Normal rules go out of the window. Companies can trade on fancy multiples, such as 100 times sales, and still be a bargain. Other businesses may get the brush-off from investors, and have to prove themselves over a longer period of time, yet still come good in the end. And, of course, plenty come a cropper. When that happens, it is no use moaning. The difference between triumph and disaster can be no more than the width of a cigarette paper in the sector.
One credo investors must follow is to be very cautious. It helps, too, if you have some genuine interest in, and knowledge of, the sector in which a company hopes to make its fortune.
With these provisos borne in mind, AIM-listed Integrated Optical Components offers some distinctive attractions. Placed at 80p a share in March last year, it currently sits at 159.5p. Last week it announced interim results, with pre-tax profits almost doubled to pounds 411,000 from pounds 208,000. Sales advanced to pounds 3.25m from pounds 1.38m.
And at least IOC makes a profit; many of its peers have yet to earn shareholders a penny, and may not do so in many cases for years to come.
Against that, IOC is valued at the astronomical figure of pounds 39m, or 12 times sales - roughly the same multiple as at the flotation. So the market has done nothing to let the price move closer to more normal valuations. As to its price/earnings ratio, it is anyone's guess where earnings per share could come in next year. On earnings of 1.5p - down 12 per cent from the previous year - the shares trade on a historical ratio of 106 times. If earnings can grow, say, 20 per cent by next year, that leaves the shares on a forward multiple of 88 times. Heady stuff.
So what is all the excitement about? IOC was set up by its three founders after they left GEC in 1991. It was at GEC they lit on the commercial potential of lithium niobate, a crystal which can be used to make microchips.
The microchips IOC makes are used as modulator switches for transmitting digital signals down fibre-optic cables. Lithium niobate chips can send signals further and more clearly than the conventional manner, through switched laser signals.
Despite being a tiny company, IOC aims to sign up the world's biggest telecommunications companies to its products. So far it has three major telecoms firms on board, and there should be more to come.
The company has already encountered teething problems. A production problem lost it pounds 250,000 in sales. IOC says the matter has been dealt with. But you can be sure of further troubles ahead in a situation like this. Even so, the shares should prove to be an exciting item at the more speculative end of a portfolio.Reuse content