I read an article at the end of September that brought my attention to a small-cap growth fund managed by M&I Asset Management, a Milwaukee-based firm that's now part of the Bank of Montreal (NYSE:BMO). The Marshall Small-Cap Growth Fund (MRSCX) has more than doubled investors' money over the past 10 years. The fund's third largest holding is Safeguard Scientifics (NYSE:SFE), a hybrid between a venture capital and a private equity, that invests in growth-stage life sciences and technology businesses. Despite a checkered past, its future is bright. Read on and I'll explain why.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Safeguard's past goes all the way back to 1953 when Warren "Pete" Musser and Frank Diamond created Lancaster Corporation, a holding company that would invest in small firms like Safeguard Corporation, a manufacturer of bookkeeping and accounting products. Its investment in Safeguard was so successful that it spun off the business into its own independent company in 1980. One year later, Lancaster was renamed Safeguard Scientifics. At the height of the dot-com boom, Safeguard Scientifics' market cap was as high as $6.9 billion, very different from the $325 million today. After the 2000 crash, its market cap went into the tank, and eventually it replaced Musser in October 2001 with Anthony Craig, who stabilized its business over three years. Then, in 2005, Craig stepped aside for its current CEO, Peter Boni, who came over from private equity firm, Advent International. Boni and his team have turned things around and in recognition of their achievement, Ernst & Young named Boni one of Philadelphia's Entrepreneurs of the Year. It's on a roll.

The first thing Boni did, upon his arrival, was to sell many of Safeguard's existing investments and redeploy the funds in early-stage companies in both tech and life sciences. In the past year, four of its portfolio companies have sold for $1.72 billion, with performance clauses that could take the number as high as $2.23 billion. If so, it would receive $431 million for its trouble, an average return of between three and 13 times its original investment. Its current roster of companies is 13, seven in life sciences and six in technology. However, two are public: NuPathe (Nasdaq:PATH), a specialty pharmaceutical company with an 18% interest, and Tengion (Nasdaq:TNGN), an organ regeneration business with a 2.5% interest. Patrick Gundlach, the co-manager of the Marshall fund, particularly likes the fact that its investments were able to grow revenues from $100 million in 2007 to $400 million in 2010, suggesting more paydays are on the horizon. (For more on this industry, read The Ups And Downs Of Biotechnology.)

The hard part for Safeguard is redeploying cash from its successful exits. Safeguard has $254 million in cash on its books, as of the end of June, and only $45 million in debt, although the interest rate is relatively high at 10.125%. It could pay down the debt, but investments with this kind of risk profile do warrant a higher yield. Therefore, it will have to find some new investments to go along with the existing ones. In July, it acquired 36% of Penn Mezzanine, a mezzanine lender for companies with revenues between $5 million and $100 million and a history of profitability. Safeguard paid $3.7 million for its stake, and will commit and an additional $26.4 million to future Penn Mezzanine funds. It made the investment to provide a stable stream of income while it redeploys capital. Some analysts don't like the move because the middle-market is a competitive racket. I don't see a problem with it because Penn tends to target smaller companies, which are definitely underserved.

The Bottom Line
Safeguard's share price as of October 17 was $15.73. Its cash per share is $12.31. You're buying a piece of 13 investments for $3.42 a share. If one or two of those investments end up being acquired, you'll get your money back, and then some. I wouldn't bet the farm, but the risk is manageable and the rewards tremendous.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Financial Advisors

    Are Alternatives Right for Your Portfolio?

    Alternative investments are increasingly making their way into retail investors' portfolios. Are they a good fit?
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. Do hedge funds invest in private companies?

    Hedge funds normally do not invest in private companies because of liquidity concerns. Capital funding for private companies ... Read Full Answer >>
  2. Who do hedge funds lend money to?

    Many traditional lenders and banks are failing to provide loans. In their absence, hedge funds have begun to fill the gap. ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center