Posting annualized total returns of 26% since its initial public offering in 2009, OTC Markets Group (OTCM -0.55%) may be one of the most surprising multibaggers on the publicly traded markets. Shorthand for over-the-counter (OTC) markets, OTC Markets hosts roughly 12,600 businesses that do not qualify for the more stringent marketplaces, such as the New York Stock Exchange or the Nasdaq Stock Market.
The company may often be viewed as risky due to its connection to these pink sheet shares, which are generally companies in default or severe financial distress. OTC Markets itself, though, could hardly be in better financial shape -- and its recent shareholder returns speak to that fact.
Let's dive in and see why OTC Markets looks well positioned to continue its multibagging ways in 2024 and beyond.
Quietly dominating its "second-tier" equity market niche
Serving broker-dealers, professional and individual investors, and issuers (companies looking to be publicly traded), OTC Markets operates three business segments:
- OTC Link (17% of sales): Provides broker-dealers with quotations, messaging, trade execution, and reporting services through its Alternative Trading System, Electronic Communication Network, and National Quotation Bureau.
- Market data licensing (41%): Subscriptions for investors to access market data, financial information, security master details, and general company data for OTC and some exchange-based equities.
- Corporate services (42%): Three separate markets for public trading: OTCQX Best Market, OTCQB Venture Market, and the Pink Market. The Best Market holds the highest standards for qualification and is home to financially sound businesses that don't quite meet the threshold for the NYSE or the Nasdaq. It also counts numerous blue chip European stocks like Zurich, Heineken, and Adidas as customers. Meanwhile, the Venture Market focuses on entrepreneurial start-ups and development-stage companies that don't meet the qualifications for the Best Market. Lastly, the Pink Market comprises companies in default or financial distress. On top of all this, the corporate services segment also allows issuers to publish disclosures and news on OTC Markets' website and hold virtual investor conferences on the company's online platform.
The beauty of this suite of OTC offerings is that the company generated 82% of its revenue in 2022 from recurring sales, providing investors with valuable predictability and stability. While sales and net income only rose by 4% and 3% in the company's most recent quarter due to low volatility in the stock market, OTC Markets quietly made two acquisitions in 2022 to restart its growth.
First, the company acquired Blue Sky Data and its state law compliance data on over 40,000 equity and debt securities for a mere $12 million. A few months later, OTC Markets picked up EDGAR Online (yes, the old-timey website you may have read SEC documents on researching new stock ideas) for a minuscule $3 million. Together, these two purchases beef up the company's market data, disclosure, and news services, bolstering OTC Markets' leadership position as the one-stop shop for anything related to being traded over the counter.
While these acquisitions represent OTC Markets' first foray into the mergers and acquisitions (M&A) market, they are far from a make-or-break proposition for the $700 million company. Even without any M&A activity until 2022, OCT Markets has more than quadrupled its revenue since 2009, highlighting its long-standing ability to grow organically.
Top-tier free-cash-flow generation and dividend payments
In addition to the company's recurring revenue and impressive growth over time, OTC Markets boasts one of the highest cash return on invested capital (ROIC) marks out there at 74%. Measuring the free cash flow (FCF) a company generates compared to its debt and equity, a high cash ROIC like OTC Markets' has proven over time to be a market-beating proposition for long-term investors.
To put the company's incredible cash-generating prowess in perspective, only two S&P 500 stocks currently have a cash ROIC higher than OTC Markets' 74%.
The cherry on top for investors?
OTC Markets' management has an incredible track record of returning the vast majority of this FCF to shareholders through quarterly and special dividend payments.
OTCM Free Cash Flow data by YCharts
Returning roughly two-thirds of its FCF to shareholders through dividends since its initial public offering, OTC Markets is as shareholder-friendly as a stock can get. And with CEO Cromwell Coulson holding 28% of the company's total shares outstanding, it is well incentivized (and aligned with individual investors) to ensure the payments continue flowing.
At 26 times FCF currently, the company looks like a perfect example of a premium business trading at a fair price. Whether it's the 3.7% dividend, the company's steady growth within a niche market, or its best-in-class FCF generation, OTC Markets looks poised to continue its multibagging ways far into the future for investors.
