I think I made a mistake. My investment in Harris and Harris Group VC (NASDAQ:TINY) might have been a few years too early. So in this blog post I will explain to you why I think TINY is a value trap.
If you haven’t spent much time analyzing TINY before, let me quickly bring you up to speed on the positives to the investment, as well as why this small cap nanotechnology company might be a value trap.
The Bull Case for TINY: Innovation and Value
I first started looking at TINY as an investment idea in early 2013. And in that analysis I detailed the interesting opportunity TINY presented. You don’t often find such innovative companies trading at such low valuations.
And most of these fundamental measures are true to this day. For example:
TINY is still the only public venture capital company. It is also still debt free and has even realized some gains from a portfolio company in the last few months with the sale of Xradia to Carl Weiss Group. So why is TINY a value trap?
Why TINY Might be a Value Trap:
Even though the fundamental value of TINY looks strong, it’s only a good investment if you can earn a significant return on your invested capital. And from that perspective, shares of TINY don’t look all that attractive. Let me show you what I mean…
Public companies are often hungry to meet analyst expectations each and every quarter. As result of this, management often takes shortcuts that are detrimental in the long term. While TINY does not have this problem, it does have the exact opposite.
TINY is not concerned with analyst expectations this quarter, or for a few years in the future. Management continues to make this clear. And arguably, this is because the venture capital industry (by it’s very nature) is a little bit more long-term than most traditional operating businesses. But I think in the case of TINY, management has used this narrative a bit too much, sometimes to hide their own shortcomings.
As a result of this long term time frame and the nature of the venture capital industry, investors are starting to lose faith that TINY can ever turn a profit. And the resulting price action is turning TINY into a possible value trap.
Even if TINY does eventually become profitable, investors are unlikely to earn a return for a few years to come.
TINY Technical Analysis: The Definition of a Value Trap
When you look at the daily candlestick chart of TINY it’s pretty obvious that the stock is not performing. It has not seen any meaningful buying in months. And the stock looks eager to explore all time lows. What’s with all the selling?
One possible reason is:
At the end of June, TINY was delisted from the Russel 2000 index. This resulted in a lot of selling that drove the stock price down (as funds that invested in Russel companies rebalanced) – leaving TINY out in the cold.
Since then, buyers have yet to regain control of the stock and any nascent jumps in the stock have been faded aggressively. On no matter which timeframe you look (monthly, daily, intra-day) TINY has yet to show relative strength or a trade-able bottom.
Is Investing in TINY Trapping Your Capital?
As always, I encourage you to do your own research. And you should also think about how an investment in TINY fits in with you own investing strategy. If you’re looking for a short term trade, TINY is decidedly not for you.
The reason for that is…
It’s pretty safe to assume that TINY is 3-5 years away from generating any significant shareholder value (through IPOs or exits in portfolio companies)… and…
Without this kind of significant catalyst on the horizon, it’s unlikely there will be a sustainable move higher in the stock price of TINY – making it a value trap. On the other hand, if there is a positive surprise, TINY could explode at least 25-30% in value.
But I think the more likely case is TINY continues to amble along slowly (trapping value). Portfolio company revenue is likely to keep growing, but I’m skeptical that will translate to shareholder value in the near future.
While TINY presents an interesting opportunity to invest in disruptive technology at a good valuation, management has not been shareholder friendly and this company is years away from a home run.
Do you think TINY is a value trap?
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