The Globe and Mail

  People are avoiding small-tech stocks with good reason, but here’s a little US company that may be a buy, our contrarians say.


Saturday, April 29, 2000

Over the past year, it seems that every week an initial public offering with nominal revenue, major losses and intense hype saw its share price double and triple out of the gate.

An 85 percent return on the Nasdaq Stock Market last year, and numerous funds tacking on seemingly routine gains of 50 to 150 percent made the high-tech domain appear like a sure-fire bet for decades to come. While the party was in full swing, we unloaded the last two technology positions in the Contra portfolio, CompUSA and Mitel. And even with huge gains, many of our most ardent followers thought we were crazy. Departing the sector when it’s red hot? To many, we appeared like a couple of hot dogs with bean curd filler.

Now high tech is tripping up and down like a yo-yo, dropping about 30 percent since we sold out. This is frightening many investors, and when that fear becomes more intense, the tendency is to run whole hog from a sector and drive it due south. There it will sit for a number of years while value guys like us dip a foot back in to retest the waters.

Welcome to the initial phase of this scenario for the new economy stocks.

The downturn is leading to the typical change in investor psychology. The bandwagon that became thick with bodies as the masses hopped on to stocks like Research In Motion, Sierra Wireless and 724Solutions, is quickly becoming more spacious as carcasses are thrown off. Part of the irony is that people will now avoid many of the smaller high techs with genuine possibilities that were making a name for themselves away from the hype. One of these is AmeriQuest Technologies Inc. (AMQT--OTCBB), a small (market capitalization of $25 million [US]) Willow Grove, Pa., company that markets and sells products and services providing business information solutions for value-added resellers and systems integrators.

AmeriQuest is not a new kid on the block. In a previous incarnation, this corporation was a high-flying market darling. Revenue approached the $500 million level, but a high debt load put the kibosh on this firm, placing it on life support. Division after division was sold and at the end of the day, the enterprise was a remnant of its former self. The New York Stock Exchange examined the almost barren remains, was not impressed and delisted the company. President Alex Kramer and his partner chief financial officer Jon Jensen invested their own funds to resurrect the enterprise in the wild west show of US over-the-counter bulletin board trading.

They redefined the company, turning it into a firm that provides computer technology solutions. The corporation offers a wide selection of products that include server and networking systems, storage sub-systems and printers, and the technical expertise for network engineering, telephony and enterprise databases.

While confident a turnaround would be accomplished, the company let it be known that additional revenue was necessary to keep it afloat. This meant that investors ignored the corporation almost completely and the stock price flatlined at a nickel for months. While it languished, Mr. Kramer and Mr. Jensen were busy working behind the scenes to improve the operation. They carefully chose new products, formed a liaison with Unisys Corp. and hired a select crop of salespeople. This was done while maintaining a squeaky clean balance sheet, with zero long-term debt.

AmeriQuest is a company that goes against type -- it has real revenue that’s growing swiftly. Sales last year of $55 million were up 8 percent from the year before. This year, revenue should jump even more swiftly and $80 million seems easily doable. The first-quarter tally was up 32 percent from last year. That was before deals were signed in the past month with CMS Peripherals and SMS Data Products. Both of these firms specialize in storing data, providing simple backup systems that make it virtually impossible for their clients to lose information.

Recent changes in technology are also working to AmeriQuest’s benefit. For decades, Unix has been the operating system backbone for large networks. This is a proprietary operating system that corporations must pay to use. Linux, an open system that anyone can download from the Internet and use free of charge, is now challenging this domain.

This arena is becoming red hot not only because it’s easy for users to access, but also because of the decision that Microsoft Corp. abused monopoly powers by violating US antitrust laws. This will make it easier for other systems, like Linux, to compete and capture a greater share of the marketplace.

AmeriQuest has both Unix and Linux expertise, but they did not promote their command of the latter during the recent craze for this system. Mr. Jensen stated in February, "We decided to wait until we actually see a major boost to the bottom line from this technology. When that happens, we'll be happy to talk about it. Until then, it’s not in our best interests. In the meantime, we’re concentrating on our Unix-based operations."

Last week, AmeriQuest finally marketed its Linux ability to the public after inking a deal with Cobalt Networks. Cobalt produces the Cobalt Qube, which can support up to 150 network users, making it practical for small and medium-sized businesses along with educational institutions. Its other key product, the Cobalt RaQ is useful for Internet service providers, as it can host up to 200 individual Web sites.

Mr. Jensen and Mr. Kramer are not another chock-a-block pair of Johnny-come-lately Gen-Xers out to make a quick killing. Both men are in their mid-50s and realize there is an excellent possibility that this might be their last kick at the can.

As Mr. Jensen said, when asked if it might be time for him to file a Form 144 to sell some stock and take a profit, "I haven’t filed one. This is the last pony ride for me. I expect to make it a long and fruitful one." With the stock still trading near a very cheap 40 cents, our bet is he will.