Making a Quick Buck,
Capital Pool Corps Update
Making a Quick Buck
In Brent Holliday's column he often gets
interesting and insightful readers' comments. Here's a sample of the kind of
stuff I get from readers: "Should I invest in 360networks since the stock
is so cheap, now? I've got $10K to invest and I want to know what stocks have
the most promise for a quick buck?"
I bet brokers love to get these kinds of
questions from their clients. Although I found the question somewhat amusing, it
got me thinking a bit about how to answer such questions since I'm sure we'd all
like to know the answer. Who wouldn't like to make a quick buck, or any buck for
that matter?
Before attempting to answer the question, one
would have to determine what the reader means by a quick buck. What is the time
frame for making a buck? I assume quick means months or even days - but not
years. Also, how big a buck would he like to make? Bigness is best measured by
rate of return (ROI) expressed on an annual basis compared to the standard
benchmark for returns which is interest rates on short-term deposits (e.g.
T-bills). These currently run around 3.5%. Longer term deposits, e.g. bonds will
provide interest yields around 6% (the current prime rate). For example, the
current yield on the Canada 5.75% bond due June 1, 2029 is 6.03%.
The great thing about our financial markets is
that there are so many investment alternatives - literally something for
everyone! The prudent investor must establish some goals and criteria before
jumping into any investment and before asking for investment suggestions.
Indeed, you will notice that when you sign up for an account with an investment
dealer, they must ask you what your investment preferences are, i.e. are you
interested in income, growth or speculative investments? And what is your
risk propensity? Obviously, wanting to make a big buck fast will mean exposing
yourself to more risk than making a steady buck over time.
Because this column is focused on technology
investments, let's take a look at some investment scenarios with a high tech
underpinning where possible.
Going back to the initial question about
investing $10K to make a quick buck, my answers would range all the way from
"buy T-Bills" to "buy options on the Nasdaq Cubes" or, for
that matter, "buy options on any volatile NasdaqNM tech stock (of which
there are many these days)".
In the first - and safest case - the $10K will
return, as it turns out, almost exactly $1/day (using a 3.5% T-bill rate). So,
there's your quick buck: i.e. one every day on your $10K (has a nice poetic ring
to it, doesn't it?) for almost zero risk. Please note that there's no such thing
as zero risk. Even Her Majesty can go bust. I guess that's why we sing "God
save our Queen" - to help ensure zero risk on government-backed deposits.
In the extreme case, the $10K could return 100%
or more in a few weeks or even 30-40% in a few days. Case in point: if you
bought 45 Aug QQQ $42Call options yesterday at $1.50, you could sell them today
at $1.90, giving you a profit of C$2700 on your $10K in one day! Go
figure out what the annual ROI is on that! The QQQ's are the so-called Nasdaq
"cubes" which are exchange-listed and traded (on the Nasdaq, of
course). QQQ is the ticker symbol for the Nasdaq-100 index stocks which includes
Burnaby's PMC-Sierra (NASDAQ:PMCS;$30.35) and 99 other Silicon-Valley
style companies. The $42Call contracts give you the option to buy/sell 100
shares, i.e. the Cubes, per contract. Hence, 45 contracts represents 4500 cubes
at a cost of U$1.50 each, i.e. the $10K which we're "investing".
You can be even more aggressive and take even
greater risk by getting into the Futures market on indexes, e.g. buying or
selling (shorting) the S&P Composite Index, but I'll keep away from
that because you could lose more than the $10K you're starting with - even with
the prudent use of stop loss orders (does anyone remember Oct'87?).
Next, let's take a look at the next-to-extreme
cases mentioned above, i.e. low risk/low return to high risk/high return and
then let's take a look at the mid-range of investments, i.e. modest risk/modest
return.
But what's in between these two extremes, i.e.
the next-to-extreme cases? The choices range from picking junior speculative
CDNX-listed companies (I won't go near the OTCBB companies - which you can't
really call "listed" in any event) to picking senior tech companies
listed on the NasdaqNM.
So, what will you pick? I'll limit my examples
to B.C. since that's what this column is all about, i.e. B.C. technology. Will
it be a CDNX company such as Marine Bioproducts (CDNX:MBP;$0.50), Electric
Mail Company (CDNX:ELE;$0.35), EXI Wireless (CDNX:EXI;$0.90), CST
Coldswitch (CDNX:CST;$0.25), Prescient Neuro (CDNX:PRE;$0.58), TIR
Systems (CDNX:TIY;$0.60) or one of the many CPC stocks, exclusive to
the CDNX, especially those with a tech focus (see further down in this column)?
Or, will it be a Nasdaq company such as PMC-Sierra (NASDAQ:PMCS;$30.35), Pivotal
Corp (NASDAQ:PVTL;$10.00), CREO Products (NASDAQ:CREO;$16.00), or any
of the others that you'll find listed on the T-Net top 20 companies? The
smaller, riskier ones can give you a return in the multiples - hundreds of
percent - (remember, companies like QLT and Westport were in this
category). The larger, less-risky ones, can give you high double-digit ROI's.
Of course, even the biggies can tumble. Take 360Networks
(NASDAQ: de-listed) which was just this morning delisted from the Nasdaq
pursuant to its voluntary filings on June 28 for protection under the
Companies’ Creditors Arrangement Act in Canada and its U.S. subsidiaries under
Chapter 11 of the U.S. Bankruptcy Code.
As 360Networks demonstrated - not to mention
our Canadian "favorite", Nortel Networks (TSE:NT;$12.60) which
is under fire - the big cap firms are not necessarily safer investments. Another
example of this is Ottawa's JDS Uniphase (NASDAQ:JDSU;$8.35) which is
plastered all over today's financial press - having gone from being one of the
most valuable tech companies to now having the distinction as reporting the
biggest corporate loss ever, in Canadian financial history!
For those of you how find it tough to make
investment decisions and tend to rely on "expert opinions", don't
forget that these analysts' learned prognostications aren't much better than our
naive hunches. To illustrate this point, go back one year to what was being said
about Nortel when its stock was peaking at $124.50. According to The Globe and
Mail, "buy" and "strong buy" ratings were the norm. ABN Amro
analyst Kenneth Leon raised Nortel to "top pick" from "buy"
in late July, 2000. Credit Suisse First Boston analyst James Parmelee suggested
in early August that Nortel could go to U$150 within the next year, up from an
earlier estimate of U$120. Ha!
Unless we do a great deal of analysis on
specific companies, which is still, at best, a crap-shoot, we might settle on a
less-aggressive approach with a modest ROI.
So finally, let's look at the mid-range of the
spectrum. I suspect that investors would fit a bell-curve with respect to the
foregoing investment scenarios. And, you'll find that the majority are in this
middle range, i.e. where most investors put their dough. Just look at all the
number of mutual funds and index funds, and the trading volumes in these, to get
an appreciation of this.
In this category, we find a myriad of funds,
with varying risk profiles and ROI objectives. Mutual funds are very popular
because you don't have to pick specific winners. I liken these to a shot-gun
investing approach over a rifle-shot single-company game plan. As well as mutual
funds which are holding companies with investments in public companies, there
are Venture-capital style funds such as BC's Working Opportunity Fund (non-listed,
RRSP eligible and tax-driven) and Discovery Capital (CDNX:DVY;$0.30)
which both invest in emerging tech ventures. Discovery is presently raising $30
million for tech sector investments. You can buy as little as 5 units for $1,000
per unit.
Mutual funds which invest in public companies
are frequently compared to index funds. An index fund is simply a basket of
stocks selected in such proportions so as to mirror a specific index. When you
buy the S&P500 index, you are effectively buying a basket of the 500 stocks
in the S&P500 index. A managed mutual fund attempts to beat the market by
making investment buy/sell decisions whereas an index funds is formula-driven.
That's why managed funds have high management fees associated with them whereas
index funds have little overhead.
My personal favorite index fund investment in
this category is the Nasdaq-100 (NASDAQ:QQQ;$41.85). These are the Cubes
referred to earlier. But, instead of buying options on the Cubes, just buy 'em
and sit on 'em. You can certainly make a few bucks quickly with these. And if
you don't score quickly, you can sit and wait. Or, trade them - day in and day
out.
These so-called Exchange Traded Index Funds (ETIFs)
are created by financial firms such as Barclays Bank in cooperation with
the owner of the index so that investors like us can buy or sell the underlying
index on a regular stock exchange.
A few years ago, we created the T-Net20
index to track the performance of BC's tech industry. If you could have put the
$10K into this index when it was created in early '98, you could have cashed in
last year at $100K (900% gain over two years). Darn good! Alas, if you had
waited until now, you'd only get $14,750 - but even that's a pretty good - and
fast - buck! The only problem here is that we're dealing with a hypothetical
case since the T-Net20 is not a traded index. To invest in this index, i.e. to
invest in BC's top public tech companies, you'd have trouble spreading $10K
around in 20 companies to mirror the T-Net20. Maybe some day....?
A very creative, unknown vehicle has been
created by Canada's Business Development Bank. Take a look at their Internet
Notes (TSE:BDB.n;$6.75), a "simulated" basket of 20 internet
stocks - including the likes of Microsoft. These have been trading on the TSE at
less than U$7.00 (52 week lo-hi of U$6.00 - U$9.75). 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! How come nobody knows about
this? This investment gives you the prospect of making a quick buck at virtually
zero-risk. It's almost like a bond with unlimited upside, i.e. you get back U$10
on a $6.75 investment PLUS the upside is unlimited!
Just recently, i.e. in June, the BDB announced
the issuance of 1.65 million Canadian technology equity linked notes
which are listed under the symbol:BDB.C. These are currently trading at $10.00.
Then there's the BDB's principal-protected Nasdaq-100 Index-Linked notes
(TSE:BDB.Y). Some interesting stuff. Great for risk-averse quick buck aspirants!
Regardless of your goals and risk
criteria, it's got to be a great time to get into the market and find some
companies (or funds) with good value. Markets tend to overshoot in heated times
and retreat during cooling off periods (kind of a hysterisis curve for your
techies). This is a good time to put that $10K into the market!
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. They provide
companies with an alternative to traditional venture capital financing. CPCs are
the continuation of the former VCP and JCP programs on the Vancouver (VSE) and
Alberta Stock Exchanges.
Since the program
was launched, more than 250 CPCs have been formed and more than 30 have
completed their so-called Qualifying Transactions (QT). It takes at least a year
- usually longer - for a CPC to find a suitable takeover candidate and another
six months to a year for a deal to be finalized. One way to expedite the
process is to eliminate the need for a special shareholders meeting to approve
the deals - leave it up to the CPC boards.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the CDNX's
CPC and VCP companies, thanks to David Ing of Pacific International
Securities. This list is updated on a monthly basis.
Investments Ltd., a CPC from Alberta,
and The Jenex Corporation, which is from Ontario.
Some companies that have come to trade include Avic
Technologies Inc., Coastport Capital Inc., Elite Capital Corporation, EREZ Inc.,
Gateway Capital Corp., Leitrim Group Inc., My Venture Inc., Quicksilver Ventures
Inc., Seneca Equities Corp., and Vista Investments Inc.
Old Sun Resources Ltd. has been removed
from the list because it has completed its QT.
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Footnotes
I'm taking a few weeks vacation
this summer, so my next column will appear in 4 weeks, i.e. August 24th.
Although the summer is usually
a quiet time for the Tech industry, a complete calendar of technology events can
be found on T-Net's
Events page.
SFU's TIME Centre is
open for business - business folks, that is. TIME is an acronym for Technology,
Innovation, Management, and Entrepreneurship. TIME supports the growth and
development of the tech industry in B.C. TIME features a "Business Centre"
(looks like an airport business lounge) which is open to technology
entrepreneurs and business people to use as a drop-in downtown office facility.
Need to plug-in? Make some calls? Do some work? Hold a meeting? Why hang out at
MacDonald's when you can work productively at the TIME Centre? Drop by and check
it out! It is located at SFU's downtown Harbour Centre campus at 515 West
Hastings St. More information can be found at www.sfu.ca/time.
PS - there are some great facilities for holding your company meetings.
For a convenient printable, pdf version of this
column, click
here.
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