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Jubak's Journal
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The hot nanotech stocks of 2015, on sale now
The prospects for nanotechnology -- designer drugs, shape-shifting materials -- are so dazzling they seem to defy rational investing. Here's how to cut through the hype.
By Jim Jubak
Lets get one thing straight from the start: I think nanotechnology will indeed be a revolutionary technology, ushering in another age of head-spinning, breathless change in everything from computers to medicine to clothing to housing.
I agree 100% with the Rand Corp.s 2001 report that predicts that multidisciplinary technology will revolutionize social, economic, political and personal life by the year 2015. (You can find the full-throttled report here.)
So Im certainly no nanotechnology-basher. (Hey, Ive even read all of Neal Stephensons The Diamond Age. All 512 pages.) No, Im a fan of the technology as well as the science fiction visions of Stephenson and John Robert Marlows NANO.
As an investor putting money to work in the here and now, however, Ive got just one little problem: I cant find much actually to invest in. Worse, most of what is touted and hyped as nanotechnology stocks is rubbish.
But that doesnt mean you cant invest in the technologies of 2015 today. You just have to be a bit unorthodox to do it. Let me give you my personal five-step approach to the nanotechnology revolution to come.
Know more than the buzzwords
It helps to have some idea of what the technology is before taking cash out of your wallet. There are almost as many definitions of nanotechnology floating around Wall Street as there are guys hawking nanotechnology newsletters, but I think its relatively easy to agree on a few basics.
Nanotechnologies use really, really, really tiny building blocks, far smaller than used today to manufacture most things. How tiny? The cutoff used by the Institute of Nanotechnology in the United Kingdom is from 0.1 to 100 nanometers. A nanometer is a billionth of a meter. For comparison, the smallest semiconductor chip technology now in use is called 0.13 micron or 130 nanometers. Intel (INTC, news, msgs) is at work on 90-nanometer technology that uses transistors that measure just 50 nanometers. A human hair is 1,000 times as wide as a 50-nanometer transistor.
At this scale, manufacturing takes on a whole new meaning: rather than snapping together pieces of plastic, pouring hot metal into molds or combining petroleum-derived olefins to make plastics, nanotechnology creates and then builds new materials by manipulating individual atoms.
And those new materials are likely to show startling new properties. Nanotechnology will, for example, produce materials that change shape with temperature shifts, sensors that shift frequency to match a signal, nanotubes that are 100 times as strong as steel at one-sixth the weight and logic switches for computers made out of synthetic organic chemicals.
3 industries with a head start
Look for industries where nanotechnology could result in marketable products within 10 years. (Why 10? Anything further out comes with so much uncertainty that you might as well select stocks at random.) There are three strong candidates.
- Biotechnology, where the knowledge of the human genetic code and the ability to manipulate drug compounds at the atomic level could lead to new efficiencies in drug discovery and, ultimately, to designer drugs.
- Semiconductors, where new nanomaterials could extend the lives of current chip technologies. They also might lead to whole new approaches to computation such as using the quantum-level properties of matter that start to emerge at these scales to create logic devices.
- Industrial materials, where the ability of nanotechnology to custom-design the physical character of the materials that go into things such as visual displays, touch pads, sensors and signal processors could produce new products with new functions at a fraction of current costs.
How close is a marketable reality?
Try to handicap the odds that any of these three areas will produce marketable products in volume and at a profit in the next decade. Heres my ranking, least likely to most likely:
Least likely: Semiconductors. Its clear that current semiconductor heavyweights Intel and IBM (IBM, news, msgs) take the technology seriously because they both are spending big research bucks in the area. But, IBM told Merrill Lynch technology analyst Steven Milunovich in February, the company thinks the first products based on nanotechnology are about seven years away.
Even then, these new products are likely to be in memory and storage rather than in computer logic. Thats because current technology for making more powerful and cheaper computer logic chips looks good until 2015 or so. That creates a huge barrier to entry for logic chips based on innovative and disruptive technologies.
Somewhat likely: Biotechnology. Human Genome Sciences (HGSI, news, msgs) is an almost perfect litmus test. Human Genome began as a company dedicated to building a library of human genes to discover which of these genes produced proteins that were capable of changing the behavior of individual human cells. Each protein that had that ability was a potential drug candidate. The second stage of the companys life began when it decided to develop some of those potential drugs itself, thus combining gene sequencing, protein screening, drug development and drug manufacturing under one roof.
The company now has eight potential drugs in clinical trials; five of these are derived from the genomics approach. We wont know for about five years if this gene-based approach is likely to yield significant drug discovery advantages and investor profits. The best bet for investors is to watch this company from the sidelines to judge the value of nanotechnology in this sector. Its worth noting the CEO recently left the company.
Most likely: Materials. Its the nature of the materials market that makes me so positive on nanotechnologys near-term potential in this sector. The market is fragmented with no dominant standard and no dominant company. It feeds into a diverse and growing set of end markets that range from aerospace companies to flat-screen makers. Many of these end markets are showing the kind of huge year-on-year growth and downward cost pressures that drive innovation.
And in the materials field, companies have already brought nanotechnology-based products to market. In 2003, General Electric (GE, news, msgs) began selling conductive powder paints, a nano-engineered material, to auto makers and their suppliers as a replacement for the metal and plastic substrates now in use. GE already sells about $1.5 billion in plastics to the auto industry annually, so the company clearly has the clout to bring this new product to market.
Theres an important downside to watch for in this sector: New nanomaterials are likely to be very disruptive to existing segment leaders. Watch out for companies that are underspending on R&D and are vulnerable to getting blindsided by new products from competitors.
The most exciting prospects are still private
That is, you cant buy them yet. Want to play nanotechnology in the materials sector? Here are names that you can buy now: General Electric, 3M (MMM, news, msgs), Dow Chemical (DOW, news, msgs) and DuPont (DD, news, msgs). These companies are spending research and development bucks to discover nanotechnology materials. On their track records, investors can be sure that theyll get them to market and sell millions of dollars of these products to new and existing customers. Same is true if youre looking for a nanotechnology investment in the biotech field right now.
Id recommend Johnson & Johnson (JNJ, news, msgs), which, thanks to its 2001 acquisition of Alza, is the leader in using nanotechnology to deliver drugs. But these arent exactly the nanotech stocks to stir an investors soul. Sure, new products from these technologies will add to earnings. However, these are already huge companies, and their stocks wont get huge pops from any single product. To get that youll have to wait until the current generation of private nanotechnology companies sells stock to the public.
The best of nanotechnology companies have been funded by private venture capital firms: About $300 million went into nanotechnology from this source in 2003 according to Lux Research. These companies wont go public until the venture capitalists think their products and the stock market are ripe.
Some names to watch for include NanoDynamics (nanofuel cells), NanoScale Materials (chemical cleanup), ZettaCore (molecular memory) and Nanosphere (sensors and diagnostics). (Another alternative is the nanotech instrument companies such as Veeco Instruments (VECO, news, msgs) that make the equipment such as atomic force microscopes needed by nanotechnology researchers.)
Beware the hype cycle
Nanotechnology has started to get the star treatment -- magazine covers, special reports, breathless newsletters, special stock indexes -- thats reserved for investment fads. Its already clear that simply putting the word nanotechnology in a company name is enough to create a speculative rocket. But you aint seen nothing yet. The dearth of exciting publicly traded stocks means that the IPOs of venture-capital funded but now-private nanotechnology companies will be wildly over-subscribed and wildly volatile.
Keep your wits about you, and remember the lessons of the Internet boom: The technology was real even if some of the companies werent, and, two years after the hype peaked, investors could pick up the best for a tenth of their highs.
The future is coming. And you can buy a piece of it now. But thats no reason that you have to overpay for it.
New developments on past columns
3 growth stocks with room to grow
Bunge Ltd. (BG, news, msgs) shares fell by 1.86% Thursday basically on news the company would sell 9.5 million shares, diluting the interests of current investors. The decline was actually a bit of an improvement. Investors reacted so negatively to the sale news that the stock dropped 4% by about 1:30 p.m.
The offering overshadowed Bunges report of very strong first-quarter earnings. Bungee will use most of the proceeds from the share offering to purchase the outstanding minority stake in its Brazilian subsidiary. The timing on this looks good since Brazilian financial markets have plunged on negative financial and political news recently. For the quarter, Bunge reported earnings of 65 cents a share, well above the Wall Street consensus of 45 cents a share. Bunge also raised its projections for the 2004 second quarter from 74 to 83 cents. The Wall Street consensus for the quarter is currently 77 cents.
Bunges results benefited from stronger volumes in its soybean division, up 4% from a year ago, and rising prices. Net sales for the division climbed by 19%. The companys fertilizer division saw lower volumes offset by higher prices. In the second quarter, Bunge expects its margin, which climbed in the first quarter, to rise again on higher U.S. soybean production. As of April 30, Im raising my target price by $1 to $44 a share by September 2004.
10 stocks for a changed planet
Shares of Oshkosh Truck (OSK, news, msgs) got slammed after its first-quarter earnings report came out on April 27. The problem, as its been with many other earnings reports this quarter, wasnt in reported results but future projections. Oshkosh earned 62 cents a share in the quarter, about 15% above the Wall Street consensus of 54 cents a share. Thanks to higher parts sales as a result of the fighting in Iraq and Afghanistan, operating income in the defense division grew from 5.2% of sales to 13.7% of sales -- better than Wall Street projections. Margin pressure in the fire and emergency vehicle division was offset by continued cost cutting.
But the company disappointed Wall Street by raising its guidance for all of 2004 only modestly, by just the 2 cents a share more than the first quarters 8 cents a share surprise had, in fact, already delivered. Even worse, the company pointed out that 2005 sales could fall $100 million short of this years levels.
The extent of Wall Streets dismay is, in my opinion, just another example of the triumph of short-term reflexes over long-term thinking. This is very conservative management that hates to count its chickens before they hatch for the rest of 2004: thats why Oshkosh Trucks delivers earnings surprises as frequently as it does. As for 2005, investors should only worry about that possible $100 million sales decline if they believe global peace is about to break out. As of April 30, Im leaving my target price for Oshkosh at $68 a share by September 2004. (Full disclosure: I own shares of Oshkosh Truck.)
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Oshkosh Trucks. He does not own short positions in any stock mentioned in this column.
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