Looking Toward The Horizon For Opportunity

| About: Horizon Technology (HRZN)

Charles Holland Duell was appointed in 1898 to the post of United States Commissioner of Patents and held this position until 1901. So from his position of relevance to the future of innovative new products for our nation, it probably surprised many people that Duell was given credit for a bold statement: "Everything that can be invented has been invented." The good news is that this prophecy hasn't come true, at least until now. Also, for Duell's true legacy it has been shown that he hadn't even made the utterance concerning the end of inventions in our country.

Alvin Toffler's book Future Shock, though published in 1970, has continued to resonate in my mind when I think about our nation's economy and his perceptive ideas that will have meaning for our citizens well into the future. For those who have never read this iconic book, what Toffler was advocating was simply this: Society was experiencing an enormous structural change, a revolution from an industrial society to a "super-industrial society." He believed the augmented rate of technological and social change left people disengaged and suffering from "shattering stress and disorientation" -- or future shock. Toffler stated that the majority of social glitches are symptoms of future shock. In his discussion of the components of such shock, he popularized the term "information overload."

With this article I hope to identify for investors a stock that I think has the opportunity to provide monthly income, with the enhanced chance that Buell's pseudo-prediction isn't going to happen in the next few years and thus provide the prospect for capital growth. The company is Horizon Technology Finance Corporation (NASDAQ:HRZN). Horizon is a specialty finance company, lending to and investing in development-stage companies in the United States. It provides secured loans to companies backed by established venture capital and private equity firms in the technology, life science, healthcare information and services, and clean-tech industries. The company was founded in 2008 and is based in Farmington, Conn.

One should note that it isn't the typical financing fund that has billions of dollars under management and has investments across a wide range of industries. As noted, it is my opinion the company is concentrating on critical industries that will dominate our economy in the coming years -- healthcare information and services along with clean-tech are just two examples of venues for the future economic growth. I could list the vast number of companies that it has alliances, but I would suggest that all readers should review their company website for more information and SEC filings.

One word of caution, however. From the total list of companies that have financing deals with Horizon there are some, especially in the biotech arena, where I would not invest in their respective company stocks. However, for most startup biotechs funding is the issue, and what might be an ugly duckling today could become the beautiful swan in the future. One can review the recent announcement concerning one biotech (ACT Biotech, Inc.) that has been written off its books. Horizon does maintain the future opportunity should the company eventually become successful; it could still gain a monetary reward for their success. The good news, in my opinion, Horizon has a well-diversified portfolio across the critical industries that will have an impact on our future economy.

The following features are, in my opinion, positive benefits for investing:

  • Company management has an extensive background in the financing industry. The CEO and other critical management members come from a background with Transamerica Corporation, located in San Francisco.
  • The company has office locations in three critical areas of the country, so it has vital and personal exposure for the types of companies that they invest. Those are Farmington, Reston, Va., and Walnut Creek, Calif.
  • As of September 2013, Horizon has $143 million of equity capital. Also as of September 2013, Horizon's portfolio consisted of 50 secured loans with a combined fair value of $231.7 million and warrants in 71 companies with an aggregate fair value of $6.6 million.
  • On Nov. 1, 2013, Horizon declared a monthly dividend of $0.115 for January, February, and March 2014. This represents a dividend rate of about 9.8%, plus it allows through their DRIP for investors to reinvest their dividends in more shares.
  • Horizon's revenue growth is higher than the industry average of 8.8%.
  • The gross profit margin is a lofty 65%, well above the average of 44% for similar companies in this venue of financing.

Insiders apparently believe in its future as they are purchasing shares on the open market. I always like to see management with some skin in the game.

However, there are areas that investors should be aware of. As mentioned earlier, there is greater implied risk for the fact that Horizon is investing in ground floor operations where failures of product or service can occur. The example of the just announced write off for its investment in ACT Biotech clearly points out this issue. Horizon's low balance in equity capital can be an issue because it will only take a few missteps for this to impact the bottom line earnings.

The management team is a both a plus and a minus, because keeping the team in place is critical for the future growth. The fact that now they are net buyers of the stock makes this less of a concern, but one should always be attuned to management and its priorities. Over the last year the underlying stock has not moved beyond a limited range, and is now a shade below the 52-week high. It would be nice to see the stock capital appreciation issue be more prominent in the investment equation. However, its near 10% dividend makes this issue more palatable for holding the stock long term. Plus, investors should always have a point of entry in a stock before it has made it's hoped for price appreciation.

As with my personal portfolio, I believe in a highly regimented balance with bonds, common stocks in established industries, and in stocks that have a dividend and potential for hitting some home runs with the highly attractive growth industries where they are investing.

Disclosure: I am long HRZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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