Because of the growing scarcity of attractive listed stocks, an increasing number of professionals are turning to over-the-counter stocks in search for better values. They are potentially better values because they have been less publicized and therefore less exploited.

The over-the-counter market is the least understood, not only for the average investor, but also for the professionals who have taken a skeptical attitude toward it. This situation, however, is changing rapidly.

The investment companies, for instance, are taking a keener interest than ever before in over-the-counter stocks. While five years ago their unlisted holdings amounted to less than $100 million, exclusive of bank and insurance stocks, their holdings in the fifty Vickers’ over-the-counter favorites alone (the top fifty unlisted stocks held by funds) added up to $664.5 million (September 1, 1961, values). That's exclusive of what the funds own in hundreds of other unlisted concerns.

Over-the-counter stocks now account for about 10 per cent of the estimated $25 billion assets held by 250 mutual funds and 75 closed-end trusts as of September 1, 1961. This represents a substantial growth from the $1.5 billion recorded at the start of the year.

Nothing is more misleading than to classify over-the-counter stocks categorically as speculative. The top unlisted fifty industrials as compiled by the Vickers Associates, for instance, are comparable in quality to the top listed fifty industrials. Among the unlisted fifty, we have Eli Lilly, Miles Laboratories (now listed on the New York Stock Exchange), G. D. Searle, and William H. Rorer in the drug category; Avon Products, Shulton, and Beauty Counselors in cosmetics; Grolier, R. R. Donnelley & Sons, and Western Publishing in publishing and printing; Dun & Bradstreet, A. C. Nielsen, and American Express in commercial and industrial services; High Voltage Engineering, Sanders Associates, and Control Data in electronics and computers. Others include Papercraft, American Greetings, Jim Walter, Diebold, Metromedia, Holiday Inns of America, Thrifty Drug Stores, and California Financial. And, of course, also Weyerhaeuser, the world's largest lumber company; Bank of America, the world's largest bank; and Time, Inc., America's leading magazine publisher.

These and many other unlisted stocks are just as good as any quality listed stocks. Generally speaking, off-board stocks are available at more realistic price levels than their more prominent listed counterparts for the simple reason that the latter are more in the market spotlight and, therefore, tend to be more expensive in the face of ever increasing investment money chasing a dwindling supply of sound listed issues.

While the over-the-counter market is indeed the trading arena for most of the untested and speculative issues, it also has some of the most stable investment media almost exclusively traded there, including government bonds and public-held insurance company stocks.

If you had confined your investments in stocks to listed securities, you would have missed the tremendous profit opportunities, for instance, in life insurance company stocks which have showed, in 1961, an average price appreciation of between 75 and 100 per cent.

Other quality equities purchasable only at the over-the-counter market are the shares of 14,000 operating banks, most fire insurance companies and all mutual funds. To have stayed away from the off-board mart was to have missed all the excitement going on there. Franklin National Bank, for instance, rose to the 60 level in middle November 1961 from 45 less than three months before. Security National Bank, for another instance, shot up from around 20 to 40 in a period of five weeks covering October and November of 1961.

Also mostly traded over the counter are foreign securities which a growing number of experienced investors are buying in search for profit opportunities.

The buying is largely of institutional origin for participating in the rapid growth of the European Common Market. European stocks are attractive in many ways. First, the profit squeeze on European firms from rising production costs is not as acute as in the United States. Second, tax treatment in Europe is less severe. Third, even after the recent market rise of European stocks, they still sell much cheaper than their American counterparts price-earnings-ratio-wise. And, finally, the purchase of European stocks should serve to diversify the portfolios of United States investment companies geographically and industrially.

Among the more popular European stocks are West German bank shares, including the Dresdener Bank, the Deutsche Bank and the Commerzbank.

West German bank shares are attractive because they are engaged in investment banking and securities brokerage in addition to doing the normal loan business at high interest rates. Their investment portfolios hold large blocks of common stock, much of which is carried at book at far less than its actual worth.

The growth rates of most of the well-favored European stocks are so great that shareholders can generally expect to be offered every year or so rights of substantial market value for new issue subscription.

Altogether, the over-the-counter market is the shopping place for some 40,000 diverse equities, compared with only about 3,200 listed issues on major exchanges. Of the 40,000, between 8,000 and 10,000 are quoted and traded every day.

As the world's largest trading arena for securities, the over-the-counter market offers a great variety of issues that cover virtually the entire range of investment interests. Moreover, it is being augmented by a continuous flow of new issues at the rate of 1,000 a year. Here, experienced investors look for "beginning" stocks or stocks in emerging industries.

An entirely new investment vehicle, as we have seen in Chapter 10, has sprung up within the last few years in the form of Small Business Investment Companies. Some 360 of them are already in business, and many more are on the way. All of them are traded over the counter.

It is well known that all new issues start trading over the counter immediately after their first offering. To have stayed away from the off-board mart was to have missed all the excitement and exciting issues that have marked the new issue market in recent years. The new issue market has its ups and downs. There will always be a "Polaroid," "Technical Operation," "Itek" or "High Voltage Engineering," in the making, most probably in the obscure off-board mart, temporarily hidden from public view but ready to explode with all the force and excitement of a winner.

The over-the-counter market is all things to all kinds of people; it is also a market of extremes, from the government municipal and triple A corporate bonds at one end to the most speculative stocks at the other. Its price ranges go all way from the mining stocks, often selling in pennies, to such ultra blue chips as Superior Oils, commanding $1,300 a share.

Despite its vast profit potential, the over-the-counter mart has been completely ignored by many investors. Why? Because it's something of a mystery to them. They have got used to the practice of a listed or auction market, where transactions are made at central locations, with tickers recording every purchase and sale. They are suspicious of a market that operates without a marketplace and have no confidence in a market where traders bargain security prices by telephone or teletype instead of negotiating on the floor of an exchange.

Travelers Insurance                                           50                    168
First Nat'l City Bank (N. Y.)                             49                    108     
Avon Products                                                 37                    102            
Aetna Life Insurance                                         35                    155     
Chase Manhattan Bank (N.Y.)                         30                    92            
Chemical Bank N.Y. Trust                                30                    99       
Jim Walter Corp.                                              30                    21            
Morgan Guaranty Trust                                     28                    141
Continental Casualty                                         26                    110     
Brush Beryllium                                                25                    36            
Bank of America                                              24                    70       
Grolier, Inc.                                                      24                    53       
American Express                                             21                    57       
Hartford Fire Insurance                                     21                    90       
U. S. Fidelity & Guaranty                                 21                    80            
Lincoln Nat'l Life Insurance                               20                    186     
Bankers Trust Co. (N.Y.)                                 19                    75       
Coastal States Gas Producing                           19                    87       
Colorado Interstate Gas                                    18                    46       
R. R. Donnelley & Sons                                    18                    62       
High Voltage Engineering                                  18                    35       
National Life & Ace. Insurance                         18                    220     
Republic Natural Gas                                        18                    45       
Weyerhaeuser Co.                                            18                    34       
Connecticut General Life Ins.                            16                    333
Automatic Retailers of America                         16                    61
Fireman's Fund Insurance                                 16                    66
Western Publishing Co.                                     16                    69
Continental 111. Nat'l Bk.                                15                    181
Home Insurance                                               15                    67
Manufacturers Hanover Trust                            15                    66
O. M. Scott & Sons                                         15                    38
Union Texas Natural Gas                                  15                    42
Beauty Counselors, Inc.                                    14                    70
Eli Lilly & Co.                                                  14                    94
Schlumberger Ltd.                                            14                    85
Jostens, Inc.                                                     13                    19
Security-First Nat'l Bk., L. A.                           13                    93
Shulton, Inc.                                                     13                    43
Southwestern Life Insurance                             13                    146
American Greetings                                          12                    54
A.C. Nielsen                                                    12                    62
Purex Corp.                                                     12                    76
G. D. Searle & Co.                                          12                    137
Transcontinental Gas P. L.                                12                    26
Beryllium Corp.                                                11                    36
Emhart Mfg. Co.                                              11                    93
First Nat'l Bk. of Boston                                   11                    100
Liberty Nat’l Life Ins.                                       11                    100
Miles Laboratories**                                        11                    124

*Source of information: Vickers Associates Inc. Guide to Investment Company Portfolios as compiled by the 11-27-61 United Investment Report of United Business Service. The prices were bid prices.

**Now listed on the New York Stock Exchange.

And then, of course, there is the disadvantage in the spread between "bid" (at which price you sell a stock) and "offered" (at which price you buy a stock) instead of the uniform price at which you sell or buy a listed stock. This "spread" may amount to three-eighths of a point in a low-priced stock up to as much as several points in a high-priced stock.

To be sure, this disadvantage of a spread and the lack, in most cases, of daily printed price quotations must be weighed against the potential undervaluation of an unlisted stock resulting from its lack of market spotlight. Also, in buying into unlisted stocks, investors should be aware of their comparative lack of marketability, especially in the "thin" issues (issues with small capitalization) which might make it difficult for you to get out of them in a hurry, particularly in times of market adversity.

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