CDNX Liquidity Woes, Good Buys, Fresh Air at
the Commission, Capital Pool Corps Update, and Coming Events
CDNX Liquidity Woes
The stock market's a pretty boring place these
days. Where are the IPOs? Where is there any momentum? What are the hot plays?
What's getting "promoted"?
Business news commentators like to invent new
buzz words. I was just listening to the market wrap-up when I heard the
announcer say, "today's market action is choppy and volatile with markets
trading sideways". What the heck does "sideways" mean? I always
thought stocks traded up or down or unchanged. But sideways? Maybe that's what
happens when you buy U.S. shares with your dwindling loonie.
The main problem is that investors and traders
are sitting on the sidelines (they're not even trading sideways). This is
especially true on the junior markets, i.e. the CDNX. Barbara Stymiest,
chief of the Toronto Stock Exchange (TSE), identified the poor liquidity
as one of the major challenges now facing the CDNX as well as the TSE, for that
matter.
There's a serious CDNX liquidity crunch as
reported by Peter Kennedy in the Globe and Mail earlier this week.
Daily trading has fallen to a mere $10 million from $260 million in the past
year and a half. Share volume is down to 20 million/day from the peak in March
2000 at 170 million/day. The article mentioned that the daily trading on the
CDNX is the dollar equivalent to a few seconds of trading in Microsoft stock.
Considering that the CDNX has more than 2600 listed companies, that's not a lot
of action. Indeed, not only are the volumes very thin - in many cases there is
no volume at all. None. Zip!
This lack of interest can't be blamed on the
general market malaise. There are some more fundamental issues here. For
example, many small brokerage firms are disappearing and many brokers just can't
be bothered with junior companies. Besides, the CDNX is getting some competition
from the unregulated OTC (Over-the-Counter) market in the U.S. And the increased
influence from "back east" - the TSE - perceived or real, isn't
helping either. Gone are those good old days of Howe Street/VSE wheeling and
dealing. Although some may argue that that's a good thing, we do need to get
speculators and risk takers back into the game to bolster volumes and provide
real investors with liquidity.
There aren't too many solutions being
suggested. One that I heard about recently was a proposal to get the
institutional investors to allocate a percentage, e.g. 5%, of their portfolio to
junior issuers. That'll help in a direct way but it may be more beneficial in an
indirect way - by drawing more retail traders to these companies.
Whenever a large company takes over a small
entrepreneurial venture, the combined corporate culture usually shifts in the
direction of that present in the larger entity. The free-wheeling, fast paced
style of the acquired firm quickly gets replaced by the more formal structures
in place at the acquiring company. This is exactly what I fear may happen with
the CDNX.
To prevent this, the ownership and operating
structures should be separated. That is, the owners should not operate it.
Instead, they should appoint a completely independent and autonomous board to
govern the CDNX. Members of this board should not be predominantly brokers and
financial types. It should include entrepreneurs, especially accomplished ones
that have nursed their companies through the junior markets and those who
oversee companies presently listed on the CDNX. These are, unfortunately,
missing at the board room table.
A board like this will work at opening the
doors to more investors. An obvious place to start is on TSE turf - i.e.
getting Ontario and Quebec investors more involved. The CDNX (i.e. the ASE and
VSE) were always viewed by Ontarians as wild and wooly western exchanges.
Speculative Ontarians had their own rendition of a junior market - the old CDN-OTC
market (so there's some appetite). But, the real trick will be in going beyond
our provincial boundaries and getting American companies and investors to see it
as a better alternative to the OTC. There's a big void between the OTC and the
Nasdaq small cap market - hence a market opportunity for the CDNX to seize. In
my columns in 1999 which you can still find in the T-Net archives, I pushed for
a North American identity (I never did like the CDNX name! and still don't).
Hopefully, when the TSE demutualizes and goes
public itself, it'll spin-off the CDNX to make it a publicly owned entity in
which the TSE could still hold a stake, but will exert even less influence.
In the meantime, the best option to address the
liquidity issue is plain and simple promotion. All companies - large or small -
promote themselves. Have you ever counted how many press releases companies like
Nortel put out on a weekly basis?. The CDNX must be far more vocal in
this respect. It has many success stories that it mentions all too infrequently.
The heroes themselves would make excellent spokespeople.
A good first step in this direction, i.e. to
draw investors' attention, was just announced. The CDNX and Standard &
Poor's, a leading provider of financial information and investment analysis,
are teaming up to create the S&P/CDNX Composite Index -- a new
venture capital index for Canada. The S&P/CDNX Composite Index is being
developed as a broad market indicator for the Canadian venture capital market.
The index, which will replace the existing CDNX index, will debut on December
10, 2001. Calculated in a manner similar to the TSE 300 Composite Index, the new
index will be market capitalization weighted and will include approximately 500
companies as opposed to the 2600+ (i.e. all companies) which are now in the
current CDNX index. This list will be revised quarterly. For the list of stock
names which will comprise the new index, criteria for inclusion and the
methodology, check: http://www.spglobal.com/news.html.
There was some talk as last year about creating
an index which would be exchange-traded. This hasn't materialized. Perhaps the
S&P label will bring us a little closer to the possibility.
I should add that creating an index fund isn't
easy. Myself and some others have spent a great deal of time and money
attempting to create an exchange-traded index for BC Tech companies, but the
logistics behind such an undertaking are far more complex than they appear. And
to make it work, you need a large fund and good liquidity. We haven't given up
just yet.
A CDNX traded index (analogous to the NASDAQ
QQQ's) would, in my view, go a long way towards marketing the CDNX.
My bottom line: a vibrant, active, junior
exchange can't be run and managed by an institution. Without entrepreneurs in
the picture, it'll surely fade away.
Good Buys
In the spirit of getting back into the market,
I thought I should allocate some column inches on a regular basis to the
identification (or reminding) of publicly traded B.C. tech companies. I'll
include a few at the top end, in terms of market cap, a few in the mid-range and
then finally some of the more speculative penny stocks.
MacDonald Dettwiler (TSE:MDA), a pioneer
on the B.C. tech scene, represents a good big-cap investment opportunity. The
company, unlike most in the sector, has reported its 69th consecutive quarter of
profit. The company ranks 4th on the BC technology venture revenue scale. The
company may benefit from the increased government spending on security and
defense. The company sells information per se as well as advanced technology
products. The company is best known for its Canadarm deployed on NASA's
Space Shuttle. I haven't heard any negative prognosticators. Most analysts
expecting healthy near-term stock gains. Since MDA went public in mid-2000, it's
stock is one of the few with a substantial increase, i.e. more than 60%. In the
latest quarter (Sep30), sales rose 12% to $124 million while profit increased to
$4.9 million. Even better is the balance sheet which, during the quarter, added
$13 million in cash flow. MDA is trading at $23.
In the same league as MDA, I would bet on
second-ranked Creo Products Inc. (TSE:CRE) and Sierra Wireless (TSE:SW),
in 15th place. Both are well managed and very focused on their businesses. Many
investors wished they could've participated in the IPOs of these companies.
Today's pricing offers a similar opportunity. Indeed, it's almost like buying in
pre-IPO! Creo's at U$12.50 and Sierra's at C$27.00.
The Harry Potter phenomenon should bode well
for Burnaby's Electronic Arts (NASDAQ: ERTS) operation since EA was quick
on the draw to negotiate the game rights to the novels. (What we need is to
bring some Harry Potter magic to the CDNX. Maybe EA could develop a CDNX market
game featuring Harry?) EA's not cheap, though. At U$55, it's near the upper end
of its 52-week range of U$31-U$63.75.
In the middle grouping, a good place to begin
is those companies that are in the process of buying back some of their own
stock - taking advantage of the relatively low prices. These are no-brainers.
Buy-backs imply high internal management confidence, good cash reserves,
positive cash flow, improved EPS through immediate anti-dilution, while at the
same time providing a back-stop against further price erosion.
These companies are: Burntsand Inc
(TSE:BRT), ACD Systems (TSE:ASA), Pacific Insight Electronics Corp (CDNX:PIH),
Triant Technologies (CDNX:TNT), Ignition Point Technologies Corp (CDNX:IPN)
and ALI Technologies Inc (TSE:ALT).
These six companies are all buying back their
own shares - around 10% of their issued capital - on the open market over
the next year.
ACD, a Victoria imaging software company, is
trading at only $2.50, well off its peak of $10. In the month following the
release of its ACDSee(tm) 4.0 software, more than one million copies were
downloaded by consumers.
ALI, a medical imaging technology maker,
reported Q4 (Sep30) revenues of $12.3-million, an increase of 16 per cent over
the prior quarter. Gross margins of 57.1 per cent exceeded even management's
targets according to a recent news release. Net income of $2.4-million (EPS:
$0.23) was 119 per cent higher than the prior quarter. That's a net margin of
20% - darn good. Revenues for the entire fiscal year are up 28% to $40.4
million.
In the penny category, my three
"gut-feel" picks this week are: Marine Bioproducts International (CDNX:MBP),
TIR Systems Limited (CDNX:TIY), and Immune Network (CDNX:IMM).
Insiders of Marine Bioproducts just put $640K
of their own dough into the firm at $.16 a share. They're obviously confident.
TIR just announced a $6.6 million "loan" for the federal government.
So, in a way, we've all invested in it already. Immune Network is working on
commercializing research on Alzheimer's. There is no drug available yet that
will slow the progression of Alzheimer disease once it is diagnosed. IMM hopes
to have one - the first one. And, at $.06 it's shear speculation. Hey, 10,000
shares will only set you back $600! Better than 649 if you ask me. Besides, I'm
a big fan of research on this terrible disease.
Finally, for those of you who are still a bit
reluctant to jump into a tech stock or for those seeking some diversification,
I'll make a departure from my usual high-tech-centric recommendations to comment
on a low-tech BC company that merits a look (or better yet, a taste). That's Vincor
International Inc (TSE:VN). Vincor makes some great B.C. wines - e.g.
Jackson-Triggs, Inniskillen, Washington's Hogue Cellars and Sawmill Creek. I've
heard one of their Chardonnays described by connoisseurs as "a bold and
fruity little wine" (nice line to use when you're at a wine-tasting). Me, I
just like the taste! I just wish more wines came in the handy 4-litre box
pack like their Sawmill Creek label. There's an innovation that hasn't caught on
yet! CEO/Entrepreneur Donald Triggs pulled off a $7m net on Q2 sales of $92
million with a 48% margin to boot. He's out seeking a few more labels to add to
his Cellars.
Fresh Air at the Commission
last week, I attended a seminar put on by the B.C.
Securities Commission. What a breath of fresh air it was! Together with its
counterpart in Alberta, the BCSC plans to introduce some sweeping changes to the
money-raising rules as early as next Spring. Much of the red-tape now facing
companies and investors will be eliminated.
The
challenge for commissions has been to strike the right balance between
protecting the investing public and facilitating access to capital for
companies. Historically, the emphasis has been on protecting investors, e.g.
keeping widows and orphans from getting fleeced by ruthless scam artists (many
of which almost caused the demise of the Vancouver Stock Exchange, just before
it merged with the Alberta Exchange to form the CDNX in 1999). In an attempt to
keep the hustlers at bay, new policies and rules were invoked – making it
almost impossible for legitimate companies to sell their shares.
In
B.C., the governmental reporting structure had the Commission reporting to the
Minister of Finance. Collecting fees and fines and serving as a watchdog was its
primary duty. The new B.C. Liberal government’s promise to cut government red
tape and create a pro-business climate was, I’m sure, behind the announcement
that the Commission would now fall under the new B.C. Ministry of Competition,
Science and Enterprise (love that name!).
Most
equity capital raised by companies – again public or private firms – does
not come from the public at large. It comes from family, friends, angels, seed
funds, venture capitalists, and institutional investors. It is in this area were
the regulations have caused headaches. For example, it is technically illegal
for any
company to sell its shares to anyone
unless it produces a prospectus or relies on an “exemption” to the
prospectus requirement. There are numerous such exemptions. For example,
companies can sell their shares to company insiders and friends thereof without
any hassle. However, outsiders cannot easily invest unless they invest a minimum
of $25,000 (much higher in Ontario) and meet certain criteria.
Under
the new rules, expected to be in effect next Spring, angel investors, for
example, will be able to invest any amount with almost no red tape. This is just
one example of the many positive changes. Yet, there are a few things which
still need to be worked on. For example, the BCSC has adopted a rather arbitrary
definition of what it calls a "public" company. If a company has more
than 50 external investors, they consider it public. Yet, to be a publicly
traded company, you have to have at least 300 shareholders (a CDNX requirement).
This is an important distinction because some of the exemptions disappear if a
company is no longer considered a "private issuer". Yet, it isn't
really public, either - so it'll find itself in a no-man's land area with
respect to accessing capital.
Other
government bodies, notably Canada Customs and Revenue Agency (CCRA), have
a completely different definition of what they call a public company with
respect to taxation. Hence, more confusion.
Complete
details can be found at the Commission’s web site at www.bcsc.bc.ca.
The BCSC is still accepting comments and
feedback until the end of the month. They've been really good at listening to,
and accepting feedback from, all stakeholders. Be heard.
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 CPC program was launched
in B.C. a few years ago, more than 250 CPCs have been formed and more than 30
have completed their so-called Qualifying Transactions (QT). Right now, there
are dozens just sitting there with modest amount of cash - usually around $500K
- not knowing what to do with it. I'm even seeing a number of CPCs looking at
merging with one another to pool their capital.
I note from a recent brochure
produced by the CDNX that since the CPC program was invented in Alberta, more
than 1200 such entities have been created and have raised in excess of $3
billion in equity since 1987. WOW!!
24% of the CDNX companies which
graduated to the TSE in 2000 started off as CPCs.
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. In the last column, I
mentioned that this chart would be updated to Oct 31st. My apology - it'll be
updated at the end of November. Not to worry, though, these CPCs have lost a lot
of momentum
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Coming Up
The next Vancouver Enterprise Forum
event will be held on Nov 27th and the topic will be "From Research to
Commercialization" and will discuss corporate challenges in moving from the
development phase to product commercialization. Questions such as "What are
the key manufacturing issues that come up when a company transitions from
R&D to commercialization?" will be covered. Details at: www.vef.org.
The VEF's new tag line is: "VEF - Advancing Technology
Entrepreneurship."
A complete calendar of technology events can be
found on T-Net's
Events page.
Footnotes
I was delighted to see some light on the IPO
front. Shoppers Drug Mart Corp floated its IPO earlier this week,
and in spite of the pall cast by Monday's plane crash in NYC, it was able
to place 30 million shares in the market at $18/share. These will start trading
on the TSE on November 21st.
A Vancouver Sun article last weekend
picked up on the recently updated T-Net100 list. The Sun's reporter put a
negative slant on it noting that 360networks (TSE:TSX) appeared at the
top of the list, yet it is currently operating under receivership protection.
She wondered how this could be since the list was called the "industry's
benchmark for success." It's an interesting observation, but omitting it
would mean ignoring the fact that it did ramp up its revenues in very short
order. And, let's remember that receivership is more synonymous with intensive
care than it is with death and it ain't dead yet. 360networks, which IPO'd (is
that a verb?) in April 2000, had revenue of $761 million for its FY2000 (Dec)
whereas Creo Products Inc (TSE:CRE) ranked second at $675 million and PMC
Sierra Inc (NASDAQ:PMCS) placed third at $637.8 million. In a column some
time ago, before 360networks existed, I was contemplating which firm might be
the first to pass the $1 billion mark. I'm still wondering.
The Loonie is down 7% since beginning of the
year and 2.4% down since 9-11. In contrast, the Mexican peso is up 4.5% and 2%
respectively. Maybe it's suffering from a liquidity crisis? It strikes me that
the Loonie is just like a junior CDNX stock - even if its good, no one's
noticing and no one cares. It just keeps inching lower and lower. No one wants
to buy it. So, should we merge it with a currency that's got good branding (no
not the peso - the dollar!)? Or, we just wait till it's a dime (US). Sherry
Cooper, BMO's economist, seems to be advocating such an action, noting that
nothing is likely to change it.
I'm glad I'm in high tech and not in the travel
industry. I note that the Government of Canada has announced a $20 million ad
campaign to encourage travelers to take flight. Those of you who've traveled
recently may agree with me that the best way to get folks mobilized again is to
reduce the hassle factor. Security checks, especially the line-ups, add
considerably to the stress factor associated with travel today. Since airlines
pay for these checks, they ought to insist on prompt (and no less thorough)
service. Is that too much to ask? I'm quite convinced that some of the security
people equate deliberate slowness with increased security. I suppose that fewer
travelers mean fewer security risks! That's no way to build an industry. And,
while I'm at it, am I alone or have you noticed how the airlines seem to be
using the present malaise as a justification for their inefficiencies? The last
couple of Air Canada flights I took had us wait at the arrival (not departure)
gate for more than 15 minutes waiting for the ground crew to get off their
coffee break and another 30 minutes to unload luggage. That's simply
unacceptable. [Funny! I just arrived in Toronto after typing the above
while en route and guess what - no luggage! Serves me right for being mouthy!]
Do email change notices drive you nuts? @home.ca
(bankrupt!) email IDs are changing to shaw.ca and rogers.ca (although Rogers is
sticking with @home for the time being opting for a little bribe to get users to
switch). What a nuisance! The only thing worse is people with multiple emails
that haven't figured out how to manage them properly. For example, I just love
those people who give you three or four addresses telling you this one's for
personal use, this one's for business, this one's for weekends, etc. For the
small cost of getting one's own domain, I think the investment is well worth it.
After all, how can anyone reach you if you're a victim of downsizing or a
defunct ISP?
A reminder: 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.
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