Tech Futures:
December 15, 2000
By Michael
Volker
Market Commentary, Christmas
Stock-ing Stuffers, Orphans Orphans, IPO
Watch, Capital Pool Corps Update
Market Commentary
Blame the market's performance on the
uncertainty surrounding the presidential election. On Monday both the U.S.
Supreme Court and a circuit court in Florida issued rulings the market construed
as favoring Bush, and on Tuesday the market rallied sharply, with the tech-laden
Nasdaq bouncing up 10.5% to 2889.80.
Now the election matter seems to have been
settled. So now we can't blame this uncertainty for market actions we don't
understand! There were no substantial market swings following Bush's victory.
We'll have to find new explanations.
Now that Bush is in though, one of his first
challenges will be to deal with the R-word, recession, i.e. is this a threat to
the recent booming economy? This issue and how it is handled will largely
determine market performance over the next few quarters.
Yet, Nasdaq remains in a bear market - more
than 40% below its March peak, even after Tuesday's rally. Investors seem to
have switched from studying business models to income statements.
For the time being, markets are more likely to
react to earnings prognostications. The bearish crowd will no doubt be
reinforced by the Microsoft earnings warning not to mention IBM, EMC and SUNW
all of which have been downgraded.
In early trading today, Microsoft was slammed
by almost 10%, due to its statement that sales for its second quarter ending
Dec'00 would be off 5-6% from previous estimates. MS projects sales in the
U$6.5B range with quarterly earnings at $.47/share.
B.C.'s QLT Inc. (TSE:QLT,NASDAQ:QLTI),
no longer called QLT PhotoTherapeutics, saw 32% of its value evaporate yesterday
as shares fell $20.05 to close at $41.95 on the TSE. The company said that its
Q4 sales would be coming in between $36M and $38M as compared to analysts'
expectations of $40M. It's hard to believe that a 5% miss would knock the
stuffings out of this stock. A buying opportunity, maybe?
I believe, based entirely on my own optimism,
that being in the markets with a long-term perspective is the best way to play
the game.
Christmas Stock-ing Stuffers
Not sure what to buy the kids or your spouse
for Christmas? Well, why not give them a little piece of B.C.'s tech sector -
especially now when bargain prices abound? This is not a bad time of year to
buy, pursuant to tax loss sales and a general dwindling of market interest as
many turn their thoughts to R&R pursuits.
Speaking of tax loss selling and gift-giving,
here's an idea for you: takes some of the stocks you really like, e.g. the ones
you bought back in March and April at two or three times their current price,
and give these as gifts. Maybe you can use the tax loss while at the same time
giving someone you love a stock which you also love (or did).
And while we're on the subject, don't forget
that a donation of stock to your favorite charity or your alma mater has some
attractive features. Because of the way in which deemed gains on donations are
taxed and how tax credits are applied, you can give a buck at a real cost to you
of only a third or so of that amount. Check it out with your accountant and wish
your cherished organization a Merry Christmas (or happy holiday, as the case may
be).
Probably the best way to invest in emerging
companies is via WOF - the Working
Opportunity Fund. WOF is one of the most active Venture Capital companies in
B.C. Unlike other VC's which receive their capital from larger investors and
institutions, WOF allows the average retail investor to get in on the action -
and with a tax incentive to boot.
You can't trade WOF shares day in and day out.
You're unlikely to make many multiples on a WOF investment in a short time
frame, but it is a good way to enjoy a fairly steady return. In comparison to
the broader markets, e.g. the TSE300, WOF has faired fairly well as the
following chart shows:
| |
WOF
Returns as of 31 Oct 2000
(Balanced Shares)
|
|
|
1
year
|
3
year
|
5
year
|
8
year
|
Since
Inception
|
|
Excluding
tax credits
|
42.1%
|
25.8%
|
18.9%
|
12.3%
|
11.3%
|
|
Including
tax credits
|
48.6%
|
31.5%
|
26.7%
|
19.7%
|
18.6%
|
|
TSE
300 Index
|
34.1%
|
12.5%
|
17.4%
|
|
|
WOF first sold common shares to the public in
1992. In January 2000, all previously issued common shares were exchanged for
Balanced Shares on a one-for-one basis and continued the same investment
strategy. In January 2000, WOF began offering Growth Shares. The Growth shares
were designed to invest not only in venture and fixed income investments but
also in public equities and debt securities offering a higher risk/return
potential. Both classes give investors a 15% provincial and 15% federal tax
credit. Both are 100% RRSP eligible.
For investors who bought WOF shares in 1993 and
earlier (like I did), there's some great news. You can effectively redeem your
shares and reinvest the same amount for another tax credit. Of course, to get
the 30% cash break, you need to commit your funds for another eight years!
If you take a look at WOF's
investment portfolio, you'll see a nice list going back to November 1993 of
the companies in which WOF has invested (including amounts). At the bottom of
the list are the dozen or so companies that WOF no longer has - either because
it has sold its stake or written it off. This list also shows which companies in
the portfolio are publicly traded.
Although WOF aren't listed on an exchange, most
investment dealers can help you acquire some stock.
Itemus Inc.
(TSE:ITM, $0.61) was recently rated a STRONG BUY by Paul Bradley of Canaccord
Capital. Though not strictly a B.C. company, Itemus does own Yaletown-based
IdeaPark. Itemus reports third quarter results ahead of expectations - an
unusual surprise these days. Itemus reported Q3/00 revenues of US$671k versus
US$330k in Q2/00. The company’s balance sheet remained strong with a cash
position of $13M at the end of the quarter and a steady burn rate of
US$800k/month.
Itemus, an incubator fund, now has 20 investee
companies under its wings. Canaccord's Bradley has a 12 to 18 month target price
of $3.45 for Itemus.
A few others worth mentioning: QLT Inc
(see above), Creo Products Inc (TSE:CRE, NASDAQ:CREO), and Pivotal
Corp (NASDAQ:PVTL).
QLT is trading in Toronto at $43.50, near its
52-week hi-low range of $121.30 - $37.00. Creo, trading around $34.00 (TSE), is
also near its 52-week hi-low range of $75.00 - 23.05. Pivotal lost some steam
this week due to one bearish analyst's views and can be picked up at U$37.00.
Its 52-week hi-low is U$18.75 - U$75.88.
Where to shop or get some other ideas for some
stocking stocks? Take a look at the list in my previous
column. This is the list of those publicly traded B.C. companies selected
from the top 100 list of all B.C. tech companies. If I had the dough, I'd
be getting into many of these!
If you want to look beyond just B.C., then I'd
suggest checking out the Nasdaq-Canada
list of companies. There are almost 150 Canadian companies on this esteemed
list. The Nasdaq-Canada index, the CND, is currently at 902, up some 60
points from where it was at the end of November, but still off 98 points from
its start on November 21st.
Happy Stock Stuffing Shopping and Happy
Holidays!
Orphans, Orphans
Lately, I've been hearing the term
"orphan" a lot - in reference to neglected companies, especially
seemingly boring CDNX-listed junior companies. What does this mean?
These are companies which are thinly traded
because investors just aren't interested in them. Usually analysts ignore these
firms (hence low investor interest). Institutional investors aren't keen in them
for the same reason.
Even if these firms are cash-flow positive,
they typically trade at low Price-Earnings multiples. A good example of one of
these (A B.C. non-high tech company) is Sepp's Gourmet Foods Ltd. (CDNX:SGO).
Sales in its fiscal period 2000 were $88.5-million, approximately 8 per cent
higher than the $82.2-million 1999. Gross profit increased from $12.7-million in
1999 to $13.5-million in 2000. Yet, in spite of this excellent performance in a
tough industry, the stock is trading at only $.80, half its 52-week high of
$1.60. With only 13+M shares issued, that puts a value of just over $10M on the
company - less than its gross profit! What are we missing here? This firm is
obviously sizzling in the kitchen but is being served up cold in the market. I
suspect that the industry category and relatively low growth (albeit great
performance) just doesn't excite many people.
I've talked before about how some great
companies (such as QLT, Burntsand, ACD Systems, Westport, etc) got started as
small junior companies and then graduated on to the TSE and/or NASDAQ. Whenever
I look at the list of all public B.C. companies I wonder which of those on the
CDNX are going to be the next graduates? Which are going to be the shooting
stars?
I'll refer an observation from Brent Holliday's
recent column, pursuant to some of his Silicon Valley observations (I was there
recently, too. In fact - I lived there for a while in the mid-80's when it was
just as exciting as it is today - at least to me). Brent observed that company
entrepreneurs who are successful thing BIG and they think fast (and they fail
fast, too and retrench). Does this mean that the dozens of B.C. pubcos on CDNX
that have been plodding along for the past three or four years with no
significant news, management changes, or growth are destined to be orphans?
Quite likely. So maybe the best speculative bets in this category are the new
ones.
Perhaps those with substantial management (or
board) changes in the works are worth watching, too. Clearly the team makes the
company. Those that are just idling along need to be rejuvenated with new blood.
To me, in building companies, an ambitious mission statement is key. Back in the
early 90's, Wal-Mart's mission statement was "to be a $125B company by the
year 2000". Guess what? Earlier this year, Wal-Mart reported sales of
$188Bn. It must have worked for them. And Wal-Mart is not high tech and it is in
a very competitive business.
So, if you're thinking of buying into a junior
venture which you think has some sizzle, check out how long the current team has
been at the helm and what its vision is. Do you want to adopt an orphan? (Maybe
a great idea if you want to provide some parental guidance for it!)
IPO Watch
Before looking at what's happening on the B.C. IPO
scene, let's take a quick look south of the border.
In the U.S. markets, fresh public stocks have taken
quite a beating. And many more deals are being delayed or withdrawn than are
coming to market. The average IPO has shed 33% of its value in the four weeks
since the still-undecided U.S. presidential election. Recently, only one deal
has managed to reach the secondary market, while nearly a dozen have been
withdrawn and a half-dozen others have been postponed or reorganized with new
underwriters or a lower asking price.
Of the 437 offerings in the IPO
Express database of done deals, only 35, or 8.0%, are trading higher than
they were 31 days ago. The median company, Radview Software Inc., (NASSDAQ:
RDVW), a producer of e-business software, was down 33% in the last month, and
73% since it went public on Aug. 9th. It came out at $10, and closed recently at
$2.81.
Last week only one company, Rigel Pharmaceuticals,
came to market, while four deals were restructured, one postponed and seven
withdrawn. Rigel, a biotech firm, came out at $7, traded as high as $8.06.
Most of this year's U.S. IPOs have come from technology
companies, and they have taken the brunt of the market's fickleness. Even Palm
Inc., the popular maker of handheld computers, shed 34% of its market value
in the last month, though it remains ahead of its March IPO price by 28%.
In the Biotech world, IPOs of U.S. genomics and other
biotechnology companies surged this year, garnering $36 billion so far in 2000,
more than four times the total of $7.7 billion in all of 1999. Until this year,
1999 had been the best IPO year in the biotech industry's 20-year history.
The kind of biotech companies which are coming to market
has changed. In the mid 1990s the latest technology was combinatorial chemistry,
says John T. McCamant, editor of the Medical Technology Stock Letter, published
in Berkeley, CA. "This year's hot group is heavily weighted toward genomics,
bioinformatics and DNA chip companies."
McCamant believes that next year the action is likely to
shift to pharmaceutical manufacturers, bringing back a shift to product
companies.
"It takes roughly $500 million to bring a product
all the way from discovery in the lab to launch on the market," McCamant
says. "One of our primary premises for why biotech is the single best
long-term investment is the fact that, for the first time, the industry has the
ability to develop its cutting-edge drugs unfettered by the watchful eyes of
stingy corporate partners."
As for the IPO scene in B.C., not much is happening. In
previous columns, four new offerings were identified. These are Kinetek
Pharamaceuticals Inc. (www.kinetekpharm.com), Sourcesmith Industries Inc.,and
Beanstream Internet Commerce Inc. Other IPOs are CPC and are covered
elsewhere in this column.
According to Goepel McDermid, Kinetek's IPO "has
been deferred pending improved market conditions." I'm sure that Dr. Steven
Pelech, founder of Kinetek, is anxious for Kinetek to go public seeing as how he
recently closed some private funding for his latest
company, Kinexus Bioinformatics. But, according to a recent, Dec. 13th
notice issued by the Ontario Securities Commission, the prospectus dated Oct
19th, has been withdrawn. So, it would appear that this offering has, at least
for now, been pulled. That's painful. And, it was just in March of this year
when Kinetek successfully raised just over $20M in a private second round. It
once again shows that building and financing companies at all stages of growth
is tough.
Sourcesmith Indsutries Inc.(CDNX:SSM), the firm
which helped NBC TV manage the planning, logistics and equipment inventory for
the 2000 Olympics, started trading on Dec4th on the CDNX under the ticker symbol
"SSM". The gross proceeds received by the company for the offering
(two million shares at 50 cents per share) were $1-million. The company is
classified as a software developer company. The shares are presently trading
$.50, but since the offering have gone as high as $.75.
WaveCom Electronics Inc. (www.wavecom.ca)
is a Victoria, BC company which designs broadband transmission equipment for
data over cable and fixed broadband wireless networks. It seeks to raise
approximately $75 million at $13-$15 per common share. Pricing was supposed to
be finalized in mid-November with a closing expected in the last week of
November. This hasn't happened. When I called the company to check on the status
of the IPO, I learned that the firm's head office is actually in Saskatoon (but
the "boss" lives in Victoria). No one at either office could give me a
definitive answer. Those who could were tied up in meetings. It would be nice if
companies posted updates on their websites.
The most recently updated prospectus for
WaveCom is dated October 20th. The company has a 12-year history of sales and
profits. In its most recent fiscal period (June 2000), sales were almost $22
million with a $4.5 million net income - after tax! Contact one of their
underwriting agents - Goepel McDermid, Yorkton Securities, TD Securities, or
CIBC World Markets. Note - if you look for Wavecom on NASDAQ - be careful!
There's a French Wavecom (also a wireless company), which trades on NASDAQ under
the ticker WVCM).
Beanstream Internet Commerce Inc's
filed a preliminary prospectus on September 11th to raise $1.575 million by
selling $1.75 million shares at $0.90 per share to BC investors only. Haywood
Securities is acting as the agent. No news here, either.
As far as I know the CDNX still plans to
introduce its own ETIF - i.e. an Exchange Traded Index Fund. The CDNX said that
it will soon choose a company to create a new
exchange index and provide index participation units to track the junior
market's performance. Trading in the units could begin in the first quarter of
2001.
You can get a full prospectus on any Canadian
IPO offering (or any Canadian public issuer for that matter) on the Sedar
website at http://www.sedar.com.
While on the subject of IPOs, I recently read a
report from the Conference Board of Canada which looked at the cost (to
companies) of IPOs in Canada and the United States. The study showed that it is
less expensive to do an IPO on the Toronto Stock Exchange than either on the New
York Stock Exchange or the NASDAQ. They also found that there is less
underpricing of IPO issues on the TSE than on senior U.S. exchanges. Does that
mean that those who are lucky enough to buy shares via an IPO fare better in the
U.S.?
Another point which I found particularly
interesting in view of the fact that many companies aspire to get listed on
NASDAQ is that there has been no clear trend in the number of Canadian companies
listing on NASDAQ over the past five years.
The largest number of IPOs on the TSE fall into
the U$10M-50M range. For these, the direct IPO costs (commissions, legal,
accounting, underwriting) run just under 10% on the TSE and slightly over 11% on
the NASDAQ and 12% on the NYSE.
One thing's for sure, though, Americans think
big: the average size of a NYSE IPO was U$470.6M - almost five times the size of
the average TSE IPO at U$99.6M.
Capital Pool Corporation (CPC)
Update
In this column, I keep track of
Capital Pool Corporation ("CPC") companies (see chart below) as
defined by the CDNX because they may provide funding and management to, and in
the process acquire, technology companies. CPC's are the continuation of the
former VCP and JCP programs on the Vancouver and Alberta Stock Exchanges.
I like CPCs from an investment
perspective. Although one may regard them as speculative (indeed, they are),
they are also an inexpensive way of getting in early and inexpensively. You can
pick up 10,000 shares of a typical CPC for pennies.
New additions to the CPC
list of companies are Churchill Street Investments Ltd., Coventry
Charter Corporation, Elite Capital Corporation, Glenwood Ventures
Inc., and Revolve Capital Corp.
Churchill Street Investments Ltd. and Coventry Charter
Corporation are from B.C. whereas Elite Capital Corporation and Glenwood
Ventures Inc. are from Alberta. Revolve Capital Corp. is from Ontario.
Since the previous update, the following companies have
come to trade: Babylon Technologies Inc., Digital Atheneum Technology
Corporation, Dunsmuir Ventures Ltd., Karisma Capital Corp., Planet
Organic Health Corp., and SNC Equity Inc.
The following companies have been deleted from the list
because they have completed their Qualifying Transactions: New Media Capital
Inc. and Venturecorp Capital Inc.
The
se
updates now bring the total number of CPCs to 217
companies. Of these, only 25 have
consummated their qualifying transactions.
Check
our Capital
Pool Corporation chart (in .pdf format) for a complete updated list of the
CDNX's CPC and VCP companies, thanks to David Ing of Pacific
International Securities.
An introductory article explaining CPCs may be
found at www.bctechnology.com/statics/mvolker-jun02
Footnotes
You know how lawyers and others
like to put interesting disclaimers at the end of the emails? Well, here's an
interesting one that's going around at this time of year:
Please accept with no obligation, implied or
implicit, my best wishes for an environmentally conscious, socially responsible,
low stress, non-addictive, gender neutral, celebration of the winter solstice
holiday, practiced within the most enjoyable traditions of the religious
persuasion of your choice, or secular practices of your choice, with respect for
the religious/secular persuasions and/or traditions of others, or their choice
not to practice religious or secular traditions at all . . . and a fiscally
successful, personally fulfilling, and medically uncomplicated recognition of
the onset of the generally accepted calendar year 2001, but not without due
respect for the calendars of choice of other cultures whose contributions to
society have helped make Canada great, (not to imply that Canada is necessarily
greater than any other country or is the only "Canada" in the western
hemisphere), and without regard to the race, creed, color, age, physical
ability, religious faith, choice of computer platform, or sexual preference of
the wishee.
(By accepting this greeting, you are accepting
these terms. This greeting is subject to clarification or withdrawal. It is
freely transferable with no alteration to the original greeting. It implies no
promise by the wisher to actually implement any of the wishes for her/himself or
others, and is void where prohibited by law, and is revocable at the sole
discretion of the wisher. This wish is warranted to perform as expected within
the usual application of good tidings for a period of one year, or until the
issuance of a subsequent holiday greeting, whichever comes first, and warranty
is limited to replacement of this wish or issuance of a new wish at the sole
discretion of the wisher.)
To heck with it, as far as I'm concerned, "MERRY
CHRISTMAS!!" to all of you......
For a convenient printable, pdf
version of this column, click
here.
What Do
You Think? Talk Back To Mike Volker
Tech Futures is a bi-weekly column that
focuses attention on new and emerging BC publicly listed technology companies.
Mike Volker is the Director of the University/Industry Liaison Office at Simon
Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology
entrepreneur. He owns shares in many of the companies he writes about.
Contact: mike@risktaker.com
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