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Some bubble Aussie tech stocks head for burst.com

Added: (Wed Dec 01 1999)

Pressbox (Press Release) - (This story is accompanied by a FACTBOX outlining high-tech and small telecom stocks that are keenly sought by investors as well as their share price gains.)
By Wendy Frew

SYDNEY, Dec 1 - A few years back, Australia's small mining companies were all that glittered at the speculative end of the market.

But those stocks have long since lost their shine and investors are now targetting the more glamorous sector of high technology and telecommunications.

Aware of the giant gains made on the Nasdaq high-tech market in the United States and eager to share in the wealth created by the Internet, retail investors have been buying some of the smallest and least-known stocks on the Australian market.

Despite dazzling run-ups in their share prices, many of these companies have yet to make any money. According to analysts, it is a bubble market just waiting to burst.

Investors lucky enough to have ridden this small-cap boom have made gains up to 31 times from year-low levels. By comparison, the market's benchmark index, the All Ordinaries, has risen only nine percent.

"The market continues to have a strong appetite for these stocks but the point will soon come where we are going to have to start sorting out the good ones from the junk and there is plenty of junk," said Hartley Poynton broker Dirk Van der Struyf.

NO PROFITS NO WORRY

Analysts agree that just because a company hasn't made any money doesn't mean it won't. However, they say current share prices can't be sustained forever on blue sky valuations.

Examples of small stocks with no profit history but a strong investor base abound on the local market.

New Tel Ltd (Australia:NWL.AX - news) is one. In the five years to end-June, the mini-telco has posted net losses averaging A$5.9 million and in 1998/99 it recorded revenue of just over A$1 million. Despite that, its market value has soared to A$112 million (US$72 million) as its share price rocketed from around 49 cents mid-October to as high as A$1.67 in late November -- a rise of more than 200 percent.

At the same time, turnover has surged from no more than about 100,000 shares daily, into the millions.

Radio communications equipment Quicktrak Networks (Australia:QTK.AX - news) also now regularly appears in the list of most heavily traded stocks. Its share price has more than doubled to about 25 cents in the last two weeks and it too is yet to turn a dollar.

Some of the new speculative stocks are the same ones that used to trade at the small end of the mining market, such as the A$450 million telco Davnet (Australia:DVT.AX - news), formerly Golden Hills Mining, which was worth A$60 million earlier this year.

EXTREME RISK

As the price of bullion headed south, some companies dumped their mining assets for Internet businesses, and added '.com' to their names.

Others, such as online media company Spike Networks (Australia:SPK.AX - news) are new businesses involved in web site design or software development.

Some analysts have suggested the heat in this new market is more intense than anything the mining sector experienced because the advent of online trading has slashed transaction costs and led to the emergence of so-called day traders.

"There are punters out there operating at the extreme end of the risk curve,'' said one institutional portfolio manager who, like many others, is steering clear of most small-cap stocks.

"We can't justify being in the sector," he said.

High net worth individuals are thought to be keen buyers, but the 'mum and dad' investors also appear to be involved. Much of the brokerage is done by discount brokerages.

Mercantile Mutual's smaller companies funds manager David Paradice said that although there were companies in the sector with potential, the whole market was heavily influenced by sentiment and Nasdaq's bull run. That index has risen about 24 percent since mid-October and is up about 52 percent over the year, taking into account Nasdaq's fall on Tuesday.

Until the profits come through, many of the stocks are precariously positioned.

"When prices go this high everyone gets nervous and it could just take the smallest thing to change sentiment,'' said Commonwealth Bank of Australia equities research analyst Caroline Egan.

As for what to pay for these companies, who's to say?

"At the end of the day, how do you value something that is not making any money?" said Paradice.

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