Shares: Risky flights in blue skies: Most stocks in companies with no profits record have cost their investors dear

THE stock market's relaxation of the rules allowing the flotation of shares in companies with short trading records and no profits has - so far at least -been a disaster for most investors. Known as 'blue sky' or 'concept' stocks, this sub-sector is in virtual free fall, with many shares at or close to all- time lows. Anyone contemplating investing in such companies should take care; you can expect to lose some, probably most of your money in eight or nine out of 10 such investments.

Among the 35 companies in this group, there are probably no more than half a dozen worth a closer look. The market valuation of the whole group is at present around pounds 3.5bn including two giants, Eurotunnel and Euro Disney. Most of these stocks have been floated in the past two years, though a few date back to the late 1980s. So far none has come good to any great extent - the combined profits of the group to date are, in effect, zero.

Blue-sky enterprises also consume money at a furious rate. It could be said that putting money into them recalls the famous description of owning a yacht: as being like 'standing under a cold shower tearing up pounds 5 notes'.

There are two reasons why the stocks are so weak. One is that the two giants, Eurotunnel and Euro Disney, have proved disastrous so far. The second is the generalised bear phase in the stock market. Almost by definition, these stocks reflect investor optimism and suffer on an exaggerated scale when the bullish temperature is falling.

This suggests that there could be an equally dramatic recovery when the stock market recovers. My guess is that a worthwhile across-the-board recovery will only occur if some of the hopefuls turn into genuine winners.

Many concept stocks are in the biotechnology sector. In this respect, the UK has followed the US experience. The portents are not too hopeful.

Biotechnology stocks in the US are finding it increasingly difficult to raise new money because there have been so few successes. Two companies, Amgen and Genentech, have market capitalisation around the pounds 5bn mark, and one or two others have done reasonably well for investors. But that is from a starting field of hundreds of would-be Glaxos.

Ian White, an analyst at Robert Fleming Securities, points out that worldwide there are about 300 quoted biotechnology companies and around 300 compounds undergoing clinical trials. Historically, one in every eight or 10 of these compounds is destined to become a commercial product. If we assume that each company has one drug in trials, then we can see that only around one in 10 is going to come up with a commercially successful product.

His advice is that the whole area is a minefield for investors who are neither doctors nor working in the pharmaceutical industry. Exposure is best obtained for non-experts via a managed fund, such as Rothschild's Biotechnology Trust.

The reason why investors keep coming, in the face of such off-putting odds, is that very occasionally, like companies exploring for oil and minerals, one hits the jackpot. Two companies fairly well down the route to turning their concepts into real money are ML Laboratories, with its kidney dialysis solution that has successfully passed through all clinical trials, and Tadpole Technology, with its high-powered computer workstation.

Both shares are standing closer to their 'highs' than their 'lows' at 189p and 356p respectively. Shares in ML Laboratories have weakened recently, after a hefty sale by a large stockholder, Kevin Leach.

Tadpole has also tested the enthusiasm of its City fan club by always being next year's story. But the story is a good one. Most recently the group has won an order to supply its portable workstations, based on the Risc chip, to the US Airforce. There are hopes that this could lead to further military orders from the US military and other Nato countries.

Analysts are looking for a further loss of around pounds 1.5m for the year to 30 September 1994 but a profit of between pounds 6m and pounds 10m for the current fiscal year. That would put a rocket under the share price, which presently values the group at pounds 90m.

Two exciting contenders for investors who want to defy the general odds and have a go are British Biotechnology Group (BBG) at 587p and Magnum Power Selection at 67p. BBG has a compound, Batimastat, which is in Phase 3clinical trials to test its efficacy as a treatment for the liquid retention that is a late symptom of ovarian cancer. If these are successful, the drug could be on the market late in 1996 or early in 1997.

If Batimastat proves helpful in treating ovarian cancer, it is also likely to be useful against a wide range of other cancers - and this is what has driven the share price to its current peak. With 6 million cancer sufferers in the US and Europe, the group could have a blockbuster.

Magnum Power Selection, a recent flotation capitalised at pounds 28m, has a simpler but arguably even more exciting story. It is developing a patented process for protecting computers from power-supply interruptions. This is so cheap it could be fitted by equipment suppliers like IBM and Compaq in all their PCs. The potential rewards, as calculated by stockbroker Henry Cooke Lumsden, beggar the imagination.

The bear case scenario projects pre-tax profits of pounds 12m by 1999 against a bull case projection of more than pounds 80m. For investors who like to bet on a single number when they play roulette, the shares have undoubted appeal.

(Photograph omitted)

PROMOTED VIDEO
Arts and Entertainment
American singer, acclaimed actor of stage and screen, political activist and civil rights campaigner Paul Robeson (1898 - 1976), rehearses in relaxed mood at the piano.
filmSinger, actor, activist, athlete: Paul Robeson was a cultural giant. But prejudice and intolerance drove him to a miserable death. Now his story is to be told in film...
News
i100
Arts and Entertainment
Babysitter Katie and Paul have terse words in the park
tvReview: The strength of the writing keeps viewers glued to their seats even when they are confronted with the hard-hitting scenes
Life and Style
Make-up artists prepare contestants for last year’s Miss World, held in Budapest
fashion
Life and Style
life
News
‘The Graduate’, starring Dustin Hoffman and Anne Bancroft, was directed by Nichols in his purple period
people
News
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...

Ampersand Consulting LLP: Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

Carlton Senior Appointments: Director, Private Bank - San Francisco, CA

$175 - $200 per annum, Benefits: full benefits: Carlton Senior Appointments: P...

Carlton Senior Appointments: San Diego, CA – Tier 1 House - Senior MD FA

Not specified: Carlton Senior Appointments: Senior MD Financial Advisor - San ...

Day In a Page

US immigration: President Obama ready to press ahead with long-promised plan to overhaul 'broken system' - but will it get past a Republican-controlled Congress?

Immigration: Obama's final frontier

The President is ready to press ahead with the long-promised plan to overhaul America's 'broken system' - but will it get past a Republican-controlled Congress?
Travelling to work by scooter is faster than walking and less sweaty than cycling, so why aren’t we all doing it?

Scoot commute

Travelling to work by scooter is faster than walking and less sweaty than cycling, so why aren’t we all doing it?
Paul Robeson: The story of how an American icon was driven to death to be told in film

The Paul Robeson story

How an American icon was driven to death to be told in film
10 best satellite navigation systems

Never get lost again: 10 best satellite navigation systems

Keep your vehicle going in the right direction with a clever device
Synagogue attack: Fear unites both sides of Jerusalem as minister warns restoring quiet could take 'months'

Terror unites Jerusalem after synagogue attack

Rising violence and increased police patrols have left residents of all faiths looking over their shoulders
Medecins sans Frontieres: The Ebola crisis has them in the headlines, but their work goes far beyond West Africa

'How do you carry on? You have to...'

The Ebola crisis has Medecins sans Frontieres in the headlines, but their work goes far beyond West Africa
Isis extends its deadly reach with suicide bombing in Kurdish capital

Isis extends its deadly reach with suicide bombing in Kurdish capital

Residents in what was Iraq’s safest city fear an increase in jihadist attacks, reports Patrick Cockburn
Underwater photography competition winners 2014 - in pictures

'Mysterious and inviting' shot of diver wins photography competition

Stunning image of cenote in Mexico takes top prize
Sir John Major: Negative West End portrayals of politicians put people off voting

Sir John Major hits out at theatres

Negative West End portrayals of politicians put people off voting
Kicking Barbie's butt: How the growth of 3D printing enabled me to make an army of custom-made figurines

Kicking Barbie's butt

How the growth of 3D printing enabled toy-designer to make an army of custom-made figurines
Will Smith's children have made waves with a gloriously over-the-top interview, but will their music match their musings?

What are Jaden and Willow on about?

Will Smith's children have made waves with a gloriously over-the-top interview, but will their music match their musings?
Fridge gate: How George Osborne keeping his fridge padlocked shows a frosty side to shared spaces

Cold war

How George Osborne keeping his fridge padlocked shows a frosty side to shared spaces
Stocking fillers: 10 best loo books

Stocking fillers: 10 best loo books

From dogs in cars to online etiquette, while away a few minutes in peace with one of these humorous, original and occasionally educational tomes
Malky Mackay appointed Wigan manager: Three texts keep Scot’s rehabilitation on a knife-edge

Three texts keep Mackay’s rehabilitation on a knife-edge

New Wigan manager said all the right things - but until the FA’s verdict is delivered he is still on probation, says Ian Herbert
Louis van Gaal: the liberal, the enemy and... err, the poet

Louis van Gaal: the liberal, the enemy and... err, the poet

‘O, Louis’ is the plaintive title of a biography about the Dutchman. Ian Herbert looks at what it tells us about the Manchester United manager