Nanotechnology Investing and Large Cap Companies

In a recent article, we highlighted the fact that the now discontinued Merrill Lynch Nanotechnology Index did not show investors superior returns when compared to the returns of the S&P 500 over the past ten years. This means that “nanotechnology investors” would have been better off just investing in an S&P fund or ETF with better returns and far lower risk. The reason most investors are interested in nanotechnology is that it promises to be disruptive and because of that fact, should show superior risk-adjusted returns over time.

While there are many ways to measure and analyze risk, most investors would agree that large-cap companies (market cap of $10 billion plus) are much less risky than small-cap companies. The question risk-averse investors may then be asking is “can I receive exposure to nanotechnology by investing in large cap companies”? This is not an easy question to answer when looking at your typical large cap company because with companies this large, there is almost no way of figuring out just how much “nanotechnology” has impacted or will impact their bottom line. Financial statements of large cap companies do not disclose enough granular information for this to be determined. The only way then to determine a large cap company’s involvement in nanotechnology is by looking at the company’s stated commitment to nanotechnology.

Let’s take as an example the 4 large cap companies that were part of the now extinct Lux Nanotech index; Dupont, GE, IBM, and Intel. These are solid companies that most investors would be able to hold in their portfolios and sleep well at night. But do they offer any exposure to nanotechnology? Firstly, let’s look at some numbers:

Market Cap 10-Year Return Beta Dividend
IBM 184 billion 103% 0.72 2.42%
Dupont 60 billion 49% 1.52 2.75%
Intel 154 billion 11% 1 2.91%
GE 265 billion -18% 1.51 3.33%

 

If a large cap company is defined by a market cap of $10 billion, then these are all very large “large caps”. Holding all 4 of these companies over the past year would have returned 36% compared to the S&P return of 70%. Of course we need to take into account that all 4 of these companies pay a reasonable dividend which would have significantly affected the overall return as well, especially if dividends were reinvested. Since many of our readers our either retired or planning for retirement, the idea of holding an income generating asset is very appealing. We can also use beta to determine the risk of holding these assets. For those of us who don’t have a background in finance, “beta” is the extent to which the company’s returns are correlated with the broader market. In other words, if I hold a low beta stock I will not lose as much if the market tanks but I will not gain as much if the market rallies (all things being equal). Given that definition, we see that IBM significantly outperformed the market when taking into account the low risk of holding this stock.

Each one of the above 4 companies publicly states that they are committed to nanotechnology and nanoscience research. It is easy to see how this is applicable for Intel Given that Moore’s law requires smaller and smaller resolutions for chip making. Dupont is in the materials business and this is one of the first industries that are expected to benefit from nanotechnology. IBM has held the record for most patents generated by a company for 20 consecutive years so this level of innovation would naturally align with the emergence of nanotechnology. According to a recent report by McDermott Will & Emery sent to us by one of our readers, IBM was the top assignee in 2013 nanotech patent literature. GE has plenty of industry verticals such as healthcare, energy, and aviation that would all benefit from nanotechnology.

So does the fact that IBM innovates more in the area of nanotechnology explain their superior returns? With $99 billion in 2013 revenues, it’s anybody’s guess as to what extent that number was affected by nanotechnology innovation. Regardless of the impact nanotechnology may have on any one of these large caps, investors could add all 4 of these companies to their portfolio while sleeping well at night, enjoying some respectable dividend income (at least while interest rates stay low), and perhaps receiving some exposure to nanotechnology while doing so.

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Comments

  1. says

    Great analysis and great article! I would like to see more articles like this with exploration of nanotech investment ideas. Thank you.

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