The scientific community has been buzzing about nanotechnology ever since the discovery of the carbon nanotube in 1991, but last week was a particularly "big" week for nanotechnology: Nanomix, a private company based in California, launched an industrial sensor, the first commercial product incorporating carbon nanotubes as an integral part of a working device. Separately, Motorola (NYSE:MOT) grew carbon nanotubes to its specifications and used them to manufacture a prototype flat-panel display screen. The company claims that the 42-inch screen is superior to current flat-screen technology, costs only $400 to manufacture, and is more energy efficient.
These are truly the next steps in a field of scientific research that stands to revolutionize health care, defense, energy, agriculture, and our everyday lives, and we want to get in on the ground floor (when it's ready to stand on).
Nanotech scientists manipulate individual atoms and molecules to create or enhance materials, devices, and systems. In addition to the aforementioned display screen, tiny nanotech innovations will have a big impact on our future, so it's perfectly reasonable for the scientific community to be vocal about its excitement. With more and more stunning laboratory breakthroughs being made every day, that buzz is justified.
But what of investors? Should our portfolios take notice of this emerging, Rule Breaking -- but as yet commercially unproven -- technology? Companies at the forefront of nanotechnology promise to be the commercial giants of the 21st century. Mastering the unique chemical and physical properties to potentially create products that promise to deliver disruptive technologies is what the nascent science is all about. Tomorrow's commercial giants can reward the patient investors who believed in them early on -- just ask the wise and wealthy early investors in IBM (NYSE:IBM).
Seeing down the road
And that's a key point, because we are still very much in the development stage for many nanotech breakthroughs. Turning important lab discoveries into commercially available disruptive technologies is a complicated and arduous process, which partly explains why the increasing excitement from the investing community is not yet justified. The commercial results of this science are less than stunning so far and have provided somewhat less-than-stunning investment returns. The important words here, however, are "so far."
We remain convinced that in the long term, nanotechnology will create new markets, produce substantial savings in existing industries, and provide returns for investors that will likely surpass all previous disruptive technologies. Merrill Lynch (NYSE:MER) agrees. Its investment gurus recently proclaimed that nanotechnology is at the beginning of a 30-year trend. While investors should be excited about that, your investment dollars should not be thrown into any old nano company with a breakthrough-touting press release. At our Motley Fool Rule Breakers investment service, we follow this industry from the ground floor, ready to advise our community on outstanding investment opportunities as they arise. We also aim to alert our readers to the hype artists and other dubious characters looking to make a quick buck in this area.
A little reality
There is little commercial evidence to date to support companies gaining 50% in a day based solely upon being awarded a nano patent, as happened recently with Nanogen (NASDAQ:NGEN). When a company claims a technological breakthrough in a press release and gains 129% in one day, as Altair Nanotechnologies (NASDAQ:ALTI) recently did, we need a little reality check. Such spectacular returns make the investment potential of nanotechnology look appetizing, but don't be fooled by those single-day jumps. Take a look at those share prices six months after the news breaks, when no commercial revenues have accrued from the patent or technological "breakthrough." It's not pretty, and it's a perpetual cycle. A graph of Nanogen's stock performance looks like you could take an intense mountain bike ride on it.
So the challenge, then, is to separate the nanotech winners from the nanotech wannabes. At Rule Breakers, we obsess about finding the companies with sustainable advantages that already demonstrate good science. We navigate the nanotech universe looking for businesses that produce actual revenues from actual sales of actual products (we're a bit funny that way). Ultimately, we want companies that demonstrate smart financial backing with powerful commercial partners that are prepared to pay money -- big money, in some cases -- to get involved in the nano "upstart" trend.
Today's formula, tomorrow's success
There have been only a few instances of nano companies successfully taking the science and producing sustainable commercial developments. The number of publicly traded nano companies that have had a sustainable share price rise from commercial breakthroughs? Just one: American Pharmaceutical Partners (NASDAQ:APPX). Its Abraxane drug delivers solvent-free treatment for breast cancer using nanoparticles. Nanotechnology enabled the company to deliver chemotherapy on such a small scale that it increased cellular availability and effectiveness of the treatment without side effects from solvents or reagents.
Established industrial giants other than Motorola have joined the fray of nanotechnology. Samsung has nanosilver additives in its washing machines. EastmanKodak (NYSE:EK) jumped on the bandwagon by pioneering an organic light-emitting-diode display technology, but the company's revenue increases from this technology will not affect the share price in any meaningful way to interest us as prospective Rule Breakers.
Rule Breaking investing
The genuine and sustainable Rule Breakers will mainly emerge from the hundreds of currently private companies that focus on research and will take their nano expertise public only when they have a product for the commercial markets. That's why we don't get too excited when we see a company trading at $2 suddenly jump to $3 and $4 -- taking its market cap to $100 million -- on a rumor, without the support of a genuine commercial product. Before we recommend anything, we want to see tangible proof that our investment (and its product) has legs.
Will we miss the first nanotech double? Maybe. But our aim is to find companies that will sustain growth to obtain a $1 billion market cap and beyond. If we accurately spot such companies, it will not matter that we missed a stock that doubled from a $50 million cap to $100 million solely on promise. We'll be more than compensated when our nanotech investment soars from $100 million to $1 billion based on actual product development and sales.
Nanotechnology is ready to make a difference in our lives. Everyday products such as cell phones, washing machines, or even pharmaceuticals will be enhanced and improved. But buyer beware: There is a crucial difference between finding short-term share price pops based solely on buzz and finding long-term Rule Breakers built on good management, first-mover status, and sustainable advantages. We've already recommended one nano company to our subscribers, the VC firm Harris & Harris (NASDAQ:TINY). If you'd like to join us in discovering tomorrow's nanotech giants, a 30-day free trial to Rule Breakers will give you a better look at our coverage of the industry. You'll have access to all our back issues, prior recommendations and analysis of nanotechnology, and our Foolish community of discussion boards. There's no obligation to subscribe whatsoever. You have our word.
Motley Fool Rule Breakers nanotechnology analysts Carl Wherrett and John Yelovich both own shares of Harris & Harris. They do not own shares in any other companies mentioned in this article. The Motley Fool has a disclosure policy.
