue!)
• OTC Markets Group is on the smaller side ($670M market cap), but the company packs a punch…

1/ OTC Markets Group is oozing profits. OTC is a well-run, highly efficient business with a 33.5% profit margin (last 12 months).

Since 2010, they’ve more than tripled their sales and increased their net profit margins from 11.3% to 33.6% in 2021. What are they doing with all that cash? Paying back shareholders…

2/ Strong historical returns. $OTCM gave investors a 180% total return (incl. dividends) over the past five years (23% compounded annually) — compared to 63% for the S&P 500 (10% compounded annually).

For each of the past eight years, $OTCM consistently paid out a special dividend — on top of their regular dividend. The combined dividend yield over the last 12 months was ~3.8%