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)

Start your day with The Independent, sign up for daily news emails
New Articles
tvDownton Abbey Christmas special
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
News
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
News
news
PROMOTED VIDEO
News
i100
Arts and Entertainment
Left to right: Stanley Tucci, Sophie Grabol and Christopher Eccleston in ‘Fortitude’
tvSo Sky Atlantic arrived in Iceland to film their new and supposedly snow-bound series 'Fortitude'...
Arts and Entertainment
Jenna Coleman as Clara Oswald in the Doctor Who Christmas special
tvForget the rumours that Clara Oswald would be quitting the Tardis
Arts and Entertainment
Japanese artist Megumi Igarashi showing a small mascot shaped like a vagina
art
News
The Queen delivers her Christmas message
newsTwitter reacts to Her Majesty's Christmas Message
Arts and Entertainment
tv
Life and Style
fashion
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
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

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

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

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all