With shares of Utek, investors get access to stakes in small, developmental-stage companies. By Bob Frick, Senior Editor August 31, 2007 The concept behind Utek is simple: Universities have lots of research that they want to sell to companies. Utek (symbol UTK) acts as a broker, hooking up companies with technology they need. The number of matches Utek makes goes up each year, and its operating income has climbed from $3 million in 2004 to $32 million last year. So, why is the stock, which closed at $14 on August 29, no higher than it was three years ago? The answer is complicated, as is the company's business. But once you get a handle on what's important, you'll see why I think this is a cheap stock with great potential -- although Utek's business is inherently risky. That business starts with universities and includes some of the top research institutions in the country. Included among those whose technology it brokers are Princeton, Stanford, Cal Tech and Yale, not to mention the Los Alamos National Laboratory. Utek has a database of more than 35,000 technologies that may be licensed. Advertisement If a client finds a technology it likes, Utek buys it with its own money then sells it to the company, all publicly traded entities, for stock. Those clients have included such luminaries as Trio Industries American Soil Technologies and XEthanol. Not ringing a bell? All are tiny companies that sell for less than a dollar on the OTC Bulletin Board -- a trading service for small and often risky companies. Some of the companies Utek holds stakes in are in bio-fuels, bio-tech, wireless communications and engineering. For example, Matech develops high-tech equipment that identifies metal fatigue. Matech has done four tech transfer deals through Utek. Because Utek mainly rises and falls on the success of these stocks, chief executive Clifford Gross likes to say Utek is "a specialty finance" company. But equity stakes in small, often developmental-stage companies sound like venture capital to me. And that is something to which most individual investors usually can't get access. If nothing else, Utek can help diversify a portfolio. The potential at Utek is big, but so is the risk. That was underscored last year, when the company reported operating income of $32 million, triple the 2005 figure, but it still posted a $5 million loss (Utek books the value of the shares it receives in transfer deals as revenue). Advertisement What happened? Essentially, five of Utek's 60-plus stock holdings went bust, ruining what would have been a blockbuster year. In addition, Utek's 2007 second quarter was shockingly poor as income from operations sank to $6.4 million, from $23 million for the same quarter in 2006. Still, Utek is growing briskly by two key measures. In 2006, it completed 29 tech transfer deals, compared with 14 in 2005. Also, it's added to its client list. At the end of last year it had 36 corporate clients. That figure is now 50, says Gross. Of greater importance, Utek's income should become less erratic in the future. The big write-offs of worthless stocks are spurring Utek to find bigger, more stable clients. Gross calls it a "risk mitigation strategy." Among its new clients are DuPont (DD) and Robbins & Myers (RBN), which supplies high-tech equipment to the energy and chemical industries. Stocks of big corporations are "the equivalent of cash," Gross says. Compared with its typical, speculative client, that's certainly true. The efforts to sign up big corporate clients, which takes longer to accomplish than inking deals with small fry, were responsible for the stinko second quarter, says Gross. Only 11 transactions were finalized in the first six months of 2007, compared with 16 for the same period in 2006, he says. That doesn't seem like it would account for such a big decline in income, so consider that one red flag raised. Advertisement Another reason to own Utek is simply because it's cheap. Brian Culpepper, a co-manager of James Small Cap fund, points out that it has a price-to-earnings ratio of 5 or 6. "Normally these smaller tech companies are extremely expensive," he says. He also notes Utek has a return on assets of 29%, "which is not bad at all." If the stock were higher -- say at its 52-week high of $20 -- this wouldn't be as compelling a story. But more deals, bigger clients and the potential for some of Utek's small-company stock holdings to turn into gold mines make this closet venture-capital company tempting.