Pioneers And Big Dogs

The stocks in the Big Dogs and Pioneers sections don’t represent a portfolio in the formal sense. Having been in this business a long time, I know most subscribers—especially subscribers to niche sector publications—aren’t trying to build the ultimate niche portfolio.

Granted, if you wanted to pick up all these companies, you’d have a well-rounded nanotech growth portfolio. And my goal in this portfolio is one of balance.

The Big Dogs—as I mentioned in the Nano News article “Real Nanotech Investing”—isn’t a literal name. It applies to the old country saying, “You can run with the big dogs or stay on the porch.” The Big Dogs are some of the most innovative and successful companies out there.

Their size makes them stable and influential. Stability is fairly easy to understand. They’re so big their businesses aren’t going to evaporate if a single product or technology falls on its face, the poster children of diversification’s advantages.

Influence is a more nebulous advantage. Big companies influence their clients by offering new products with a new vision, better efficiencies, better performance—anything that adds to the bottom line. If the clients buy in, the Big Dogs’ competitors then need to change their practices and adapt their business vision.

Two of my favorites offer classic examples. Check out the comparison between Big Dog Siemens and porch dog General Electric below.



GE might have been the company of the late 20th century, but Siemens is well on the way to becoming the GE of the 21st century. Siemens is ensconced in China, with long-term contracts to build China’s nuclear reactors, upgrade its postal service and modernize its telecommunications systems.

It’s also winning contracts in Europe and the US at a very impressive clip. While Siemens isn’t a nanotech powerhouse, it has an extensive research and development (R&D) operation, and it has a very good record of developing technologies with practical applications.

It has an entire division, c-lab, dedicated to “Innovation Management,” whereby innovative products or processes are explored. And if one or more are identified, they’re exploited. For more, check out this c-lab presentation from last year.

The stock has pulled back in recent weeks, while the company has been engaged in some innovative long-term deal-making with Nokia and Bayer. Recent market turmoil also has been a factor. That makes now a great time to buy Siemens at current prices.

The second company I see as a mover in the next decade or two is BASF, one of the world’s top chemical companies and also one of the world’s leading nanotech patent holders. Check out the performance comparison of this Big Dog with the tired old dog DuPont, the once mighty chemical company of Delaware and beyond.



Simply looking at the BASF Web site gives you an indication that this giant global company has chosen innovation over lobbying efforts to grow its client base. You don’t see many multinationals that have a section on sustainable development as part of their main business themes—along with “Helping Our Customers Be More Successful.”

It’s not that sustainability should make you feel warm and fuzzy, nor is it likely this German giant made this commitment for sentimental reasons. No, the real reason is far more practical.

When you’re in the chemical business, one of the biggest things you have to worry about is poisoning things—and then getting sued. Developing countries also have footprints from big multinationals rolling in and making “mistakes” that cost the citizens and nation dearly–politically, monetarily and ecologically.

Being a “green” chemical company is a compelling irony. And you can imagine the potential nanotech has for this chemical and coatings company. BASF is buy at current prices.

Before you start thinking you accidentally subscribed to the “Buy Germany” newsletter, I present to you another Big Dog raised in the US Heartland, Motorola.

There’s no doubt that Moto was in the dog house a decade ago. Its R&D was always top notch, but management wasn’t interested in trying something new from the people in lab coats. Damn the horseless carriage, keep selling the buggy whips.

That attitude had its repercussions. At one point, the company was going through CEOs like Italy goes through prime ministers. But all that is behind it now, and Motorola is doing some great work in the labs that’s heading out the door as fast as you can say “nanotech.”

Its most noteworthy product is new screen technology using carbon nanotubes (CNTs). Reports are that you get the picture quality of a plasma or liquid crystal display and the sharpness of a cathode ray tube at the power consumption—and price—of a cathode ray tube. Moto is planning on using the technology for its cell phones as well as launching a line of televisions.

Now, it may be a bit ambitious to get into the TV business as a communications company. But even if it licenses the technology or co-brands with an established electronics company that has established distribution and production infrastructure, it would be a big deal.

What’s more, Moto is a worldwide player again. And its phones, as well as its reputation, are growing exponentially in Asia, especially in gadget-loving Japan. Motorola is a buy below 23.

Speaking of Japan, two Big Dogs–Toshiba and NEC–hail from the Land of the Rising Sun.

Toshiba is a global electronics powerhouse. Its laptop computers line the shelves of big box retailers like Best Buy and Circuit City as well as boutique geek shops. Simply put, it builds computers that freshman college students and systems engineers are happy to have in their computer bags.

The company has established a reputation for excellence in virtually every component it manufactures, and that is seeing sales continue to climb. Yet, as it competes for every gewgaw dollar consumers are willing to spend, Toshiba is pumping truckloads of that money back into R&D.

Earlier in the year, while small companies were pumping out CNTs in the range of an ounce or two a month, Toshiba announced it was producing a kilo of CNTs a month. That gives researchers plenty of material to play with–and a lot more than most researchers can get their hands on, which means innovations can happen much faster.

NEC is like the IBM of CNTs. In 1991, Dr. Sumio Iijima in NEC’s R&D division created the first multi-walled CNT. Further refinement brought about the single-walled CNT, the technology that’s spread throughout the world.

Its CNT patent library is enormous; yet instead of committing significant resources to building CNTs, NEC has chosen to license its technology. That’s afforded the company the time and money to refine another offshoot of CNTs, carbon nanohorns.

Carbon nanohorns are essentially CNTs with a closed, conical-shaped end. These have their own very special properties that NEC has been exploiting for almost a decade in its labs. One of the most promising applications is micro fuel cells that can power portable electronic devices, such as laptop computers and cell phones.

Earlier this month, NEC signed its first US licensee, SouthWest NanoTechnologies, an Oklahoma-based CNT developer with a worldwide client base.

NEC has suffered along with the broad Japanese market, but this won’t last much longer. Toshiba is a buy below 7; and NEC is buy a below 6.

Pioneers


The Pioneers section of the portfolio is a collection of small companies with at least one great idea. They all have to pass through the Valley of Death, but for one reason or another, they have a leg up on much of their competition.

Each company passes my four precepts and has a specific advantage over its peers within the context of the precepts. I’ll explore each in more detail in coming issues, but for now, I’ll give you the core reasons they’ve made it this far.

Most of the plays are on the energy side of the market. The logic here is simple: With oil at $70-plus a barrel, natural gas heading back to its historic highs and global warming concerns putting a crimp on old-style coal production, alternative energy technologies are getting a lot of attention.

What’s more, when oil was at $20 a barrel, these technologies didn’t have a shot because they were too expensive to develop and deploy. That’s not the case now.

Another reason I’ve plugged into these companies is that battery technology is so old. There hasn’t been a quantum shift in battery technology in almost a century. The time is ripe.

Altairnano is a specialty materials company that’s used its ability to develop and manufacture nano-sized powders of various compounds to reach beyond its typical base and attempt to develop some truly unique applications for its materials.

It has its hands—or at least fingers—in a number of high-tech pies, but its most robust effort is in its revolutionary lithium ion (Li) battery. Readers of my free e-zine High-Tech Bulletin know the back story on this company, since I’ve been talking about it for at least three years now.

For newcomers, Altairnano is working with an electric vehicle (EV) maker that’s looking for batteries to power fleet vehicles in various California towns and counties. It also has good connections in China.

The Middle Kingdom is planning on hosting the first “green” Olympic games and has asked Altairnano to work with local companies to develop batteries for the Olympic village busses. If it all works out, Altairnano is in a great strategic position in one of the largest alternative technology markets in the world.

Earlier this month, the company posted quarterly earnings that more than doubled from 2005’s second quarter and were up 94 percent from the previous quarter. Companies like what Altairnano is selling.

One caveat: This stock has hit momentum investors’ radar screens, so it tends to get shaken around a bit. Be disciplined and only buy Altairnano below 3.15.

Another battery company that actually has a strategic relationship with Altairnano is Electro Energy. Where the former is working the lithium ion side, the latter is focused more on nickel cadmium (NiCD).

Traditionally, Li batteries have been used where constant power is necessary, such as with laptops, PDAs and cell phones. NiCD batteries are used when you need bursts of power, torque and durability, such as in motors, power tools or satellites.

Electro Energy has a well-established defense and aerospace business, which means it’s not depending on the nanotech thing to pan out. But as it explores the opportunities nanotech offers, there may be a big payoff for this well-connected company. Buy Electro Energy below 2.50.

Maxwell Technologies is an odd duck when it comes to all this nanotech and distech stuff. It’s an old, established capacitor company. Pretty sexy, eh?

Well, the thing is that the advent of nanotech has given birth to what are called supercapacitors or ultracapacitors. These capacitors have the potential to change battery use altogether. Capacitors have the same essential characteristics as batteries, power storage and power delivery.

But here we’re talking about starting up a submarine or a turbine engine, not a Toyota Prius. This is a sector that most nano pundits don’t even talk about because it still has such a tiny following.

That’s a curse and a blessing for investors. It means you’re buying a company that has a solid—if not boring—capacitor business. But you’re not buying a lot of nano hype, and you’re getting a company that’s a world player in the capacitor and ultracapacitor space. Buy Maxwell Technologies below 17.

Spire Corp rounds out my energy plays, although this and the next portfolio company straddle a couple fences. It gets its nanotech credentials from its biomedical device division where it develops surfactants for its medical devices business.

Its distech creds come from its photovoltaic division. It’s one of the world’s largest suppliers and manufacturers of solar panels. It also manufactures custom epitaxy for semiconductors.

Like Maxwell, because it doesn’t fit neatly into one sector or another, coverage has been light on Wall Street–if you can’t wrap it up in a nice little package, it’s not worth selling. So, it also presents the double-edged sword of being unique. Buy Spire below 7.50.

Oxonica is the world’s first publicly listed pure nanotech stock. It has three divisions: energy, materials and healthcare. Its energy division has created a fuel additive to diesel engines that increases fuel efficiency while lowering emissions. The product is already in the tanks of drivers in the Philippines and is scheduled for use in Singapore and Hong Kong in the near future.

Its healthcare division’s main product at this point is a sunscreen that’s distributed through England’s Boots pharmacy chain—the United Kingdom’s version of Walgreens or CVS. That’s a very nice distribution channel to be in.

Both these pragmatic applications of nanotech have gotten Oxonica’s products to market fast and don’t rely on huge budgets and distribution channels. Some concerns about the safety of applying nanotech-based products will likely discount this stock. And better yet, most new research is showing that nanotech is no more dangerous than most other human endeavors. Oxonica is a buy off the London exchange below GBP1.25 (USD2.38).

Starpharma is an Australia-based company that’s used some oddball work done by a scientist at Dow Chemical to create one of the most interesting medical applications in years.

Using theories of dendrimers—synthetic particles the size of a protein—the company has developed a dendrimer-based cream that research has shown prevents the transmission of HIV and herpes. The National Institutes of Health has given Starpharma millions in grant money to explore its efficacy, and Phase III trials should be complete by 2008.

The company is partnered with Michigan-based Dendritic Nanotechtechnologies, where the original Dow scientist now works. Starpharma is a buy below 4.30.

pSivida is a strategic partner of QinetiQ, the former UK Government Defence Evaluation & Research Agency (DERA) and Europe’s largest research and development organization. It’s a bio-nanotech company that specializes in drug delivery products in the healthcare sector.

Unlike most polymer-based drug delivery systems, the manufacture of BioSilicon doesn’t require complex chemistry, and the final product is pure silicon irrespective of the delivery characteristics imparted by the nanostructuring process.

BioSilicon also distinguishes itself from other delivery systems by its heat and radiation stability, simplifying manufacture and sterilization. pSivida has nine different products in various stages of clinical trials in the US, two of which are already on the market. It also has marketing agreements with major companies such as Bausch & Lomb and ITOCHU. And being connected to QinetiQ is a major plus in the European market. pSivida is a buy below 3.


  Portfolio Precepts

I follow four precepts in screening companies. They are as follows:

  • It’s What You Do With Size That Matters There’s an old Texas saying: It’s not the size of the dog in the fight, it’s the size of the fight in the dog. Size has a point of diminishing returns. Intellect and agility are always prized attributes in the race to the top of the food chain.
  • Show Me The Money A big firm has to be looking for a way to make the economies of scale work. Ideas being tweaked in R&D year after year without management committed to rolling out a product are worse than worthless.
  • Friends In High Places Being well-connected can be an enormous benefit if you’re big or little. The national defense industry is always looking for the Next Big Thing and usually has the money to throw at anything reasonably attractive. It’s always encouraging to see little guys working with the big guns for a piece of the subcontractor crumbs–it’s the best way to make it big or get bought out.
  • Wake Up, Sleepy Dreamer Companies have to pick a spot and do battle—with a plan. Cool ideas with 50 different applications mean a company is looking for handouts for a buyout of the idea, not any specific product. Until a company has the guts to develop a clear strategy on how it plans to exploit a market, its investment value is limited at best.
 
The Big Dogs
Company Ticker Price+ Market Cap (Millions) R&D Spending (Millions)* Advice
Siemens NYSE: SI 111.99 86,613.50 6,626.23 Buy @ 104
BASF NYSE: BF 116.49 45,430.40 1,367.21 Buy @ 99
Motorola NYSE: MOT 17.59 54,301.10 3,680 Buy @ 20
Toshiba OTC: TOSBF 7.15 20,000.92 3,218.46 Buy @ 7
NEC NSDQ: NIPNY 5.56 10,419.48 2,378.80 Buy @ current prices
QinetiQ LN: QQ 1.89 2,323.64 504.7 Buy @ GBP2.04 (USD3.97)
Armor Holdings NYSE: AH 68.16 1,926.87 15.1 Buy @ 61
Bayer NYSE: BAY 65.97 43,896.16 2,473.44 Buy @ 60
*R&D Spending is for the companies’ most recent annual reports. +Recent price as of 04/06/07.  
Pioneers
Company Ticker Price+ Market Cap (Millions) R&D Spending (Millions)* Advice
Altairnano NSDQ: ALTI 3.18 189.08 5,073 Buy @ 3.35
pSivida NSDQ: PSDV 1.88 76.62 8,288 Hold
Starpharma OTC: SPHRY 3.60 70.49 6,410 Buy @ 4
Oxonica LN: OXN 1.36 128.8 1,834 Hold
Maxwell NSDQ: MXWL 12.35 262.04 7,175 Buy @ 14.50
Spire NSDQ: SPIR 10.22 67.07 1,346 Hold
Electro Energy NSDQ: EEEI 1.20 28.42 688 Hold
Feel Good Cars Corp TSX V: ZNN.V 2.96 75.65 0.17 Buy @ USD2.80
iRobot Corp NSDQ: IRBT 14.63 356 11.51 Buy @ current prices
*R&D Spending is for the companies’ most recent annual reports. +Recent price as of 04/06/07.

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