In the 1820s a far-sighted ironmonger, William Farlar, developed Brompton Square in London’s Knightsbridge. A smart investment, you might think, but he was in debtors’ prison a few years later. Mr Farlar had been too far-sighted. His elegant houses are now much sought after – but they proved difficult to sell when first built, because they were considered too far away from the ‘happening’ part of the city.    

A similar tale can be seen in the development of both Canary Wharf and Broadgate. An idea ahead of its time can be of immense benefit for future generations, but the initial investors may struggle to profit.

I remember the dotcom bubble in the late 1990s. Here the problem was slightly different, but it was still an issue of timing. Excited investors were selling down companies with physical assets to buy any internet startup. In the US you had companies like Pets.com, which delivered dog food at a loss. Here we had sports e-tailer Boo.com, which spent a fortune on faltering technology and marketing. Few worried as valuations soared – in five years the tech-focused Nasdaq index rose 400%. And then the bubble burst.  

Investors had misjudged the speed at which consumers would change their behaviour. Too many companies were launched, and the resulting fight for the customer just added to the value destruction. 

Yet from this corporate carnage emerged some of today’s mega-companies. Amazon shares went from about $4 in the late 1990s to a post-crash low of about 35c. Today they trade for around $95.

The original investment thesis was correct. It was all about backing the right companies – and timing.

Keeping the faith, but with who?

In recent years there has been a similar – albeit smaller – bubble in the stock prices of battery and alternative energy tech companies. Having had a stellar 2020, many have fallen back to earth. Investor passion ran ahead of reality – that old problem of timing.

I believe this area will eventually prove worthwhile. And some of the companies that come through this period could become giants. But large amounts of capital need to be deployed – and deployed smartly. Too often the science is still to be proven outside the laboratory. The commercialisation, commissioning and ramping up of new products pose further impediments.

The bubble in prices had one benefit. It enabled many companies to raise capital so they can pursue their goals for a while regardless of their share price.

An example is the world leader in green hydrogen, ITM Power (ITM). We first bought the shares within the Henderson Opportunities Trust (HOT ) for £2.35 in November 2020. In August 2021 the government published ambitious plans to build a thriving low-carbon hydrogen sector in the UK, and ITM’s share price took off, giving management a chance to tap the market for cash. In November 2021 they raised £250 million, selling new shares at £4 each (we did not partake). Today ITM shares are priced at nearer £1.

Investors supporting that capital raise are nursing a particularly painful loss. This leads to a failure of patience and the shares being sold into an unwilling market. As a result, the share prices are very volatile. But these are the ingredients for investment opportunity.

Any investment in this arena requires detailed research. We look at the technology and whether the business is generating revenue yet. How big are the company’s cash reserves? How fast is it burning through that cash? Has management got a credible plan for ramping up production and building scale? And is the management itself credible? This is an area where Wright’s Law applies – costs should fall as lessons are learned and production rises. Is there evidence of that?

ITM is burning through cash quickly but its recent interim results to the end of October show it still has over £300m of net cash on the balance sheet.

Crucially, ITM has partnerships with companies like Shell, Scottish Power and German industrial gas giant Linde Engineering. Big partners bring commercial nous, wider technical expertise and distribution opportunities that can help fast-track new technology.

ITM appointed a new chief executive in December – a former managing director of Linde, Dennis Schulz. He has already announced 100 job cuts, reducing the company’s wage bill by 30%. He has promised to narrow the company’s focus and to put more emphasis on prioritising successful deployment of current products ahead of developing the next generation.

There are others in this space on the AIM market, including AFC Energy and Ceres Power. We hold them all within HOT – just 2% to 3% of the trust in total, including ITM. Each specialises in different aspects of the hydrogen energy theme. All are still in their early stages with hurdles to overcome. Are they the right companies? Is now the right time to invest?

Fortune does not always favour the brave – as Mr Farlar’s experience testifies. But last year’s price correction at least mitigates some of the risk for those buying today. And remember, those who bought Amazon shares at their dot-com peak and held them have still seen a return of more than 2,000% – enough to offset a few mistakes like Boo.com perhaps. Even if you do not time your entry to perfection, buying the right ground-breaking company early and sitting patiently can be a good investment strategy. 

James Henderson is co-manager of the Henderson Opportunities Trust (HOT ), Lowland Investment Company (LWI ) and Janus Henderson UK Equity Income & Growth fund .

Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitudes towards risk.