While most investors should stick with equities listed in major U.S. exchanges, sometimes venturing out into the over-the-counter market – and specifically, the best OTC stocks to buy — may yield surprisingly positive results. Now, it’s important to understand what the OTC market really is given the platform’s poor reputation. Simply, it’s a mechanism for equity transactions to occur via broker-dealer networks.
On a more complex level, your typical U.S. blue chip will trade on the major exchanges like the New York Stock Exchange or Nasdaq. These entities feature centralization as one of their common bonds. In other words, participants operate under the same platform and the same rules. However, even the best OTC stocks trade on decentralized platforms. Featuring less regulation and oversight, transactional dynamics may vary.
Naturally, such circumstances present administrative risks to the investor, most conspicuously in the form of wide bid-ask spreads. The International Monetary Fund (IMF) notes that “dealers in an OTC security can withdraw from market making at any time, which can cause liquidity to dry up.” That’s just one hiccup that can impact even the best OTC stocks.
Still, you can find some interesting deals. Here are the best OTC stocks to consider.
Best OTC Stocks: Nestle (NSRGY)
Several days ago, Federal Reserve chair Jerome Powell laid out his intentions for monetary policy at the annual economic symposium at Jackson Hole, Wyoming. Essentially, he recognized the long-term damage that inflation could cause. Therefore, Powell’s main priority is attacking escalating consumer prices, even if it causes near-term pain.
Recently, the Fed chair reiterated this commitment to control inflation. Logically, then, consumer discretionary purchases may wane since the dollar in a hawkish environment tends to rise. However, households cannot set aside necessary purchases, such as food and water. Therefore, companies like Nestle (OTCMKTS:NSRGY) may enjoy downwind benefits.
Currently, Gurufocus rates Nestle as a “fairly valued” security. However, it really could be one of the best OTC stocks for its rising business relevance. In addition, the company scores highly in terms of profitability metrics. In particular, Nestle has a net margin of 17.8%, which is well above the industry median of 3.4%.
During the worst of the Covid-19 pandemic, video game companies like Nintendo (OTCMKTS:NTDOY) enjoyed a massive boost. Simply put, they benefitted from the “hostage audience” thesis. With nowhere to go and limited entertainment options available, people wiled away the hours with video games.
Now that Covid-19 fears have faded into the rearview mirror, Nintendo hasn’t performed so well. On a year-to-date basis, NTDOY is down nearly 13.5%. To be fair, that’s better than the S&P 500 benchmark, which is down 16.5% during the same period. Still, being off parity by double digits isn’t great, no matter the context.
However, Gurufocus considers Nintendo to be “modestly undervalued.” As well, the company maintains excellent profitability metrics. This implies that Nintendo can raise prices on its customers yet they will still keep coming back for more.
As well, experts project that the console gaming sector will reach a valuation of $51.15 billion by 2027. Given that Nintendo remains incredibly popular in the segment, NTDOY could be one of the best OTC stocks to buy.
Best OTC Stocks: BAE Systems (BAESY)
Just as a fair warning, BAE Systems (OTCMKTS:BAESY) represents a controversial and cynical take on the best OTC stocks to buy. A U.K.-based arms, security and aerospace firm, military circles will immediately recognize the BAE brand. However, look a little closer into Russia’s invasion of Ukraine and you can see the company’s substantial footprints.
For example, BAE manufactures the M777 Lightweight Towed 155mm Howitzer. This bit of news offers much significance to the conflict because these weapons have now found themselves in Ukraine. Further, reports indicate that Ukrainian resistance forces have used these howitzers to great effect.
If that wasn’t enough to consider BAE (again, from a cynical perspective), management reported better-than-expected profits. Not surprisingly, BAESY has been one of the best OTC stocks on a pure performance basis, gaining 20.5% YTD.
Finally, with Ukraine initiating its counteroffensive to take back Russian-occupied territories, this conflict may go into overdrive. Like it or not, that’s probably going to increase demand for the company’s offerings.
On a related note to the Ukraine crisis — but with a far less controversial flavor — Orsted (OTCMKTS:DNNGY) could see demand flow down its chimney. As a renewable energy firm, Orsted commands a specialty in wind turbines. Featuring a vast portfolio of both onshore and offshore wind power infrastructures, DNNGY is one of the best OTC stocks. That’s especially true for those with long-term time horizons.
To be clear, as I’ve said in previous InvestorPlace articles, renewable energy sources like wind and solar feature the lowest capacity factors. The capacity factor refers to the generation of maximum output per unit of time. However, it’s also important to point out that with global energy supplies likely to be restricted indefinitely, all sources are on the table. Cynically, the conflict in Eastern Europe bolsters the case for DNNGY stock.
Still, investors must realize that Orsted presents a risky profile, with shares down 24% YTD. Still, the worst of the volatility appears to have faded, making for interesting speculation.
Best OTC Stocks: Panasonic (PCRFY)
One of the prominent examples that companies trading their securities over the counter aren’t necessarily penny stocks is Panasonic (OTCMKTS:PCRFY). Of course, the Japanese consumer electronics firm has seen better days regarding its legacy business arm. However, in the current framework, Panasonic earned a very positive reputation for partnering with Tesla (NASDAQ:TSLA) as its battery maker.
Indeed, much of Tesla’s success in becoming a cornerstone of the electric vehicle (EV) industry is due to Panasonic. With no sign of this relationship slowing down — it’s actually accelerating — the consumer electronics firm has found its second wind. Moving forward, the company’s track record of delivering class-leading products will likely sustain its relevance.
However, the major knock against Panasonic in terms of market performance is that 2022 has not been kind to PCRFY. Shares have slipped 28% since the January opener. Still, if you believe in the broader integration of EVs, PCRFY could be one of the best OTC stocks.
Fast Retailing (FRCOY)
If Fast Retailing (OTCMKTS:FRCOY) isn’t one of the best OTC stocks to buy, it’s certainly one of my favorites. While Fast Retailing may not be a household name, its primary subsidiary Uniqlo may eventually be one. Based in Japan, Uniqlo makes quality fashion at budget prices. It’s wildly popular in Japan and Asia. Further, the company makes significant inroads into Europe.
However, the U.S. represents a tricky arena. With so many fashion brands competing for consumer dollars, Uniqlo faces a tough challenge. Nevertheless, parent Fast Retailing can rise to meet these obstacles head-on. What draws interest for investors is that millennials don’t care so much about brand labels as prior age cohorts did. That’s going to fit in well with what Uniqlo is all about: again, great products at very reasonable prices.
Further, Fast Retailing features excellent profitability metrics. For example, its net margin of 11.7% is well above the industry median of 2.59%.
Best OTC Stocks: Danone (DANOY)
One of the biggest companies trading over the counter, food and beverage specialist Danone (OTCMKTS:DANOY) theoretically should be unquestionably one of the best OTC stocks to buy. As mentioned earlier, the Fed currently focuses on controlling inflation. As well, the European Central Bank raised rates by 75 basis points to tackle regional inflation.
Effectively, this pivot to a deflationary framework doesn’t bode well for reckless spending. However, we all have to eat (and drink). Therefore, DANOY fundamentally enjoys relevance. For right now, though, the market doesn’t see it that way, with shares down 17% YTD.
Arguably for most investors, the combination of Danone performing poorly and its equity being traded in the OTC market represents a non-starter. However, for the contrarian that wants to take a higher-risk, higher-reward shot, DANOY may be enticing.
Gurufocus labels Danone as “modestly undervalued.” Reasons for wagering on DANOY include strong profit margins and a long history of positive figures on the bottom line.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.