Newsletter Watch: Big potential from TINY
To fully understand the value of the advice given by Josh Wolfe, one must consider his background. With degrees in economics and finance from Cornell, Josh worked at Salomon Smith Barney's investing banking group before co-founding Lux Capital, a nanotech venture capital firm. (Some readers may recognize the name Lux through its role in the Powershares Lux Nanotech ETF.)
Particularly impressive is the fact that Josh was one of just 10 nanotech industry leaders invited to the White House for President Bush’s official signing of the $8 billion nanotech funding bill in 2003.
The reasons for emphasizing Wolfe’s background are two fold. First, his industry expertise strongly supports the basis for paying heed to the advice he shares in his newsletter, The Forbes/Wolfe Nanotech Report.
Second, as a venture capitalist in the nanotech space, Wolfe is particularly well suited to analyze the specific recommendation we are discussing in this column -- Harris & Harris (Nasdaq: TINY), a publicly traded nanotech venture capital fund.
Harris & Harris -- a New York City-based firm with a market cap of $275 million -- is invested in a diversified portfolio of early stage nanotech companies, holding 27 private companies.
There is high risk. Wolfe cautions, "TINY's shares trade mostly on investor hype over their potential for growth. With net assets of $113 million and 21 million shares outstanding at the end of 2006, TINY's net asset value (NAV) per outstanding share was $5.42. That means investors were getting $5.42 worth of value for a share price of $13.25—not a great trade if you're measuring performance by the usual metrics of sales and profits."
But, Wolfe adds, conventional valuation metrics do not apply well to business development companies like Harris & Harris. So what, if anything, justifies TINY's premium valuation?
"I believe there is plenty to like about Harris & Harris, Wolfe says. “For one, the firm adheres to some basic rules of sound investing, such as keeping a diversified portfolio, sharing investments as a consortium, and selecting companies that have a solid business plan rather than mere nano-hype merchants."
In addition, TINY's invested assets are all in private companies so, as Wolfe observes, its portfolio can't be replicated. Plus, he adds, Harris & Harris has "returned $144 million on an invested capital of $51 million, with an average holding period of 3.63 years from first dollar in to last dollar out."
Last year, Wolfe says, TINY's portfolio generated $158 million in revenues and, unlike other publicly traded investment firms, he points out that it regularly reinvests about 65% of capital gains to help drive new growth."
Importantly, the company's future and valuation will be impacted by what he calls the IPO factor. Wolfe explains, “Ever since Sarbanes-Oxley threw a wet blanket on many of the benefits of being publicly traded, the IPO market has been hesitant. Still, eventually investors' appetites for higher risk, high return stocks will make a comeback"
In the meantime, he notes, “Time is on Harris & Harris' side. With $60 million in cash or cash equivalents, no debt and very little overhead, the company can afford to sit back and let its assets mature."
Today, he notes the nearest thing to "finished goods on TINY's shelf" are Neophotonics, Molecular Imprints and Nanosys. Of these, Wolfe believes that NeoPhotonics appears "most ready for prime time." The company makes optical components for communications networks.
Nanosys, he says, isn't far behind. "Begun as a nanomaterials supplier, over the past few years it has built collaborative business partnerships with companies like Sharp, Intel, and Micron Technology."
Indeed, Nanosys applied and then withdrew an IPO registration three years ago, citing adverse market conditions for the decision. Says Wolfe, "When those conditions reverse, Nanosys should be much more prepared for a public offering."
Molecular Imprints lithography, Wolfe observes, has one of the largest patent portfolios in nanoscale and three-dimensional imprint lithography. In addition, he adds, the company has received additional backing from Motorola, KLA Tencor and Japan's Dai Nippon Printing Co. In Wolfe’s view, “It won't be long before Molecular Imprints revenues start attracting the attention of investment bankers.”
Wolfe concludes, “If the IPO market does indeed warm up in the next 12 months, speculators who buy TINY at even its current share price may be glad they did by this time next year.”
For purposes of full disclosure, Josh Wolfe’s venture firm Lux Capital is an equity investor in both Molecular Imprints and Nanosys.
Steven Halpern is the founder of “TheStockAdvisors.com - Steven Halpern's Guide to Financial Newsletters,” the first website to feature a daily overview of the investment newsletter world.
