The phrase Hidden Gems has a very specific meaning at The Motley Fool. It represents small-capitalization companies with little or no following on Wall Street, with significant inside ownership, and with a stock price that does not reflect their three-to-five-year potential.

Getting the quick Hidden Gems look-over today is NVE Corporation (NASDAQ:NVEC). Its market capitalization is a very small $160 million, and it is really undiscovered -- no analysts at established firms follow it. Insiders own roughly half the shares, and the stock is up 66% over the last 52 weeks.

Investors are excited by the company's "spintronics" nanotechnology used for Magnetoresistive Random Access Memory (MRAM) -- the so-called "holy grail" of memory because it has the potential to combine the speed of SRAM, the density of DRAM, and the nonvolatility of FLASH. It is also called "universal RAM."

Two promises of MRAM are instant-start computers (no "booting up") and greater battery life in cell phones and portable computers. That promise has not gone unnoticed. Heavyweights IBM (NYSE:IBM) and Infineon (NYSE:IFX) joined forces so they could enter the market early with product introductions in 2005.

NVE licenses its technology to three companies. Freescale Semiconductor (NYSE:FSL), the spun-off semiconductor operations of Motorola (NYSE:MOT), plans to begin MRAM pilot production this year. Cypress Semiconductor (NYSE:CY), which will manufacturer MRAM for itself and NVE, is expected to offer samples by the end of 2004. Agilent Technologies (NYSE:A) licenses NVE's spintronic coupler technology.

NVE has, over the last year, produced free cash flow from a combination of sensors and couplers sales and milestone payments from its MRAM licensees. That free cash flow will not continue, unless there are new licensees, because the company is ramping up its spending for its own line of MRAM products.

Hidden Gems have defined markets and are cash flow positive (or are poised to become so). As exciting as the NVE story is, its future is unfolding, uncertain, and with many deep-pocket competitors. It will take time for the potential to become clear.

NVE stock rocketed up more than $9 a share yesterday morning on news it was awarded a "key patent." Large gains are part of the allure of small-cap investing. But also note that 1.8 million of the company's 4.5 million outstanding shares are sold short. That means there are many skeptics willing to wager that NVE does not become a Hidden Gem.

Those interested in Hidden Gems and nanotechnology should take advantage of the free trial offer and look at the May issue. The recommended stock is a nanotechnology company in the medical field.

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Fool contributor W.D. Crotty owns stock in NVE Corporation but none of the other companies mentioned.