The nano-savvy investor: making sense of the public markets

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Mar. 24, 2005 The year 2004 was one in which small tech was too often equated with small cap. It was a year in which many investors first tuned into the nano theme. Demand for information grew. So-called nanotech experts appeared on the scene, explaining how nanotechnology would radically change our lives. Stock recommendations focused on illiquid stocks — that is, very small stocks with few shares available. As a result, such stocks rapidly became the playthings of retail investors with short-term mindsets.

It was a tough year for business journalists caught by surprise by the topic and suddenly under pressure to become nano-literate. As a result, newspapers and magazines published many articles in which examples of tangible nano products already on the market were arbitrarily mixed up with futuristic or even mystical perceptions about what the future might bring. Such stories did not help alleviate the general confusion.

Nor did the events of April 2004, when Merrill Lynch launched a nanotech index composed of 25 nano stocks. The authors were eager to stress the index was meant simply for tracking the nanotech sector and that investors could not buy it. However, the only selection criteria for the stocks were that they had to have some meaningful nano activities.

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The danger of a “nano” bubble was clearly there. But the aborted Nanosys IPO revealed the difficulties the financial markets have in evaluating a pre-product company years away from profitability and a business model based on a technology platform strategy. Although many hoped a Nanosys IPO would serve as a catalyst for others to follow, the withdrawal had the opposite effect of slowing things down.

The current year now looks promising. Investors are more familiar with nanotech stocks and have gradually abandoned their “nano” fixation, instead adopting a more informed evaluation of the companies.

They might still discover their short-term expectations on some stocks are much too high. And if doubts about the long-term prospects of a company arise, any nanotech premium factored into its valuation will simply disappear. Conversely, companies whose valuations are at least partly justified by the current fundamentals would be more stable in such an environment.

Therein lies an opportunity. I believe the transition from a nano fixation to a more sober analysis based on profitable and sustainable business models will continue through 2006 and beyond, successively retrenching any of the hype that has lingered on within company valuations. Additional support will come from a steadily improving quality of news flow from the industry and research labs.

On this long road to reality, it could be advisable for companies to underemphasize their nano profile. Investors could become oversaturated by the nano buzz — especially if more companies employ the nano label just to capitalize on the financial markets. The slogan “we are a nanotechnology company” emblazoned on a Web site might suddenly be perceived negatively.

I think it’s a good strategy to look for companies where the financial market has not yet attributed a nano premium to the price. Such companies may well turn out to be the real beneficiaries of nanotech innovation. Consider them companies with a hidden nano premium, one not yet reflected in the share price. To find them, take a closer look at some established companies in the fields of semiconductors, bio-analytics, drug delivery, or even in certain niches in chemistry.

At the same time, investors should not blindly turn away from companies calling themselves nano. Rather, investors should stick to the plural term “nanotechnologies” which illustrates much better the huge variety and diversity of nano-inspired tools, methods and processes. Look for companies with an intimate knowledge of the end markets they serve, trustworthy customer relationships, a proven track record, and a management team that knows how to execute — in both the nano world and the real one.


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