Tuesday, May 08, 2007
Nanotech: Big gains from TINY
“It’s no secret that certain nanotechnology stocks get whipsawed as news and investor enthusiasm for this new science heats up and then cools,” says Josh Wolfe.
An industry-leading expert and editor of The Forbes/Wolfe Nanotech Report notes, “Publicly-traded nanotech venture capital firm Harris & Harris Group (NASDAQ: TINY) is a case in point.” Here, he reviews this volatile – but potentially valuable – play in the nanotech space.
“This New York City-based venture capital firm -- with a market cap of $275.6 million -- is invested in a diversified range of early stage nanotech companies. Its portfolio is comprised of 27 private companies and its shares trade mostly on investor hype over their potential for growth.
“With net assets of $113 million and 21 million shares outstanding at the end of 2006, TINY's net asset value (NAV) per outstanding share was $5.42. That means investors were getting $5.42 worth of value for a share price of $13.25—not a great trade if you're measuring performance by the usual metrics of sales and profits.
“But, conventional valuation metrics do not apply well to business development companies like Harris & Harris. So what, if anything, justifies TINY's premium valuation? I believe there is plenty to like about Harris & Harris.
“The firm adheres to some basic rules of sound investing, such as keeping a diversified portfolio, sharing investments as a consortium, and selecting companies that have a solid business plan rather than mere nano-hype merchants.
“Also, TINY's invested assets are all in private companies so its portfolio can't be replicated. Plus, Harris & Harris has returned $144 million on an invested capital of $51 million, with an average holding period of 3.63 years from first dollar in to last dollar out.
“Last year, TINY's portfolio generated $158 million in revenues and, unlike other publicly traded investment firms, it regularly reinvests about 65% of capital gains to help drive new growth. And, there is the IPO factor.
“Ever since Sarbanes-Oxley threw a wet blanket on many of the benefits of being publicly traded, the IPO market has been hesitant. Still, eventually investors' appetites for higher risk, high return stocks will make a comeback.
“Time is on Harris & Harris' side. With $60 million in cash or cash equivalents, no debt and very little overhead, the company can afford to sit back and let its assets mature. Today, the nearest thing to finished goods on TINY's shelf are Neophotonics,Molecular Imprints and Nanosys
“Of these, NeoPhotonics appears most ready for prime time. It makes optical components for communications networks. Nanosys isn't far behind. Began as a nanomaterials supplier, over the past few years it has built collaborative business partnerships with companies like Sharp, Intel, and Micron Technology.
“The company had applied and then withdrew an IPO registration three years ago, citing adverse market conditions for the decision. When those conditions reverse, Nanosys should be much more prepared for a public offering.
Molecular Imprints lithography has one of the largest patent portfolios in nanoscale and three-dimensional imprint lithography. In addition, it has received additional backing from Motorola, KLA Tencor and Japan's Dai Nippon Printing Co. It won't be long before Molecular Imprints revenues start attracting the attention of investment bankers.
“In June 2006, I issued a Nanosphere Alert to subscribers to purchase TINY's stock after it dropped below $10. It's already up more than 30% from that point. If the IPO market does indeed warm up in the next 12 months, speculators who buy TINY at even its current share price may be glad they did by this time next year.”
For full disclosure: Josh Wolfe’s venture firm Lux Capital is an equity investor in both Molecular Imprints and Nanosys.
posted at 11:15 PM
