So, it appears I got it right over an unprofitable technology company. But 2021 has been something of a turnaround year. Tern shares are up 160% so far, admittedly from a low base. They’re still about 30% down since my last look, mind.

Like many a tech growth share, Tern has been volatile along the way. By May, the price had more than quadrupled from the start of the year. But, again, that’s often the way it happens with popular growth stocks. Those who bought in at the early peak have lost out.

A bit of risk

So investors who got their timing wrong in May are now sitting on a 43% loss. Still, those who go for small-cap growth stocks tend to be steely folk who can handle a bit of risk. But will I finally be tempted to buy now things are looking better?

Well, the Tern share price is actually down 6% on the day, as I write. And that, it seems, is all due to Thursday’s interim results. But first, I need to remind myself what Tern does.

Tern doesn’t actually do any technology itself. Instead, the AIM-listed company invests in those who do. Tern specialises in the so-called Internet of Things (IoT). And it says it  has seen “significant progress from all of the company’s principal portfolio companies in the period.”

Turnover growth

Tern said those companies had seen turnover grow by 75% in the six months to 30 June. That compares to a 62% rise in the first half of 2020. Employee counts among the chosen few rose 14%, and they recorded a 53% jump in revenue per employee.

During the period, Tern invested a further £0.7m in its favourite companies. And at 30 June, it still had £0.4m in cash. Since then though, the company has raised a further £4m.

In the interim update, CEO Al Sisto said: “The opportunities for IoT company investments continues to be remarkably robust as a result of the pandemic requiring companies and governments to adopt digital solutions.“

So Tern has plenty of cash to invest. And it does seem to be upbeat about its prospects. The successful fundraising in July also strikes me as an impressive vote of confidence.

Tern share price dip

But there’s one thing I haven’t mentioned yet. Profit. There isn’t any. For the half, Tern recorded a pre-tax loss of £718,465. That compares with a profit of £142,474 in the equivalent period last year. And an £803,891 profit for the whole of 2020. That might well explain the Tern share price fall on the day of the results.

So what will I do? Were I 20 years younger, I might well be buying Tern shares right now. But I’m older and more cautious these days. And Tern is still a ‘jam tomorrow’ company working in a sector that I still don’t really understand, and whose share price has been gyrating wildly. It’s still not for me.

Dr. Reddy’s Laboratories, an Indian pharmaceuticals firm, has been temporarily prevented from selling its generic competitor by a preliminary injunction on 13 July, but it seems that in the preceding days the firm was able to get a large amount of it out to the market.

Indivior had anticipated a 2018 revenue hit of at least $25m, but now says it could be “materially higher“. Although sales of Dr. Reddy’s alternative have been stopped for now, the drug had already gained Food and Drug Administration approval in the USA. That approval is being contested by Indivior, alleging that it infringes on its patents, and the whole issue is heading for the US courts with both sides seeking a speedy judgment.

Profits down

The rest of the H1 results seemed barely significant in comparison, but included a 7% fall in net revenue at constant exchange rates, and a 34% drop in adjusted operating profit with adjusted EPS down 16%.

The question is, are the shares an oversold bargain now? I’d say that is a total gamble. Should the courts rule in favour of Indivior, we could see business back to usual. But there will still be a one-off hit from the generic drug already released, and the competitors will still be there when the patent expires.

With around 80% of Indivior’s 2017 revenue coming from Suboxone and making it pretty much a one-trick pony, could a judgment in favour of Dr, Reddy’s even wipe out the company?

Another faller

Among the rest of the day’s fallers, my eye was caught by Tern (LSE: TERN), which describes itself as an “investment company specialising in the Internet of Things.” That’s something which makes me a bit nervous these days, as I can’t help feeling it’s a buzz phrase that has perhaps been overhyped a little.

Tern shares lost 16% in early trading, on the day the company revealed that it has raised £2.9m through a placing at 26p per share. That was 6p lower than Tuesday’s closing price, so a drop to just under 28p in response doesn’t seem all that surprising.

Chief executive Al Sisto said it will “enhance our opportunity to further develop our underlying net asset value,” which I take to mean keep the company afloat for a while longer until it achieves sustainable profitability.

Asset acquisition

There was other, apparently good, news on the day too, after InVMA, a company in which Tern has a 50% holding, announced it has acquired “the intellectual property and other assets of  Cambridge-based AMIHO Technology.” AMIHO, apparently, is working on “the problem of connectivity for the smart energy industry.” And though I don’t pretend to understand what that means, it sounds like it’s developed a bunch of application-specific communications technology.

What does it all mean for me as an investor? Not a lot, frankly. What I see is a ‘jam tomorrow’ company working in a sector that I don’t really understand, and whose share price has been gyrating wildly. Not for me.

Clearly, this is good news for the company and investors have reacted positively to the update. Today’s share price rise takes Independent Oil & Gas’ capital gains since the turn of the year to 27%, with at least some of those gains being due to a higher oil price.

Looking ahead, there is further potential for gains if the oil price rises, although the supply/demand imbalance which has been present in recent years looks set to persist in the short term at least. Therefore, buying smaller exploration plays remains relatively high risk, although Independent Oil & Gas may be of interest to long term, less risk averse investors.

Also rising today are shares in Belvoir Lettings (LSE: BLV), with the property specialist announcing the acquisition of Northwood GB Limited for a total consideration of up to £22m. With Northwood being the largest remaining independent UK lettings franchise which operates 86 outlets nationwide, Belvoir will be the largest property franchise group in the UK upon completion of the deal.

To fund the acquisition, Belvoir is conducting a placing to raise gross proceeds of up to £2.5m. The deal appears to be a logical one for Belvoir and fits in with its multi-brand strategy to grow both organically and through acquisitions.

With Belvoir forecast to increase its bottom line by 12% this year and 9% next year, it appears to be performing well even without the acquisition of Northwood. And with greater diversity and increased resilience during what could prove to be a relatively challenging period for the UK property sector, buying Belvoir now seems to be a sound move for long term, less risk averse investors.

Meanwhile, investment specialist Tern (LSE: TERN) has also been engaging in M&A activity of late, with it announcing the purchase of Flexiant Limited last month. It is a provider of cloud management software for cloud orchestration for on-demand, fully automated provisioning of cloud services. The deal has been paid for through the issue of 8m new ordinary shares in Tern and with its shares rising by 13% in the last month, investor sentiment in the business seems to be improving.

Clearly, the cloud and internet of things spaces have considerable long term appeal and could allow Tern to deliver rising profitability over the coming years. However, with it being a loss-making entity last year and there being other options within that space, it may be prudent to await further news flow and improved financial performance before piling in.

That’s why investing in highly speculative companies can be a risky business. The returns on offer often fail to compensate investors appropriately for the risk taken on.

If everything goes to plan, AIM darlings could become multi-baggers, generating impressive returns for those who are willing to take the risk. However, if things don’t go to plan investors could lose 100% of their capital.

High risk, high reward 

Churchill Mining (LSE: CHL) is currently fighting the Republic of Indonesia for damages associated with the unlawful revocation of the East Kutai Coal Project. Churchill and its partner, Planet Mining, held a 75% interest in East Kutai.

An independent assessment has calculated that Churchill’s damages from the unlawful seizure of the mine could be $1.3bn (around £910m). At the time of writing, Churchill’s market cap is only £29m. 

Now, Churchill still has a long way to go before it can claim to have won against Indonesia, and even if the company does win in the courts getting the cash is another matter altogether. That said if Churchill does win and Indonesia pays up, investors stand to make more than 20 times their money.

Huge market 

Tern (LSE: TERN) invests in established, private software companies and its largest investment is Cryptosoft, the only supplier with a market-proven software security product, for Machine-to-Machine (M2M) applications. 

According to Beecham Research, security is now the leading concern for users of M2M devices and the size of the market for security products is exploding. Based on the current rate of growth, the M2M security market will be worth $700m by 2018, according to M2M Magazine. Tern’s market cap is only £9m at the time of writing, so even if Cryptosoft can grab only a tiny share of the M2M market, Tern could be set for the big time. 

This year, Cryptosoft has already announced that it will provide authentication and encryption services for the Internet of Things with Symantec Corp, one of the world’s largest software and information technology companies. And today, Cryptosoft announced that it had signed a merger agreement with Device Authority, a device authentication software specialist. The two companies already work together so integration should be relatively simple. 

Production surge 

Shares in San Leon Energy (LSE: SLE) are currently suspended after the company dumped its NOMAD but where the business’s shares return to the market, is likely there will be a sudden rush by investors to buy into the firm’s growth story.

At the beginning of March, San Leon secured funds from its investors totaling C$89.3m plus an additional $4.5m in transaction costs to fund the acquisition of Canada’s Mart, an exploration and production company. As part of this deal, San Leon will secure a 9.72% indirect economic interest in the OML 18 block, onshore Nigeria.

The company has also negotiated a deal to acquire another of Martwestern Energy’s shareholders, SunTrust Oil Co Ltd. In a restructuring deal, San Leon is paying $117.4m to acquire SunTrust’s stake in Martwestern. Gross OML 18 block production was 31,600 barrels of oil per day in September 2015. Most of the production is hedged at $95 a barrel until December 2017. This deal could transform San Leon into a major oil producer. 

And Cryptosoft, which is Tern’s largest investment, has also made a substantial start the year. The company has announced that it will provide authentication and encryption services for the internet of things with Symantec Corp, one of the world’s largest software and information technology companies.

Just the beginning

Tern’s future hinges on the success of Cryptosoft’s offering. As while Tern has other investments aside from Cryptosoft, Tern has £300,000 invested in the company for 95% of its equity. This investment makes up around 18% of Tern’s year-end 2015 net asset value, or just under half of the company’s equity investments.

So, Cryptosoft’s success is key to Tern’s future and Cryptosoft’s deal with Symantec could be just the beginning of the company’s growth. In a world that is increasingly concerned about online security, Symantec’s digital certificates (which are used to power strong authentication) and its encryption and digital signing applications are highly sought after. By partnering with Symantec, Cryptosoft will be able to leverage the company’s existing reputation to grow its own reputation and learn from its larger peer. The company could be set for big things.

Exploration news 

Like Tern, 88 Energy (LSE: 88E) has also had a great start to the year. Shares in the company have risen just under 750% year-to-date, and there could be more gains to come.

Today the company announced the successful completion of Phase I for Project Icewine, which has resulted in a substantial de-risking of its flagship HRZ play. The analysis shows that the HRZ play has many similarities to US shale wells. As a result, the company believes that the prospect “will be highly amenable to fracture stimulation operations”.

88’s flagship project has already been described as being a thermal maturity “sweet spot,” which contains “low viscosity vapour phase hydrocarbons modelled to flow at a ‘material rate’ based on the porosity and permeability results”. Simply put, this means that 88 Energy’s Alaskan project has some very attractive well economics. 

And with today’s news confirming that fracking is a realistic way of getting access to the oil, it shouldn’t be long before 88 starts to generate sales. One of the great things about shale oil plays is that they can be brought online relatively quickly. There is no need for drawn out periods of fundraising and drilling the wells themselves is a relatively low-risk operation.

However, 88 could be struggling on the funding front as the company has conducted two equity issues so far this month. Alongside today’s exploration news, the company also revealed that it was issuing three million new shares to keep the lights on.

You see this is the year Astra’s been dreading for some time. The company’s most successful drug, and one of the most successful drugs of all time, Crestor is set to lose patent protection, putting $6.4bn of revenue at risk. Another of Astra’s treatments, Seroquel XR is also set to lose patent protection this year putting a further $900m of annual revenue at risk. Past trends have shown that once drugs lose patent protection, generic replacements can siphon off up to 90% of sales over a very short period, which is clearly a significant risk for Astra. 

And the pain doesn’t stop this year. Around 33% of the $24.5bn in revenue Astra is expected to report for 2015 will come from three drugs, for which Astra is set to lose the exclusive manufacturing rights by 2017 at the latest — that includes Crestor and Seroquel XR. 

Time will tell

To fill the revenue hole left by these drugs, Astra’s management is pinning its hopes on the group’s best-in-class pipeline of opportunities, new drugs such as Brilinta, an anti-clotting drug, Durvalumab, and AZD9291. 

City analysts believe that these new blockbuster treatments will produce sales for the group of around $4bn per annum by 2018. Whether or not sales of these new drugs will replace the lost revenue from older treatments remains to be seen. However, sales figures this year should provide some insight as to how quickly generic competitors will siphon off Astra’s sales. If generics grab market share faster than anticipated, Astra may struggle to hit management’s sales target of $45bn by 2023. 

First sales

The next 12 months are also important for Tern (LSE: TERN), which has spent the last two years putting in place the foundations for growth. 

As Tern revealed today, the company’s net loss for the year ended 31 December 2015 trebled as admin costs mounted. Still, revenue for the period increased 290% and the group’s net asset value almost doubled year-on-year. All in all, the company is moving in the right direction and during 2016 Tern’s most significant investment, Cryptosoft, should begin to launch its new products after a year of investment. 

Indeed, in today’s press release issued alongside Tern’s full-year 2015 results, management announced that Cryptosoft is in discussions with several global companies with regards to new contracts. The installation of an experienced VP of Global sales who started in November, along with a new VP of Sales in North America who is due to start in the first quarter of 2016, should only accelerate the adoption of Cryptosoft’s offering among potential customers.  

Overall, Cryptosoft is on track to record its first large sales this year, and when these contracts are signed, Tern will become a much more attractive investment opportunity. 

Cryptosoft is Tern’s most substantial investment, accounting for 95% of the company’s potential portfolio return. Tern’s other investments are Flexian, Push Technology, and Seal Software. The company owns between 1% and 0.5% of each of these businesses. So in many respects, Tern’s long-term success is dependent upon the success, or failure, of Cryptosoft. 

Upbeat update

Today’s trading update from Cryptosoft is full of good news. The company’s new management team has been in place since 1 July 2015 and is pushing forward with a new strategic plan. 

Management’s focus during the past three months has been on marketing, strategic partnerships and finding sales opportunities, several of which have been identified. And over the next four months, Cryptosoft will focus on turning these opportunities into concrete sales. 

What’s more, since the beginning of July Cryptosoft has launched a new product, the V3 Data Centric Security Platform, and has developed strategic partnerships. The V3 Data Centric Security Platform is an updated version of the V2 version, which is already in commercial use with major UK and US companies. 

Cryptosoft claims to be the only supplier with a peer-reviewed, market-proven software security product, for Internet of Things and Machine-to-Machine applications.

Four-month watermark

Within today’s trading update, Cryptosoft tells investors that the company will be looking to convert sales opportunities into bookable revenues over the next four months, giving investors a clear-cut time frame for growth. Indeed, now that the company has laid out this goal, investors have a benchmark to judge management’s performance. 

And a clear-cut goal is exactly what Tern needs to build investors’ trust. Since coming to market, the company has been shrouded in controversy, despite the fact that it has rapidly become one of AIM’s hottest stocks. 

Like all early-stage investment businesses and small-caps, Tern needs to prove to investors that it can be trusted to hit growth targets, make sensible investment decisions and build shareholder equity. So Cryptosoft’s progress over the next four months will be a crucial factor in determining whether or not Tern is set for the big time. 

High-risk, High-reward

Unfortunately, Cryptosoft’s success isn’t guaranteed. The company is a small player in an industry dominated by large tech giants. There’s nothing to stop these competitors muscling in on the company’s target market while it tries to secure contracts. The tech sector is notoriously competitive and firms need to have deep pockets to fend off the competition. 

Cryptosoft doesn’t have the financial firepower to take on the likes of Vodafone, Blackberry, and Symantec, which has already secured more than 1bn IoT devices. 

Overall, the next four months will be a critical time for Cryptosoft and Tern. Investors could have a lot to look forward to. 

Indeed, these four highly controversial companies could all become multi-baggers in the best case scenario. But if things don’t go exactly to plan, African Potash, Tern, Gulf Keystone and Lgo could go to zero. 

Blue-sky potential 

Tern invests in established, private software companies and its significant investment is Cryptosoft, the only supplier with a market-proven software security product, for Machine-to-Machine (M2M) applications. 

According to Beecham Research, security is now the leading concern for users of M2M devices and the size of the market for security products is exploding. Based on the current rate of growth, the M2M security market will be worth $700m by 2018. Tern’s market cap is only £11m at time of writing, so even if Cryptosoft can grab only a tiny share of the M2M market, Tern could be set for the big time. 

Similarly, African Potash’s shares could surge if the company reaches its full potential. The company has inked three separate deals with three separate parties for the supply of fertiliser across Africa and holds a 70% interest in La Societe des Potasses et des Mines S.A.

Lgo released its half-year results yesterday, which showed group profit had increased by over 150%, from £800k last year to over £2m this year. Oil production was up by 200% year-on-year and to cope with the low oil price management is looking to streamline the business to cuts costs. These actions should help the company weather the low oil price storm and give it solid foundations to stage a comeback when oil prices return to more normal levels. 

Similarly, things are looking up for Gulf Keystone, which is now receiving regular monthly payments from the Kurdistan Regional Government. At the beginning of September, Gulf Keystone confirmed that a payment of $15m gross ($12m) net had been received from the KRG. If the company continues to receive monthly payments of around $12m, it should be able to keep its head above water until oil prices start to recover, then it can target growth. 

Importance of diversification 

African Potash, Tern, Gulf Keystone Petroleum and Lgo Energy all have the potential to be multi-baggers, but investors shouldn’t bet the house on these companies. It’s fine to devote a small percentage of your portfolio to these companies, but investors need to remember the importance of diversification, as it is the key to long-term wealth creation. 

Diversification is defined as “a technique that…aims to maximize return by investing in different areas that would each react differently to the same event.” Most investment professionals agree that diversification is the most important component of reaching long-range financial goals. 

Optimal diversification

Most studies agree that investors can achieve optimal diversification with only 15 to 20 stocks spread across multiple sectors, although many investors prefer a higher number, holding several different stocks from each sector to further increase diversification. 

Tern (LSE: TERN) fell almost 14% from its intra-day high on Tuesday, but Globo (LSE: GBO) fared even worse yesterday, when its shares lost 16% of value during the trading session. Glencore (LSE: GLEN), meanwhile, is down 10% since it bounced back to 144p last week on the back of a new restructuring plan.

Here’s my quick take on these three very different companies. 

Top Pick 

Globo’s downbeat performance since mid-June has surprised me. Its shares roared back today, and were up 15% at the time of writing, but I am puzzled. It is really hard to say why they have fallen and risen so much during the last couple of days, given that aside from an update on its high-yield bond fundraising, there’s not been much to report this week. 

“This process has been delayed by market events through the summer of 2015,” the tech company said on Monday, and it’s possible that investors were not pleased with that. Still, it also said that its financing plans have received “strong interest from numerous investors“, and frankly its balance sheet doesn’t strike me as being particularly stretched, while its core cash flow profile is sound. Trading multiples also point to value. 

It has succumbed to broader market volatility in the third quarter, but its first-half trading update was decent and personally I think its stock remains a good buy at 28p. 

Trust

I wouldn’t blame you if you are reluctant to invest in Glencore.

On the one hand its update on 7 September was good news, as it signalled that management is ready to take drastic action to preserve cash flows in order to ride out a very difficult economic juncture for all the major minors. On the other, it will take time to determine whether the “New Glencore” will be any better than the “Old Glencore”, and several elements of its radical restructuring deserve attention.

At 131p, the shares hover around their all-time low of 118p, yet before a sustained rally takes place, investors must regain trust in the company as well as in the global economy.

Risk 

Tern is up 10% today, and currently trades at 21p. This is a tiny firm that invests in the tech world, and as such I would expect it to have a relatively weak balance sheet, negative operating cash flows and funding needs that are essentially backed by investors who are willing to embrace risk.

That’s precisely what you’d be buying today, which is not necessarily a big problem given that its investment portfolio could indeed deliver rapidly rising returns.

The biggest risk is represented by possible dilution stemming from several rounds of equity financing that may be needed to support its cost base as well as its ambitious expansion plans. 

Until higher revenues are generated, though, personally I’d leave it to opportunistic traders.

Since the beginning of June Tern’s share price has jumped by 170%, outperforming the wider FTSE AIM All-Share and AIM 100 indexes by more than 160%. 

However, the company is shrouded in controversy, has a weak balance sheet and is still loss-making. What’s more, according to my figures, after the company’s recent placing Tern’s book value or shareholder equity is around £1.5m, approximately 2.8p per share. So, the company is current trading at a price to book ratio of 7.9 — a premium valuation for a loss-making company. 

That being said, as an investment company, much of Tern’s value is tied up in the company’s investment portfolio. 

Portfolio analysis 

Tern’s most significant investment is Cryptosoft. The company owns 100% of Cryptosoft, and this one investment accounts for 95% of Tern’s potential portfolio return. 

Tern’s other investments are Flexian, Push Technology and Seal Software. The company owns between 1% and 0.5% of each of these businesses. 

At the end of June, Tern valued its investment portfolio at £707k and since reporting this figure, the company has gone on to raise £720k before expenses through a placing of 6m new shares at 12p each. Management has stated that the cash will be used to provide additional finance for the existing portfolio, with the development of Cryptosoft being a top priority. 

And according to Tern’s press releases, Cryptosoft’s product offering is already attracting significant interest. The company claims to be the only supplier with a peer-reviewed, market-proven software security product, for Internet of Things and Machine-to-Machine applications. Moreover, Cryptosoft is in the process of discussing major contract opportunities with potential UK and US customers. 

However, Tern’s management has warned that it may take several months before the first of these contracts is secured and revenues materialize. 

Risky business

Even though Cryptosoft, Tern’s largest investment, claims to have a one-of-a-kind product, there’s nothing to stop competitors muscling in on the company’s target market while it tries to secure contracts. The tech sector is notoriously competitive and firms need to have deep pockets to fend off the competition. 

Unfortunately, Tern is strapped for cash. While the company may have just replenished its cash reserves via a placing, £720k before expenses is unlikely to be enough to help Cryptosoft repel larger competitors. With this being the case, I wouldn’t rule out additional fundraisings and shareholder dilution in the near-future as Tern ploughs cash into its Cryptosoft subsidiary. 

The bottom line 

All in all, Tern should be viewed as a binary bet. If the company’s Cryptosoft subsidiary makes it to the big time, the sky is the limit for Tern’s shares. However, if Cryptosoft can’t compete with its larger peers, Tern will struggle to survive.