There's nothing like ground-floor investing--the way venture-capital pros do it. One alternative: buying shares of undervalued venture-capital companies with big stakes in private entities and companies that they have taken public. One outfit, which some investors think might be the next CMGI or Safeguard Scientifics, is Harris & Harris Group (HHGP). Its stock has bolted from 4 in November to 14 in December, before easing to 11 on Feb. 2.
"H&H is one of the least-known, most undervalued incubators of tech and Internet outfits around," says a New York money manager who has a 6% stake. He notes that, while CMGI trades at 16 times its net asset value, H&H trades at just twice its "understated" asset value of $5.75 a share. (H&H's net asset value is close to $10, he figures.)
Chairman and CEO Charles Harris says H&H invests in startups that are filing patents for new technologies, most of which come from the labs of Massachusetts Institute of Technology. Currently, H&H has stakes in 14 companies, including four it has taken public: H&H owns 4.5% of Nanophase Technologies, which has a market cap of $74 million; 3.6% of SciQuest, with a market value of $1.5 billion; 2% of Alliance Pharmaceuticals, with a cap of $482 million; and 1% of Silknet Software, with $2.3 billion.
Harris won't comment on which outfit in H&H's portfolio will go public next. But some pros are betting that the two likely to do so this year are NeuroMetrix, of which H&H owns 16%, and 4%-owned Genomica. NeuroMetrix has developed a line of diagnostic devices that analyze neuromuscular disorders. Genomica has software that makes sense of human-genome data. Genomica has licensed the software, called Discovery Manager, to the National Cancer Institute.
One investor estimates that NeuroMetrix is worth $200 million and Genomica $250 million. Based on H&H's stakes in its stable of private and public companies, the stock is worth 20, he says.