AEA Conference: Small-Caps Come Looking for Love

Diversinet dances under scrutiny, plus the greening of Interleaf.
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SAN DIEGO -- The second session of the

American Electronics Association

conference, focusing on companies with market caps or revenue of $150 million to $250 million, might offer some of those stocks with upside potential. They are post-start-ups (largely non-Internet) or fallen angels. Or worse. But, to be sure, with 150 companies, there are plenty of dogs around. And AEA veterans, who see the same stocks in the second session year after year, are wary.

"I think there is a rule," says the loquacious Nick Moore, a tech-stock analyst with

Jurika & Voyles

, "that if a company goes more than two years in the second session of AEA, it's about to be delisted. Or it should be."

Someone Oughta Call Security

If there was ever a reason

not

to buy a stock based on technicals, it is the tiny Toronto-based Internet stock

Diversinet

(DVNT)

. The chart of this stock, which has risen to 11 from 3 this year, is a thing of beauty. But a testy presentation filled with ravenous short-sellers was downright ugly.

Diversinet offers digital certificates for the hottest area of e-commerce -- no, not

Pokemon

auctions, but wireless Internet. The presentations here at AEA were crowded with investors hoping for another four-bagger. But although CEO Nagy Moustafa kept displaying slides with

Palm Pilots

,

Nokia

(NOK) - Get Report

phones,

Motorola

(MOT)

pagers and logos from

BellSouth

(BLS)

, he offered little evidence that the company is closing deals with those companies. More egregious was a remarkable dearth of numbers. As Moustafa dragged on, investors began to get up and walk out of the room.

"Our applications," he said, "will work with Palm to develop authentication over the BellSouth network..." One testy fund manager interrupted. "But I already have a

Palm VII

and can trade my

DLJ

account

without

your product," he said. "Do you actually

have

a deal with Palm?"

"We have a relationship with BellSouth," Moustafa said. "They are looking at Palm."

It got worse from there. Another slide highlighted research and development. Said Moustafa: "There is a large investment in R&D..."

"Define large," a money manager interrupted.

"Large? It's very big," Moustafa said.

"Define large," the manager persisted.

"How about $10 to $15 million?" Moustafa said.

On further review (as they say in the

NFL

) it came out that a guy who used to run Diversinet (back when it was called

Instant Publisher

) bought the central technology in 1996 for $10 million. Where is that guy now? "He's gone," Moustafa said without further explanation.

Another short-seller asked about a former associate of the company named Bobby Genovese.

"Who is Bobby Genovese?" Moustafa asked.

"Wasn't he in company management?" the money manager asked.

"Bobby Genovese is a former investor relations person who is no longer affiliated with the company," Moustafa said tersely, his memory suddenly on the mend.

Amazingly, Moustafa concluded his presentation without any slides addressing past revenue, earnings, margins or any other basic financial information. Investors left the room shaking their heads.

Interleaf Stock Flourishes With XML Translation Program

Yet another Web software company appeared on investors' horizons at this conference. Waltham, Mass.-based

Interleaf

(LEAF) - Get Report

makes, among other things, a software that translates

Microsoft

(MSFT) - Get Report

Word

files into documents coded in XML, the state-of-the-art Internet markup language. "As the government has just stated, Word is kind of a monopoly," said CEO Jaime Ellerston. "We have the only application that allows you to do XML authoring via Microsoft Word."

XML is the hottest thing going among Web programmers. Short for E

X

tensible

M

arkup

L

anguage, XML has replaced the Web's standard language of HTML. Here's the deal: HTML turns text into a Web page. But XML turns text into almost any format. So prices, names or stock quotes can be used for all sorts of applications. With XML, static Web pages are empowered like a database.

Interleaf makes a product called

BladeRunner

, which claims to be the only product to seamlessly transform Word files to XML. "We believe that ultimately almost all e-business will be focused on XML," Ellerston said.

Ellerston said that the product will let companies take single Word files and instantly transform them across any number of platforms, from Web pages to email to Internet-enabled mobile phones, all on the fly. It is those mobile connections that Ellerston thinks will light a fire to his company's prospects. "There are something like 280 wireless devices out there. There will be 2000 in the next few years," Ellerston said. "Garter says there will be 600 million mobile phones out there by 2002. And everyone from

IBM

(IBM) - Get Report

to

Yahoo!

(YHOO)

to

Fiat

(FIA)

is trying to figure out how to use these mobile devices to get their message out. Write once, output everywhere, and our product lets them do that."

Ellerston said Microsoft is a partner and he doesn't fear that the company will try to encroach on his business. And investors, too, appear unafraid. Some were so excited by the presentation that they were putting in orders with a sales trader who stood in the doorway. The stock rallied big as the presentations went on, rising 25% on strong volume Wednesday to close at 38 1/8.

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

cjohnson@thestreet.com.

For more columns by Cory Johnson, visit his column

archive.