In only a few months, some small fortunes have been made in the stock of little Rainbow Technologies Inc., an Irvine firm that makes a computer software anti-piracy device.
In November, Rollie Adkins of St. Cloud, Minn., took notice of the rapidly growing firm and bought 500 shares at $5.25 each. In the next few weeks, the stockbroker and his clients continued to purchase thousands of shares at about $6.
At the close of trading Friday, the shares were worth $16.25, up 37.5 cents for the week in the over-the-counter market.
“I have a lot of happy customers,” said Adkins, president of Adkins Securities, a small St. Cloud brokerage.
Rainbow’s market value--the total value of all of its stock at the current trading price--has increased from $7 million in November to $28.4 million last week. The current level is more than five times the firm’s 1988 sales.
But sales are rising too, more than doubling to $6 million last year, from $2.8 million in 1987. Earnings also more than doubled last year, to $951,400 from $370,200.
The current stock price already reflects anticipated earnings gains over the next 6 months, said Leonard Flomenhaft, president of Flomenhaft & Co., a New York investment firm. But the company said it sees no reason to believe sales won’t double again this year, and brokers estimated that earnings could reach $1.9 million.
Rainbow’s success reflects the growing popularity of its computer hardware “key,” which plugs into the back of an IBM or Apple Macintosh personal computer to protect against unauthorized access to software programs.
Last year, the company signed a multimillion-dollar contract to sell its SentinelPro product to Microsoft, a large software maker, and earlier this year a similar contract was signed with Ashton-Tate Corp.
Microsoft is using the device, which adds about $25 to the cost of a software package, in copies of software sent to foreign markets, where large-scale pirating operations have become a problem.
In addition, last week the company introduced a new hardware-software security system that will be sold to computer users to protect the data they have stored in a personal computer. Because there are no similar products on the market, analysts said the potential for the new product, which has a retail price of $195, is not known.
Rainbow’s technology has attracted investors such as Adkins because of the SentinelPro’s large profit margins. Last year, gross profit margins were more than 60% of sales.
“You must have something highly proprietary to be making margins like they have. And the margins haven’t decreased,” Adkins said.
Rainbow’s growth rate eventually will slow, brokers said, as other firms develop competing products. And the stock’s rapid run-up may have reached its peak, said one broker.
But the stock appears to be gaining increased attention from institutional investors, who have missed out on most of the profits so far. According to a recent filing with the Securities and Exchange Commission, only two institutions held a significant number of shares: Wells Fargo Bank owned 25,000 and the California State Teachers Retirement Fund had 5,000.
At the stock’s current lofty level, brokers are skittish about recommending that investors purchase additional Rainbow shares. They said the stock has “great potential,” but they acknowledge that it has become relatively expensive.
“Now that it is at a higher price, Rainbow stock is competing for investment with a lot of other companies that have had increases,” Adkins said. He said he began selling some of his shares when they appreciated “well into the teens.”
But he said he kept a significant portion of his original investment. “I’ll continue to hold as long as the company continues to show potential,” Adkins said.