If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
06/03/2005 12:00 am EST
In my personal opinion, I've saved the best for last. Whether or not nanotech is suitable for your risk level, I urge all investors to read Josh Wolfe, to better understand the unprecedented impact that this emerging field will have on both our future economy and our lives.
"Nanotech, by definition, is the purposeful engineering of matter at a scale less than 100 nanometers. I am about two billion nanometers tall. If we go down a thousand times, we’re at the size of a pin dot on my thumb. If we go down another thousand times, we’re on the order of red blood cells. And then a thousand times smaller still, we are at the size of individual DNA. A nanometer is one hundred thousand times smaller that the width of a single human hair. That is the scale of individual atoms and molecules. The reason that this is so interesting today is that until now we have not had the ability to rationally control individual atoms and molecules and create functionality, which can be used to open up new markets.
"Nanotech is not just about making things smaller. It is about making things different. It’s about opening up new markets because you have a technology and capabilities that never existed before. The importance of plastics was that it was the first time that we could control the structural properties of matter. We could take plastic, create polymers, and shape everything from food and beverage bottles to electronic wires to compact discs where you could store information. But nanostructures let you not only control the shape, but also let alter electrical, thermal, magnetic, and optical properties. Nanotech will touch every industry you can think of.
"For example, a carbon nanotube has properties that are 100 times stronger than steel and weight one-sixth of steel. But the point is that a carbon nanotube is 100 thousand times smaller than the width of a human hair, yet stronger than steel by a hundred times. This technology will eventually change the economics of manufacturing. For example, a wooden desk is made from top down; in other words, you cut down a tree and shape the wood into a desk. But in nanotech, you can build a product from the bottom up. There are small objects that can be grown from the bottom up. And by doing so you can reduce the cost of manufacturing in some cases by a thousand times. The companies that do that will be big winners.
"Look back 20 years. In order to isolate a protein like insulin for patients with diabetes, you had a farm. And on that farm you had lots of sheep, which you killed in order to extract the protein from their blood, which was then put it into a human form factor and sold as a drug. The success of those companies was based on the scale of operations. But the invention of recombinant DNA changed that model by allowing a single scientist to put a gene factor into bacteria in a solution, which allows that bacteria to mass produce the protein. And it changed the entire economics of manufacturing for that market.
"Fast forward 20 years. Today, in order to make a semiconductor chip you need a fabrication facility, which costs about $2 billion. This is about to change. I personally invested in a private company called Nanosys, which own patents that can grow transistors from the bottom up, molecule by molecule, eliminating the need for capital equipment. Intel has also invested in this firm. Long-term, we are heading toward molecular computing. Think about the potential of computing with individual molecules as transistors. In a single drop of water there are more molecules than there are transistors in the entire world since the invention of the transistor. And in my laptop alone, there are some 80 million transistors. The future computing power that I believe we will soon see is astounding.
"Another important factor is that billions of dollars of government money is now flowing into this field. In the past, when you looked at the fields where government money has flowed, whether it was from defense, health, or NASA, it created new companies and new industries. For the past seven years, US government funding of nanotech has grown exponentially. It is now also important to keep in mind that this doesn’t happen in a straight line, but in fits and starts. If you invest in nanotech today, I'd say you would lose 90% of your money. Inevitably, 90% of the companies in any field, be it TVs, autos, computers, or nanotech, will fail. But the 10% that do survive will go on to change the world, just as the eBays, Googles, Dells, and Microsofts have done in the Internet age. So having the intelligence and the information to pick those winners is the key.
"Technologies will change, and companies will change, and industries will change, but there is one constant through all of this—and that is human nature. For the past 10,000 years, the emotional circuits that evolved in mankind have not changed. And the same greed and fear that governs the decisions we make and the irrational behavior that we show in the markets continues in every cycle. So when you see many of these nanotech stocks, which I’ve been touting for two or three years— get beaten down, keep in mind, that we are viewing them as ‘on sale.’ Irrationality of other investors can present an opportunity for you to profit. With that in mind, here are some innovative companies for the next century.
"FEI Company (FEIC NASDAQ) makes tools for the nanotech space, so if scientists, researchers, or start-ups want to do work at the nanoscale, they need these instruments. No matter how hard you try, you cannot see at the nanoscale. The technical reason is that things at the nanoscale are below the wavelength of visible light. These instruments were invented to actually touch these individual atoms and molecules so that they can send back a signal and let us know what is there. We also think the Street, by and large, is classifying FEI as a classic semiconductor company are not counting the upside from this research market. But in our mind, the toolmakers such as FEI will be the first beneficiaries in nanotech. Just like with the gold rush—the people who sold the picks and the axes and the dungarees— were the winners. And in the Internet, router makes, like Cisco and Sun were the first big winners. The stock recently dipped below 19 and we view that as a buying opportunity and we think it’s fairly valued below 25.
"Symyx (SMMX NASDAQ) is a materials discovery company. Using software, they are able test many, many chemicals and materials to try and invent the next ‘nylon.’ They partner with major companies such as ExxonMobil, which is paying them about $200 million over the next five years to discover new materials. In Exxon’s case, they are looking for catalysts that can go into fuel to improve energy efficiency. You can imagine this company partnering with everyone from the drug discovery guys to traditional oil companies to folks like DuPont and Dow. They are expecting revenue growth of at least 30%. We don’t think the stock is adequately priced yet and we have a target of $30.
"Skyepharma PLC (SKYE NASDAQ) is an international company that does nanoscale reformulations of drugs. The big pharmas face about $80 billion worth of drugs coming off patent in the next two years. Without making you think back to your high school physics, I’d note that as you make something smaller with the same volume, the surface area increases exponentially. The correlation is that the smaller the particle size, the more reactive it is. Why is that important? If you are a drug company, you can reformulate your drugs at a smaller scale using nanotechnology so that you can extend the patent on those drugs and make them more effective inside the body. It’s pretty thinly traded, but we view it as a long-term buy."
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