Hitachi: Blue-Chip Bargains on Pink Sheets

TheStreet.com

NEW YORK (TheStreet) -- For the investor willing to expend the time and effort in researching a stock (i.e., "due diligence"), there are a number of blue chips listed on the Pink Sheets that offer long-term potential for healthy total returns.

While the Pink Sheets have the reputation for having thinly traded firms of marginal investment value, that is not true -- stocks of some of the biggest and best companies in the world are listed there. Management of these firms has determined that it is better to be on the Pink Sheets.  That is a huge advantage for a determined investor, as many Pink Sheet stocks are thinly covered by the analyst community and undervalued, compared to peers on the other exchanges, as a result.

For a recent example, Dinakar Singh, founder of TBG, a $6 billion hedge fund, detailed in a speech at a recent investor conference why he was so bullish about Hitachi HTHIY , the Japanese conglomerate that is a Pink Sheet stock. Singh was overall positive on Hitachi as the market is mischaracterizing the equity as a consumer electronics firm.

According to Singh, Hitachi is now an industrial equipment company, much like Emerson Electric and Phillips . Hitachi should be trading at the price-to-earnings ratios of Emerson Electric (32) or Phillips (41), rather than below 15. The potential for gains here is obvious.

Generally, management lists on the pink sheets to evade the greater disclosure requirements of the Big Board. Due to its Pink Sheet status, Hitachi is only covered by one analyst, according to Yahoo! Finance. Its average daily volume is around 40,000 shares with a market capitalization of about $34 billion. The average daily volume is almost 3 million for Emerson Electric with a market capitalization of under $48 billion. For Phillips, the average daily volume is around 620,000, with a market capitalization of about $32 billion. If Hitachi were trading at the same price-to-earnings valuation as Emerson Electric or Phillips, its market capitalization would be much greater than either of theirs.

Eventually the market should fully value Hitachi, resulting in profits for those buying before that takes place.

Other well known names that are Pink Sheet stocks include:

  • Samsung SSNLF , the highly profitable Korean high tech behemoth;
  • Nestle NSRGY , the Swiss consumer goods giant;
  • Volkswagen VLKAY , the third-largest seller of motor vehicles in the world last year;
  • Roche RHHBY the Swiss pharmaceutical firm;
  • BASF BASFY , referred to as the German version of DuPont  and Dow Chemical DOW ; and
  • Two of the biggest banks in the world, Industrial and Commercial Bank of China IDCBY and China Construction Bank CICHY .

These companies compare favorably with similar publicly traded companies listed on The Big Board, and with more appealing features, in many cases.  

As an example, BASF has a market capitalization of about $93 billion and trades at a price-to-earnings ratio of 15, below the average of around 20 for a member of the Standard & Poor's Index. With a market capitalization of about $57 billion, DuPont has a price-to-earnings ratio of almost 22. The price-to-earnings ratio for Dow Chemical is about 18.50 with a market capitalization of just under $50 billion. If BASF were trading at the same price-to-earnings ratio as Dow Chemical and DuPont, it would be around $130 a share, up from the present $101 range.

Pink Sheet stocks can also provide the dividend sought by so many in the present yield-seeking investment environment, increasing the total return for the long term. Repsol REPPY , the Spanish oil firm with a global presence and market cap of more than $30 billion, has a dividend yield of 3.23%. Exxon Mobil , the world's largest oil and natural gas entity, has a dividend yield of just 2.72%.

Despite its higher yield, fewer institutional investors, such as mutual funds or pension groups, own shares of Repsol than Exxon Mobil. While about half of the shares of Exxon Mobil are owned by institutional investors, it is only around 1% for Repsol. From that, Repsol is a much more volatile stock, with a beta of 1.45. The beta of Exxon Mobil is just 0.57. As the share price of Repsol moves more, that gives patient investors the opportunity to buy at a discount when it fluctuates.

Buying Pink Sheet stocks can require extra efforts by investors, in addition to patience.

But that is more than rewarded by the potential gains. Companies like these pay off for those who are willing to invest for the long term, patiently waiting for the efficiency of the market to fully and fairly value the equity. For blue chips on the Pink Sheets, that is the essence of profiting from value investing.



Jonathan Yates does not have a position in any of the stocks mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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