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Unlisted Stocks Have Outpaced Listed Issues Since '93, New Index Shows

Securities: Thirty stocks not traded on exchanges rose more than twice as much as the S&P 500.

September 07, 1996|From Bloomberg Business News

NEW YORK — Stocks of U.S. companies whose shares don't trade on stock exchanges have outperformed better-known listed issues since the start of 1993, according to a new study by Walker's Manual LLC.

Walker's said its new index of 30 of these so-called unlisted companies rose more than twice as much as the Standard & Poor's 500-stock index from Jan. 1, 1993, to July 31, 1996.

Even during July's market swoon, when the S&P 500 fell 4.6%, Walker's Index of Thinly Traded Stocks (WITTS) gained 0.3%.

"You can find some great opportunities and undervalued stocks in unlisted companies," said Wendy Wachtel, head trader at Wachtel & Co., a Washington market maker and investment banking firm. "But you have to study the companies carefully and do a lot of research."

Many investors haven't heard of even the biggest unlisted companies, including King Kullen Grocery Co., which operates 54 supermarkets in New York; Daytona, Fla.-based International Speedway Corp., which owns Talladega Superspeedway, among others; Kohler Co., a Wisconsin plumbing products and faucet maker; and Rand McNally & Co., the Skokie, Ill.-based map maker.

Yet some of them beat the performance of most listed stocks. Chemicals company Auric Corp., for example, has jumped 365% since the end of 1992. Microsoft Corp., a market darling, advanced 176% in the same period.

Earlier this year, Walker's Manual published the first edition of Walker's Manual of Unlisted Stocks. The book provides historical information on sales and earnings for about 500 unlisted companies.

Unlisted stocks are shares of companies that don't trade on the New York Stock Exchange, the American Stock Exchange, regional exchanges or the Nasdaq. They are bought and sold through brokers or in private transactions.

While they lack publicity, unlisted companies avoid paying listing fees levied by exchanges. They also don't have to file quarterly and annual reports required by the Securities and Exchange Commission.

The trade-off for investors is that these shares are difficult to buy and sell. Investors can't always immediately get the price they want.

Trading in unlisted stocks could be worth the hassle. From Dec. 31, 1992, to July 31, 1996, the WITTS gained 128.58%. During the same period, the S&P 500 gained 46.88% and the Dow Jones industrial average climbed 67.5%

These shares do so well partly because there are few sellers.

"What people don't realize is that these stocks are thinly traded because there are not enough sellers for a more active market," said Harry Eisenberg, chairman of Walker's Manual.

The WITTS is made up of 30 infrequently traded stocks. All of the companies have three years of reliable pricing information and less than 1 million shares outstanding. Bid prices, or the price offered for securities by investors who want to buy them, are used in all calculations.

Included in the new index are Boston Sand & Gravel Co., St. Louis Steel Casting Inc., Louisville Bedding Co. and Stonecutter Mills Corp.

Some of these shares have their quirks. Kohler's shares last traded on Jan. 9 at a price of $135,000. On Aug. 4, a bid of $90,000 was put in by an investor looking to buy the stock. That makes Kohler the most expensive stock in the U.S., beating Warren Buffett's Berkshire Hathaway Inc., the priciest Big Board issue, which closed at $31,700 a share today.

Bids for unlisted stocks are put on the Nasdaq's OTC Bulletin Board or the "pink sheets." The Bulletin Board contains about 5,500 companies, whereas the pink sheets cover about 13,000.

Companies sometimes choose to avoid exchanges because they're established and don't need to raise money by selling new shares. Rand McNally was formed in 1856, for example, and Lewisburg, Pa.-based Buffalo Valley Telephone Co. was founded in 1904.

"Most [unlisted] companies have managements that don't particularly care for being public," Wachtel said. "Either the guy who spearheaded the initiative has died or retired, or the circumstances have changed and they don't know why they're public."

Analysts said that because unlisted companies have so few shares outstanding, and big brokerages tend not to provide research coverage of them, potential investors have to do much of the analysis on their own.

Luckily, though unlisted companies with fewer than 500 shareholders don't have to report financial results to the SEC, many do so anyway, Eisenberg said.

That can be a plus if an investor is able to uncover a gem. Still, these stocks aren't for everyone.

"Unlisted stocks are not good for short-term investors," Eisenberg said. "You can't make a quick profit."

Market makers say investors should be as selective when picking unlisted stocks as they are with exchange-traded issues.

"Know what you're buying," said Emanuel "Buzzy" Geduld, president of Herzog, Heine, Geduld Inc., the largest market maker in Nasdaq stocks. "Do your due diligence."

To get monthly updates on the WITTS, call (800) 932-2922.

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