Sexy theme stocks as money manager favourites are not a good mix.
It seems every year there are a couple of "hot” small cap stocks that receive all the accolades from the analysts and fund managers (who own the stock).
Most of these "hot picks” are companies with little historic financial performance, operate in an industry that has become trendy, has just raised a bunch of money by issuing many shares, and has announced business developments that usually never amount to anything to make the Company profitable.
It's time to look back to previous years, and ask, where are these "hot” stocks now?
The year was 2007, the theme was clean-tech and Hy-Drive Technologies Ltd., a developer of hydrogen generating system to improve engine fuel efficiency for commercial vehicles, had traded up to $4.75 per share.
A small cap fund manager was quoted in the business media forecasting that next year (2008) Hy-Drive Technologies could generate over $100 million in sales and earn 70 cent per share.
Last I checked, Hy-Drive (re-named Blutip Power Technologies Ltd. TSXV: BPR) lost $3 million on $325 thousand in sales in 2011 and just replaced its CEO.
Today Blutip (ex Hy-Drive) shares can be purchased for five cents.
Next up: The theme is HDTV and, in 2009 (after successfully completing several equity financings with institutional investors) Sensio Technologies Inc. (TSXV-SIO), an innovator in 3D digital technology, had the street buzzing. The Company was regularly issuing news releases about new alliances, partnerships, technology demonstrations and product showcases which sent Sensio's stock price higher.
It appeared that analysts covering Sensio Technologies needed to raise their share price targets and financial projections to keep ahead of the stock's price momentum even though the news from the Company had little relevance to the future financial performance. Once again fund managers could not say enough good things about Sensio's potential in the media.
Early in 2010, Sensio's stock price hit a high of $4.16, which valued the Company at over $150 million. Today the same Sensio shares trade for $0.35 cents. The Company lost $4.5 million on $1.25 million in sales for 2011.
My point is, when it comes to small cap concept stocks most analysts and fund managers do not have any better insight into determining a Company's success than the average retail investor. But they do have the forum to share their thoughts and create liquidity.
Therefore, "discount” what the money manager has to say on that hot small cap stock, otherwise you risk owning their shares and having to sell them at a "discount” to what you paid.
I note that last year there are worthy candidates for money managers favourite "hot” stocks. But I will give these companies another year's grace, to see if they prove their value or not!
Author's Ownership Disclosure: TSXV: BPR - No position, TSXV: SIO - No position
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