Investment Insights

Jeff Benjamin

Nanotech index offers pure-play industry exposure

Feb 19, 2007 @ 12:01 am

By Jeff Benjamin

There is a tendency to draw parallels between the current nanotechnology industry and the early days of the Internet, when the financial markets in general followed a blind pursuit of the latest dot-com initial public offering.

The final result was a top-heavy technology sector and Nasdaq Composite Index market bubble that left many investors holding pricey shares in companies that turned out to be more like concepts than actual businesses.

Although the cutting-edge nature and growing enthusiasm surrounding nanotechnology today might be starting on a path similar to that of the tech sector in the 1990s, the comparisons between the two ends there, according to Andrew Braswell, an equity analyst at Newbridge Securities Corp. in Fort Lauderdale, Fla.

“Nobody is starting a nanotechnology business in their mother’s basement,” he said. “In the dot-com boom, there were a lot of business plans that attracted investors, but in the nanotechnology area, you need big money and real intellectual property.”

Mr. Braswell is the primary architect of the Newbridge Nanotechnology Index (NNIX), which was launched in June 2004.

The index, which doesn’t yet have a license agreement with any investible funds, comprises 24 companies with market capitalizations of between $100 million and $1.3 billion.The index is market capitalization weighted, limiting all weightings to a 10% maximum.

The key ingredient, according to Mr. Braswell, is the pure-play exposure to the nanotechnology market.

“We’re trying to stay as pure nanotech as possible, as opposed to including larger companies that might use nanotechnology or happen to be developing some nanotechnology,” he said.

The index includes Immunicon Corp. (IMMC), a Huntingdon Valley, Pa.-based developer of cell-based-diagnostic-cancer-research products, and Nanophase Technologies Corp. (NANX), a Romeoville, Ill.-based developer of nanocrystalline materials used in sunscreen and antimicrobial products.

An example of a company you won’t find in the index is General Motors Corp. (GM), even though the Detroit automaker uses a number of nanotech applications.

Armonk, N.Y.-based IBM Corp., despite leading the industry in nanotech patent activity, doesn’t fit the index model; like GM, its nanotech ventures aren’t likely to affect its market value.

Generally, nanotechnology relates to applications arising from the precise manipulation of matter at the scale of atoms and molecules. This applied science and technology field covers a range of topics, but the unifying theme is the control of matter smaller than one micrometer. For perspective, a single human hair is measured at 80,000 nanometers in diameter.

The most immediate developments are being applied across three main areas.

The first involves reducing material components in everything from metals to the raw components of sunscreen down to nanotech-size particles. Early con- sumer applications are developing in the area of sporting equipment to enhance strength-to-weight ratios.

Electronics is another area of potential for nanotech in the form of semiconductors and data storage applications. And nanotech is viewed as particularly significant in the biotechnology field, where nano-size therapies can be engineered to diagnose and target specific maladies.

Although nanotechnology innovation is starting to show up in a lot of different kinds of companies, it would be difficult for a business to attract any real financial backing without the existence of an operating business.

“We’re starting to see some companies’ trying to attach nanotech to their names, but it’s pretty easy to distinguish them from real nanotech companies,” said Scott Goldstein, chief executive of Newbridge.

In addition to the pure-play companies, the Newbridge index also includes exposure to some of the firms backing the industry.

Those include Arrowhead Research Corp. (ARWR), a Pasadena, Calif.-based company that is working with colleges and universities to provide incubation funding and support for the development of specific nanotechnologies.

The index also includes Harris & Harris Group Inc. (TINY), a New York venture capital firm that specializes in nanotech companies.

The Newbridge Nanotechnology Index had gained 5.1% this year through Thursday. That compares with a 2.7% gain by the Standard & Poor’s 500 stock index and a 3.4% gain by the Nasdaq.

Last year, the Newbridge index declined by 6%, while the S&P 500 gained 13.6%, and the Nasdaq rose 9.5%.

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