ADRs May Be a Bargain-Hunter’s Promised Land in Times of Currency Fluctuation

The greenback is, at least for the moment, looking more like a muscleman than a 97-pound weakling.  That may not reflect the inherent strength of the buck as much as the apparent disarray of the euro and UK sterling — but all the European currencies seem to have become less attractive since the Greek economy started kicking sand in peoples’ faces.  Although it may not be the most recent word on the situation, this article from TIME ‘splains the currency situation pretty well:,8599,1991604,00.html

On the one hand, a weak euro makes US exports more expensive in one of our largest markets, and that’s not something most of us want.  But on the other hand, that same weak euro can create some unusual bargains if you’re holding a handful of USD.  So what comes to mind?  Cars, probably, but the fact is that most “European” cars are now being made in the US, so the extent of the bargain may be less than might be hoped.  But what about stocks?

What’s an ADR?

An ADR is an American Depositary Receipt, which is a fancy way of saying, it is a bank-verified receipt that allows foreign stocks to be traded in the US as domestic securities.  So, for example, if you wanted to buy shares of Fiat, which is the majority owner of Chrysler these days, you could buy shares of Fiat on a variety of foreign exchanges that operate in a variety of different currencies, or you could buy shares of Fiat via ADRs on the Pink Sheets, where the symbol is FIATY (all Pink Sheets ADRs have 5 letters in their symbols).  FIATY is trading for $11.54, vs a 52-week range of $9.76 – $14.98.  The catch is that the average daily volume for FIATY is only about 10,000 shares, whereas FIAT shares trade heavily in other places — but communications being what they are, there is seldom a gap in value, and if there were, the “arbs” would be all over it like white on rice.

If you want to use your strong dollars to buy some shares that will probably go up in value vs dollars when the euro and other currencies move back up — ADRs can be the answer to an investor’s prayer.  There are some extra steps you might want to take when you’re looking around.  Most ADRs trade on the Pink Sheets, but there’s nothing stopping them from trading on Nasdaq or the NYSE — nothing, that is, but the requirement to comply with all SEC rules & regs including Sarbanes Oxley.  If they trade on the Pink Sheets, they skip having to file with the SEC and instead do their filings at home — London, Frankfurt, Oslo, Singapore, Shanghai, Sydney, etc.

The company that owns the Pink Sheets, OTC Markets Inc ( , has created a “premium” listing space called OTCQX, which imposes some quality requirements on the ADRs that trade there.  Chief among those is the adoption of a system not unlike that at the junior AIM market in London — where larger, savvy financial institutions are hired to keep an eye on things, and to make sure that the companies that are listed are aware of the ins and outs of the US markets.  There are numerous of these guiding or helping financial institutions, which are termed with the acronym DAD or PAL, including the depositary banks themselves (primarily Bank of NY Mellon, JP Morgan, Deutsche Bank and Citi), but also including some accounting firms, some law firms, and some broker-dealers.  The broker-dealers who seem to have the largest “market share” in this small but very fast-growing segment are Madison Williams (a management buyout of the investment banking ops at Sanders Morris Harris), Merriman Curhan Ford, Dahlman Rose, B. Riley and CK Cooper.  The largest industry segment on the OTCQX seems to be shaping up to be resources & energy, though the parent company is agnostic as to the segments of the companies it lists.

You may find some of the hottest technology companies in the world in the ADR crowd in the Pink Sheets.  The fact that they are headquartered in Oslo or Hanover or Milan or Mumbai makes the ADR route an eminently sensible way to get their feet wet in the US markets. 

The “Y” Factor

One thing to keep in mind as you go shopping for bargains on the OTCQX or the Pink Sheets, is that you may want to confine your search to the companies whose tickers end with the letter “Y.”  Frequently there will be more than one ADR symbol for a company, and the only difference will be the final letter — most commonly a “Y” or an “F.”  The “Y” tickers indicate ADRs that are sponsored by the company whose shares are being traded, and that settle in USD as a local security.  The “F” tickers indicate ADRs that are arranged by someone other than the company — usually a shareholder or a broker or trader, and the markets for “F” tickers can be very episodic, and sometimes can even end up settling in the currencies of the home markets.

There are many big companies whose ADRs trade on the Pink Sheets, and generally one finds that if there is vigorous trading of shares on the company’s primary or home exchange, the ADR market will stay in the range set by the home traders.  But there are also many very small companies, or lesser-known companies, whose ADRs have never “caught on” in the US, so their trading volumes can be very low. 

Frequently what happens with an illiquid or sluggish ADR (one that doesn’t trade a lot) is that if there is a bid, a market maker will fill the bid by creating a technical “short” position, and then will cover his short position by buying shares on the home exchange and causing them to be converted to ADRs — a quick and easy transition.  But it is true that small orders may have a harder time being filled for a low-trading ADR — because it is less tempting to the market makers when there are fewer shares (and less revenue) involved.  So to the brave go the spoils; do your diligence, bid and stand your ground.  The worst that can happen is that your bid won’t get hit, which doesn’t cost you anything.

And if and when the euro gains in value against the USD — bingo, your investment can go up (in dollars).


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