Nanotech Firms Turn
Tiny Fundamentals
Into Big Stock Gains
By GREGORY ZUCKERMAN
Staff Reporter of THE WALL STREET JOURNAL
Some of the biggest gains in the stock market are coming from the littlest things lately.
Internet stocks, telecom shares, Chinese companies all are tearing it up. But the hottest stocks right now are a group of companies racing to develop nanotechnology, which uses tiny particles to create and improve all kinds of products.
Nanotechnology favorites such as Nanogen Inc., Nanophase Technologies Corp. and Veeco Instruments Inc. all have doubled, tripled or more during the past year, even though they have no earnings and, for the most part, minimal revenue.
"They're way too frothy," says John Romero, who runs Aptus Partners LP, a small hedge fund in Birmingham, Ala., that has invested in nanotechnology companies but has sold its stakes. "They've run up so fast that you can wake up tomorrow and some could be worth nothing."
What is nanotechnology? A way to develop a substance, like teflon, or a component, like a computer chip, with building blocks as small as 10 nanometers (a nanometer is one-billionth of a meter). The idea is that once the substances are that small, they can be manipulated more effectively and sometimes aren't as affected by forces such as gravity, giving them a range of new uses. In coming years, companies will use nanotechnology to improve everything from computer hard drives and chips to drugs and even suit pants.
"We believe nanotechnology could be the next great growth innovation," says John Roy, a Merrill Lynch analyst, who says nanotechnology companies will begin generating revenue and even profit during the next few years. "Like the Internet, nanotech risks being overhyped, but also like the Internet, where there's smoke there's fire."
The problem is, there is so much smoke that some investors aren't seeing clearly, some say. Even if many of these companies generate big profits sooner than expected, they still can't justify the run-ups their stocks have had.
Among the nanotech stocks getting attention right now is Harris & Harris Group Inc., a New York-based venture-capital fund that counts nanotech companies among its holdings. The company, which has a market value of $250 million, has seen its shares jump to $18.45 from $2.50 in March 2003. Harris & Harris invests in start-up companies and reported a net-asset value of $2.11 in the third quarter, which is down from $2.61 a year earlier. Harris President Mel Melsheimer wouldn't comment on the outlook for the company or when it will turn a profit.
Just as investors flocked to Internet Capital Group, an incubator of Internet companies that ran up during the Internet bubble but crashed when earnings for the sector took too long to materialize, some see similarities in the sudden popularity of Harris & Harris shares. If anything, the company's ticker symbol -- TINY -- is enough to make short sellers froth.
Another hot stock is Nanogen, up to $11.80 a share from $1 since March. The company, which uses nanotechnology for medical purposes, has a market value of almost $300 million but lost $7.1 million in the third quarter, on a measly $1.7 million in revenue. On some recent days the company, which has 21 million shares available for trading, has seen more than six million shares change hands, a sure sign that speculators are targeting the stock. David Ludvigson, executive vice president of the company, wouldn't comment on when Nanogen expects to generate its first profit. "We're still in the investment phase of developing the business," he says.
Some see stark reminders of the early days of the Internet bubble. "Companies that double or triple without earnings and barely any revenues one has to be a bit suspect about," Mr. Romero says. "Now there is far more risk than reward, the valuations are so stretched."
For one thing, bankers expect a slew of nano companies to go public during the next year. And just as companies raced to drop Old Economy names and stick a "dot-com" onto their names at the height of the bubble, a group of companies are putting "nano" in their names, grabbing attention and conveying to investors that they are a play on the nanotechnology wave.
Last June, for example, SI Diamond Technology Inc., of Austin, Texas, changed its name to Nano-Proprietary Inc., a research-and-development company that also develops electric signs. In July, US Global Aerospace changed its name to US Global Nanospace Inc. The name changes have helped send shares soaring. Nano-Proprietary closed at $2.99 Friday, up from 22 cents a year earlier, while US Global Nanospace closed at $1.66 on Friday, up from a nickel in April of last year.
To mitigate the risk, some analysts recommend bigger, more established names such as Veeco and FEI Co., which sell the tools that enable others to use nanotechnology.
The problem is this strategy is the same "buy the Internet toll keepers" strategy that pushed investors into Cisco Systems and Sun Microsystems during the tech bubble, and while those stocks didn't go to zero like many dot-coms, they still fell 80% or more.
Then there are the tech giants such as Intel, Hewlett-Packard and International Business Machines, which are shifting resources to nanotech and should show profits from their efforts, at least down the line. Whether those profits can help the stocks at these huge companies remains to be seen.
Still, there are reasons to focus on the sector. In some ways, companies getting a head start on nanotechnology have a leg up on the Internet entrepreneurs because there are real barriers to entry in this world, as opposed to the Internet. Three guys with a garage and a business plan could get investors enthused during the Internet bubble, but real expertise is needed to get a nanotechnology company going. |
