Microcap Driller Hits Major Milestone

Louis BaseneseKeep an eye on Earthstone Energy (ESTE).

The little oil-and-gas driller is making the jump to the New York Stock Exchange.

In market nomenclature, Earthstone Energy is an “uplister.” That is, a company moving from the over-the-counter market to the Nasdaq or NYSE.

Think of uplisters as companies ascending to a loftier status within the investment world.

By that I mean…

  1. More institutional interest.
  2. More analyst coverage.
  3. Inclusion into ETFs.
  4. Greater media attention.
  5. Attracting more talent and resources.
  6. Higher levels of liquidity.
  7. Options and derivatives listings.

With so many bullish forces (above) at their back, uplisters tend to greatly outperform the market.

In fact, they’re so mouthwatering that I asked my senior analyst, Martin Hutchinson, to drill down on uplisters.

If your portfolio doesn’t include at least one uplister, you’re potentially costing yourself thousands.

Hutch’s full report on uplisters is below.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily


Question: Martin, we’re continuing to build the ultimate investment library. What I’m talking about are important investment catalysts that every baseline investor should know.

Today, we’re going to talk about uplisting and delisting, so let’s jump right in. Tell us what are these two? How are they different, and why should investors be aware of them?

Martin Hutchinson: Uplisting is where a company that’s traded on an over-the-counter basis moves to the Nasdaq market or the New York Stock Exchange.

Question: Can I interrupt you real quick, Martin? What do you mean by “over-the-counter”?

Martin Hutchinson: That means the shares aren’t listed on an exchange, but they are public so that you can trade them.

Delisting is the other way around. It’s where a company voluntarily or, more often, compulsorily delists from the New York Stock Exchange or the Nasdaq.

Question: Let’s start with uplisting.

Martin Hutchinson: With uplisting, you need to get the consent of the exchange, obviously.

There are some criteria that the exchange looks at to decide whether or not you’re allowed to uplist — share price, for one thing. You need at least a $4 share price for the Nasdaq and New York Stock Exchange.

Size — you need to have a million shares outstanding… market capitalization of $40 million for New York Stock Exchange.

There are some rules on corporate governance. Particularly, you have to have the Sarbanes-Oxley rule on CEOs signing off on the company’s computer systems.

Then you need to give three years of figures. And there’s a need for liquidity. You need to have 300 round block shareholders for Nasdaq, 400 for the New York Stock Exchange.

Uplisting is a fairly complicated procedure, but you can benefit well off it.

You’ve got to pay stock exchange listing fees and be in compliance with Sarbanes-Oxley, as I said, or computer systems.

So a company will typically uplist if it wants to do big share issues with institutional buyers, because institutions are always interested in fully listed companies rather than OTC companies.

Question: I imagine, Hutch, that most every company trading on the OTC seeks to be trading among the big boys, right? Because we’re all capitalists here. So you’ve got to be on the big stage to get the big bucks. Is that correct?

Martin Hutchinson: By and large, yes. Although Sarbanes-Oxley has put a damper on that because of the costs of compliance on the computer systems and so on.

Indeed, when we talk about delisting, I’ll talk about a reason why, quite often, some pretty big international companies delist.

Question: Let’s get to the bottom line on uplisting first.

If I’m already a shareholder in a company that’s going to uplist, this seems like it can only be good news for me. Can you speak of that? Also, what about a company that is planning to uplist? Is that a company we should be looking very closely at?

Martin Hutchinson: Yes, it is because, for one thing, uplisting generally involves a price gain — an average of 25% is what I’ve seen in the statistics.

There was a company I had a few shares in called Galapagos, which is a pharmaceutical testing company. That company uplisted, and the shares went from around $11 to $40 over about three months.

That doesn’t always happen, but uplisting can be very good news indeed.

Question: Let’s talk about the other side of the coin, delisting.

Conventional wisdom tells me that this can only be a bad thing but perhaps not. What’s going on with companies that are delisting?

Martin Hutchinson: Delisting typically happens compulsorily if shares trade for less than $1 for 30 consecutive days. You’re then given 180 days to regain listed status, which you’d only normally do with a reverse split. Obviously, your shares might bounce back willingly, but they don’t often do that.

Delisting, however, is not necessarily negative if the stock is listed elsewhere. For example, we’ve seen a lot of companies listed on Toronto that have delisted in New York and gone OTC. In that case, if they’re listed on Toronto anyway, delisting in New York just saves them some money.

Indeed, it’s been common for international medium-cap and small-cap companies to delist in New York since the Sarbanes-Oxley rules came in 10 years ago. Listing on New York now involves a big additional cost, so they’d rather delist.

If the company is traded elsewhere, like in Toronto or Singapore or London, then it really doesn’t matter that it’s only traded OTC in the U.S. Because the arbitrageurs make sure that you can get in and out on a decent size.

It’s only if a company is not traded elsewhere that you worry much about delisting.

Question: Hutch, can you give us a final word on delisting?

Martin Hutchinson: On delisting, I’ve got one good example where it’s not always negative.

A Canadian mining company called Claude Resources was trading around 20 cents in the U.S., and the New York Stock Exchange therefore made it delist.

My son and I both owned a few shares in that, and when it delisted, I sold and my son didn’t. It turned out that he was right, because a year later the stock was taken over by Silver Standard Resources for $1.65 per share. So he made eight times his money, and I missed out.

So delisting is not always negative. You have to look at the other circumstances surrounding it.

Question: Very good, Hutch.

Now, to recap. Uplisting is almost always bullish. But when companies are delisting, it’s worth a check a little bit more under the hood, correct?

Martin Hutchinson: That’s absolutely right.

Question: Good stuff. Thanks for your time, Hutch.

Martin Hutchinson: Great to be with you.

Question: This is Wall Street Daily, signing off.

Good investing,

Martin Hutchinson
Senior Analyst, Wall Street Daily

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