Why QC Holdings Is Trading So Far Below NCAV

| About: QC Holdings, (QCCO)

Summary

QC Holdings is trading for less than a fourth of the current assets minus all liabilities.

The reason for the low valuation is QC Holdings' pending de-listing. The company will also stop filing with the SEC. Below I will explain how to still get financial reports.

Below I discuss the statistics and a few risks associated with non-listed stocks as well.

This article has been published first as part of my premium research on Seeking Alpha.

My last instablog article was structured around a collection of previous comments. I planned to write more instablogs like that one. However while I have been a very active commenter last year, I did not make so many comments on other articles last month. Not because there were not so many articles to comment on, but because I did not have so much time to read articles and think about them.

Last week, I made one comment worth mentioning, however. The comment is not on Seeking Alpha but on a site from an individual blogger: deepvalueideas.com.

The article I commented on discusses QC Holdings (NASDAQ:QCCO). QC Holdings is trading around 0.60 USD/share. It does not have a growth story. The business is lending money to not so creditworthy customers. For example, the company provides payday loans. This is a loan type suffering from strong regulation in some states as well.

At the current share price, the company trades way below the current assets minus all liabilities. In fact, it is trading for less than a quarter of this difference. Current assets minus all liabilities, or NCAV, is a proxy for the liquidation value of a company. According to deepvalueideas, the difference between NCAV and the liquidation value is relatively small for QC Holdings. I agree with him/her. So the company is worth much more dead than alive. However, the company is going to de-list and stop filing information with the SEC. This announcement has caused the stock to fall off a cliff and is the main reason for the undervaluation. In future, QC Holdings may be traded on the pink sheets.

Do pink-sheet net-nets have great statistical returns?

Now, on average pink-sheet and over-the-counter stocks have bad returns. See also this scientific article. Many of these stocks are so-called promoted stocks. They are growth stories promoted to investors, sometimes in combination with orchestrated upward share price movements. After a promotion campaign, such a stock surges and insiders secretly sell shares or dilute the new shareholders. Or insiders earn money by lending shares to short sellers followed by an orchestrated short squeeze. Recent examples of such promoted stocks are 6D Global Technologies (NASDAQ:SIXD) and Cynk Technology Corp (OTC:CYNK). By the way, in general, stocks with growth stories have worse returns than value stocks without growth stories.

Sometimes de-listed stocks are manipulated downward instead of upward. I cannot prove it, but this may have happened with Dynacq Healthcare (NASDAQ:DYII). See also my recent article on Seeking Alpha, including the comments. Insiders then try to benefit from the low valuation by buying out the other shareholders for a ridiculously low price.

So investing in non-listed stocks is not for the faint of heart. In any case, the research article mentioned above suggests that not all non-listed stocks have bad returns. Stocks that have traded before on a regular exchange have much better returns than stocks that have never traded on a main board. I suppose there are many more growth and story stocks in the latter category. Furthermore, I think that it makes more sense to invest in value stocks than in growth stocks even for non-listed stocks.

How to get the reports for a non-listed stock

Going back to my comment on deepvalueideas.com: I tried to explain that even for a stock not filing with the SEC, shareholders are always able to get annual reports. I am almost sure companies in the US have a legal obligations to provide annual reports to their shareholders. So all you need to do is sent an email to the company. In such an email you explain you are a shareholder and that you would like to get the annual reports when they are available. In practice, it does not go that smooth with QC Holdings. My email bounced. So now I am going to send my request by regular mail.

Good luck!

You probably think now: "Yeah, we will see. Good luck!" And, of course, that is what my emotional self is thinking as well. But remember that though earning money can be pleasant for most people, it usually is not. That is also true when it comes to investing.

I get disappointed just as much and often as anyone else. The difference is that I will not stop there. I will still put small amounts of money in stocks like QC Holdings. Because rationally I am pretty sure that stocks like QC Holdings have on average great returns.

For example, while last year and in January, many stocks went down, some stocks went up. One of these stocks was the despised Skil Ports & Logistics (OTC:SKPLF). I wrote about it last June. Few people thought that this harbor close to Mumbai would ever be built. But the company (read: the CEO) showed building progress by posting lots of photos on the company's website. Few people had thought he would do that. However, for me there are no holds. When a stock gets expensive within its group I sell, so I sold this harbor stock for 50% profit.

Disclosure: I am/we are long QCCO, DYII.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.