Nanotech Stocks: Profiting From Spintronics With NVE Corp. (NVEC)
by Louis Basenese, Advisory Panelist
Tuesday, May 5, 2009: Issue #990
When a subscriber recently asked us if we were hot on any nanotech stocks, my immediate reply was, "No."
But it wasn't because I'm not excited about the nanotech field...
- Over $50 billion in product sales last year included some form of nanotechnology.
- The National Science Foundation's asserts the nanotechnology market will top $1 trillion by 2015. You don't need me to tell you, but I will... Few industries, if any, can boast such strong prospects.
My problem was that time and again all I saw was gobs of money pouring into research without a penny in real profits.
Worse yet, whenever I did find a compelling technology - one capable of actually making money - it was typically buried as a tiny operation beneath a megacap. Even if the technology gained traction in the marketplace, its investment potential would be largely muted.
Nevertheless, the inquiry compelled me to do more digging. And I'm not afraid to admit that I spoke too soon. I found a pure-play nanotechnology stock with plenty of potential and a healthy stream of real profits.
Nanotechnology's Profitable Niche - Spintronics
Nanotechnology - the control of matter on an atomic and molecular scale - has only one unmistakably profitable niche, spin electronics (or spintronics for short).
Don't worry. If you haven't had a physics class in years, I'll keep the geek-speak to a minimum. Here's what's important to know...
Seventy years ago, physicists discovered that an electron has two main components: a negative charge and a spin. Since that time, however, electronics have only tapped the potential of the former - an electron's negative charge - to power devices.
They've ignored the spin, until now. Enter spintronics.
The Simple Goal of Spintronics
The goal of Spintronics is simple - to acquire, store and transfer information using the spin state of electrons rather than their charge. A nanometer-sized semiconductor is the engine that makes it work.
Exactly how big (or small) are these semiconductors? Some can be...
- Less than one ten-thousandth the thickness of tissue paper.
- One million times thinner than a penny.
- 25,000 times thinner than household aluminum foil.
- 5,000 times thinner than the aluminum lining of potato chip bags.
- One-tenth the weight of a typical housefly.
- A typical coffee cup could hold approximately 700,000 sensors.
- An Altoids box could hold more than 500,000 sensors, neatly stacked.
And some of the newest products are fast becoming even smaller.
The upshot is much faster data processing speeds; less energy consumption or even non-volatility (storing data without power); more degrees of freedom; and increased storage density (up to 100 times, or more).
NVE Corporation - The Leader in Spintronics
Given the advantages, many researchers expect spintronics - specifically, magnetoresistive random access memory (MRAM) - to be the next big thing in computing and nanotech stocks in the coming decades.
Top physicist Johan Akerman expects the technology to become the "universal memory" on its ability to combine "all the strengths and none of the weaknesses of existing memory types."
Albert Fert, the co-recipient of the Nobel Prize for Physics in 2007, concurs, saying that MRAM and its offshoots will likely be the "universal" memory of the future.
No surprise, R&D cash is pouring into spintronics, especially from tech giants Intel and IBM. They've set up research shops at many of California's premier universities.
So how can we tap into this up-and-coming market, estimated to be worth $13 billion (or more)?
Consider NVE Corporation (Nasdaq: NVEC).
- The Eden Prairie, Minnesota-based company is the leading research and developer of spintronics devices. Granted, it's the smallest company in the space. But it possesses an unparalleled amount of intellectual property - 50 U.S. patents and over 100 worldwide, most of them related to MRAM.
- This vast store of knowledge helps the company develop new products and attract even more contract research (150% more in the most recent quarter). But most importantly, it helps box out the competition.
- You see, NVE Corp.'s patents are so expansive and valuable that competitors will eventually need to license NVE's key technologies to get their own products to market.
Without question, this will translate into a huge earnings windfall for NVE Corp. There's also a chance that one of the 800-pound spintronics gorillas (IBM or Intel) could takeover NVE to gain access to these patents.
Either way works for us.
Of course, I would never base a recommendation soley on a company's takeover prospects or the potential for license agreements. Because both might never materialize.
Nanotech Stocks - NVE Corp Boasts Healthy Spintronics Business
Beyond MRAM, NVE Corp. boasts a very healthy business in spintronics-based sensors (electronic devices used to acquire information such as position and speed) and couplers (devices used to transmit data between electronic systems).
Its blue-chip customers include the Department of Defense (weapons), St. Jude Medical (pacemakers and defibrillators) and Starkey Labs (hearing aids) to name a few.
And here too, NVE Corp. outmaneuvers the competition:
- Its sensors and couplers are increasingly smaller, more precise and more reliable.
- In fact, last year NVE rolled out its next generation of packaged sensor systems, which are less than one-fifth the size of its predecessor.
- Furthermore, the company's latest medical sensors are 30% more sensitive.
Add it all up and NVE Corp. operates in an untapped billion-dollar market, it has a first-mover advantage and it's the consummate innovator in the spintronics space. All that's left is to confirm the fundamentals. And it easily passes the toughest screens...
NVE Corp. Posts 16 Consecutive Quarters of Sales Increases
NVE Corp. has posted 16 consecutive quarters of year-over-year sales increases and 13 consecutive increases for earnings. In the most recent quarter sales leapt 23% and earnings climbed 45%.
It keeps improving its already robust gross margin, too. This quarter, margins jumped four points to 70%.
And the ever-frozen credit markets don't matter - the company's balance sheet is squeaky clean with no debt and $3 million in the bank.
Best of all, though, only one analyst covers the nanotech stock. So its cutting-edge technology, blistering growth and undeniable competitive advantages have largely gone undetected.
That's the only rational explanation for the stock trading near its 52-week high, at such a modest price of roughly 18 times forward earnings.
But I don't expect this disconnect between price and fundamentals to last much longer. In fact, the company reports earnings after the bell tomorrow.
Full disclosure: I originally recommended this stock nine weeks ago to the White Cap Report subscribers. And we're sitting on a 44% gain right now.
Come Thursday, however, we expect that number to be much higher.
Today's Investment U Crib Sheet
This weekend, the annual "Buffettalooza" took place - also known as the annual shareholders meeting for Warren Buffett's Berkshire Hathaway (NYSE BRK.A). In numerous interviews and sessions where he answered questions, the world's greatest investor threw out a number of interesting quotes.
Amongst them, he said that commercial real estate will continue to fall in value. We've been talking about the problems of commercial real estate for a few weeks now, "The Commercial Real Estate Sector: As The Other Shoe Drops - Be Wary of Bank Stocks." But that's not all.
He suggested that investors should invest regularly instead of trying to time the markets. You probably know that this topic is of particular interest to us. We showed readers how they can really "Become a Market Timing Expert" last week. And that "Using The Dollar Cost Averaging Strategy" is really the best way to build great wealth.