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The 10 Best Stocks for the Next 10 Years

Today, I’m going to recommend 10 of the best stocks you can safely (and profitably) buy and hold for the next 10 years.

And if you cringed at the words “buy and hold,” I understand.

It’s great advice — except when it isn’t. At times, it can absolutely horrendous advice, particularly if you’re talking about individual stocks. Buying and holding the wrong stocks can result in the total destruction of your portfolio. Just ask anyone who had a large stake in RadioShack Corporation (RSHCQ) before it went belly up.And if you cringed at the words “buy and hold,” I understand.

Yes, 10 years is a long time to commit to a stock. Just think of everything that has happened over the past 10 years. For instance, in 2005, the iPhone hadn’t yet been invented by Apple Inc. (AAPL). We hadn’t yet had a housing crash … or a financial meltdown.

So, you’ll notice a few things about this list of best stocks. To start, the stocks tend to have timeless — even stodgy — business models. There are no tech names. Not even blue-chip dividend champions like Apple and Microsoft Corporation (MSFT) make the cut because too much can change in a decade. Ask BlackBerry Ltd (BBRY).

To make this list of best stocks, the company should meet the following criteria:

  • Must be supported by strong underlying macro trends — economic forces that are powerful and highly predictable.
  • Should pay a good current dividend, or we should reasonably expect them to pay one on the very near future.
  • Must be reasonably priced with an appropriate margin of safety.

Recurring themes you will see here are quality and stability. We’re looking for companies that can survive anything the market can throw at them over the next decade.

#1 Realty Income Corp (O)

There are few stocks that I would consider “multigenerational investments,” but triple-net retail REIT Realty Income Corp (O) is one of them.

What do I mean by that?

I own shares of Realty Income personally that I intend to pass on to my children someday. And if I raise my kids right, I would expect them to pass the shares on to their own kids someday.

There is no such thing as a “no-risk” investment, but Realty Income comes awfully close. The typical property for Realty Income would be your local Walgreens (WBA) or CVS Health Corp (CVS) pharmacy — a high-traffic, highly visible location that you pass on your daily commute. And as a triple-net landlord, the company has no real expenses. Its tenants are on the hook to pay for maintenance, insurance and taxes.

Realty Income has been one of the best stocks on a dividend-paying (and dividend-raising) front since going public in 1994. Since that point, O has made 536 dividend payments and hiked the dividend for 70 consecutive quarters. Importantly, unlike many of its brethren in the REIT space, Realty Income sailed through the 2008-09 meltdown without a scratch. Not only did it maintain its dividend throughout, Realty Income actually raised it.

I have no idea what the world will look like 10 years from now. But I have no doubt in my mind that the three rules of real estate will be the same then as today — location, location, location — and that Realty Income will still be paying regular dividends to its investors.

What’s the macro theme here? Income. With the baby boomers entering retirement, income investments will be in demand for a long time to come. Realty Income pays a nice 4.5% dividend at current prices, and the property portfolio is a bastion of safety and stability.

#2 Diageo plc (DEO)

U.K.-based Diageo plc (DEO) is the world’s largest seller of premium spirits, and its brands include Johnnie Walker scotch, Crown Royal Canadian whisky, Smirnoff and Ketel One vodkas, and Captain Morgan rum, among many, many others.

There is a lot to like about Diageo. In the developed world, drinkers are putting back less beer than they used to, but sales of wine and spirits have remained strong. This reflects both changing preferences by the aging baby boomers and the tastes of the millennials, who tend to prefer mixed drinks over beer.

But the real macro story here is Diageo’s exposure to emerging markets. Diageo expects to get fully 50% of its revenues from emerging markets this year, and that figure should rise with time.

“Emerging markets” might make some investors a little nervous these days given the volatility coming out of the region. But let me ask you a question: Ten years from now, which part of the world will you expect to have grown faster, the emerging economies of Africa, Asia and Latin America or the mature markets of the United States and Europe? I think you know my answer.

The rise of the emerging-market consumer is the macro trend of the next two decades.

Diageo trades for 24 times earnings and yields 2.3% in dividends. That is by no means “cheap” in a strict value sense, but remember that our time horizon here is 10 years. This is one of the best stocks to safely hold through 2025 and beyond, and I expect market-beating returns — even starting at today’s prices.

#3 Kinder Morgan Inc (KMI)

Oil and gas pipeline operator Kinder Morgan Inc (KMI) is one of my very favorite dividend stocks, and a stock I believe you can safely buy and hold for the next 10 years.

KMI owns and operates the largest network of oil and gas pipelines in North America. The sun rises, the sun sets, and Kinder Morgan’s network of pipelines continues to move energy from Point A to Point B.

If this isn’t a fantastic place to park money over the next 10 years, then I don’t know what is.

Kinder Morgan is a company run by one of the smartest men in the energy industry — Richard Kinder — whose interests also happen to be perfectly aligned with his shareholders. Kinder receives no salary for his work as chairman and CEO. His only compensation comes from the dividends he receives as a KMI shareholder, though as the owner of 233 million shares, Mr. Kinder is doing just fine. His dividend income is about $400 million per year … and naturally, he has every incentive to keep the dividend checks coming (and growing).

At current prices, Kinder Morgan sports a dividend yield of 4.4%, and during last year’s reorganization, management wrote that it expected to see dividend growth of at least 10% per year through 2020. Assuming you hold the stock through 2020, you’d be looking at 61% cumulative dividend growth. That would give you a yield on cost of 7% five years from now. Not too shabby.

We’ll see what it looks like in 10.

#4 Exxon Mobil Corporation (XOM)

Exxon Mobil Corporation (XOM) might get a few raised eyebrows given its performance over the past nine months. The collapsing price of crude oil has hit the share prices of the oil majors like a Louisville Slugger to the knee caps.

But Big Oil is anything if not resilient, and for the first time is a very long time, I can credibly say that XOM is cheap.

Yes, I understand that falling oil prices will take a bite out of profits. But Exxon Mobil’s dividend payout ratio is a very conservative 36% (currently — it will go up amid this year’s profit dip, but is expected to dip back down again once earnings recover), and the company has raised its dividend for 32 consecutive years. If XOM could survive and prosper during the 1980s and 1990s, when the price of crude oil actually dipped below $10 per barrel, then it can survive whatever comes its way over the next decade.

Over the very long term, Exxon Mobil and the rest of Big Oil face strategic threats from renewable energy and battery-powered cars such as those made by Tesla Motors Inc (TSLA). But I see these as threats 20 years or more into the future rather than 10.

In the meantime, enjoy one of the strongest companies in the world trading for just 11 times earnings and sporting a dividend yield of 3.3%.

#5 MTN Group Ltd (MTNOY)

I’ve made no secret of the fact that I’m a major Africa bull. It’s the last major investment frontier, and the growth is very real. Per capita GDP has more than doubled in the past decade, and according to Deloitte, seven of the 10 fastest-growing countries in the world are in Africa.

One sign of the booming middle class is Africa’s surprisingly high cell phone penetration; Africa had 629 million mobile subscribers as of 2014 despite having the lowest penetration rate of any region in the world.

Don’t underestimate the significance of this. Africa has harsh geography, which makes building infrastructure very difficult and very expensive. But mobile technology allows large parts of Africa to essentially leapfrog over legacy technology infrastructure — such as copper phone wires — and into the modern world.

This brings me to South African telecom giant MTN Group Ltd (MTNOY), one of the best stocks to play the continent rright now.

MTN Group is headquartered in South Africa, but it has more than 200 million customers spanning 21 countries across Africa and the Middle East. Roughly a quarter of its subscribers are from Nigeria alone. If you believe in the Africa growth story, then MTN Group is an absolute no-brainer to own. The expanding African middle class will be using an ever-increasing amount of voice and data services, and MTN Group will be there to serve them at every step.

There will be setbacks along the way — this is Africa we’re talking about — but again, we’re talking about a 10-year investment.

MTNOY trades at a reasonable price/earnings ratio of 14 and pays a respectable, growing dividend currently yielding 5.5%.

#6 Telefonica S.A. (TEF)

Along the same lines we have Spanish telecom giant Telefonica S.A. (TEF), one of my favorite ways to play the emergence of Latin America’s middle classes.

There is nothing more critical to modern life than the mobile phone, and Telefonica is the dominant provider in much of Latin America.

Latin America is at a much higher stage of development than Africa, of course. But mobile phone — and particularly smartphone — penetration is still much lower than in the developed world, meaning that TEF still has a lot of built-in growth in the years ahead. As consumers continue to move from prepaid mobile plans to contract and data plans, Telefonica stands to increase its revenues per user without the heavy marketing costs associated with pulling users away from competitors.

Today, Telefonica’s biggest risks come from currency fluctuations in Brazil rather than instability in Europe, its home market. This is a problem that may get a worse before getting better, as Brazil’s political crisis stemming from the Petroleo Brasileiro Petrobras SA (PBR) bribery scandal shows no signs of abating. But I believe most of the bad news was priced in a long time ago.

Telefonica found it necessary to cut its dividend in 2012 due to fallout from the eurozone debt crisis — something that long-term investors hate to see. But after the eurozone markets stabilized, Telefonica reinstated its dividend and hasn’t looked back since.

At today’s prices, TEF stock yields a very respectable 6%, and I expect healthy dividend increases in the years ahead.

#7 Silver Bay Realty Trust Corp (SBY)

It’s hard to lose money buying dollars for 80 cents. And that is exactly the situation we have today in Silver Bay Realty Trust Corp (SBY).

Silver Bay is a real estate investment trust that manages a portfolio of more than 6,800 single-family homes, primarily in the markets that were hardest hit during the housing crash that started in 2007, such as Phoenix, Tampa and Las Vegas. Silver Bay buys the properties — often at below-market prices — rehabilitates them and rents them out to American families.

This is a fantastic business to be in these days. Home prices are rising, and I have every reason to believe that home values will continue to rise given tightening supply and — importantly — a huge surge of demand coming down the pipeline from the millennials (eventually) settling down and starting families.

The coming of age of the millennials is one of the strongest macro themes in the world today — one that I consider virtually unstoppable. And in Silver Bay, we’re buying the homes that millennial families will soon be renting and later buying en masse.

What about dividends? SBY pays a modest dividend, at 9 cents per share quarterly, which works out to a 2.3% dividend yield. But Silver Bay is also a new company that only began trading in very late 2012. As the company’s portfolio continues to stabilize, I expect to see the dividend to grow.

It’s hard to beat Silver Bay’s margin of safety. The stock sells at a 20% discount to the net value of its property portfolio.

Translation: You could literally shut the company down and sell its inventory for a 20% profit. Not bad.

#8 LTC Properties Inc (LTC)

If you’re looking for a company that is almost uniquely well positioned to profit from the demographic changes of the next 10 years, look no further than LTC Properties Inc (LTC).

LTC is a landlord serving the needs of aging baby boomers. It invests primarily in the long-term care sector of the healthcare industry, including long-term care provider properties, skilled nursing properties, assisted living properties, independent living properties and memory care properties. LTC also invests in first-lien mortgages secured by long-term care properties.

Roughly four-fifths of LTC’s portfolio is invested in properties, and the remainder is in mortgages. Skilled nursing makes up 55% of its properties, with assisted living the next biggest portion at 37%.

LTC pays a monthly dividend that yields a healthy 4.5%, competitive among other medical REITs. And importantly, LTC also raises its dividend constantly — at a 9.3% annual clip over the past five years. In other words, had you bought into LTC five years ago, you’d be enjoying a yield on cost of 6.9%. Not bad!

Can we expect that kind of performance in the 10 years ahead? Given that 8,000 baby boomers turn 65 years old with every passing day, I would say yes.

#9 Ventas, Inc. (VTR)

Along the same lines we have one of the bluest of blue-chip REITs, Ventas, Inc. (VTR) — one of the few REITs included in the S&P 500.

With a market cap of $23 billion, Ventas is one of the largest holdings in most REIT index funds. Due to its sheer size, VTR cannot grow at the rate that some of its smaller rivals can.

But with its size comes stability and financial strength.

A little more than half of Ventas’ portfolio (by contribution to net operating income) goes to senior housing, split between 24% in “triple net” properties, 25% in domestic operating properties and 4% in international operating properties. Another 17% of the portfolio is invested in skilled nursing/post-acute care facilities; 18% is invested in medical office buildings, with 7% in hospitals and the remainder spread among loans and other properties.

So, in Ventas, you get a nice, diversified sampling of the facilities that aging boomers will be using in the decades ahead.

Ventas sports a relatively lower current dividend yield of 3.1%. But like LTC, Ventas is also a serial dividend raiser. VTR has grown its dividend at a 8.1% annual clip over the past five years.

It might be hard to sustain that kind of growth over the next 10 years, but if anyone can do it, it would be Ventas.

#10 McDonald’s Corporation (MCD)

And finally I come to the red-headed stepchild of the Dow Industrials … that fast-food joint everyone loves to hate, McDonald’s Corporation (MCD).

Given McDonald’s lack of growth in recent years and the general sentiment that it is getting its lunch eaten by healthier fast-casual chains like Chipotle Mexican Grill (CMG), McDonald’s might seem like an odd choice to buy and hold for the next decade. But McDonald’s boring stodginess is exactly why it makes the cut.

McDonald’s has been around a long time, and this is not the first time it has fallen behind trendier peers. MCD has redefined itself multiple times, and it will do so again.

McDonald’s is anything if not a survivor.

Let me put it to you like this: I think — and sincerely hope — that Chipotle is still around in 10 years. And I eat there often enough to probably single-handedly keep at least a few of their locations open. But while I think Chipotle will still be around, I know McDonald’s will be.

I’m willing to buy McDonald’s today, when it is out of fashion, because it is a company that takes its commitment to shareholders very seriously. McDonald’s has raised its dividends for 38 consecutive years and pays a current dividend yield of 3.5%.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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What’s the Story With the Sears Holdings-Simon Properties Deal?

Sears Holdings Corp (SHLD) made news this week by partnering with mall REIT Simon Property Group (SPG), the largest REIT in the world by market cap.

Sears plans to bundle 10 properties worth about $228 million into the venture, which it will then lease back. Sears made a similar deal with rival mall REIT General Growth Properties (GGP) earlier this month, selling and leasing back 12 properties located in General Growth malls.

Of course, all of this pales in comparison to Sears’ most ambitious move: The planned spinoff of 254 properties worth $2.5 billion into Seritage Growth Properties, a real estate holding and development company. Sears currently owns Seritage, but it is widely believed that Chairman Eddie Lampert plans to list it as a standalone traded REIT.

So … what’s going on here?

Lampert Nears His Endgame

I’ve been following the developments at SHLD for years, and it appears that this is execution of Lampert’s long-term plan of essentially chopping up Sears — an old retailer that has been dying a slow death for decades — and selling its valuable pieces for spare parts.

Just last year, SHLD spun off its Lands’ End, Inc. (LE) brand. This followed the 2011 spinoff of Orchard Supply and assorted sales of real estate along the way.

Sears stores have been losing ground to more competitive big-box retailers like Wal-Mart Stores Inc (WMT), The Home Depot, Inc (HD) and Target Corp (TGT) for longer than I have been alive. Yet, due to its age and longevity, Sears is sitting on choice retail sites across the country.

Of course, no shoppers visit these sites anymore, but they certainly might if they were rented by higher-quality tenants. At least this was Lampert’s thinking when he bought a controlling interest for $11 billion back in 2004. Though he has never admitted it publicly (it would be bad for business), it was pretty obvious that Lampert had no grand ambition for reviving the Sears retail empire. That would be ludicrous, and Lampert is too smart for that.

Lampert’s game plan was to invest whatever minimal amount was necessary to keep the company afloat long enough for him to extract the value out of it via spinoffs of its valuable brands and real estate assets.

As I wrote years ago in “Is Sears the Next Berkshire Hathaway?” Lampert’s plan probably would have worked well had he not started it immediately before the 2008 crisis and real estate crash.

Is there an investment play here?

Unfortunately, no.

Seritage, were it to go public, might very well turn out to be a decent investment. We’ll have to wait and see there. But the rump Sears Holdings — which today is trading at 2004 levels — is still struggling to turn a profit in a lousy environment for retailers.

When I compared Sears to Berkshire Hathaway years ago, I got a lot of raised eyebrows. But the comparison is completely valid. Warren Buffett has publicly admitted that buying Berkshire Hathaway (BRK-A) was the worst investment of his career and one that probably cost him $200 billion in lost gains.

Once the Sears stores do eventually go out of business — and they will — SHLD, like Berkshire Hathaway, might be a great way for regular investors to invest in the holding company of one of the best managers in the business today.

But in the meantime, you’re looking at a slow bleed.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he was long WMT and TGT.

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Time Warp: Warren Buffett on the Stock Market, circa 1999

Warren Buffett doesn’t spend a lot of time talking about “the market,” and he certainly doesn’t try to time it. As a “bottom-up” investor that looks at individual companies, that’s not his game.

Or at least that’s what you think. The truth is, Mr. Buffett has had quite a bit to say over the years about “the market.” Buffett is no dummy. He’s well aware that as the market goes, so go the valuations of the vast majority of stocks that make up the market, including his own, Berkshire Hathaway (BRK-A).

I’ll never forget an article he wrote for Fortune in 1999 (see “Mr. Buffett on the Stock Market”). I was a senior in college…and already dreaming of making millions in the stock market. It was the 1990s, and anything ending with “dot com” was an instant goldmine.

When Warren Buffett—a man I considered a hero—had the audacity to say that stock returns going forward would be disappointing, I felt betrayed…even insulted. Clearly the old man had lost his touch.

Naturally, I didn’t listen to the Sage of Omaha…and I lost a lot of money as a result in the crash that quickly followed. It was a lesson well learned.

But Buffett’s words sixteen years ago are every bit as insightful today as they were then. Buffett argued that in order for investors to earn anything close to historical returns in the market the following two conditions would have to hold:

  1. Interest rates must fall further.
  2. Corporate profitability in relation to GDP must rise.

In 1999, Buffett considered both of those scenarios unlikely, though he acknowledged that “If government interest rates, now at a level of about 6%, were to fall to 3%, that factor alone would come close to doubling the value of common stocks.”

Well, rates have obviously fallen a lot further than that, and the market hasn’t exactly doubled from 1999 levels. The market is up about 40% from the old dot-com-era high. But Buffett’s point was well made. Lower rates have allowed for much higher stock valuations.

On the second count, corporate profits, the ever-quotable Buffett wrote:

You know, someone once told me that New York has more lawyers than people. I think that’s the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%.

Well, so much for that. As you can see in the chart, courtesy of the St. Louis Fed, corporate profits have now nearly doubled the levels that Buffett believed to be unsustainable.

fredgraph

But while Buffett might have been a little off on the numbers, his logic was pretty solid. Companies cannot continue to take an ever-bigger slice of the economic pie. Eventually, this creates political backlash, as we see today. The basic laws of economics also start to rain on the parade. High profits attract competition…which crimps margins and ultimately lowers profits.

Today, market rates across the yield curve are near historic lows. They cannot realistically go much lower, unless temporarily during a crisis. And at the same time, corporate profits as a percentage of GDP are at all-time highs. None of this means the market is due to crash tomorrow, but it tells me that we should have realistic expectations about future returns. A strategy of buying and holding U.S. equities isn’t likely to offer much in the way of returns going forward. If you’re going to earn anything resembling a respectable return, plan on taking a more tactical approach and looking outside your normal comfort zones.

My advice is to focus on absolute returns strategies and on generating cold, hard cash in the form of dividends. To the extent you look for “beta” risk in the market, focus overseas. Valuations are far more reasonable in Europe and in most emerging markets.

This article first appeared on Economy & Markets.

 

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Looking for Value in the Second Quarter: Energy Stocks

At today’s prices, even the widest-eyed permabull is going to have a hard time arguing that U.S. stocks are “cheap.” With the S&P 500 trading at a trailing P/E ratio of 19.6, about the best argument you can make is that stocks are priced more or less in line with the average of the past 20 years.

That’s not exactly a rousing endorsement. And when you look at the cyclically-adjusted price/earnings ratio (“CAPE”), the story actually looks a lot worse. The S&P 500 trades at a CAPE of 27.2, or nearly 64% above its long-term average. This is about on par with its valuation in 1929 and 2007…before two of the worst market crashes in U.S. history.

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For the broader market to continue its advance, one of two things needs to happen. Either earnings growth needs to massively accelerate, or investors have to get comfortable with bubble valuations on par with those seen in the 1990s. With earnings already near all-time highs…and with most of the world economy looking shakey…it’s hard to see a major acceleration of profit growth happening this year. And while we can never rule out a 1990s-caliber stock bubble, that’s not exactly something I want to bet on, particularly with the Fed now effectively out of ammunition.

But while the broader market is looking stretched these days, there are definitely some pockets of value to be found. And one area that really stands out at today’s prices is the energy sector.

Of the 10 industrial sectors that make up the S&P 500, energy is the cheapest by a wide margin, trading at a CAPE of just 13.8. That’s roughly half the CAPE valuation of the S&P 500 as a whole. As a point of reference, the consumer discretionary, health care, and technology sectors trade at CAPEs of 39.1, 31.5 and 28.8, respectively.

To be fair, some sectors—notably consumer discretionaries and technology—deserve to trade at a premium to the broader market, as they tend to have fatter profit margins and faster growth rates. But Big Oil is not exactly a profit slouch. The two biggest heavyweights in the sector, ExxonMobil and Chevron, consistently generate returns on equity in the high teens and above, with very few exceptions.

As of this writing, I do not have a position in ExxonMobil or Chevron. But in my Dividend Growth portfolio, I do have a large allocation to the energy sector. Between energy majors and pipeline MLPs, more than 25% of my portfolio is now allocated to energy. I like to invest my money where it is treated best, and right now many of the best names in this space are trading at 20%-50% discounts to their 2014 highs and offer some of the highest dividend yields in the world.

Am I concerned about falling energy prices?

No, I’m not. Big Oil has proven over the years that it is more than capable of making money in both bull and bear markets in energy. Frankly, the sector had gotten sloppy in recent years in some of its capital allocation decisions. There is nothing like a good crude-oil crash to make management focus on building shareholder value.

Meanwhile, the sector offers dividend yields of 3%-6% after the slide in share prices. I fully expect dividend growth to slow over the next two years, but I’m not expecting a wave of dividend cuts, or at least not among the blue chips in the sector.

We can’t control market prices. But we most certainly can be selective with what we buy, and today the best values in the world are in the energy sector.

This piece first appeared on MarketWatch.

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What Happens When My Stock Get Delisted?

Even Wall Street has standards.

I know that might sound hard to believe, but to benefit from the liquidity, capital-raising power and prestige that come with a listing on the New York Stock Exchange or Nasdaq, a company has to follow a few rules.

Among other requirements, to maintain a listing on the NYSE, a company has to have an average market cap and stockholders’ equity of at least $50 million and must have an average share price of $1 or more over a 30-day period. Nasdaq continued listing requirements are slightly different, but the same concepts regarding assets, market cap and share price apply.

For both NYSE and Nasdaq listing, companies are also required make timely financial disclosures.

Enter Ocwen Financial Corporation (OCN), which recently made the news for failing file its annual report in a timely manner.

Ocwen Financial received a deficiency letter from the NYSE. In plain English, this essentially means that OCN is on the naughty mat until it learns how to obey the rules.

Ocwen stock is not at immediate risk for being delisted, however.

OCN has six months to get its house in order before the NYSE takes any further action. And if after that six-month period Ocwen still has yet to publish its annual filings, the NYSE has the option to allow another six months to pass before initiating delisting. Of course, the NYSE could also opt to delist the company now if it felt that something dodgy was going on.

I expect Ocwen Financial to get its books in order well before a delisting happens. But this brings up a good question — one that all investors should learn the answer to:

What happens when the shares of a company you own get delisted?

A delisting is scary. And frankly, you generally have no business owning a stock facing delisting because, with few exceptions, a company that fails the continued listing requirements is almost always on the express train to bankruptcy.

Take RadioShack Corporation (RSHCQ) and its newly minted ticker, for example. Back in February, RadioShack’s plunge reached a low point when, after receiving two delisting warnings, the company was delisted by the New York Stock Exchange after failing to submit a business plan. RadioShack then filed for Chapter 11 bankruptcy protection days later.

Here are some general rules you should follow with respect to companies at risk of delisting or already trading over the counter:

  1. If the delisting is due to financial distress, stay away. Yes, the company might pull a rabbit out of a hat and recover, but chances are better that delisting is merely a stop on the road to bankruptcy.
  2. The over-the-counter market is a playground for manipulators and fraudsters. This is Jordan Belfort “Wolf of Wall Street” territory. Take any information you get on a non-listed stock with a major grain of salt.
  3. If the stock also trades on a well-regulated market overseas, it is fair game so long as its over-the-counter ADRs trade with sufficient trading volume. (A couple hundred thousand shares per day in volume is adequate liquidity for most investors.)

A recent high-profile example of this last point would be German industrial giant Siemens (SIEGY), which opted to be delisted from the NYSE last year due to the reporting headache of being registered in both Germany and the U.S.

However, Siemens actually provides a few examples of what to expect during a delisting. Holders of Siemens’ NYSE-traded ADRs woke up one morning to find that the ticker symbols on their shares had been changed from “SI” to “SIEGY.” The five-letter ticker symbol is typical of stocks that trade on the Pink Sheets or Over-the-Counter Bulletin Board (“OTCBB”), which is where most delisted stocks end up. The Pink Sheets and OTCBB are essentially the Wild West of investing, as there is very little in the way of regulation or oversight here.

Several quality stocks that I have owned over the year trade over the counter, such as Siemens, Nestle (NSRGY) and Daimler (DDAIF). But all of these stocks have one thing in common: They are blue-chip companies subject to a high standard of financial regulation in their home markets (Germany, Switzerland and Germany, respectively). For these companies, the U.S. over-the-counter listing is merely a way to allow Americans to buy the stocks at home, in dollars.

Bottom Line

As a general rule, stay away from companies at risk of delisting. Most already have a host of potholes to deal with.

Plus, while in theory, nothing will change with respect to your equity in the company, in practice you might find your shares a lot harder to sell. Over-the-counter stocks tend to have low volume and low liquidity because they are shunned by institutional investors. And because of the lax reporting requirements, they are a lot harder to research.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.