How to Profit from the World's "Scariest" Stock Exchange

Stocks trading "over the counter" have been making headlines lately - and not in a good way. But OTC stocks are nothing to fear, and learning how to profit from them is easy. Here's how...

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There's a stock exchange out there with a bad reputation.

You might think of it as a warren of shady penny stocks and unregulated "pink sheets" that are subject to easy manipulation and other schemes.

And the Federal Bureau of Investigation doesn't think much of it either. G-men are cracking down on alleged fraud here involving dirt-cheap, thinly traded microcap stocks.

The reality, however, is that some of the world's largest and most successful technology and bioscience companies are listed here.

And today, I'm going to explain to you precisely how to tell the difference between the sketchy stocks and the reputable ones.

Even better, I'm going to tell you about one global tech and healthcare leader that not only trades on this exchange, but also offers investors a great "special situation."

There's nothing to fear here - just plenty of upside...

Have No Fear

Of course, I'm talking about the OTC Markets Group. And its reputation has never been worse.

The online resource Investopedia sums up the prevailing attitude toward over-the-counter shares by warning that they "are either penny stocks or are offered by companies with bad credit records."

And OTC stocks are making headlines right now - and not in a good way.

How to Profit FBIThe FBI recently divulged details of its "Operation Pennypincher" sting.

Concerned that investors are getting fleeced in get-rich-quick schemes involving microcaps, the feds set up this sting to catch and prosecute stock manipulators. Operation Pennypincher has lasted more than a year so far and still has cases pending in the courts.

To date, 22 people have been charged criminally. Of those, 18 have pleaded guilty or been convicted on various counts of fraud. The stocks in questions traded for as little as $0.05 a share.

With their bad reputation, you may be surprised to learn that some OTC stocks are more expensive than Apple Inc. (Nasdaq: AAPL) and have bigger market caps than Netflix Inc. (Nasdaq: NFLX).

That's because OTC Markets has three "marketplaces," only one of which truly caters to "pink sheet" penny stocks - so called because information about these microcaps used to be printed on pink paper.

Here's the secret to finding winners trading OTC...

How to Profit from Stocks Listed on OTC Markets

In the other marketplaces, about 3,000 foreign firms trade as OTC stocks, and many of them are global household names. Indeed, I tell investors that OTC shares are OK if the stocks in question are "co-listed."

You can consider overseas firms that are traded OTC here in the United States and on major exchanges in their home countries - such as the London Stock Exchange and Brazil's BM&F Bovespa - as "safe." These are clearly not the "fly by night" stocks that are the target of Operation Pennypincher.

The firms listed on exchanges like those in Frankfurt, Toronto, and Tokyo are regulated by those nations' equivalents of the U.S. Securities and Exchange Commission and the exchanges themselves. For these foreign companies, it's easier and cheaper to trade OTC than to go with a major U.S. exchange.

I've recommended OTC stocks to you before, such as China's Lenovo Group Ltd. (OTCMKTS ADR: LNVGY), which is co-listed on the Hong Kong Stock Exchange.

Then there's Toshiba Corp. (OTCMKTS: TOSYY). The Japanese electronics giant makes everything from televisions and disc drives and semiconductors to waste treatment systems.

Recently trading at $26.72 a share, Toshiba has a nearly $19 billion market cap. It's co-listed on the Tokyo Stock Exchange, and you can go to Toshiba's website and quickly get its annual report and investor presentation.

And Hyundai Motor Co. Ltd. (OTC: HYMTF) is one of the world's largest carmakers. It trades at over $77 a share, has a $31 billion market cap - and is co-listed on the Korea Exchange.

Siemens AG and the Man with a Plan

The company I'm telling you about today went so far as to have its shares delisted from the New York Stock Exchange earlier this year in favor of trading over the counter.

The reason? Most Siemens AG (OTCMKTS ADR: SIEGY) shares trade electronically or in its home country of Germany, so it doesn't need the fees and regulations that come along with the NYSE's prestige.

In a note to shareholders, the industrial and tech giant says the move to OTC status means its "processes of financial reporting are simplified and efficiency is improved."

Founded in 1847, Siemens first went public back in 1899. Today, it is a huge global enterprise with 360,000 employees and big operations in the energy, healthcare, and electronics sectors.

Siemens grabbed worldwide attention recently when it joined with two Japanese giants in a bid to buy the gas turbine business of French firm Alstom SA (OTCMKTS ADR: ALSMY). However, Alstom's unit ultimately went to General Electric Co. (NYSE: GE) in a $17 billion deal.

But I'm not worried about Alstom falling through Siemens' grip. I still see plenty of upside for this storied firm.

Siemens has embarked on a strategic restructuring plan designed to improve efficiencies, cash flow, and earnings. It's in the process of dropping low-margin business like airport logistics and baggage handling.

The German company has the ambitious goal of taking roughly $1.4 billion in overhead out of its operations by 2016.

It has a new chief executive officer with exactly the kind of attitude I look for in a tech leader. Since taking the job in July 2013, Joe Kaeser has worked to instill an ownership culture, urging personnel to "always act as if [Siemens] were your own company."

Kaeser, 57, knows the company well. He joined back in 1980 and has steadily climbed the ranks, serving for two years as the firm's chief strategy officer.

He replaced Peter Loescher, who was fired for poor performance. Thus the board has given Kaeser a very clear mandate: Grow the company and improve profits.

The CEO recently unveiled his broad vision for Siemens in a program he calls Vision 2020. He wants to get deeper into such tech fields as Big Data, factory automation, cloud computing, and information technology services.

And Kaeser is willing to make tough choices. The strategic plan involves furloughing or redeploying as many as 12,000 workers. He intends to reduce the number of divisions from the current 16 down to 9 as he flattens the company's management structure.

Despite these cuts, Siemens aims to remain a major energy player. The company provides giant power-generation systems as well as wind power and renewable systems through a unit that accounts for roughly 40% of its sales.

To step up its electric-generation business, Siemens recently paid $1.3 billion for the turbine business of Rolls-Royce Holdings Plc. (LON: RR). Siemens also is moving into what it calls "unconventional" oil and gas, meaning it is targeting the tech-driven energy boom brought on by hydraulic fracturing, aka "fracking."

At the same time, Kaeser says the Siemens healthcare unit will be managed separately. The division supplies advanced imaging, diagnostics, therapy, and IT solutions to the healthcare industry and accounts for roughly 20% of sales.

And it could end up offering a special incentive for investors.

This is one of my favorite aspects of Siemens' new plan. Kaeser says the healthcare operations could soon be spun off, possibly as a publicly traded separate company.

We've talked about spin-offs in the past and how they can hand tech investors windfall profits. Indeed, research consistently shows that spin-offs can beat the overall market by as much as 30%.

Trading at roughly $123 a share, Siemens has a $103.41 billion market cap and strong financials. It has a 7% operating margin and a 17% return on equity. In its most recent quarter, it grew earnings per share by 111% and last year generated some $5.1 billion in free cash flow.

And it pays a roughly 3.2% dividend.

Thus Siemens is a rare breed in the overall tech sector. It's been around for more than 100 years and is set to become a growth firm once again.

And because it's in the midst of a restructuring, the company qualifies as a "special situation" investment.

However, this also is a company that you can count on for the long haul.

To find winners like this one, you have to challenge conventional wisdom, overcome your fears, and be willing to invest in quality stocks wherever you can find them.

More from Michael Robinson: The best investments in tech are not the big names but rather the smaller, pick-and-shovel plays. And this one will double your money in two years...

About the Author

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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