BMW: Blue Chip Hides in Pink Sheets

10/10/2014 10:00 am EST

Focus: MARKETS

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

International expert Carl Delfeld notes that-in recent years-numerous blue chip global stocks have moved off listed US exchanges and are now found hidden in the pink sheets. Here, the editor of La Jolla Letter explains the background for this trend and looks at such a favorite hidden blue chip, a German luxury carmaker.

Steven Halpern:  Our guest today is global investing expert, Carl Delfeld, editor of the La Jolla Letter.  How are you doing today, Carl?

Carl Delfeld:  Hello, Steven, nice to be with you.

Steven Halpern:  When most investors hear the term pink sheets, they're likely to think of small, low quality penny stocks, but you know that there are also hidden blue chips within this market.  Could you expand on that?

Carl Delfeld:  Sure, sure.  Well, let's start with how this strange event occurred and, as you know, Steven, it's not long ago where almost every international company of any sort of weight wanted to be listed on the New York Stock Exchange and the reason was it was the ultimate sign of being a blue chip, a company of high quality, respected, and a company with prestige.

But over the last, I'd say three or four years, there's been quite a change and many of these international companies-that we know the name of-have migrated away from the New York Stock Exchange to the pink sheets, and I'm talking about, not just a few companies, but more than 120 companies have left the New York Stock Exchange and maybe 75 or more have left NASDAQ as well.  

I'm talking about names like Deutsche Telekom, Allianz, Lufthansa, Mercedes Benz, Volkswagen, Gucci, the Swatch Group, Gazprom, you know, really well-known names and this happened for two reasons.  

The first is, you remember Sarbanes Oxley, which really raised the cost and liabilities of listing on the New York Stock Exchange.  That's a really key reason, but the second reason is the market changed.  

You know, Wall Street really doesn't care that much anymore about individual investors and-for institutional investors-they don't buy these international companies here in the US.  They go to their home market and buy them on that exchange, so those two reasons combined to drive a lot of these great names into the pink sheets.

Steven Halpern:  Now, from a valuation standpoint, you also note that once these stocks are on the pink sheets, that they lose some coverage by Wall Street analysts and brokers.  How does that impact the valuation of these ideas?

Carl Delfeld:  Well, the interesting thing is, and, you know, with the La Jolla Letter, we write about IPOs, we write about a lot of different opportunities, but we're writing more and more about these blue chip pink sheets because, I find that, first of all, like you mentioned, you know Merrill, Goldman, JP Morgan, they don't follow these companies.  

The liquidity is sometimes a little bit low, lower than they would like, and so they almost discourage their clients from even looking at them, which makes me very intrigued and so sometimes you can find them trading at very low valuations, because the coverage, even in the financial publishing business, I think I'm alone in covering this group of stocks.

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And part of it, as you mentioned in your lead-in, that the pink sheet address scares away investors, even though the actual company they're investing in is very, very high quality and the other thing I found is that a lot of them are very high growth companies as well, tapping into, you know, we all know the high growth global markets and emerging markets.

And then the last reason I focus on them is, believe it or not, you can sometimes get these pink sheets at lower prices than they are trading in their own home market, so this is kind of like an arbitrage opportunity.

That happens because, obviously, the market at home is much more liquid than the pink sheet blue chip, although I might add that some of these trade five, six, seven, eight hundred thousand shares a day, so, I mean, they're certainly safe.  

Steven Halpern:  So let's walk through an example of what you call a hidden blue chip in the pink sheets and one of those that you like is the well-known auto maker, BMW (BAMXY). Could you tell our listeners a little bit about this idea?

Carl Delfeld:  Sure, sure, I'd be happy to. Now, BMW, I mean that's probably the last company that you would think would trade in the pink sheets, but it does.

The reason I like BMW is that it's obviously a premier luxury automaker, but when it came out of the financial crisis-and you know the global financial crisis hit all auto makers pretty hard-they did a very smart thing.  

They, of course,  sell a lot of cars in the US and in Europe, and all over the world, but what they did is, they targeted the six fastest growing markets in the world outside of the developed countries, Brazil, Russia, China, India, South Korea, and Turkey.

And they made a commitment to lead in every one of them-and they do- although they're tied with Mercedes in Russia, and their growth rate in these markets is really high.  

The other thing that I really like about it is they're always at the leading edge of innovation.  You know, I don't know if you've looked at the BMW i event, you know, the carbon aluminum frame cars, hybrid, cars, electric cars, but they're really selling very well.  

The other thing I like is that the ownership of BMW is almost half of the shares are in the hands of its strategic partners: suppliers, marketing partners and so on, and then the other thing that's interesting is BMW sales are up 11% so far this year.  China, up 25%.

Best of all, BMW or BAMXY is on sale.  It's off almost 20% since early July and it's trading at only nine times earnings.  That's less than half the S&P 500 index.  

Steven Halpern:  Well, we really appreciate you taking the time to share your ideas with us.  Thank you.

Carl Delfeld:  Thank you, Steven.

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