The OTC market is home to a lot of sketchy penny stocks. But in the middle of all of the OTC “stinky pinkies,” Fannie Mae (FNMA), Computer Services, Inc. (CSVI) and Kansas City Life Insurance Co (KCLI) offer investors legitimate long-term investment opportunities.
The OTC market is filled with ADRs of foreign companies that don’t want to hassle with listings on major U.S. exchanges. There are also plenty of U.S. companies with suspect business operations traded on the OTC market. But FNMA, CSVI and KCLI are far from the typical OTC stocks.
Fannie Mae (FNMA)
FNMA and cousin Freddie Mac (FMCC) are perhaps the most controversial OTC investments out there today. For those with short memories, FNMA and FMCC were once giants of the U.S. big boards, pulling in billions of dollars of profit by packaging and selling mortgage-backed securities prior to the Financial Crisis. When subprime mortgage borrowers started defaulting on their payments, FNMA and FMCC were screwed.
The U.S. Treasury initially stepped in and took control of the two entities, requiring both FNMA and FMCC to issue $1 billion in preferred shares to the Treasury that paid 10% annual dividends.
Once Fannie and Freddie returned to profitability in 2012, however, the Treasury amended the terms of the agreement. From that point forward, the Treasury forced FNMA and FMCC to fork over 100% of their annual earnings.
Shareholders have challenged the legality of this “net worth sweep,” claiming that the government’s amendment to the original terms was illegal.
High-profile investors like Bill Ackman and Whitney Tilson are convinced that the government seizure of FNMA will eventually be overturned in the courts, producing huge potential upside for shareholders. This week, Tilson even named FNMA one of his two favorite investing ideas.
Computer Services (CSVI)
FNMA is a unique investment opportunity that hinges on a legal decision. CSVI is simply a successful U.S. company with a 50-year business record and a stock that happens to trade on the OTC market. The company provides technology solutions and customer service to financial institutions and other companies nationwide. CSVI reported $27.8 million in income in 2015 and $221.3 million in revenue. The stock even pays a generous 2.7% dividend, a rarity for an OTC stock.
With this kind of performance, CSVI has understandably drawn the attention of some high-profile investors. In fact, CSVI is currently 10% institutionally-owned by names like RE Advisers Corp (585,000 shares) and Fidelity Management & Research Company (260,000 shares.)
Kansas City Life Insurance (KCLI)
KCLI is another successful American public company that also happens to trade on the OTC market. KCLI has been insuring policyholders since 1895 and currently has more than half a million customers in 48 states.
The company is no mom and pop business either. It has a $440 million market cap and generated over $440 million in revenue last year. Like CSVI, it also pays a healthy 2.5% dividend to its shareholders.
KCLI is also 15% institutionally owned. Top institutional investors include Glacier Peak Capital (123,000 shares) and Vanguard Group (121,000 shares).
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.