Nanotechnology

CONCLUSIONs
There are many more companies involved in nanotechnology than I have discussed. Many of them are not publicly traded and therefore difficult for the typical individual investor to invest in. There are also many organizations and publications dedicated to this science. Some web sites I have discovered, which I found to be interesting and informative are: NanoTechWire.com, Foresight.org, Nano.org.uk, and Nanotech-now.com.

I am not recommending any of the companies mentioned in this article. The pure nanotech companies are completely speculative investments, which may be appropriate for some investors who can tolerate the risk, but they are not my typical kind of investment recommendation.

Nanotechnology is a fascinating subject, and I wanted to explore it, make some introductory observations, and identify some participants in the industry. Use this article as a starting point, if you are interested in the subject and able to take this kind of risk. There is a plethora of information available on nanotechnology, and each company involved in it has its own web site with detailed information about themselves. No doubt, some nanofirm will develop the next big thing and make its investors a lot of money.

MAKE YOUR OWN ETF OF TINY TECHS
Since it is so difficult to know which of the young nanotech companies is going to make it big, and since most of them trade at less than $10 per share, an investor could choose three or four or five of them to create a mini-exchange traded fund (ETF) of tiny tech. There would be a commission cost for each of them, thus increasing the cost per share, but the risk will have been reduced somewhat.

OTHER WAYS TO PLAY NANOTECH
A less speculative way to gain exposure to the potential explosion of nanotechnology is to own bigger, diversified companies that are also actively pursuing the benefits expected from this science. There are quite a few to choose from: IBM, Hewlett Packard, Lucent, Intel, and Motorola, to name a few. Though a less risky bet, the possible gain is also certain to be less dramatic, as nanotech is currently such a small part of these companies’ business models. Their success in this endeavor is not likely to quadruple their stock price, something which is not uncommon when a pure play achieves a key goal in their field. Here is how some of these bigger companies are approaching nanotech:

IBM – “IBM is one of the true pioneers in nanotechnology. Among IBM's many nanotechnology milestones, its scientists have invented the scanning tunneling microscope (STM) capable of imaging individual atoms, they have positioned atoms one-by-one for the first time, and incorporated sub-nanometer material layers into commercially mass-produced hard disk drive recording heads and magnetic disk coatings. IBM's current nanotechnology research aims to devise new atomic- and molecular-scale structures and methods for enhancing information technologies, as well as discover and understand their scientific foundations.” (company web site) Stock trades around $92 per share.

Mitsui & Co. (MITSY) – “[Mitsui] is focusing in particular on coordinating the activities of various research institutes and companies in moving promising technologies from the research stage to the benchmark pilot plant stage prior to full-scale commercialization.” (company web site) Stock trades in ADRs around $136 per share.

Hewlett Packard (HPQ) – “Our [Quantum Science Research] objective is to define and explore the limits of the physically possible. The core research areas are currently nanoscale science and the fundamental physics of switching, with a significant emphasis on molecular electronics.” (company web site) Several specific projects and publications are listed. Stock trades around $22 per share.
Motorola (MOT) – “. . . “nano emissive display” (NED) . . . technology enables manufacturers to design large flat panel displays that exceed the image quality characteristics of plasma and LCD screens at a lower cost. Motorola currently is in discussions with electronics manufacturers in Europe and Asia to license the technology for commercialization.” (company web site) Stock trades around $13 per share.

Harris & Harris Group, Inc. (TINY) – TINY is a closed end venture capital investment company investing solely in nanotech companies. As a Regulated Investment Company (RIC), it must distribute at least 90% of its taxable net income. It last paid a distribution in 1999 for $.35 per share. The company looks to invest in private development stage or start-up companies that offer high potential return, but also have great risk. On their web site they list 15 companies in which they have significant investments.

The stock has risen from $2 and change at the beginning of this year to around $9 per share, while its net asset value (NAV) is only $2.11. Most likely this performance is due to the recent broad interest in nanotechnology.

STOCKS FOCUSED ON NANOTECH
This new industry generally overlaps with the pharmaceutical and technology industries in that their nanoparticles and nanodevices are most often used in medicine and microelectronics. I found it difficult to cubby-hole any of these firms into a subsector, so I will just present them uncategorized:

Nanogen (NGEN) – NGEN integrates microelectronics with molecular biology. They make molecular diagnostic tests, which can be used to identify and analyze molecules in medical disease diagnosis, forensics, and biowarfare agent detection. Their open architecture semiconductor microchip allows users to customize it for their own applications. Nanogen’s goals are to establish a revenue stream from demand for their disposable cartridges and to make their technology the standard for molecular diagnosis.

On their web site they list six patents in 2003, 10 in 2002, and more than 20 in 2001. One commercial product worth mentioning is their patented NanoChip Molecular Biology Workstation, which is primarily used for DNA-based analyses, such as how genetic makeup correlates with disease and for human identification in forensics.

Earnings per share for the trailing 12 months is a loss of more than $1 per share. Debt to equity is very low at .04. The stock trades around $6 per share.

Altair Nanotechnologies (ALTI) – “Altair owns a proprietary technology for making novel nanocrystalline materials of unique quality, economically in commercial scale. The company is currently developing special nanomaterials with potential applications in pharmaceuticals, environmental remediation, advanced batteries, fuel cells and thermal spray coatings.” (from their web site) The patent is pending on its nanomaterial RenaZorb, a non-calcium pharmaceutical for patients undergoing kidney dialysis. Their unique drug delivery system is patented.

Earnings per share are still negative: -$.20 per share for the trailing twelve months. The stock trades around $2 per share.

JMAR Technologies (JMAR) – JMAR develops and manufactures laser plasma lithography and x-ray lithography systems for the semiconductor industry and for other microelectronics applications. They also provide precision instruments for inspection and repair of semiconductors, data storage devices, and biomedical and optical communications products.

“The Department of Defense has provided over $60 million in R&D contracts to JMAR to develop a LPP X-ray lithography light source for production of high performance communications and radar chips.” (from JMAR’s web site) They have done research and development for the University of Central Florida and have a business alliance with a NASA spin-off to design and manufacture advanced sensors. Standard & Poor’s reports that the company will receive $8 million in Defense Advanced Research Projects Agency (DARPA) funding between now and the end of 2004, and, also in 2004, another almost $4 million will come from the Naval Air Warfare Center and General Dynamics. Net revenue has been declining over the last four years, but loss per share is also declining—TTM is -$.14 per share—and net income has improved the last three years. Debt/equity is about .78, and the stock trades under $2 per share.

Veeco (VECO) – “Veeco is a leading provider of Metrology and Process Equipment solutions used by manufacturers in the data storage, semiconductor and telecom/wireless industries. . . . Veeco's Metrology tools are used to measure at the nanoscale and our Process Equipment tools help create nanoscale devices.” (company web site) Examples of their products are Atomic Force Microscopes (AFM), other kinds of scanning microscopes, ion beam etching systems, and dozens of other measurement and processing products.

Unlike most pure nanotech companies, this firm has a long history, having been created by two Manhattan Project scientists in 1945. The name stands for Vacuum Electronic Equipment Company. The business went through a number of changes, ultimately being re-launched in an IPO in 1994, since which time it has focused on supplying equipment to information age industries. The company grows through internal development and strategic acquisitions.

Earnings per share are projected to be positive for 2003 for the first time in two years, at $.10 per share, due to successful cost-cutting. Standard & Poor’s expects sales to increase more than 20% in 2004, and to remain strong beyond that as technology demand improves and some products, such as the AFM, become involved in pharmaceutical development. The stock currently trades around $27 per share, and debt to equity is about .75.

EVALUATING NANO COMPANIES
Identifying the one company that is going to make it big is an exciting proposition with many challenges. The most difficult challenge is understanding the science. This challenge is so demanding that businesses find it particularly tough to make nanotech profitable. In fact, on the Japanese conglomerate Mitsui & Co.’s web site they make these statements regarding their 6.2 billion yen nanotech project: “There appear to be platforms that make it possible to move from the research stage through to the commercialization stage in the IT and biotechnology fields. However, nanotechnology is much more complex, involving a greater range, depth, and complexity of scientific knowledge crossing over many areas.”

Since most of us cannot know what these companies do exactly, we have to hope we understand enough to recognize a good business model. In addition, we must make judgments about these stocks based on the same fundamentals used to judge companies in other industries: revenue history and outlook, management, debt, and valuation.

Most of the companies focused entirely on nanotech will have not yet been profitable in their short lives. Even so we can look for those that have increased revenues each year. From these stocks we need some confidence that there will be adequate future revenues or a source of funds that keeps them in operation. Patents, venture capital, and partnerships are forms of such assurance.

NANOTECHNOLOGY: A SPECULATIVE INVESTMENT
Many believe nanotechnology is the next big thing. Probably even more people consider it the most important new thing, particularly with respect to its potential to revolutionize medicine. The federal government is quite interested in its development and applications, having recently approved the National Nanotechnology Initiative to the tune of $849 million toward research and development of nanotechnology in next year’s budget.

“Nano” generally is used to mean very small; as a measurement it means one billionth; in nanotechnology it refers to size less than 100 nanometers. About three to six atoms equal the width of a nanometer, depending on the atom. The technology works with single molecules and atoms, building particles, even devices, only a few nanometers in size.

There are quite a few companies focused solely on “tiny tech”, and many more that include this endeavor as part of their overall strategy, such as giant tech firms like IBM and Intel.

Linda Stewart for www.fizone.com
December 11, 2003