This article was originally published here in June 2003
This month presents a good opportunity to look at three technology companies. All flew high during the Technology, Media and Telecommunications bubble and all crashed to earth in the subsequent bust. They are all members of the infamous 99% club, the price of their shares having collapsed to nearly nothing. These companies are Energis, Marconi and Pace Microtechnology. I have invested in all three companies, loosing money on two but making a bigger profit on the other.
Although I prefer a long-term value style of investing I do keep an eye on the daily share price of companies that I am interested in. Share prices that are volatile (rapid and large up and down swings) present opportunities for a quick profit. Companies that have just issued a profits warning are interesting as their share price often drops significantly only to recover. Buy low and sell high is the aim but, as you will see, sometimes it goes terribly wrong.
You have probably read about the collapse of Marconi. In the late 1990’s the new management of a long-standing industrial giant sold off its traditional defence companies and moved into telecommunications. Once the bubble burst those "new economy" companies were worth a fraction of the money that Marconi borrowed to buy them. Marconi’s banks started to get restless. In early 2000 Marconi followed the general market down, the share price falling from £12 to £8. In one last hurrah the price soared back to £15 in autumn of 2000. Then came the first of several profit warnings. Within a year the share price was under a pound. You can see a steep fall from £3 to £1 in the middle of 2001. After that the price stabilised and even moved up a little. I bought some shares at the end of August and some more in early September. Then came September 11th and the market lurched downwards. I panicked and sold out on September 21st having lost 60%.
With the benefit of hindsight getting out was the correct thing to do. Initially the share price did recover a bit, but by the middle of 2002 Marconi shares were worth just a few pence each. A financial restructuring imposed upon Marconi by its banks and bondholders was completed last month. Ordinary shareholders were left with one "New Marconi" share for every 559 "Old Marconi" shares they had. My entire holding would now be worth a few pounds.
Energis was a data communications company created by The National Grid, the UK’s electricity distribution network. The greatest cost in creating a data communications network is in digging up the ground to lay the cable. Energis had the great idea of stringing the cable along its existing over-ground power lines, creating a telecommunications network for a fraction of the usual cost. Incidentally, British Waterways, the owners of the UK’s canal network, had the same idea, laying fibre-optic cable into the bed of its canals. British Waterways history is worth reading. Canal companies had their own stock market bubble in the 1790’s, as did the railways in the 1860’s. Did you know that Britain’s canals remain a nationalised company?
In January 2002 Energis’ share price was often moving up or down by several percent a day. I felt that I could see a pattern to the highs and lows. On the 25th I bought. I sold three days later having made a profit of 15%. I did this again on February 8th, making 8% in a day. I bought back in on the 14th, but this time the share price carried on going down. I tried averaging down, but on April 10th I had had enough and sold my holding at a loss of 46%. This proved the right thing to do as the company went into administration in July 2002. It was bought by a private venture capital company leaving shareholders with nothing.
Pace Microtechnology make set-top boxes for satellite, cable and digital TV. The price chart of Pace since its flotation in 1996 really shows the TMT bubble in action. Look at the explosion in the share price in just a few months at the end of 1999 and the later sorry retreat downwards. On the 19th April 2002, after one of many profit warnings, I bought some Pace shares. I sold them later the same day for a 16% profit. I kept my eye on them and bought back in after another profit warning on July 8th. After I purchased at 40p there was a brief rally in the price but then it started falling again. By October the shares were only 15p each.
I felt that there was something fundamentally different between Pace and Energis and Marconi. Looking at Pace’s balance sheet showed real value, a tangible book value of 29p a share and little debt. I was happy to buy significantly more shares to average my purchase price down to 23p. My quick punt turned into a long-term value investment. The smart money had written Pace off. Two of its big customers (NTL and ITV Digital) were in financial trouble and another customer (Sky) was forcing Pace to cut its margins. Yet NTL was another company like Marconi, too big for the banks to allow to fail. It is still here today, buying Pace boxes. Freeview replaced ITV digital and Pace supplies them too. Pace survived the downturn and is now starting to prosper.
The city woke up to this in March. Since then I have nearly tripled my investment, making much more than the money that I lost on Energis and Marconi. Now I am waiting on its results in early July.
There are a few conclusions that I can draw looking back over my trading in these three companies. Profits can be made from short term trading but you must be prepared for losses. Be vigilant and quickly close any positions that are not performing as you expect.
The other conclusion is that companies with little debt and cash in the bank do not go bankrupt. Just because big city investors have given up on a company does not mean that you should. Over time real value will be recognised and your patience can be rewarded.