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Big buzz... for tiny things
Nanotechnology holds a lot of promise, but investors need to be wary of small pure-play stocks.
December 17, 2003: 3:44 PM EST
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - If the end of 2003 is any indication of what hot tech trends will emerge in 2004, then "nanotechnology" will probably be a major buzzword next year.

So what exactly is nanotechnology, or nanotech for short? It is the science of manipulating matter at an extremely small level -- we're talking about molecules and atoms -- in order to make new microscopic materials. The hope is that nanotechnology can be used in a variety of applications, ranging from drug development to electronics manufacturing.

Shares of many small companies in the nascent industry have soared in recent weeks on the heels of three significant events. Earlier this month, President Bush signed a bill that calls for $3.7 billion in funding for nanotech research over the next four years.

That same week, a small company called Nanogen (NGEN: Research, Estimates) announced that it received a patent on a particular method of nanotech to build tiny devices for a variety of fields, such as medical diagnostics or data storage. That news caused shares of Nanogen to surge more than 50 percent the day of the announcement.

Finally, IBM said last week that it had a nanotech breakthrough that could help lead to a more efficient way of making semiconductors. IBM (IBM: Research, Estimates) has been devoting a sizable amount of its research and development efforts to nanotech, said Dr. Chris Murray, manager of nanoscale materials and devices.

Small stocks, huge gains

Still, while the study of nanotech has led to some fanciful thoughts of the future, both good (clothes made of self-cleaning fabrics) and bad (tiny killer robots in Michael Crichton's novel "Prey"), the reality is that nanotech is unlikely to yield any significant commercial products for several years, according to Murray.

With that in mind, the recent moves in shares of Nanogen and other stocks that have been pegged as nanotech plays, companies like Altair Nanotechnologies (ALTI: Research, Estimates), Nanophase Technologies (NANX: Research, Estimates) and NVE (NVEC: Research, Estimates), may be just a bit too much.

Large gains for tiny stocks
Company 1 mth price change YTD price change Revenue* Market value 
Altair Nanotechnologies 63.8% 309.6% $0.2 mill $70 mill 
Nanogen 56.1% 257.4% $17 mill $135 mill 
Nanophase Technologies 19.9% 131.2% $5.3 mill $103 mill 
NVE 12.2% 461% $11 mill $208 mill 
Harris & Harris Group 31.1% 269.9% N/A $105 mill 
 * for previous 12 months. All data as of 12/16/03
 Source:  Thomson/Baseline

Even a company that does no nanotech research whatsoever, Harris and Harris Group (TINY: Research, Estimates), a publicly traded venture capital firm that funds nanotech upstarts (note the cutesy ticker symbol of TINY), has soared as of late.

All these firms are thinly traded with market values of less than $250 million. And only NVE, which is developing a technology that uses the spin of an electron instead of the electron's charge to store data on chips, was profitable over the past twelve months. So investors probably should be cautious.

Todd Campbell, president of E.B. Capital Markets, an independent research firm, said that if larger tech companies start to acquire some small public or private nanotech firms, then that could be a legitimate catalyst for more investor excitement.

Large firms should reap biggest rewards

But that may not happen. IBM's Murray said that while there has been a lot of interesting work done by small nanotech upstarts, the likely winners would be large companies that can afford to devote a lot of money to internal nanotech research.

In addition to his own firm, he said that Hewlett-Packard (HPQ: Research, Estimates), chip makers Intel (INTC: Research, Estimates) and Infineon (IFX: Research, Estimates), and Japanese electronics firms NEC (NIPNY: Research, Estimates) and Toshiba have been making significant headway in nanotech research.

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So even though nanotech is likely to be in many headlines next year, it's still a lot like biotech in the '80s and early '90s or the Internet in the mid-'90s, a very speculative area that's going to be difficult for the average investor to handicap.

"Nanotech is in its early stages and is influenced by lots of hype. Anyone that is investing in it now has to be aware that a payoff is many years down the road," said Michael Mahoney, managing director of hedge fund EGM Capital, which has no nanotech investments.

Sure, there will probably be lots of upstarts attracting attention, and one of them may wind up being the next Amgen (AMGN: Research, Estimates) or Amazon.com (AMZN: Research, Estimates).

But more will probably suffer the same fate as Immune Response (IMNR: Research, Estimates), the promising biotech co-founded in the late '80s by polio vaccine inventor Jonas Salk to develop a treatment for HIV. It's trading 99 percent below its all-time peak price from 1992. And some may very well end up like Pets.com.

"Nanotech is a burgeoning field, but I want to see a leader come out and exert itself, and we don't have one yet," said Campbell.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.