A Prudent Play in Nanotech

03/18/2005 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

John Buckingham will soon be launching a new and much-anticipated publication, The Prudent Speculator TechValue Report (I will notify our readers when it is available). In the meantime, here’s a recent stock recommendation of his that comes from the nanotech arena.

"Technology investing presents its own unique set of challenges. Tech investors are a very fickle bunch and as such, tech stocks often demonstrate tremendous volatility. This volatility, however, creates ample opportunity for profits, especially over long-term holding periods. We tend to avoid chasing technologies because that's exactly what the momentum folks do, generally putting hot technology names out of our price range. One would expect it hardly likely, then, that any company involved in the often-hyped nanotech world would show up on our buy list.

"Veeco Instruments (VECO NASDAQ) is a semiconductor firm that truly is operating at the edge of nanotech science. The company targets the storage market with assorted 'process' systems that either deposit or remove particles from a prepared surface. One can think of the devices as extraordinarily sophisticated spray painters and sand blasters with the capability to operate on a scale that would enable all the text in the Library of Congress to be stored inside a pizza box.

"Not cool enough? How about a microscope that can see three-dimensional objects that are several thousand times thinner than a human hair. Veeco is the world's largest supplier of Atomic Force Microscopes (AFMs), the devices that perform such measurements. Additionally, Veeco is a leading supplier of process and measurement equipment used to produce semiconductors for the communications industry and to manufacture high-brightness light-emitting diodes (LEDs) for use in applications ranging from cell phone backlighting to automobile headlights, and eventually to ultra-low cost general lighting.

"These applications may seem rather broad, but they are each an outgrowth of Veeco's focus on all things tiny. Further, the breadth is supposed to enable the company to soften various exposures to the highly cyclical storage and semiconductor industries. For Veeco’s stock, however, the trouble is that those desired counter-cyclical traits have yet to fully surface. In the third quarter of 2004, Veeco was hit hard by the cautious spending among storage and semiconductor manufacturers, a decline that growth in scientific-research-related orders was insufficient to offset. Third quarter revenue of $92.4 million was 46% higher than year-prior levels, but came in well shy of earlier guidance.

"Given the disappointing results of late, Veeco shares are far below their two-year high of $34.40, trading at 1.5 times sales and 1.8 times book value. Those multiples aren't high by electronic equipment manufacturer standards, and we believe that they don't reflect the potential growth in consumer device and scientific research markets to which Veeco's long-term success is wedded. It will take some time for the bottom line to show sustained improvement, but patient value-seeking investors should strongly consider a purchase today of this former high-flyer. Buying tomorrow’s momentum-investor darlings at today’s bargain prices has been the path to success for us in the technology space and VECO just might be our next hot stock, especially as analyst earnings forecasts presently call for the company to post earnings of more than $1.00 per share in 2006."

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