Nanotechnology -- it's the perfect name to lure stock investors into thinking they have found that elusive next big thing.
Actually, the word is a bit of a catchall to describe materials and devices manufactured on the nanoscale -- one-billionth of a meter. In addition to medical purposes, nanotechnology is used to create better metals, fabrics, paints, chemicals, and computer chips.
Some scientists have even called it the driver of the next industrial revolution. Understandably, interest among investors is increasing as more money is being spent on nanotechnology research, more products are coming to market, and more nanotechnology companies are going public.
''Nanotechnology companies are just now introducing products," said John Roy, a research analyst at W.R. Hambrecht & Co. ''It's just a matter of time, and when these products really start coming, they will change a lot of industries."
Roy estimates that nanotechnology could be used in products totaling $1 trillion in the next five to seven years.
But potential investors should remember the financial carnage left in the wake of the Internet craze of the late 1990s. That was supposed to be the next big thing, too.
So far there are only a handful of public, pure nanotechnology companies, meaning those who derive a significant portion of their revenue from this technology. Nanophase Technologies Corp., based in Romeoville, Ill., became the first public nanotechnology company in 1997. It makes ''nanoengineered" ceramics, cosmetics, and industrial catalysts.
The behavior of Nanophase's stock price should serve as a cautionary tale to potential investors. In late 2003 it began to report some promising new product developments, and its stock soared from about $4 a share in September 2003 to $14 by early 2004.
But then some of its customers began to report that its ''nanopowder" metal oxides didn't mix with their products as well as expected, and lawsuits began flying. Shares of Nanophase dropped to about $4 by August 2004.
Management has since solved the problems, and its stock price has rebounded to $6.
''While Nanophase is well-positioned in materials, we are waiting for more evidence of a revenue ramp," Roy said. ''Revenue has lingered around $5.3 million for the last three years."
Picking winners during technological breakthroughs is a risky business, said Mark Luschini, head of asset management at Parker Hunter Inc. That's because often the stocks are trading more on the hope of profits rather than actual profits.
Ideally, investors who can't resist nanotechnology should buy a mutual fund focused in this area. But that's difficult, because there aren't enough publicly traded stocks in the sector to create a pure nanotechnology mutual fund.
First Trust Portfolios, based in Lisle, Ill., offers a fund with some nanotechnology stocks, but it holds other company stocks that may only dabble in nanotechnology, such as General Electric Co., Motorola Inc., and Exxon Mobil Corp.
Another alternative is to find a publicly traded venture capital company that invests in upstart nanotechnology companies. Roy's favorite in this area is New York-based Harris & Harris Group Inc..
But investors should expect a wild ride with this stock. After hitting $20 a share early last year, it dropped below $10 midyear and currently trades around $12.
Roy believes the first high-profile nanotechnology initial public offerings are coming this year, and that will boost the sector. He predicts Harris will hit some investing home runs in the IPO market.
Hopefully, those potential home runs won't turn into long outs.