Today's Penny Shares to Watch…

Penny Share Tips & Advice for February 2012

• The strangest penny share story you’ll hear all year: WORLDLINK GROUP (WGP)…

• The great technology story to replace the digital boom…

The strangest penny share story you’ll hear all year

(This article first appeared in Penny Sleuth in January 2012. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by Fleet Street Publications Ltd.)

It may only be January 5th, but I doubt you’ll hear a stranger story than this all year…

To get to the start, we need to pop back to the tail end of last year, to November 24th. That was the day a new company called WORLDLINK GROUP (WGP) was admitted to the main list of the London Stock Exchange.

Now as you probably know, not just any old business can be accepted onto the main list. You’ve got to meet the entry requirements…

While it’s pretty straightforward for the racier outfits to get a listing on AIM or PLUS Markets, companies on the main list are (rightly or wrongly) perceived as being safer. The London Stock Exchange insists that these companies are thoroughly vetted before being allowed in.

Now, on November 24th in a statement that was no doubt scrutinised, checked, debated and finally agreed by bankers, lawyers, PR advisers and the great London Stock Exchange itself, this statement was made about Worldlink:

‘The market capitalisation at listing is anticipated to be circa £55m and the opening share price approximately £2.50.’

To Worldlink’s advisers, £2.50 must have seemed like a nice beefy share price, the sort to convince investors that this is a business with substance. And what about the £55m stock market value? It’s not huge by any means – but surely not a business that is going to disappear in a puff of dust.

How a shock slump knocked this share down 77%

But that was just six weeks ago. It’s a different picture now. Things have got better for Worldlink in terms of business. It’s won some €15m of financial backing and launched two new promising initiatives, of which more in a moment.

So where is the share price now? It’s at 15 pence! Worldlink is no longer valued at the £55m its bankers anticipated. Now, it’s just £3.51m –well below even the €15m value of the promised financing!

What on earth is going on?

In fact, Worldlink never achieved the £2.50 share price the admission announcement mentioned. The shares did actually open at 112.5p on the first day of trading. But by the end of the second day, and after the rather puny amount of 115,000 shares had been traded, the price had sunk to 25p. That’s a staggering 77% slump from the opening price!

I have never seen anything like this in my life. And, to be honest, the silence from the London Stock Exchange, which you would think would want to explain this strange affair, is deafening.

To make the story even stranger, Chief Executive and major shareholder Neil Riches, whom I met just before Christmas, thinks that Worldlink is going to make serious money this year. And a report by Marble Arch Research calculates that Worldlink has a hidden value of £180m – worth about £8 per share.

But here we are today, with Worldlink shares trading at 15p and right down in penny share territory. Intrigued? I certainly was! This is exactly the sort of anomaly I like to check out…

Let me deal first with how Worldlink might make money this year. We find a clue in a deal that it has struck with the mighty Ramsgate Football Club (of Ryman League Division 1). In a deal similar to those done by football clubs with credit card providers, Ramsgate will pocket 20% of any profits sourced from those who sign up to use a betting service – Ramsgate football supporters presumably.

Where does Worldlink come into this? Well, it provides the on-line platform that makes this betting possible. And Riches sees the chance to roll the service out to other clubs. That makes sense – why wouldn’t these clubs go for it, given that it costs nothing and provides some much needed extra revenue? That means that this could soon be making money for Worldlink.

Why you need to look carefully before you invest

But one thing this story does show is that you can’t just assume that everything’s OK, just because a stock is listed on the main list of the stock exchange.

I spend my life defending my rationale for investing in interesting, innovative, exciting and potentially rewarding small companies that trade on the junior AIM market. Yes I know these small stocks by their nature can be risky – but for me the upside potential can make those risks worthwhile.

The great technology story to replace the digital boom

(This article first appeared in Penny Sleuth in January 2012. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by Fleet Street Publications Ltd.)

Ten years ago the world of digital media was in a state of great flux. Established players, such as music and newspaper industries were waking up to the threat of new media. But there was a constant battle between competing technologies as thousands of business started up each year.

Ultimately though, the endgame was clear. It was possible to see where this great whirlwind of creative enterprise was leading…

The industry’s goal was to make it possible for each one of us to call up whatever type of information or entertainment we wanted, at any convenient time and on a device of our choosing. Whether you are sitting on the sofa, riding the bus or basking on the beach, it was going to become possible to listen to your favourite music, watch a film, or check the football results. This was where the digital media and broadband communication revolution was taking us.

Today, we have the world at our fingertips. There are now over 1.2 billion mobile phone users able to connect to the internet using their phones, across the globe.

This has been the great technology story of the last ten years. And it has proved a very happy hunting ground for penny share investors. But I think that over the next two years, penny share investors will be obsessing over a very different technology story.

How the pace of innovation destroyed the big media players

Established players have fought desperately to defend their turf in the media battle. But one by one the obstacles have been overcome. The music and newspaper industries have simply not been able to cope with competition from online channels and from internet piracy.

Hollywood has staged a running battle with cinema chains, gradually reducing the latter’s period of exclusivity over the screening of new films. Television stations, which have traditionally been used to pushing out programmes of their choice and at their chosen time, have been forced to offer flexible timetables to suit the viewer. Now the book trade must respond to the challenge of Kindle and other electronic book devices.

This great passage of creative destruction has been made possible by new technologies and by the relentless march of Moore’s Law (which states that the number of transistors on a chip doubles every two years). But advancing technology alone does not create a multi-billion dollar global industry. You also need demand. The digital revolution may have been pushed by technology, but it has also been pulled by popular demand for new products and services.

More than a decade ago visionaries could see that by melding broadband communication with a free supply of information and entertainment each of us could receive what we want and when we want it. When you can describe a product in this simple phrase, you know that consumers will happily empty their pockets.

Has the digital revolution reached its peak?

But is the digital revolution nearing its end? It might be. The feedback from this month’s huge International Consumer Electronics Show in Las Vegas was downbeat. The most exciting new product was a super-slim lap-top – a neat design improvement but hardly a breakthrough. The fact is that mobile devices are now highly sophisticated and digital content in the form of information, TV shows, films or music is widely available.

The stock market’s dot-com boom happened little more than ten years ago. Despite all the arguments and failures since, a massive amount of progress has been achieved so that the end-game is now in sight. So now the question is this – from where will emerge the next great leap forward?

The century of biotechnology

While the nineteenth and twentieth centuries have been called the centuries of chemistry and physics respectively, I think the start of the new century will be dominated by biotechnology. Just as with digital media ten years ago this industry today is riven with controversy. And vast amounts of money are being spent for uncertain returns.

Most biotech investors have struggled to make decent returns so far. Others have been put off by the complexity of the story - terms like epigenetics and proteomics haven’t yet become dinner conversation. Investors need to learn about such futuristic concepts as genetic engineering and stem cell implants. It is difficult and confusing and challenging.

The endgame for biotechnology

But there is an endgame – and it is ‘personalised medicine’. This describes the notion that your own individual genome could be read and that medical treatment could be devised and tailored exactly for you. The aim is to achieve the right dosage of the right drug at the right time for each patient, and it promises a major advance on the ‘one-size-fits-all' approach that has traditionally characterised drug development.

Having initially been wary of a potentially disruptive threat to their traditional business model, pharmaceutical developers are now realising that molecular diagnostics offers a better way of treating people.

Who will profit from this breakthrough? Well I’ve been looking at a number of picks and shovels plays. Because I think it could be the diagnostics and DNA analysis companies that could prove the early winners in this great story. And I have my eye on a few. I’ll keep you updated on developments in this hugely exciting space shortly. For the biggest and most significant breakthroughs in the coming years, I am backing biotechnology.

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Good investing,

Tom Bulford Editor, Red Hot Penny Shares

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(This article first appeared in Penny Sleuth in January 2012. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by Fleet Street Publications Ltd.)