From today's Washington Post. Contrats may give the stock a short-term boost, but earnings will drive it over the long term.
WASHINGTON INVESTING:
Y2K -- a Year of Investing Dangerously
The Washington Post via Dow Jones
Publication Date: Monday November 24, 1997
Financial; Page F27
Copyright 1997, The Washington Post Co. All Rights Reserved
By Jerry Knight
Washington Post Staff Writer
If your choice is between investing in year 2000 stocks and the Brooklyn
Bridge, you might be better off to consider a bridge.
Finding a solid stock in a company that specializes in curing computers'
problems with the dreaded millennium date flaw is far more difficult and risky
than putting your money into a good bridge -- the old jokes about buying the one
to Brooklyn notwithstanding.
Bonds issued by the Chesapeake Bay Bridge Tunnel Authority -- a personal
favorite -- are not without risk, but bridge bonds rise and fall largely on the
tides of interest rates, jolted occasionally by the threat of a catastrophe.
Stocks of computer service firms concentrating on the year 2000 date problem,
on the other hand, float on the fickle waves of investor opinion, which are
routinely disrupted by reality.
Investors who bought shares of Information Analysis Inc. of Fairfax and Zmax
Corp. of Germantown have learned that lesson in the past year. Fueled by
speculation about lucrative year 2000 contracts, both stocks soared, then
swooned when the millennium fever abated.
Now the stock of a third obscure company, Synergy 2000 Inc. of Washington, is
suddenly taking wing, based on speculation that it, too, could cash in on what
computer geeks call the "Y2K crisis."
As most computer users know by now, many older systems keep track of dates as
just two digits. The machines can't tell the difference between 1900 and 2000
and could go into a terminal dither come the millennium.
There is money to be made fixing this problem, so investment analysts have
been picking companies they expect to prosper. Big computer services firms such
as BDM International Inc. of McLean or Electronic Data Systems Corp. of Dallas
are getting much of the business, but so are many smaller, less familiar firms.
Information Analysis turned up lists of Y2K investments about a year ago. At
the time, its stock was trading for less than 50 cents a share -- on those rare
occasions when it traded at all. As word of the company's expertise in Y2K
remediation spread, Information Analysis stock quickly tripled -- to $1.50 --
and then jumped to $3 just before last Thanksgiving. By the year's end, it was
trading at $7 a share, on its way to a high of almost $32 in July.
The soaring stock price was great for Information Analysis. Many long-time
investors were able to cash out some shares with handsome profits. The company
raised $5 million in expansion capital through a private placement of stock in
March. And as its market value increased, the stock qualified to move from the
over-the-counter bulletin board to the more respected Nasdaq Stock Market, where
it trades under the symbol IAIC.
But many speculators who jumped into Info Analysis stock were what are known
on Wall Street as "momentum traders" who buy stocks when they are moving up and
immediately dump them when they stop moving. When the momentum players jump, a
stock doesn't just lose momentum, it loses altitude. Since midsummer, IAIC has
drifted down to $16.37 1/2 a share.
Considering that its Y2K business is just getting off the ground, Information
Analysis had "a fairly overinflated stock price," President Brendan J. Dawson
acknowledged in a September interview. The company announced a $1 million
contract last month and says it is looking to raise additional capital so it can
handler other jobs.
A similar pattern of premature enthusiasm occurred at Zmax. From $1 a share in
February 1996, the stock soared to $17 and change in March. It then dropped to
$12.34 3/8 Friday on the bulletin board, where it's listed as ZMAX.
Like Information Analysis, Zmax has promising technology for fixing computer
date problems, but hasn't generated much business yet. "Though the company has
successfully completed a number of assessment projects and small-scale (pilot)
conversion projects, the company has not completed a large-scale millennium
conversion project, either alone or together with a strategic partner," Zmax
said in a recent filing with the Securities and Exchange Commission.
Crass as it may sound, a company's expertise in Y2K work may not be the real
issue for investors. A good fix doesn't guarantee that a company's stock will be
a good investment. As a practical matter, few individual investors -- or for
that matter, professional securities analysts -- can evaluate Y2K companies.
Researching Zmax and Synergy 2000 is particularly difficult because both
stocks slipped into the market without going through an initial public offering,
in which the details of a company's operations must be spelled out.
Zmax began trading its stock by merging with a corporate shell, a defunct
corporation whose stock was still eligible for trading. The company that became
Zmax was once named Pandora, an apt appellation, perhaps.
Because going public via a shell gets around the usual disclosure
requirements, it makes many investors nervous. To legitimize its birth, Zmax now
is going through a complicated reorganization, with all the usual disclosures,
through which it intends to raise $6.7 million in additional capital. The
process requires an inch-thick SEC filing and is costing Zmax more than $1
million. That's 15 percent of the offering -- twice the usual 7 percent
underwriting fee on an IPO.
Synergy 2000 stock began trading on the over-the-counter market last month by
another unusual method. The company sold 250,000 shares of stock for $1 a share
under an exemption from SEC registration rules for firms selling less than $1
million worth of stock, according to an SEC filing.
Most stocks issued under that exemption are sold to "family and friends" of
the company, in the local community and do not trade actively, industry sources
said. But five dealers are trading Synergy 2000 shares, two in New York City,
two in Jersey City and one in California.
The shares issued under the SEC exemption are only a small part of the stock
in circulation, said Synergy 2000 founder Eli Dabich Jr. There are 1.5 million
tradable shares and another 9 million restricted shares that can be traded in
the future.
Since it began trading Oct. 3 under the symbol SYNY, the stock has jumped from
$1 a share to $4.50, giving the start-up company a market value approaching $50
million.
Dabich was national director of insurance consulting for Coopers & Lybrand LLP
before starting his computer consulting company in 1993. Active in insurance
industry computer organizations, Dabich was executive vice president for
administration of Maryland Casualty Co. in Baltimore in the 1980s.
Dabich's reputation is about all investors have to go on if they are
considering buying the stock, because the exemption from registration means
Synergy 2000 did not have to issue any financial reports or provide any other
information to investors. Financial reports are being prepared, Dabich said.
While Synergy 2000 isn't disclosing details of its business, the company said
last week it has hired a New York public relations firm "to communicate its
focused Y2K growth strategy to its shareholders, increasing investor awareness."
The press agent, Stephen Axelrod of Wolfe Axelrod Associates, said he had no
information about Synergy 2000's finances. Hiring a press agent instead of
providing financial reports for investors may be unusual, "but we have not been
doing a hype job on this stock," Axelrod said.
The shortage of facts hasn't kept Synergy 2000 stock from trading actively --
as many as 97,000 shares a day. Dabich said investors are buying his company's
stock, "because they know who we are. We are not touting it."
Why anyone would buy stocks in companies that won't provide basic information
to investors is a mystery to me. I can't imagine doing it, and I've got my son's
college money in a bridge.
(END)
04:58 EST November 24, 1997
Copyright (c) 1997 The Washington Post
Received by NewsEDGE/LAN: 11/24/97 5:22 AM |
