Friday, December 22, 2006

A dash of pink for your portfolio

Random Roger wrote about the Vietnam opportunity fund last week. Vietnam was in the news recently because of the failed trade bill on the eve of the APEC summit. In spite of that, Vietnam is due to become the newest member of the WTO next year while it’s doing to China what China has done to others in manufacturing. Roger’s article was about how much emerging markets in general and the Vietnam fund in particular has appreciated in the last couple of months, but I mentioned it as a long segue to the topic at hand which has to do with pink sheets.

It turns out the Vietnam Opportunity fund (VOF.L) trades in London which makes it difficult to buy from an online broker with the exception of IB. Fortunately, it’s accessible in the over-the-counter market known as the pink sheets. It trades under the symbol VTOPF at a decent volume of 300-400k shares/day. Most online brokerages (TD Ameritrade and Scottrade for sure) treat pink sheets exactly the same as other stocks/ETFs.

Pink sheets are formally defined as

A daily publication compiled by the National Quotation Bureau with bid and ask prices of over-the-counter stocks, including the market makers who trade them. Unlike companies on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets also refers to OTC trading.
The name came from the pink paper they are printed on. They have a bad rap as a lightly regulated market where penny stock pump-and-dumpers cruise for their prey. That reputation may be deserved; however, some well established foreign companies can also be found there. They tend to be smaller than household names like Sony and Nokia that have ADRs, but are solid nonetheless. In addition, a large number of Canadian junior mining companies can also be bought via pink sheets. While riskier, they aren’t exactly fly-by-night operations either. Below are some examples that I have looked at one time or another. This is not a recommendation for purchasing them.

Established foreign companies
Sherritt S.TO/SHERF.PK (Large Canadian company in coal, oil and base metals)
Canadian oil sands trust COS-UN.TO/COSWF.PK
Western oil sands WTO.TO/WOTIF.PK
Vestas wind systems VWS.L/VYSPF.PK (Dutch wind energy company, trades on just about every European stock exchange)

More speculative plays
International Uranium IUC.TO/IUCPF.PK (uranium mining and processing)
Denison Mines DEN.TO/DNMIF.PK (uranium mining)
Dragon Oil DGO.L/DRAGF.PK (Caspian oil)

Symbol look up
Normally what happens is that you have a foreign company that you are interested in, but it’s only listed on a foreign stock exchange. You can use the Yahoo finance symbol look-up to see if it trades as pink sheets. Note you have to specify US&Canada or World Markets in the pull-down menu. After locating the symbol, you can check with your broker to see if you can purchase it from them. Yahoo uses the “.pk” extension, but most other quoting services do not.

Intraday quotes/pricing
The pink sheets are quoted only at the daily closing price. For intraday quotes you have to use the symbol on the native exchanges. Note the quote will be in the local currency while the pink sheets trade in US dollars, so you will have to do a conversion when placing an order.

Caveat emptor
- Limit orders are absolutely necessary as the volumes are usually low.

Places to do research
Canadian Stocks: Stock House
London Stock Exchange

As always, you need to thoroughly research what you’re getting into. But for those daring, a dash of pink may do wonders for their returns.

This post first appeared at 1stmillionat33.