Nano indexes fail as benchmarks but excel as marketing tools

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June 21, 2005 – You have to make news to be in the news, or so goes the mantra of a PR professional. There are lots of ways to generate news these days, from labeling sales as “strategic partnerships” to announcing scientific breakthroughs and product releases. I actually get a little worried on the days I don’t see a press release from Altair Nanotechnologies or Biophan Technologies. OK, just a little good-natured ribbing. Repetition can be a good thing.

Having been a marketing director in a past life, I’m always on the lookout for creative ways to generate news and attention. I appreciate the difficulty of developing a strong marketing campaign, and if it’s a good idea, I may want to try a variation. Why recreate the wheel? This works if you can port the idea to a different industry segment or put a unique spin on the concept. It doesn’t work as well when you are the third or fourth to the same marketplace.

Nano indexes. More nano indexes. And now more nano indexes.

Yes, I am calling the nano indexes marketing tools. My understanding is that stock indexes are supposed to be a valid benchmark, whether to a specific industry segment or the larger economy as a whole. If a specific market index is going up, then investors are optimistic about that segment. If the index is going down, then investors are pessimistic. I’m subscribing to the “rational” theory of investing here. Day-to-day fluctuations seem to be caused by variations in sunspot activity, but overall, when the economy is good the bull charges forward, and when the economy is bad the bear gets mean.

Why do I think the current nano indexes are just marketing tools? Besides the fact that they aren’t available for sale (which is a good thing), an index benchmarking a specific sector needs to:

  • Track companies in which the primary business or revenues of the company are associated with the sector.

  • Measure investor sentiments regarding the specific sector.

  • Ensure that the companies in the index are a representative sample of the sector. If trends do become apparent, the trends will be seen across the majority of companies in the sector and not just those in the index.

Based on these criteria, which are all interrelated, nanotechnology is not a candidate for a sector index. There are not enough public companies with a significant portion of their revenue tied to nanotechnology to drive an independent index. While EmTech Research, Small Times Media’s research division, tracks more than 200 public companies with U.S. activities in nanotechnology, only a small subgroup (many of which are not profitable) has nanotechnology as the primary driver behind its business model.

All three nano indexes that I am aware of (Merrill Lynch, Punk Ziegel, and Lux Research) include many of the same types of companies but have slightly different spins. Lux Research, for instance, adds some end-use players. But gauging true investor sentiment on nanotechnology isn’t possible when you include companies like General Motors or General Electric in the index, regardless of where they sit in the supply chain (demand chain, value chain, whatever you like to call it). The revenue contribution of nanotechnology to these companies would barely be visible under an atomic force microscope. Investors in these companies are concerned with market share and health care liabilities, not the future prospects of incorporating nanomaterials into product designs.

A comparison is helpful. When you look at established indexes for sectors such as energy, health care and defense, there are clear movement trends that are distinct from the broader indexes like the Dow Jones Industrial Average or the Nasdaq Composite. This is a good indicator that investors are valuing these sectors differently than the broader economy. A quick charting of the Nasdaq against Merrill Lynch and Lux Research indexes did not show a distinct pattern for represented nanotechnology firms. The indexes closely followed the movements of the tech-dominated Nasdaq.

Another problem: Is it possible to truly measure the growth of the business of nanotechnology with at most a few representatives of the primary market segments — bio, materials, energy, defense, consumer products, and semiconductors? It would take more than 20 to 25 companies on an index to get an accurate picture of nanotechnology trends.

I’m not against nanotechnology indexes, but it is important that the general investment community and the public not be misled. The current indexes are good marketing vehicles. They lend financial “legitimacy” to the institutions running them. The indexes, however, are not good benchmarks, today or six months from now. And they may never be.

If nanotechnology is a real platform technology, then we will continue to see large corporations include it in their research and development activities and in their product lines. More than half of the Fortune 100 could be involved either in the development or sales of nanotechnology products in the next five years, with almost a quarter already doing so. This broad market applicability makes nanotechnology exciting but extremely difficult to value independently in the current financial markets.

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