Soon after the tech bubble burst in 2000, investors searched for
a new industry that could replicate some of the massive gains seen
by investors just a few years earlier. The major investment
magazines helped to boost the hype into the stratosphere. The hot
The premise was simple. Scientists had found ways to develop
ultra-tiny particles that could be used in a range of biotech,
industrial and cosmetic applications. We're talking smaller than
"micro." Smaller than "milli." You have to go down below the width
of a human hair, or one millionth of a meter to get a sense of just
how tiny nano particles are.
Ten years on, the industry has seen limited success, and most of
the major players have been vehicles to separate investors from
their money. In fact, the U.S. government and the
community have poured nearly $20 billion into the industry during
the past 10 years, without a lot to show for it. As a result,
investors have steadily drifted away from the sector.
In the last year alone, the entire industry appears to have fallen
even further out of favor, with many stocks off -30% or -40%. Don't
fault the industry completely on this one. These companies remain
unprofitable and speculative and that's precisely the type of
company that investors are shunning in this troubled economic
environment. Conversely, speculative stocks can post out-sized
gains when markets rebound, as investors move further out on the
risk curve. With shares in a funk, let's take a look if any
long-term value may still be created in this former highflying
Company Name (Ticker)
2009 Sales ($M)
2010 Sales Growth
|Altair Nanotech. (Nasdaq: ALTI)
|FEI Company (Nasdaq:
|Flamel Tech. (Nasdaq:
|Harris & Harris (Nasdaq: TINY)
Most nanotechnology companies have scant revenue bases, as they
have yet to effectively commercialize their technologies. And even
though some of these companies will never see their technology get
out of the R&D labs, some companies are making an impressive go
of it. For example,
Altair Nanotechnologies (Nasdaq: ALTI)
uses nano-sized materials to improve the electricity flow in
lithium-ion batteries -- the kind that are finding their way into
many new electric and hybrid vehicles.
Altair's battery technology provides high power rates, fast charge
and discharge rates (within 10 minutes), longer life cycles
(12,000+ charges), wider temperature operating ranges (-40 degrees
C to 55 degrees C) and improved safety compared to other chemical
approaches. The electric utility market has also been looking at
Altair's approach. But Altair's revenue base is still too small to
generate profits, so the company routinely burns through $20
million a year and any potential profits are likely several years
The use of nanotechnology has always held a great deal of promise
among biotech and drug makers. By using super small molecules,
drugs could theoretically be more effectively distributed in
precise targeted dosages.
Flamel Technologies (Nasdaq: FLML)
had been an investor favorite in this area, as the company looked
poised to boost sales sharply as major drug makers licensed its
But shares have fallen from $35 in early 2007 to a recent $7 as
sales growth has slowed and stubbornly high losses remain in place.
But it's not fair to completely disregard the company's progress to
date. Partners such as
continue to pour research dollars into Flamel's novel approach. And
if any of those efforts bear fruit, then licensing revenue could
prove to be significant and shares would post a nice rebound.
An industry bright spot
There is one company that has arguably delivered on its nano-tech
FEI Company (Nasdaq: FEIC)
. Research scientists at universities, government agencies and
corporate labs use the company's imaging equipment to analyze
materials at the nano-size level. Trouble is, demand for the
company's equipment isn't growing and sales remain stuck at around
$600 million. Analysts expect sales to grow just +6% to +7% both
this year and next, due solely to improving budgets at key
customers, and not because the company's nano-focused approach is
finding many new applications.
The fund approach
Investors can avoid the risks associated with particular companies
by investing in holding companies that have stakes in a range of
nanotech players. For example,
Harris & Harris (Nasdaq: TINY)
owns stakes in more than 30 companies that are using nanotechnology
as part of their manufacturing process. The value of those stakes
is currently valued at around $4.60 a share, more than +10% higher
than the current share price, and management notes that some of its
holdings are being valued at less than they are likely worth, which
means that the
net asset value
) of its holdings is likely closer to $5. To the extent that some
of these nanotech holdings hit pay dirt, then Harris & Harris
could rebound nicely.
Shares had occasionally moved up to the $15 to $20 mark in the
first half of the last decade when investors had been focused on
this sector. But they've been steadily falling in the past few
years and now trade close to five-year lows.
Action to Take -->
Despite a reputation for unfulfilled promises, the nanotechnology
industry could still take off. The slow and frustrating development
should have been expected from such a completely new technology
approach. Yet most of these companies are likely to keep burning
cash, issuing more shares, and staying in a funk -- until sales
really take off.
Harris & Harris' diversified approach makes a lot more sense,
especially since the investment firm can strike promising deals for
company stakes that individual investors never could. This may be
the safest way for individual investors to play the sector.
As with all speculative plays, these investments should only be
a small part of your portfolio. But as is also the case with
speculative stocks, a strengthening stock market could easily push
these stocks back up by a hefty margin , erasing the big drops
they've seen in the past 12 months.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
P.S. When you get in on the ground floor of a promising new
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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