Rarely does one-plus-one equal anything other than two, but it does happen occasionally, and investors can benefit when it does.
Here's an example: Synodon Inc. SThe small, Edmonton-based maker of remote gas sensors was worth $10 million on the stock market in September, before it announced a financing. When that private placement closed in October, Synodon's market capitalization was $18 million, even though the company raised just $2.8 million from the sale of new shares and warrants.
How does 10 plus 2.8 equal 18? The promise inherent in Synodon's technology wasn't worth much until it had enough money to execute its business plan. The best part for investors in the private placement (including me, for the record) is that, for 45 cents-which was below the market price as the company's shares climbed in late September-you got one share plus half a warrant. Warrants are a common sweetener in small-cap financings, and each one of Synodon's allows you to buy shares for 75 cents apiece any time over the next two years. Obviously, the warrants will be valuable if the share price climbs over 75 cents. If it goes to $1.05, holders will have 30 days to exercise the warrants.
I think there's a good chance the shares will go beyond 75 cents. I've followed Synodon for almost two years, and I know its technology and management fairly well. The technology is a gizmo that tests for natural gas leaks in pipelines, plants and other sites, a job it does faster and more accurately than existing methods (often manual inspection). The device is on the cusp of commercialization, too-Synodon recently signed a small deal with giant Nova Chemicals.
The upside potential is huge: Synodon's fees to test for leaks start at $100 per kilometre of pipe, and there are more than a million kilometres of gas pipeline in North America. The company needed money to realize this upside, but the market had been indifferent to the story, so the company offered the shares at an attractive price.
How do you spot small-cap opportunities like Synodon early on? You have to keep your ear to the ground. It helps to know both an industry and the stock market very well. You've got to understand what the company wants to do, how it will get there and, most importantly, how a financing is going. If it's picking up momentum, you'll likely get more than one dollar of bang for your investment buck.
The risks? One investor's growth opportunity is another investor's risky penny stock. Plenty of young ventures look promising, but many of them fail. Usually their shares are thinly traded, too, meaning that it may be hard to cash out-at any price-if the company runs into trouble.
Bearing in mind the risks and rewards, some other companies to consider are: Landis Energy Corp., GC-Global Capital Corp., Blackline GPS Corp. and Titan Trading Analytics Inc. (see sidebar, right). All four have good prospects, but need to raise more money to realize them.
If and when that happens, I'm guessing that one plus one will equal three. You've gotta love that math.
Looking to get in on an early financing by a promising growth company? These four look like they might head to market soon:
LANDIS ENERGY Business natural gas storage Recent share price 60 cents The pitch Plans to build and operate an underground storage facility near Truro, Nova Scotia, with a big collaborator, Fort Chicago Energy Partners Challenges Needs tens of millions of dollars, a large multiple of its market cap. Had to shelve a planned financing in the uncertain summer of 2008
GC-Global Capital Business merchant bank for small-cap companies Recent share price 60 cents The pitch Charges healthy interest on its loans, and often takes an equity kicker. Profitable and has paid dividends Challenges Trades at a stiff discount to book value
BLACKLINE GPS Business compact and smart GPS locators Recent share price 20 cents The pitch Locators are easy to put in your car, boat or kid's backpack. Escort, the world's leading radar detection company, is a partner on the car model. Management is top-drawer-chairman Cody Slater built BW Technologies and sold it for $250 million Challenges Needs to sign up more retailers
TITAN TRADING ANALYTICS Business algorithmic trading software Recent share price 28 cents The pitch Early trials are cranking out solid returns Challenges CEO Kenneth Powell bought a big block of shares and warrants in October, but Titan will need more money soon