Tiny Tools, Big Solutions
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Think of nanotechnology as a set of tools that are applicable to a broad set of industries. These special little tools are improving product capabilities, end-user experiences, and manufacturing productivity. According to Lux Research, $3.1 trillion worth of nanotechnology-enabled products are expected to be sold in 2015.
Boom and Bust
Many will recall the market’s euphoria for anything “nanotech” back in the early 2000's. During the bubble, shares of Harris & Harris Group (NASDAQ: TINY) skyrocketed from $1.98 to $22.53 in less than two years! Since the bubble burst, shareholders of TINY have likely suffered symptoms of depression, as prices have drifted lower for over 8 years— anyone with a cost basis above $3.50 is on the losing side of the trade.
At this point, even the most steadfast believers in nanotechnology have had plenty of time to doubt themselves. Basically, Wall Street has left the nanotech sector for dead, and that’s precisely the reason I’ve decided to bring Harris & Harris to your attention— as a value proposition.
Sum of the Parts
Harris & Harris is an early-stage, active investor in transformational nanotechnology companies. As of Sept. 30, 2012, the company estimates their Net Asset Value (NAV) is $4.78. Shares of TINY are currently selling for just $3.36 as of Dec. 26, 2012. Therefore, the market is valuing the company at a 30% discount to NAV. When beginning to determine if this may be a legitimate bargain, an investor from the Fool school would break Harris & Harris down into three parts.
1) Primary Liquidity: includes cash and U.S Treasuries worth $26,556,886
2) Secondary Liquidity: includes, in total, TINY’s equity holdings that are publicly traded. This value can be easily monitored, as it fluctuates up and down daily.
Solazyme Inc. 1,938,190 shares owned at $8.30
NeoPhotonics Corp. 450,907 shares owned at $5.34
Champions Oncology Inc. 2,666,667 shares owned at $0.49
The sum of two parts is $46,358,373. [Primary Liquidity + Secondary Liquidity]
This number currently represents 45% of Harris & Harris Group’s overall market value of $104,162,019 (or $1.50 per share of TINY)
3) Private Company Portfolio: includes all non-public holdings, “estimated” to be worth $94,258,701. Stressing the word estimated, as private companies are less transparent, valuing them involves both art and science.
With that said, at today’s prices investors are paying roughly $57,803,646 (or $1.86 per share of TINY) for the Private Company Portfolio. Within the portfolio, you will find many young companies with exciting growth potential. A few of them are actually excelling in their respective industries; the portfolio as a whole has consistently grown revenues by over 25% despite the economic downturn.
On the surface, paying $57,803,646 for the entire portfolio appears to be a bargain— considering the company tells us their Private Company Portfolio is worth $94,258,701.
Therefore, It Must Be One Of Two Things:
1) Shares of TINY are appropriately valued, 30% below their NAV. Analysts and investors have done their due diligence, sniffing out the inaccurate valuations placed on the 32 companies in the Private Portfolio.
2) Analysts and investors have it wrong; they don’t understand the company and are overly discounting the inherent risks. Harris & Harris Group will eventually trade higher, closer to its stated NAV.
Catalysts For Growing NAV
Corporate Partnerships are going to provide more than just money, as opposed to traditional sources of capital (i.e. financial firms). Strategic corporate partners are better equipped to incorporate nanotechnology into their manufacturing processes. Ultimately, these large corporations are often the same folks who determine whether or not a product gets on the shelf.
Giant Acquisitions are often the end-game for many of these corporate partnerships. Let’s take a quick look at two noteworthy companies that have been plucked from Harris & Harris Group’s Private Portfolio:
1) Innovalight – makes a “silicon ink” material that enhances the efficiency of solar cells by up to 20%. DuPont (NYSE: DD) is no stranger to the solar materials business, selling over $1 billion worth of solar cell products themselves, which means they recognized the value of Innovalight’s silicon ink early on. Eventually a partnership was not enough to satisfy them, so they acquired Innovalight for an undisclosed amount in July 2011, describing the acquisition as a natural step for them. DuPont has since integrated Innovalight’s technology into its existing photovoltaics (PV) business. Conrad Burke (former CEO of Innovalight) now heads up the new division – DuPont Innovalight.
2) BioVex – was snapped up by Amgen (NASDAQ: AMGN) in January 2011 to beef up their pipeline for cancer vaccines. Amgen made a upfront cash payment of $425 million to secure the rights to “OncoVex,” which is in late stage trials for melanoma cancer. BioVex is eligible to receive another $575 million, provided the drug hits all of its milestones. At the time, the deal was considered a shrewd move for Amgen, as compared to Gilead’s $10.4 billion purchase of Pharmasset Inc. at a 90% premium. Some analysts applauded Amgen for taking a more measured approach.
At minimum, this demonstrates Harris & Harris Group's ability to identify and back winners!
FYI: Harris & Harris Group’s management team has met with over 70 global corporations in the past 9 months.
Increasing Assets Under Management: the management team has publicly stated that they intend to increase their assets under management. Such an announcement would heighten their profile and generate additional revenue without diluting the stock.
Harris & Harris Group has been able to maintain a tight capital structure, with just 31,000,601 shares outstanding. It appears that less than 50% of these shares are currently owned by institutional investors, so plenty of new buyers are still on the sidelines.
*Primary Liquidity, Private Company Portfoio, and total shares owned are stated as of Sept. 30, 2012
**Share prices stated are from the afternoon of Dec. 26, 2012
Daniel T. Cook & Partners, LLC is registered with the State of Florida as a (RIA) Registered Investment Advisor. Custodial and clearing services are provided through Scottrade Advisor Services, Inc. member. SIPC
Daniel has purchased shares of TINY on behalf of his client partners.
DanielTCook has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!