A Tiny Way to Play Something Huge: The Nanotech Promise
By Michael Brush
January 26, 2006
Few "new" technologies have stirred as much controversy as nanotechnology - the science of how to exploit behavioral quirks that develop in materials when you smash them up into really tiny particles.
Coming onto the investment scene as a theme a few years ago (http://moneycentral.msn.com/content/P63642.asp), nanotechnology holds the promise of breakthroughs like powerful mini-computers, new families of drugs and diagnostic tools that can detect diseases early on, say proponents.
Detractors claim much of nanotech is plain old fraud - or at best nothing more than the latest trendy investment rubric that unscrupulous managers try to fit their companies into, as a way to generate buzz and attract funding.
A fraud?
Few critics have been as vocal as short-seller Manuel Asensio who has maintained a scathing campaign against at least one company seeking the nanotech mantel, NVE (NVEC). It should be no surprise, of course, that Asensio has had a short position in the stock - or a kind of bet that the stock will go down.
"NVEC still hunting for illiterate investors," was the headline on a December missive from Asensio maintaining that NVE recently announced it had been awarded a research grant but failed to mention in the press release that it was for the minimal amount of $190,000. Other Asensio assaults have carried biting headlines like "Is NVEC a fraud?"
Since I started following Asensio's attacks on NVE in late 2004, the company's stock has declined over 50% to trade recently for around $16. The sharp decline underscores how easy it is to lose a lot of money investing in a single play billed as an easy ride on a hot technology.
In other words, investors really face two problems when looking for a way to play nanotech. First, they'd be dumb to ignore it, because many people will ultimately find ways to make a lot of money with nanotech. Second, however, there are no nanotech mutual funds. And buying a basket of these companies on your own can tie up a big part of your capital.
A small way to something big
Fortunately, insiders have recently been showing the way to an alternative that takes care of both these problems. Around the end of December, there was a small flurry of insider buying at a company called Harris & Harris Group (TINY).
Based in New York, Harris & Harris is a sort of venture capital fund that puts money into small, private companies that are working on nanotech breakthroughs. By following the insiders and buying shares of Harris & Harris, you'd be getting a diversified portfolio of potential winners in the nanotech field. To be sure, the Harris & Harris insider buying has been relatively light - only $111,000 since last summer.
But Harris & Harris still looks promising. In the past two weeks alone, it has:
* Invested in the Durham, North Carolina-based Metabolon, a company that is working on discovering biomarkers and measuring biochemical changes and how they affect metabolic pathways as a way to diagnose diseases early.
* Upped its investment in a company called Chlorogen which uses a technology that alters tobacco plants in a way that coverts them into little "factories" producing proteins that may one day treat gynecological cancers.
* Upped its investment in NanoGram, a San Jose, CA, company working on the application of nanotechnology in optical, electronic, and energy products.
These are among more than two dozen investments that Harris & Harris has going in the nanotech field.
Some concrete catalysts ahead?
If all this seems too esoteric, WR Hambrecht + Co. analyst John Roy identifies two more concrete near-term catalysts that could move the stock.
First, there's a nanotech investing conference that will run from January 30 to February 2. News and presentations could move Harris & Harris shares.
Second, Roy expects a few nanotech initial public offerings soon. If successful, they would shine a spotlight on Harris & Harris - since it has investments in companies that may one day go public, too.
"While the next nanotechnology IPOs may not be in Harris & Harris' portfolio, successful nanotech IPOs will likely reflect well on the company," believes Roy.
A wee bit of caution
To me, this is the kind of investment you put just a little money into for the long-term - meaning several years. Despite his enthusiasm for the stock, for example, Roy only has a $17 price target on it. The stock recently traded for $14.80 suggesting limited upside - though stocks in hot sectors are known to blow through analysts' price targets fast.
What's more, in a recent letter to shareholders, Harris & Harris said it may need to invest $200 million to $700 million over the next five years to keep on top of the field. That's a lot of money for a company with limited revenue. So it may need to do a dilutive financing.
The bottom line: Some major breakthroughs are going to come out of this science of the small. But they could be a long time in coming. I'd only put a nano-slice of my investment portfolio into this stock as a way to play the developments.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.