2,000+ OTC Stocks Will Disappear This Week. Penny Stock Investors Rejoice!
On Tuesday, a new Securities and Exchange Commission rule goes into effect. The rewritten Rule 15c2-11 essentially removes the Piggyback Exception — a loophole that allowed non-reporting companies to trade over the counter (OTC). (Previously, any firm that submitted at least one financial statement made the cut).
That all changes tomorrow. As of Sept. 28, companies that fail to file will likely get relegated to the gray market, an inglorious forum where trades are done by telephone – if at all.
That’s bad news for shell companies and those who trade them. Firms from corporate husk Sears Holdings Corp (OTCMKTS:SHLDQ) to bankrupt Sequential Brands Group (OTCMKTS:SQBGQ) could see their lively trading vanish. In all, roughly 2,000 stocks stand to get de-listed unless they provide annual reports on a continual basis. In fact, the OTC Markets Group expects that up to 2,800 could disappear.
But there’s also a silver lining. With ~20% fewer stocks to watch, penny stock investors’ attention will focus on the remaining 80%. Meaning those stocks left standing will see a boost in interest.
The Hot Penny Stocks of Reddit
I’ve written before that some of the best Reddit picks come from a surprising source: r/PennyStocks. Unlike its heavily moderated cousin r/WallStreetBets, the Penny Stock subreddit provides an unfiltered look into how retail investors actually feel about individual stocks.
Consider Vinco Ventures (NASDAQ:BBIG), a firm both Twitter and r/WallStreetBets consider an ultimate short squeeze. Shares jumped 260% at one point before giving up some gains.
r/PennyStock investors, however, are less impressed:
“TL;DR: BBIG is an unprofitable shell company with no viable product who’s stock is rising because of an alleged merger with a company ran by the man who ran MoviePass and defrauded millions of people who slapped a $5b ‘valuation’ on a Tik-Tok wannabe he paid $100m for.
“Downvote away you f*cking idiots, but don’t say I didn’t warn you.”
Couldn’t have said it better myself.
3 Potential Penny Stock Moonshots
I’m not saying that r/PennyStock users focus on quality.
Far from it.
Instead, these Moonshot investors are looking at cheap companies that they think will go up 10x… 100x… 1,000x. Think GameStop at $4…
…or Asia Broadband (OTCMKTS:AABB) at 11 cents.
Asia Broadband (AABB)
Most outsiders have probably never heard of Asia Broadband, a Las Vegas-based company that owns several Mexican gold, silver and base metal mines (talk about a misnomer). The company regularly files financial statements i.e., isn’t at risk for Rule 15c2-11 delisting), and its unaudited financial statements show $13 million in profit last year.
But Reddit’s r/PennyStock investors have their eyes on AABB for a different reason: the firm’s big cryptocurrency ambitions.
In February, AABB launched AABB Gold (CCC:AABBG-USD), a cryptocurrency supposedly backed by $30 million of the company’s physical gold reserves. And earlier last week, management announced it had reached the final stages of development for its AABB Exchange. If true, this could help AABBG join the ranks of other successful gold-backed tokens such as PAX Gold (CCC:PAXG-USD).
Most of AABB’s claims are likely exaggerated. The firm’s unaudited financial statements show unusually high profits even in 2018 when prices in the gold industry collapsed. And the AABBG cryptocurrency remains unlisted on major aggregators. It’s a company that any traditional investor would write off as a possible pump.
But for Reddit investors seeking a thrill ride, the long-term truth might not matter. When other unknown firms like Hello Pal International (OTCMKTS:HLLPF) can rise 4,500% after announcing cryptocurrency dreams, why wouldn’t companies like AABB do the same?
Transportation & Logistics Systems (TLSS)
The OTC fallout will also benefit older firms with longer operating histories. And that brings us to Transportation & Logistics Systems (OTCMKTS:TLSS), a firm that recently gained an OTCQB listing.
Unlike AABB, TLSS isn’t profitable on paper. The company failed to renew its delivery agreement with Amazon (NASDAQ:AMZN) last year, losing 96.7% of its revenues in one fell swoop. Shares of the struggling company are currently available for 2 cents.
But CEO John Mercadante hasn’t been standing still. In H1 2021, he raised $3.6 million in preferred shares to shore up his company’s balance sheet and acquire two competitors — Cougar Express and DDTI. And the firm’s uplisting to the OTCQB market means a greater ability to attract penny stock capital.
All of the above should give TLSS investors hope. Trucking in recent years has favored consolidators like Knight-Swift (NYSE:KNX), which makes TLSS’s ability to raise capital ever more critical. And with the lowest-tier Pink Sheet securities gone, more money than ever could flow into industry consolidators, possibly seeing TLSS’s stock rise again.
Revitalist Lifestyle and Wellness (CNSX:CALM)
Finally, “spring” cleaning in the OTC market will help newcomers stand out. That includes Revitalist, a Canadian-listed firm that could soon begin trading OTC.
Revitalist has all the signs of a meme stock in the making. Its five U.S. clinics focus on ketamine infusions for treatment-resistant depression (TRD), making it essentially one of the few pure-play psychedelic drug companies available. And its low 0.50 CAD price will make it a tempting target for Moonshot investors.
The firm is already riding a wave of interest in psychedelic drugs. Sales doubled to $632,000 over the four months ended in August and management plans to open another three locations by the end of the year. An OTC listing could come before then for this Knoxville-based company.
Meanwhile, investors can already get started — Revitalist trades on the Canadian Stock Exchange under the ticker “CALM,” and most major brokerages offer international equity trading (Note that the CALM ticker on the Nasdaq represents Cal-Maine Foods, an unrelated company).
As for those who would rather wait, most Canadian Securities Exchange (CSE) stocks make it to OTC markets within 2-3 months of listing.
Bottom Line: The OTC shakeout will benefit firms like AABB, TLSS and CALM that remain on OTC boards.
The Case of the 2,000 Disappearing OTC Stocks
On the other hand, investors in those 2,000 to 2,800 delinquent OTC stocks should tread carefully. Few survive their trip into gray market territory.
Here’s why. Once a stock moves into gray markets, they stop trading on any electronic exchange. Instead, investors must deal with each other through brokers; the only way to offload your shares is to find a consenting individual to exchange them at an agreed-upon price.
That means few shares ever change hands, if at all. Gray market listing International Jet Engine Supply (OTC:FLYE) saw a grand total of 2,870 shares traded this year — a value of about $2. Taste Water (OTC:TSWT) has seen zero shares traded all year.
Trades “may dry up almost entirely,” explains Brenda Hamilton of legal firm Hamilton & Associates, “and FINRA will put the stock out of its misery, deleting the ticker as an inactive issue.”
Already, shares of at-risk companies such as Town Sports (OTCMKTS:CLUBQ) and Sequential Brands (OTCMKTS:SQBGQ) are down 77% and 57%, respectively. Other issues such as Sears Holdings will likely follow suit.
Bottom Line: Sell “No Information” Pink Sheet stocks while you still can. Absent a FINRA/SEC intervention, these stocks will quickly become untradeable on the gray market.
Trading on OTC Markets
|2,800||Companies that OTC Markets believe will get removed from publicly quoted market.|
|$190 Billion||Combined value of these delinquent firms. These companies exist “largely for the benefit of minority, non-affiliate investors seeking pricing and liquidity options,” according to OTC Markets.|
|859||The number of companies traded on the “Expert Market,” a special exchange for broker-dealers that OTC Markets initially hoped to move the delinquent firms to in July.|
|0||The number of delinquent firms OTC Markets now expect to shift to “Expert Market” classification. The SEC has refused to consider exemptions to the revamped Rule 15c2-11.|
Other Penny Stock Moonshots
With short squeezes in the news again, Bret Kenwell picks out seven that could become the next Reddit squeeze.
Sundial’s (NASDAQ:SNDL) stock could soon fall to a can’t-miss price, writes Thomas Niel. Here’s why investors should wait until the next capital raise before jumping in.
And finally, with Zoom’s stock now down 50%, InvestorPlace’s Joanna Makris writes how the teleconferencing company found its way into her top trades list.
r/PennyStocks ≠ r/WallStreetBets
It’s often tempting to think of Reddit investors as one cohesive entity. Many of their trading strategies, after all, rely on investors squeezing stocks in unison.
But more experienced investors understand that a few loud-spoken stock promoters can give the impression that all Redditors favor certain stocks. Roaring Kitty’s GameStop (NYSE:GME) posts can gain a hundred thousand upvotes at a time.
Meanwhile, the free-for-all r/PennyStocks crowd have far more diverse opinions.
“Bag holders are just saying good things hoping to con a few new buyers.”
“Pepperidge Farms remembers”
“To the mooooo… Oh.. Yeah nevermind.”
Ouch. Even I wasn’t that brutal when I wrote up on ExpressSpa (NASDAQ:XSPA).
That means there’s plenty of room for various penny stock strategies to work. Don’t worry if r/WallStreetBets is ignoring 1) possible pump AABB, 2) deep-value turnaround TLSS or 3) young Moonshot CALM. r/PennyStocks has you covered.
FREE REPORT: 17 Reddit Penny Stocks to Buy Now
Thomas Yeung is an expert when it comes to finding fast-paced growth opportunities on Reddit. He recommended Dogecoin before it skyrocketed over 8,000%, Ripple before it flew up more than 480% and Cardano before it soared 460%. Now, in a new report, he’s naming 17 of his favorite Reddit penny stocks. Claim your FREE COPY here!
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.