The Globe and Mail

  Buying thinly traded stocks is an art form in itself


Saturday, November 11, 2000

Choosing the best price to bid for a stock makes a dramatic difference in terms of overall returns. Many overanxious investors select the market price to make their play, deciding they must have the stock now. While this does guarantee a purchase, it rarely garners the best value. Which is why we seldom do it.

Instead, our standard procedure is to scan where the stock has been for the past week, focusing on the last few days. Then we normally choose a spot near the bottom end of the range. Sometimes this means that companies do not join the Contra portfolio, but after a couple of decades in this business, we know that another purchase possibility always avails itself. We can afford to be patient.

When there is a large bid-ask spread, selecting a price at which to buy, rather than letting the market price dictate, is particularly important. For example, Montreal-based Pantorama Industries Inc. (PTA--TSE) is a stock we bought earlier this year at 81 cents.

Because the bid-ask spread was around 20 cents, we placed a bid one cent higher than the bid level to get us into the game. We did not jump at the offer because that would have meant paying about 25 percent more.

Large bid-ask spreads are often the norm for thinly traded companies such as Pantorama. Often firms of this nature trade a few thousand shares a day -- sometimes there are no trades at all for a week.

This creates the problem of placing an order and only having a partial fill. With a stock like this, you could place an order to buy 10,000 shares, and the fill might be 100. Not only would this mean that you obtained a piddly amount of what you want, but the commission as a percentage of the purchase price would be astronomical.

That is why with potential buys such as Pantorama, it usually pays to place an all-or-nothing order meaning exactly that -- you either pick up the whole ball of yarn, or zilch.

A primary disadvantage of the all-or-nothing approach is that you queue up after the regular bids that do not have special instructions. For example, our 81-cent all-or-nothing bid would be filled after a bid of the same price with no conditions. This low priority can mean that waiting your turn can take time. In our case, it took about six weeks to get filled on this order.

This same complication occurs on an all-or-nothing order on the sell side. Of course, if we had desired, it would have been possible to speed up the process by changing our bid. But we were comfortable that our price was reasonable, and we sat and waited for the market to come back to us.

Pantorama operates a chain of retail stores in Ontario and Quebec, selling a full range of casual clothing for men and women. Their strategy is to lease multiple stores in shopping centres, thereby attempting to establish a dominant position in the marketplace. The outlets include Levi’s, 1850, Roberto, Vintage Blue and a few others.

The firm has been in retraction mode, closing unprofitable outlets. In 1996, the operation had sales of almost $160 million with 241 stores, while last year revenue dropped to $134 million with fewer than 180 stores.

Cash flow has improved because the organization has been carefully watching costs as it operates a typically tight ship. It needs to -- the firm has remained skin tight to profitability, while paying out a handsome dividend of about 10 percent.

One of the primary advantages and principal dangers of thinly traded companies is that a rapid increase in trading activity can create dramatic price moves. Given that Pantorama has a current book value of nearly $2.50 a share, about triple the current cost, and they are getting the store in order, the market might soon develop a healthy appetite for this firm. This could lead to a swift upturn in price from its current 68 cents bid and 95 cents asked.