Evaluating High Tech Companies

I have a fascination for small high technology companies.  It's largely the result of my past roots in managing research for many years in a variety of capacities: managing a long-established wildlife research station, administering a variety of research funding programs and, founding an energy research centre.

I've learned that research enterprises can only advance by taking risks but that the "bread and butter" of established research hauls the freight i.e. the research stream has well-established clients and is supported by a base of physical infrastructure, experienced staff, social networks, and institutional support.

I never forgot this.  However, to promote the possibility of venturing into new research areas, I let it be known that staff were free to spend 15 percent of their time doing anything they wanted ... and that I did not need to know what they were doing.  (I also realized that the more creative ones could easily "hide" their projects within existing budgets and played the financial side of things with a loose hand.)

I've put these lessons in play while evaluating high tech companies for investing purposes.  I look for a number of things:

• great management with "muddy boots" ... not fresh-washed MBA's whose life experience is limited to book learning
• a product/service which addresses a significant client need and provides a distinct advantage over competing products/services
• strong links to their "communities of interest"
• the ability to secure financing 
• a revenue stream (in the best scenario it's best to select companies which are able to bootstrap themselves using revenue flows)
• a business plan which "makes sense"

That is why I invested in Kelso Technologies and Titan Logix as a result of researching the theme of "railway tanker safety".  I will leave it to readers to visit the company web sites to see how the aforementioned characteristics are expressed. I am especially sanguine about the future prospects of Kelso Technologies.  It would appear that management is doing everything "right".

Here is one take on two companies in the biofuel sector: one that failed; and, one that succeeded. It is instructive and well worth considering when you go through the process of winnowing out potential investments in any field.
http://www.altenergystocks.com/archives/2014/03/as_kior_stumbles_aemetis_soars_what_made_the_difference.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+AlternativeEnergyStocks+%28AltEnergyStocks.com%29

I have a great respect for the editor and contributing editors of Alt Energy Stocks and subscribe to their offerings via an RSS feed.  I recommend it highly as it provides a great avenue of understanding for alternative energy, renewable energy and clean technology companies.  One of the best of breed.
http://www.altenergystocks.com

There is a risk in investing in small high tech companies:

• the "moat" for small enterprises is sometimes small as "innovation waves" of similar products/services tend to be synchronous, meaning that many other similar ideas may unseat a company's technological advantage in short order
• financing is always difficult to obtain
• the market base for a company's product/service is usually tiny and subject to fluctuation: it takes time to get known and establish a customer base
• there are always technical glitches to be ironed out in the product and its production and distribution
• key staff may move on to greener pastures 

This said, the hunt is fascinating and fun.  And sometimes, you knock one out of the park when the gods smile.  A case in point is Arotech Corp ARTX.  I looked at it using the above-noted metrics and established a position on March 18, 2014.  Imagine my surprise when it rocketed in value by almost 50 percent in very short order.  Why?  I Googled the company name and discovered that a very positive article in Seeking Alpha was likely the reason:

http://seekingalpha.com/article/2107833-arotech-corp-a-lithium-battery-stock-ready-to-quadruple-16-price-target

It illustrates the power of web sites such as Seeking Alpha.  Some websites (not Seeking Alpha) are shameless efforts on the part of "financial writers" who are out for hire.  I once fell victim to one and resolved NEVER to make the same mistake.  Some writers may or may not disclose their connection to companies which occupy their keyboard time.  Read this to learn more about the measures some people take - it's not pretty: 

http://finance.fortune.cnn.com/2014/03/20/seeking-alpha-dreamteam-news-sites/