An Investment Opinion
Following the Stupid Money
I'll share with you a few examples that have come to our attention here at Fooldom. They may make you laugh, they may cause you to roll your eyes and go "Pfffft!" They may also give you some really good ideas for companies that would make good candidates to short, if only one could short bulletin board stocks.
I have come to accept the possibility that companies that are currently unprofitable can in fact be good investments if they show a propensity toward later profitability through superlative growth, operational profitability (before capital reinvestment), and good turn on marketing expenses. (See "Valuation Metrics for Unprofitable Companies," Fool on the Hill, February 16, 2000). The revolution, started by Netscape (now part of America Online), the first unprofitable Internet company to go public and succeed in the stock market, has spawned a change in paradigm in the equity markets.
Where previously only well-established, profitable companies gained any support in their equity capital raising efforts, now companies with neither profits nor a clear path to profitability are perfectly reasonable candidates for public offering. But now I see the darker extension of this logic: public companies that have not only failed to make a profit, but have yet to make one red cent in revenues. And the scary thing is that people are bidding them into the stratosphere.
This is not necessarily the fault of the companies. I do not believe in accusing them of wrongdoing. Rather, they are simply raising money in a way that is acceptable in the current equity environment. But what is wrong with people? Is the lure of easy money so persuasive to allow them to suspend all logic?
An example: InvestAmerica (OTCBB: INVT). Here is the company's profile:
InvestAmerica, Inc. is a development stage Co. with a purpose to seek, investigate and, if such investigation warrants, acquire an interest in business opportunities presented to it by firms or persons that desire to seek the advantages of an Issuer who has complied with the 1934 Act. For the three months ended 12/31/99, the Company reports no revenue. Net income totalled (sic) $810 thousand, vs a loss of $60 thousand. Results reflect a forgiveness of indebtness (sic).
Let me translate: We're not doing anything. We're looking for something to do, and we're interested in merging with a company that would like to become public the easy way.
Current market cap? $148 million dollars. For no revenues, and $500,000 in the bank. Look, I don't want to cast aspersions on the company, but starting up a business is hard, even without the added hassle of dealing with public shareholders. More than 80% of all new companies fail within the first two years. The people who have invested in this company have given themselves, mathematically, a 20% chance of even getting their money back. On what? A company with no business plan whatsoever. We often talk about the illogic of playing the lottery as an investment (average return -50%), but these people would be better off if they DID put their money into lottery tickets.
Next example: Microaccel, Inc. (OTCBB: MIXL). Market cap of $212 million, no operating revenues, no operations. This company used to be called Hortitech, until it merged with a private company called NV Electronics. NV Electronics makes a "non-volatile microprocessor," which could serve as the driver for RAM, ROM, and D-RAM for your computer, using less power. Sounds good, right? Well, two problems. First, the prototype model they have developed contains all of four bits of memory. And second, again, the company, none of the companies, have any product for sale, or any revenues whatsoever. Oh, and the person who has this idea, the president of the combined company, as of the January 2000 press release, still worked for Cisco Systems (Nasdaq: CSCO). Let me repeat -- somebody out there right now, based on no physical evidence of a viable product or sales model, is valuing this company at $212 million.
What is the motivation for people to invest in companies with no operations? The promise of easy riches, certainly. But as someone who has formed a company and seen it grow the right way, let me let all of you in on a little secret: There is no shortcut. And the majority of these businesses will fail. And MOST importantly, the chance of any company with no current revenues ever justifying a valuation of $212 million dollars is so slim that it boggles the mind. It's as slim as the prospect of Prairie View A&M winning the NCAA basketball tournament.
It's too bad these companies aren't on listed exchanges -- they truly are dying for short positions. I do have two candidates that are in the process of listing on Nasdaq, however. One of which came across my desk the other day in the form of a "due diligence" information package prepared by a company called Emerging Company Reports, Inc, which was paid $4000 by the company to promote it. The topic of this due diligence is a development stage company called Centraxx (OTCBB: CNXX), which "will" be deploying a wireless tracking technology. Again, the company is valued at $188 million, with sales of zero.
Look, I've got no ill will toward this company, but there is something decidedly wrong when a subset of investors are convinced to invest in a speculative technology that has absolutely no current sales. When ECR, Inc (note to Centraxx -- when you hire a company to promote your stock, at least find one that can use proper grammar) sends me what we used to call in lacrosse a "hospital ball," I've got to make a stink about it. This is a development stage company, with an unproven, incomplete technology, no infrastructure, all with unproven marketability. Sending out a tout to talk up the price of their stock at this point is irresponsible and unconscionable.
You may also want to look at Broadband Wireless International (OTCBB: BBAN). Until last month, it was known as Black Giant Oil Company. Yep, that's right, an obscure oil company has decided to give up the search for black gold in Texas and is instead looking to strike it rich in telecommunications. And the scary thing? Thus far, it's worked, with the stock rocketing up from being a $2 per share oil stock to a $12 wireless stock in no time. Even with the company's shares down to $6, it still seems like they've tapped into a gusher.
Well, at least this company has earnings.
I know I'm preaching to the choir here at the Fool, but every once in a while we could all use the reminder that no such thing as a sure thing, and there is no path to easy money. Get rich slow. Those who enlist the strategy of buying pink sheet stocks will, in the long run, be much worse off. But on the other hand, maybe we should all just go public. I can see it now: OtterCorp (Ticker: CRUD). "Ottercorp is an e-commerce solutions application provider. OtterCorp has no operational earnings, but we have no operations, so we haven't lost much, either." Market cap $120 million. Yeah, that's the ticket.
End of rant.
Bill Mann, TMFOtter on the boards