OFFTOPIC: I'll outline three that might be constructive.
At their peaks, all of these stocks sold somewhere between 10-20 a share.
First is the interesting and recent case of NetFRAME(NETF), a superserver manufacturer who is currently being bought out by Micron Electronics (MUEI) for $1 per share. This company was always able to put out a technological superior product, but lacked a sales channel. Their most recent server design receive a "Best in Class" award in April. Check out the NetFrame thread on SI. They were done in by companies like Compaq who sold much less powerful servers at $10K; the much more cost effective powerful servers at $50-200k weren't considered. It seemed that customers perferred to buy a group of smaller cheaper servers from their normal PC vendor, and network them, than a larger server, even if the larger server had a better performance/price ratio. If they were going to buy a really larger server, they went up to a mainframe. Incidentally, almost all the independent server companies went down the tubes or were acquired. So here is company that had a technically superior product, but a poor sales channel. They really should have sold out to a PC company years ago. I understand that about a year earlier, they had an offer to sell at over about $8-9 a share that they passed on. The day before the takeover was announced the stock was trading at 1 1/2, so it was taken out at a discount to the publicly traded price. At one point the stock was trading at 5, and had $7 a share in cash and net liquid assets; so from a value perspective, it sold for less than liquidation value. At another point the trailing PE was less than 10. There was lots of reasons why an investor might buy the shares; but it didn't work out.
The next example is Genex. This was a biotech company from about 8-10 years ago, that developed a bio-organism that produced a complex chemical used in the manufacture of Aspartame. In fact they signed a contract to supply the chemical to Nutrasweet and built a factory to make the chemical. But the cost of the chemical turned out not cost competitive with other traditional sources when they scaled up to commercial production. They were eventually bought out by ICN Pharmaceuticals for much less than a dollar a share for the value of some of their other research work. The factory was sold for pennies on the dollar. So this is an example of a company that had a technically innovative product, but couldn't compete economically with an alternative source.
The next example is Scientific Micro Systems. In the mid-80s, this company made PCMCIA cards. This is basically the same business that last year's sweetheart stock of the NYSE, Centennial Technologies(CTN, now CENL), is in. This stock at one point traded at 6 and had trailing earnings of $1.20 a share for a PE of 5. They couldn't keep with demand for their product and were profitable right up until 4 months before they filed for bankruptcy, went out of business, and never emerged again. Today their shares are worthless. What happened? The functions that were carried out on their cards were incorporated in new chip designs and/or motherboards. The technology changed and eliminated their role in adding value. BTW, look at what happened to Centennial, the best performing stock on the NYSE last year, hit a peak of 60s at Cristmas, and now is trading at less than 1.50 a share last I looked. Corrupt CEO and faked books caused that one.
I don't own this one, but a friend of mine, one of the smartest EEs who ever graduated from Carnegie-Mellon, does. And he has spent the last 20 years working in telecom networking interfaces. The stock is Gandalf, the company who supposedly had some of the best ISDN technology going. Today the stock traded at 5/8 of a point. What happened? I'm not as sure about this as some, but lets credit it to newer tech supplanting older tech, markets that never matured, and better capitalized rivals who had better sales channels.
My point is, that you can never be certain that the "story" we use to invest in a stock is the "whole story" or the "correct story". Even some of the brightest and best connected make some terriffic mistakes. Over on the Valence Technology thread, there is a guy FMK who has spent hundreds, if not thousands, of hours investigating that stock and company and product. And he has invested virtually all his money, on margin, in the stock. I own the stock, and I agree with him on the basic "story", but I think investing everything in one stock is too risky. The company currently has no significant revenues. He thinks as strongly about his stock, as some on this thread think of Nuko. I hope he does well.
I have personally met several people who post on this thread, and I'm not sure some should even be in this stock, IMO. One bought the stock on the advice of his broker in January or early February because of "an impending hot announcement". He didn't really understand the company, the product, the technology, or the risks, when he bought the stock. He had no way to value the stock. His entire holdings is less than 50k, and he had about a quarter in this stock. In fact when the stock got in trouble recently, he sold Octel and Sandisk stock to hang on. If you check the recent moves in those stocks in the last month, you'll see that was a mistake, they both have doubled. They were solid growth companies, with revenues, products, and customers, as well as profits. For someone with his investment experience and amount of capital, to be investing in a speculative investment like Nuko, for the reason he did, is a mistake, no matter what happens. He should get rid of his broker. I really hope Nuko pulls through for him.
Lets check if Nuko could run into some of the problems the above stocks ran into. They tried to create their own sales channel, but wisely have abandoned that in favor of forming strategic alliances with companies that field existing sales forces (Netframe mistake); good move. We don't know to what degree the entire coding/compression system could be standardized and incorporated into chip design (Sci Micro System mistake), but Peter Smith says this is unlikely and I suspect this is many, many years down the road in any case. The cost of the Nuko solution may prevent the market from developing (Genex case), but I think given the trend to decreasing costs discussed at the annual meeting, this is unlikely. And I don't think the technology will change to a new form rapidly. Their product seems to be technologically superior right now, but it seems like several orgs are working on improved coding/compression algorithms and software for MPEG-2. I still think Nuko technology will be competitive for the forseeable future. BK says they understand compression better than anybody working on MPEG-2. He told me that they even found and verified 13 micro-code errors in the chip they were using, that they had to correct for.
To me the big risk, is that the market doesn't develop quickly enough due to a slow ATM backbone rollout, and Nuko runs out of money waiting. But management has anticipated this, and has raised enough money to survive 12 months, and then targeted the key market segments which will develop first.
All in all, I think the risks are within reason. But remember, we just simply cannot know all the relevant info, and anticipate all the risks, and understand all the factors at play. And so I limit my risks to a reasonable level for me.
Bullish on Nuko, Paul |
