Warnings come in various shapes and sizes, the most familiar being that for the fools: "The price of shares can go down as well as up." Indeed they can, sometimes every day. However, a rider with particular relevance to the smaller IT stocks is that many of them are notoriously illiquid.
The problem is in part created because directors of IT companies often own a large slug of the equity. The culture of the sector is to spread as much equity as possible around the rest of the staff, who are usually keen to hang on to it for the long term.
Nothing wrong in either case, but it does mean that private investors should be prepared for a bumpy ride. The IT index has risen by 70 per cent since 1 January; one reason has been a lack of stock. But these companies are not recession-proof, and for some a slowdown could be imminent. If the market as a whole tumbles, expect some of the institutional investors behind these stocks to start selling to lock in some of their phenomenal gains. Once that happens, the prices of the shares could fall as fast as they have risen, a typical response of illiquid shares to a bear market. So watch out! Hang on to the shares for the long term, but be prepared for some of these miraculous gains to disappear almost as fast as they appeared.
A recent pounds 30m facilities management contract for construction services company Tilbury Douglas was good news, coming at the same time as its pounds 47m purchase of the facilities manager, How Group. Tilbury Douglas is keen to see its shares re-rated to reflect its move away from traditional construction activities to a more service-oriented business. The fact it could win a contract on its own merit bodes well for the eventual integration of How Group, with its much larger facilities management business. Stockbrokers reckon there is a mismatch between the market's understanding of the business and where the shares should trade, and think they are worth 330p against the current 305p.
Dialog Corporation, the renamed M.A.I.D., is the vehicle of the exceptionally ambitious Dan Wagner. Since his bid for the big time through the purchase of Knight Ridder Information, the company claims to be the world's largest on-line data service provider.
The challenge for Mr Wagner is to integrate the two companies' existing products and delivery channels, so that customers have easy access to all the group's products. A market capitalisation of pounds 220m against sales of pounds 46m, which are expected to zoom up to pounds 200m-plus in the current year, leaves the enlarged group on the undemanding sales to market value ratio of 4.8, falling to around about one times sales. Stockbroker Nomura reckons that is way too cheap, and that the shares, at 156p, are worth closer to 270p.Reuse content