Friday, January 23, 2009

Answers from the CEO of Harris & Harris Group

In the comment thread of a previous post ("Harris & Harris as an Obama Stock") a commenter asked if Harris & Harris (Nasdaq: TINY) would spin off shares of a portfolio company that goes public or distribute a cash dividend after selling its shares. According to Harris & Harris CEO Doug Jamison, with whom I spoke this evening, after a portfolio company goes public, Harris & Harris typically has a 180-day lock-up period before it can sell its shares. It wouldn't spin off shares to shareholders, but would sell portfolio company shares after the lock-up period expires and either use those proceeds to reinvest in other opportunities (among current portfolio companies or new ones) or potentially distribute proceeds to Harris & Harris shareholders as a cash dividend. Of course, this is an inauspicious time for any company to attempt to go public, so it may be a while before the next IPO of a Harris & Harris portfolio company.

I also asked Jamison about the investment thesis mentioned in the Forbes article, that some of TINY's clean tech portfolio companies may benefit from Obama infrastructure spending. That's their hope, Jamison said, and he noted that the clean tech portfolio companies have been liaising with their Congressional Representatives about that.

Another question that came up in the comment thread of the previous post on Harris & Harris concerned the company's liquidity. According to Jamison, the parent company has about $53 million in cash and no debt on its balance sheet, and it expects parent company operating costs to be about $6 million in '09.

Descriptions of Harris & Harris's portfolio companies, along with their respective website addresses can be found here.

19 comments:

P. Price said...

Now that they have confirmed that all gains from IPOs are retained by their shareholders it is even more telling that...

they haven't had a substantial winning year since 1999 when the market was crazy for tech IPOs.

All they've done since then is burn through a cumulative $78.68 million.

In a bad time for their companies to go public the prospects don't sound too good.

Liquidity is not a problem but the lack of earnings over a 10 year period when conditions were more favorable than today isn't a good sign.

DaveinHackensack said...

In order to have a portfolio company go public you need more than just a market for IPOs: you need portfolio companies that are ready to go public. If memory serves, the average time it takes a successful portfolio company to reach that stage, from the initial VC investment, is about 7 years.

P Price said...

But in the past 10 years TINY has not been successful on balance.

That's well over the 7 year cycle period you describe.

P Price said...

NAV was $5.80/share at YE 1999.
NAV was $4.68/share as of Sep. 30, 2008.

Total distributions after 1999 were 2 cents per share total.

The only reason they are not out of business is that they issued tons of new shares to raise more capital to lose.

Shares Outstanding 1999 = 5.8 MM
Shares Out. A/O 9/30/08 = 25.8 MM

Share price late 1999 = $19
Share price Jan. 23, 2009 = $3.53

There's a sucker born every minute. TINY has been very willing to sell new shares to them each and every year.

Why own something as dicey as this in a market that offers proven, profitable, high quality shares at great prices?

P Price said...

Why should you believe that TINY will make money for its shareholders when its long-term track record says it has burned through over $78 million in the past 10 years?

All winners have been more than offset by TINY's overhead and losses from losers.

happy gilmore said...

the price is wrong bitch

I like AIG [$45.50] and XL Capital [XL:$38.65] as long-term plays since both look like definite survivors and each is trading at P/E, P/CF and P/BV levels that seem to take into account even worst case scenarios.

-paul price's recommendation last Feb

JK said...

In fairness to stockdocx, he did admit earlier in the comment section on this blog where he went wrong in his previous picks and how he adjusted his process going forward. That's more than a lot of people do when their picks go south. Let's stop looking at stocks as aspects of their "picker's" personalities and focus on the merits of the argument. Hard to do, I know...

P Price said...

Can anyone, Dave included, make a good case why TINY's management should be expected to do better in the next 10 years than they did in the past 10 years?

Albert said...

I can't keep track of the various folks who are posting comments here, but let me make a few points:

(1) Whoever is asking why we should expect TINY to give us any sort of return, given that it has not been able to produce any value for shareholders in the past is spot on. Recommending TINY is not recommending a good "investment" but rather simply a form of speculating or wild ass gambling on what might happen. There doesn't seem to be any solid reason to expect good returns, other than hope. You may as well take your money to the craps table, you probably have just as good a chance of making money as you do on "betting" on TINY.

(2) Whoever keeps attacking Paul's posts by pointing out mistakes he has made in the past is just an ass. That the person can't respond substantively to a comment on here, but instead resorts to posting irrelevant prior statements shows a lack class and brains. Which brings me to my third point.

(3) You folks who keep using different names to attack one another, just shut the f*ck up, will you? No one, including Dave, wants to read your infantile posts. It only ruins any usefulness of these comments. If I were Dave, I wouldn't allow anonymous comments, and I would be quick to delete non-substantive, time wasting comments.

Anonymous said...

"I wouldn't allow anonymous comments"

Ironic coming from a blogger profile simply named "Albert", whose access to profile has been turned off!

DaveinHackensack said...

Paul,

If memory serves, Harris & Harris's biggest IPO was in 2000, but, unfortunately for the parent company, by the time its lock-up period expired, the stock market crash of 2000 had already begun.

The company wrote down many of its stakes in portfolio companies last quarter, due mainly to an objective assessment of the current market environment (e.g., if the share price of a publicly-traded company in a similar space to one of TINY's portfolio companies dropped, that would influence the write-down of a TINY portfolio company, even if nothing material changed with the portfolio company's business). These write-downs led to a reduction in the parent company's NAV.

Regarding the issuing of new shares, the company acknowledged in its recent quarterly shareholder letter that in order to become a "true growth stock" it will need to finance its new investments via earnings/gains from acquisitions or IPOs of portfolio companies. Given that much of the capital raised has been invested in new portfolio companies, characterizing this money as 'burned through' is premature. Its effectiveness will depend on the outcome of these investments.

Regarding your more general questions about current management's track record over the last several years versus the company's potential going forward, as I haven't followed TINY closely over the last few years, I've invited (via voicemail) Mr. Jamison to respond here directly.

DaveinHackensack said...

Happy Gilmore,

As others have noted, Paul's previous stock picks aren't relevant to his comments/criticisms about TINY.

Albert,

If I banned anonymous comments, then I'd lose some valuable commenters such as J.K., Paul, Ravinsu, and others who post anonymously for work or other reasons.

I disagree with your analogy of investing in TINY to playing craps. It's certainly a speculative investment, and perhaps more so than some simple operating companies, but all stock investments are speculative to some extent, since none of us knows what the future will hold. Individual venture capital investments are of course highly speculative, but the idea of investing in tens at a time, as TINY does (and privately-held venture capital companies tend to do) is to increase the chances that one or two or three of these investments will be successful.

P Price said...

Dave,

The $78.68 million figure I quoted as money that was 'burned through' are the cumulative net losses and gains they reported for the 10years 1999 - 2008.

If their corporate overhead has not increased too much recently then the majority of the losses went right into enrichment of TINY's employees.

Albert said...

Dave, your defense of TINY is too cute by half I think. It's no defense at all to say that "all stock investments are speculative to some extent, since none of us knows what the future will hold" since, of course, doing anything at all with money, including putting it under your mattress, is speculative since we don't know what the future will hold. The problem with TINY, which you didn't really address, is why that particular company is in any way better than, say throwing your money at a craps table. To reinforce the analogy, assuming you actually know how to play craps, if you take $10k and go to AC, there's a reasonable chance you might turn that 10k into 11, 12, or more, on any given night. Obviously, over the long term, you're going to lose, but it's not a certainty that just tossing back a few drinks and throwing a few dice will bring a loss.

With TINY, you have a company that, admittedly, hasn't made any money in 10 years. It hasn't had a successful IPO since 2000 you say. Using your own timeline, that means that TINY's management was investing in private companies well before that, if it takes 5-7 years for a company to get to the IPO stage. Since 2000, it hasn't done anything but lose money. So it has a strong track record of underperformance (perhaps more accurately, no-performance).

Given that there is no evidence that management is really any good at what they do, what else does the company have going for it? Well, there is TINY's own self-serving claim that 42% of its portfolio companies are "clean tech." First of all, who knows what that really means. Moreover, is that really a good enough reason for someone, you, me, anyone, to invest in the company, because they have investments in "clean tech"? Even if you think Obama will have some sort of effect on "clean tech" companies, is there any reason at all to think that TINY's portfolio companies will benefit? Isn't that in and of itself an ENORMOUS gamble? How can you place any sort of probability on that? 10% 30% 75%?

Finally, even assuming in the best case scenario, that the last 10 years are NOT indicative of management's skills, and that the companies are "clean tech" meaning they will benefit from some of the new administration's efforts, and that those benefits will come in the next 1-3 years, and that the portfolio companies will then become in a position to make an IPO, then what?

The company rep even told you that they don't spin off their portfolio companies to TINY shareholders. They just keep using that money to do the same thing they've been doing all along, which in this case, has been to lose money and dilute shareholder equity.

Given all that, how can you possibly say that an investment in TINY (not an investment in some hypothetical venture capital company) is any better than gambling for a few hours?

As far as I can see it, the only bull argument that can be articulated is that the company owns many "clean tech" investments and that there is some unknown chance that those companies will benefit from Obama's new policy. The veracity of both of those reasons, by the way, could very well be in doubt.

So yeah, given the choice, I'd rather take $10k to the Borgata for a night. I know how to play craps, and at least I'd be getting free drinks, which is more than you can say for what TINY shareholders have received for the last 7 years...

DaveinHackensack said...

Doug Jamison returned my call today. He said that they generally doesn't respond to comments on blogs, partly because they are busy running a company and partly due to legal concerns, but he did say he would take a look at this post and the comment thread and get back to me in the next day or two. If he isn't able to respond directly here, I may be able to paraphrase a response from him to me. We'll see.

DaveinHackensack said...

Albert,

Since you don't know what the next quarter holds, the decision to buy a stock now, versus after it reports is, to some extent, speculative. For example, I've purchased shares of Alloy Steel recently because I believe the investment thesis is intact, and I think its current valuation of ~3x trailing earnings is a reasonable price. I also think it will produce positive earnings in its fiscal 1Q, assuming the finished goods figure on its 10k represents 1Q sales. That is, to some extent, speculation, because I have no idea what the company will report. If it reports a loss, the longer-term thesis may still be intact, but the stock will probably drop by half on that news.

Your comparison to craps is specious. I'm not an expert on craps specifically, but casino games are designed to produce small negative cumulative returns for players, so you are guaranteed to lose money if you play long enough. Depending on the casino and the local laws governing it, the average return for craps players might be -1.5%. You can, of course, lose plenty of money investing in venture capital, but the average return for venture capital funds over the long term is, I believe, a double digit positive number.

P Price said...

The actual odds on craps:

Basic 'pass' or 'don't pass'= -1.6%
Basic with single odds = -0.84%
Basic with double odds = -0.60%
Basic with triple odds = -0.50%
Basic with 10x odds = -0.1%
[available in Vegas]

One-roll bets are worse:

Boxcars = -14.28%
Eleven = -11.76
Any 7 = -12.5%
Any craps = -12.5%


For financing your losses there's Mastercard.

Beating the odds and winning anyway... Priceless.

Albert said...

Dave, it's your defense/non-defense of TINY that's been specious here.

I originally said that TINY was not any real sort of "investment" but rather a type of speculation or gambling, and thus drew the craps gambling analogy. Your response was that TINY is "certainly a speculative investment" but ALL stocks "are speculative to some extent, since none of us knows what the future will hold." And then you defended TINY as an investment because investing in tens of venture capital investments at a time reduces the risk/speculation.

You still fail to give any support whatever to why investing in "Harris and Harris Group" is anything more than wild-ass speculation, which term I think most people would know to connote something fundamentally different from an investment.

I went through the factors that have been discussed in these posts about why TINY may or may not be a good investment, and concluded that there is basically on objective reason to think that share price will increase over time. I (and another poster) asked you whether you explain why TINY specifically, not a hypothetical venture capital firm, is a good investment other than they claim they invest in clean tech companies, and hopefully Obama's policies will help those companies.

Given that those seem to be the only reasons anyone can point to to justify buying the stock, I said that purchasing the stock is no different from throwing money at craps because it's nearly a random dart throw at a company. To give you another analogy, there is a small construction company near where I live. I know nothing about it other than its name. If I think to myself, with Obama's focus on infrastructure, there is a chance some of those billions will find its way down to that small neighborhoos construction company, does that mean I should go down there and offer the owner some cash in exchange for some upside over the next couple of years? Knowing nothing other than the name, that they do some construction, and that infrastructure spending will probably increase? Wouldn't you call that complete speculation? There's no objective basis to believe that there is much of a chance of the thesis coming true, and the same can be said of TINY.

Craps is still a fair analogy, because I am comparing the chances of you taking $10k and turning it into $12K. With craps, there's a significant chance of doing so on any given night. It is, of course pretty much blind luck whether you do so of course, but it's the exact same with TINY. Can you ascribe any probability, any probability AT ALL of whether TINY will see success based on its investments in clean tech?

P Price said...

TINY is worse than craps as its $6 million a year in overhead is a higher hurdle than the calculable. and relatively slight house advantage at craps (if you avoid the worst bets).

That corporate overhead at TINY is like a mutual fund with an enormous expense ratio.