Cash in as nanotech finally comes of age

People got very excited about nanotechnology a few years ago. But nobody could explain exactly what it did. Once oil and house prices boomed, it became yesterday's fad. But it could soon make a comeback. Eoin Gleeson examines the industry, and picks the best stock in the sector.

Investors were quick to latch onto the promise of internet stocks. After all, if you had a computer, you only had to log on to grasp its possibilities. The story was so simple, you could explain it to your grandmother she probably invested herself.

Nanotechnology was a different story. People got very excited about it back in 2003. But nobody could explain exactly what it was for. Once oil and house prices started to boom, nanotech became yesterday's fad.

But it could be set to make a comeback. Nanotech is the science of making things smaller than 100 nanometers less than one ten-thousandth the thickness of tissue paper. Operating at a nanoscale with an atomic microscope, you can make remarkable changes to a material's structure. You can take something as fragile as human bone and change it into a fibre as strong as stainless steel able to withstand temperatures ranging from 150C to above 1,500C.

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Right from the outset, industry was alive to the possibilities. Boeing looked into making lightweight rockets and satellites. Kodak saw a new generation of flat-screen displays. There were dreams of medical breakthroughs such as tiny machines that could be absorbed into the blood to clear cholesterol deposits.

But it was near-impossible for the average investor to find a way in. Governments poured in cash much of the $3bn invested globally in 2003 came from the state. Corporate giants such as General Electric and Boeing, who were able to plough fortunes into developing super-strength materials, reaped the benefits. But there were no dotcom-type success stories. Soon the venture capital money started to dry up. And investors stopped talking about nanotech.

But that should have changed by now. Because under the radar, nanotechnology has been producing remarkable industrial advances and not just in super-strength materials. Silicon nanoparticles can ferry cancer drugs to tumours, for example. And if you've had a CAT scan recently, you'll be familiar with the nanoparticles that light up your blood when exposed to ultraviolet light. Solar-cell panels are being revolutionised by nanoparticle inks. In all, more than $50bn-worth of products sold last year incorporated some form of nanotechnology. The National Science Foundation reckons the market will be worth more than $1trn by 2015.

Better still, investors can make money from nanotech this time around. A generation of nanotech stocks has come through over the last two years. The industrial giants are still beavering away. But they are no longer crowding out smaller specialists, many of which have been turning solid profits for a good few years now. The venture capitalists have returned too providing $1.2bn of last year's nanotech funding, of a total of $18.2bn, with corporates (on $8.6bn) and the public sector providing the rest.

Nanotech groups are ultimately selling into industries that are thriving even as the global economy suffers in sectors covering everything from energy efficiency to water filtration and medicine devices. With investors looking for a new big story to get excited about, hype about the "next industrial revolution" is sure to return.We look at the best way to get in ahead of the crowd in the box below.

The best bet in the sector

One major area of nanotechnology is 'spintronics'. Most electronic devices make use of the electric charge of an electron (a subatomic particle) to store and transmit data. But by controlling electrons using a nanometer-sized semiconductor, you can exploit the electron's 'spin' (or magnetic properties) instead.

To cut a long story short, this enables major improvements in the way information is stored and transferred. Tech giants Intel and IBM are pouring a fortune into using this nanotechnology to improve the memories of their computers. The leader in this field is NVE Corporation (Nasdaq: NVEC).

NVE has an unparalleled amount of intellectual property among nanotechs, says Louis Basenese of the Oxford Club, with 50 US patents and over 100 worldwide, most related to computing memory. These will "translate into a huge earnings windfall as competitors license its technology," says Basenese.

NVE has posted 13 consecutive quarters of earnings growth with recent quarterly earnings climbing 45%. The firm has no debt and $3m in the bank. It trades on a forward p/e of 18, but this is more than justified by its rapid earnings growth. What's more, there's the possibility that the $200m company could easily be bought out by a large rival, such as Intel or IBM.

Update: Another tech stock that's been thriving in the downturn is online assessment group Education Development (LSE: EDD). The stock is now up 67% since we tipped it in March. We still like the stock, but having come this far, you should lock in some gains.

Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.