Tech Futures:
January 12, 2001
By Michael
Volker
Market Commentary, What to Buy?, Hedging
your Bets with Collars, and Capital Pool Corps Update
Market Commentary
I'm bullish. I always am. But, there sure have
been many not-good news stories and reports which, although I hate to admit it,
have dampened even my enthusiasm for the markets. Reports from car makers,
Nortel cutting jobs, profit warnings from companies like Yahoo (2001 sales
expected U$1.2Bn slightly below analysts' predictions of U$1.4Bn, reports that
PC (Personal Computer) sales were down last year (30% off in revenues while only
1% down in unit sales, according to PC Data of Reston, VA.) make it tough to get
excited about the markets. Doom and gloom.
Invariably when there's bad news, regardless of
how bad, companies get hammered. However, when the news is good, we rarely see
huge price increases. In fact, prices often stay flat or decline even when good
news is reported. This tells me that current holders of stock - not the
potential buyers - are the ones who most directly affect the price. Any negative
news is unlikely to attract a buyer (only sellers at current prices), hence a
downside bias. Positive news, on the other hand, may attract new buyers but it
will also attract sellers (i.e. here's my chance to get out of this one!). In my
simplistic view of the world, that's why I believe that modest pessimism can
have a greater impact in driving prices down than enthusiastic optimism can have
in driving prices up (except when everyone is bullish and greedy).
On the bright side, though, market research
firm, Forrester Research Inc of Cambridge, MA, predicts that on-line B2B
(Business to Business) trade in Canada will reach $272 billion in 2005. This
would represent some 18% of the $1.54 trillion forecast for total B2B
transactions. $69 billion of the $272 billion is expected to come from Ontario's
motor vehicle trade. Another chunk is expected to come from Quebec's electronics
industry.
Here's an encouraging piece which I received
from local tech investor and marketing guru, Ullrich Schade of Ullrich Schade
and Associates. He refers to an article and interview of Don Wolanchuk, an
"expert" in market timing.
He predicts that the NASDAQ should go through
5000 this year. He's one of Market Timer Digest's Top Market Timers, having won
17 annual timing awards since 1989. Some of his greatest timing calls were
widely ignored by the investment community. Wolanchuk forecast the bull market
rally following the 1987 crash and called for a DJIA above 10,000. When NASDAQ
traded at 1800, he forecast a NASDAQ 5000. In 1999, at the bottom of the oil
market, Wolanchuk called for $30/barrel oil. He was Market Timer of the Year in
1995, 1996, 1997 and 1999. Good luck again, Don!
Finally, based on my own discussions with
investors and brokers, I am encouraged by hearing - for the first time this week
in a long while - that things are improving. Many feel that the market has
corrected and has bottomed out. Even gloomy news heard this week (Yahoo, Cisco,
Nortel) has not caused the huge avalanches that were so common before the
Christmas break. Admittedly, earnings forecasts have been reduced. According to
First Call/Thomson Financial, S&P500 company earnings should grow by 4.1%
which is down quite a bit from the October estimate of 15%. But, hey, it's still
positive (and better than GDP growth estimates).
What to Buy?
So, what are some good buys right now? One of
my favorites, which I've mentioned before, is looking even more interesting due
to the market's fall-back.
What if I told you that you could invest in a
basket of the top 20 info-tech and internet companies (like Cisco, Microsoft)
with huge upside potential and a guaranteed minimum return on the
downside, i.e. a no-lose proposition? Invest U$7.00 today, with a guarantee of
at least U$10.00, but with unlimited upside potential. Sound crazy?
Then take a look at the Business Development
Bank's Internet Notes (TSE:BDB.n), a "simulated" basket of
20 stocks. These have been trading on the TSE at less than U$7.00 (52 week lo-hi
of U$6.00 - U$16.00). These "notes" (they trade just like shares on
the Exchange) are guaranteed by Her Majesty at U$10.00 (i.e. they can be given
to her in Exchange for ten bucks in 2009). But - the upside is unlimited! What a
deal!
So, wassup, then? Well, first of all, they have
not been promoted. It's even tough to find information about them (try it,
you'll see what I mean). No one (except me and a few others) know about them.
Secondly, they are thinly traded (hence not of interest to certain investors)
and thirdly, the float is very small with few having been sold on the initial
IPO. Indeed, there are only 1.5 million outstanding. The third point is a plus
for investors because even a modest buying interest will push up the price.
Because of points #1 and #2, the stock is
trading around $7.00. On Dec 29th, 2000, its theoretical "paper" value
was down to U$5.38 whereas the notes were trading at a premium, at U$6.50. Until
recently, they were trading at a discount to the theoretical value. For example,
when the notes were trading at U$12 last Spring, the theoretical value was over
U$20. Both scenarios reflect the lack of interest or awareness of these.
The basket of stocks which the BDB tracks
consists of the top 20 internet companies. It includes these companies: Yahoo,
Etrade, Ebay, Sun, Microsys, VerisSign, CNET, Amazon.com, Doubleclick,
Microsoft, Inktomi, AmericaOnline, CMGI, At Home, Cisco, Entrust Tech, Infoseek,
Qwest, Psinet, Macromedia,and Qualcomm. Not bad company(s)!
With respect to investing in
emerging tech ventures with a B.C. focus, there are two vehicles available to
the general public. These are: the Working Opportunity Fund (WOF, see
www.wofund.com) and Discovery Capital Corporation (CDNX:DVY).
The Working Opportunity Fund is especially
attractive to retail investors at this time of year due to its RRSP eligibility
coupled with attractive tax credits.
Discovery was written up last August by Salman
Partners who projected a $2.15 target. At that time the stock was trading at
$1.40 and today it is less than half that price, trading in the $.60+ range.
Discovery has picked some winners along the likes of Sierra Wireless Inc.
(TSE:SW), ALI Technologies Inc.(TSE:ALT), and Dees Communications (acquired
by NASDAQ-listed NICE Systems Ltd). This one merits a closer look.
The folks that manage the Working Opportunity
Fund, GrowthWorks Capital Ltd. (see www.growthworks.ca), have launched a
new fund - the GrowthWorks Access Fund. This unique retail vehicle offers
sophisticated individual investors the opportunity to invest in the
explosive market of early stage information technology and life sciences
companies on a pre-IPO basis. This may appeal to the more serious (i.e. minimum
$25,000) investor.
A lot of investors have learned that choosing risky
growth stocks is not as simple and painless as it seamed at the start of the
year 2000. Are you paying too much for a cute but rather useless technology that
will never really go anywhere? Let's face it, it is not difficult to be
impressed by fancy technological advances or biotech discoveries that sound
awesome but are impossible for most of us to put into proper context. We simply
lack the scientific or technical experience. Instead, consider riding the
coat-tails of a proven venture capital firm that has earned over $300 million in
gains while losing (on paper or realized) only $512,000. Their tech and biotech
venture capital portfolio returned 68% on average per year for the past seven
years. The trick is to invest in the companies in their early stages of growth
(well ahead of an IPO) and to take an active roll in ensuring that a sound
management team is in place in each investment.
With respect to picking winners, here are a few
examples. Their average per share cost in Angiotech Pharmaceuticals (TSE:ANP)
was $2.65 (currently $59.00), in Stressgen Biotechnologies (TSE:SSB) it
was $0.63 (currently $6.26), and in Chromos Molecular Systems (TSE:CHR)
it was $2.26 (currently over $7.00), and in Anormed Inc. (TSE:AOM)
it was $3.57 (currently $18.00). Their best win was HotHaus Technologies,
in which their $4 million investment grew to $170 million when the company was
acquired by Broadcom Corp (NASDAQ:BRCM).
The Growthworks Access Fund is offered to the
sophisticated investors only. This means that the minimum subscription in
British Columbia is $25,000 dollars. It is offered as a limited partnership
which gives an investor the opportunity to reduce the capital gains taxes as
significant portion of the Fund distributions may be eligible for Canadian
Controlled Private Corporation rule for the $500,000 capital gains exemption
(hot damn!).
Citizens Bank of Canada offers financing
for this issue in the amount of up to $50,000 dollars.
Thanks to Jarek Matysiak, Investment Advisor at
Canaccord Capital, for bringing this to my attention. If you wish to
receive the copy of the offering memorandum, contact your registered rep or give
Jarek a call at 643-7347 (email: jarek_matysiak@canaccord.com.)
Yorkton Securities
has been in the hot seat lately. They've been criticized for their role in
various startups, e.g. dot-coms like Book4golf.com, in which certain principals
of Yorkton have acquired cheap stock which they then promote to their clients.
Scott Paterson, Yorkton's head, has commented that such dealings should be
welcomed insofar as it is a tough for junior companies to get risky deals
financed. I tend to agree with him on this matter and I think it's good that
there is more investment activity in this arena.
Concerns about this relate to "potential
conflicts of interest" which arise when an investment dealer is selling
shares to its clients in which its own principals stand to benefit.
Over the past year, I've seen numerous such
dealings by various firms. Often, they do disclose such dealings in order
to comply with the regulatory requirements, but such disclosures are often quite
subdued. It's a good idea to put these front and centre - not in the fine print.
As long as the investing public is aware of any conflict of interest, this
information can be factored into one's propensity to invest (or not). In fact,
it may even give investors additional confidence. I'm always reluctant to act on
a suggestion by an investment dealer who herself has not made a financial
commitment to the firm she's touting.
Hedging your Bets with
"Collars"
Here's an interesting idea using something
called a Put/Call Collar. This will be of interest to entrepreneurs or investors
with big stock positions in their companies.
Paul
Allen, on of Microsoft's founders recently used this strategy and what he did
serves to illustrate the concept.
The
strategy involves the selling of a CALL option, i.e. giving the holder of the
call the right to buy stock from the holder at a specified price for a certain
period of time (just like employee or market stock options) and the buying of a
PUT option, giving the holder (in this case, the stock holder) the right to
sell, i.e. "put" stock, to the seller of the PUT at a specified price
for a certain period of time.
A
few weeks ago, when Microsoft Corp's (NASDAQ:MSFT) stock was trading down
in the U$41 range, a 65% drop over the past year, Allen
set up a "Zero-cost collar". He did this by selling CALLS with
a $130 exercise price (averaged over a few years) and using the proceeds from
the sale of these CALLS to buy PUTs with a $60 average exercise price.
In
so doing, he limits the price he can get for his Microsoft stock to $130 (still
3X above where it was recently), but more importantly, he protects his selling
price to a minimum of $60. So even if MS tanks to $25, he is still guaranteed
$60 - no matter what. In essence, he's got an insurance policy.
This
is a good strategy, especially for insiders, who believe in the future prospects
of their company - hence they don't want to bail out in any great hurry - yet at
the same time want to be prudent with respect to their investment by covering
their downside. It makes a lot of sense for company founders with huge positions
that they don't particularly want to liquidate even though market factors might
suggest that it is time to cash in.
This strategy works well for anyone with a
large exposure in any given stock. Whereas the selling of CALLS by stockholders
has always been a good, low-risk way of generating extra income on one's
investment, the use of these zero-cost collars should be considered in these
turbulent times. At least, you'll sleep well at night.
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.
However, there's a ton of them
now. Over 227 have been formed in the past two and half years. Many are even
trading below their IPO prices. I hope that there'll be fewer formed with more
emphasis on building value in the existing ones.
New additions to our list are Predator
Capital Inc., a B.C. company and VistaTech Corporation from Alberta.
Predator? Sounds a little ominous, wouldn't you say?
Since the previous update, the following
companies have come to trade: Arsenal Capital Inc., Cross Border Capital
Inc., Horizon Industries Ltd., PanGlobel.com Inc., VTEC Capital Corp. and
WWS Capital Inc.
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
With a mandate to become a national venture
capital stock exchange that provides emerging and small companies access to
capital, the Canadian Venture Exchange (CDNX) ended its first year of
operation having helped companies raise $2.37 billion in equity financings. It
also saw 45 of its listed companies graduate to the Toronto Stock Exchange (TSE).
The next Vancouver
Enterprise Forum event scheduled for January 23rd features the very popular
annual venture finance session, i.e. who's got the dough and what does it take
to get it. Book now to avoid disappointment. This event has been sold out for
several years in a row.
For a convenient printable, pdf
version of this column, click
here.
Michael
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. Copyright,
2000.
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.
Contact: mike@risktaker.com
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