September 2011’s Penny Shares to Watch…

 
Despite the current economic situation discover why I think penny shares could be the smartest choice with this month’s penny shares to watch:

• I’m watching this stock like a hawk...

ENTEQ UPSTREAM (NTQ), SONDEX (SDX)

• Don’t let these forex scoundrels ruin your holiday...

EARTHPORT (EPO)

Looking to invest in penny shares? Keep reading to discover my ideas for the coming month...

I’m watching this stock like a hawk

(This article first appeared in Penny Sleuth in August 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

I dread filling in my tax return. You gather data from dusty files, crunch numbers and send it back to grimly await the bill. This exercise does, though, have one redeeming feature – it reminds me of a few old friends…

Part of the process, you see, involves going through my ever swelling file of contract notes from my share dealing. It brings back to mind a few names that I had forgotten. It is like reading the school magazine – a reminiscence of days gone by, of friend and foe, of happy days and not.

Here are a few of the old friends I rediscovered this time around: City of London PR, which soared during the dotcom boom owing to its ownership of a website. Then there was Reliance Security and Omega International, both delivering handsome profits. And there were the villains. Homebuy – a disaster! Aero Inventory – another shocker! Touchstone – what went wrong there?

Looking back, it is surprising how many of my biggest profits were reaped when the companies concerned were acquired either by larger rivals or by their own management. This is an added attraction of small companies. If they are any good they will be bought out, always at a decent premium to the market price.

One example was Sondex (SDX), which I bought for my ISA in 2006. Within a year it had been acquired at a nice premium by GE, capping a successful run by its Hampshire-based management. So I was very interested to see this same management team reappearing on the stock market with a new vehicle.

These managers have a superb track record

This new vehicle is called ENTEQ UPSTREAM (NTQ), and it came onto AIM at the start of July at a price of 100p. Already the shares have gained 24%, so investors are obviously expecting a repeat of the Sondex success story. Let me remind you of it.

Sondex was a UK company that designed and manufactured ‘down-hole’ products to the upstream oil and gas industry. These were used to maximise hydrocarbon recovery, extend the production life of established oil and gas reservoirs and improve the cost efficiency of the extraction process. Sondex made instruments that could determine what was happening down below ground. They could measure the scientific properties of reservoir fluids, assess the condition of tubing and casing and assist directional drilling. Sondex was built through a series of five acquisitions and, crucially, by devoting 10% of annual revenues to research and development.

The managing director was Martin Perry. And it is he and former Sondex colleague Raymond Garcia who are behind Enteq Upstream. At present Enteq has no operating business but the plan is to buy companies that specialise in geophysical equipment and services: wireline logging; drilling; and other down-hole tools.

Although the markets for these products are by no means small, together they account for just 10% of the vast $270bn global market for oilfield equipment. It’s hard not to be bullish for this sector. Not only does the hunt for oil become more urgent with each passing year, but the technical challenges mount as exploration advances into ever more hostile environments.

The question is whether Enteq can make attractive acquisitions in an industry that has some seriously powerful players like Schlumberger, Halliburton, Baker Hughes and Weatherford. Perry and Garcia reckon that their experience and contacts will allow them to identify small companies ahead of these giants, while also supplying some of the smaller regional players in the oil services industry.

But the key will probably be to identify some genuinely innovative technologies that will command wide adoption. Enteq’s management have a well-earned reputation in the City and for this type of acquisition vehicle that is what counts. I’ll be monitoring this group’s next moves very closely in the coming months.

Don’t let these forex scoundrels ruin your holiday

(This article first appeared in Penny Sleuth in August 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

Rip-off merchants – they are the scourge of a decent holiday. Hotels that charge twice what they would ask at any other time of year; airport car parks that make you think it would be cheaper to take taxis; dodgy Mediterranean restaurants that pretend that some leathery bit of old fish is today’s catch. Who hasn’t had a holiday that has ended up costing far more than expected?

But the biggest rip off of all has to be foreign currency exchanges. How much do we lose in the process of changing our pounds into euros, or dollars? 6% maybe, if we are lucky. Each time we set foot outside these shores we hand over a large chunk of our money just for the privilege of being given another lot of money in return.

My wife tells me that the best place to buy foreign currency is a little kiosk down an alleyway here in Oxford. So off I go with my £200. The guy beyond the desk gives me £200 worth of dollars less his 6%, so £188 worth of dollars.

Behind me are Hiram and Myrtle, over here from the USA. They want my £200, so the kiosk merchant gives them this in return for £200 of dollars, plus, of course, his 6%. So this dealer has ended up exactly where he started, only he is £24 better off for doing nothing more than shuffling paper across the counter.

Frankly it is a rip-off, but with every rip-off comes the opportunity to do something better and cheaper. And that is the opportunity that was spotted by one Aim-listed penny share company – one that seems so obvious to me that I can’t believe it wasn’t done before.

Why I think this business is just a racket

When you buy foreign currency, you probably do it through a bank. I am a customer of HSBC, whose pathetic advertisements of its global network make the Heathrow experience even more depressing than it is already. If I go to Hong Kong why cannot HSBC just let me have a few of the many HK banknotes that it must possess, without charging me 6% for the privilege of getting my hands on my own money?

I mean are we supposed to believe that all those ten pound notes that are presented by British tourists in New York have to be shipped back to London by an armed flotilla of warships? Why does it cost so much? These days, most financial transactions involve no notes and coins at all. They are just electronic transactions. If tsunami videos can be instantly viewed all over the world thanks to the wonders of digital transmission, why are we still asked to believe that money transfer is such a difficult process?

What’s the alternative? Well Hank Uberoi, who has taken over the reins at AIM-quoted EARTHPORT (EPO), has spotted an opportunity. Before going on my own holiday I spoke to Hank who did not endear himself by recounting his feats at Goldman Sachs and a hedge fund called Citadel. This does not necessarily fit him to run a small quoted company, but he and his colleagues can hardly do worse than the previous management.

The local banker trying to crack this market

Earthport has a rotten record. But Uberoi believes that the company has a good central idea. He said that the basic proposition is all about “netting” and “local payment”.

Think of it this way. If lots of English people exchange pounds into pesos in a bank in Manila and lots of Filipinos exchange pesos into pounds in a London bank, there is little point in settling every transaction in full. Much better is to simply net off the difference of the aggregated transactions and make one balancing payment. This strikes me not just as a good idea, but one that is so obvious one can only wonder why it has not always been done this way.

But Earthport seems to be pioneering this process. It has been setting up bank accounts all over the world, making sure it conforms with money laundering and other regulations, receiving approval from bodies such as the FSA and now it is starting to orchestrate the whole settlement process.

The biggest challenge has been to persuade clients to sign up. Nobody is going to fire large sums of money into the digital universe without being entirely confident in the system, but recently Earthport has announced some new clients. Although it is still loss-making this is a business that could really scale up. Definitely one to watch.

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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 August 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)