Today we’ve got a teaser that has already been solved, and it’s for a teensy weensy stock that has already experienced a dramatic surge in its fortunes over the past week or so just because a large publisher teased the stock… so you can probably predict that my sentiment is likely to be something along the lines of “don’t get too crazy with unprofitable microcaps” … but so many readers are asking and posting comments about this one that we should at least take a quick look.
The ad is from Jason Stutman’s Cutting Edge newsletter, which is one of the pricy ($799/year) “back end” newsletters at Angel. I’ve only covered one teaser pick from this service, and it turned out to be a terrible one back in the Summer of 2015, but I don’t know what the overall record might be for their picks — if they’re consistently choosing these $100-300 million market cap pre-profitability tech stocks they’re likely to have a lot of losers, so my guess would be that they rely on occasional 1,000% winners to offset the several near-100% losers.
(What does “back end” mean? Most publishers have “front end” or “entry level” newsletters that get you in the door at $49 or $79 and make a little money, but rely more on the “back end” newsletters that they sell to those folks as $500 or $5,000 “upgrades” to generate much of their profits, with these letters often positioned as trading in less liquid or more specialized investments like microcap stocks or options, and sometimes specifically limited in terms of readership size.)
Volatility and wildly uneven results for a portfolio are not that unusual for “growth” focused newsletters, or those that focus on tiny companies (whether biotech or junior miners or tech stocks), but it means you should probably take any individual teased stock with an especially large grain of salt — when it comes to an advertisement for a newsletter, the ability to “sell” the exciting story of a stock to readers is probably more important (to the publisher and the copywriter, at least) than the judgement about which stock in that newsletter’s portfolio is judged to be the one with the highest potential… and if the newsletter editor knew in advance which of his stocks would be the losers, and which would “win” enough to make up for the losers in his portfolio, well, he wouldn’t recommend the losers.
Sorry, that’s just my usual “buyer beware” note — I often feel extra compelled to add those kinds of cautionary statements when looking into the tiniest stocks, because even a cautious mention here in lil’ ol’ Stock Gumshoe is enough to move a stock sometimes. Particularly a stock with a $50 million market cap that only trades $50-100,000 worth of shares in a given day.
So given all that, what’s the stock?
The headline is what clearly grabbed the attention of our readers:
“Forget About Tesla and Solar City:
“This Company’s ‘Tiny Dots’ Promise to Turn the ENTIRE Renewable Energy Industry on its Head
“(And Its 15-Cent Stock Could Make You a Fortune!)”Are you getting our free Daily Update
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And then the heart of the pitch, which is about how Elon Musk’s Tesla is about to become obsolete:
“Elon Musk’s supposed stranglehold over clean energy may be so overblown, in fact, that my team of researchers has recently uncovered a single set of documents that threatens Tesla as a company altogether.
“As a matter of fact, these documents threaten to disrupt not just Tesla, but the entire renewable industry as a whole…
“I’m going to show you how it will be possible to profit from these documents for many years to come. I’m talking returns up to 4,600% if you take action today.
“You see, these documents I’m about to reveal grant exclusive rights to incredibly powerful technology — a groundbreaking material — that stands to make Tesla, and companies like it, virtually obsolete.”
So what’s the 15-cent company that Stutman says is going to “explode” over the coming years? More clues:
“… my team of researchers has recently uncovered a set of patents that expose a major chink in Tesla’s armor: a groundbreaking technology that could simply blow Elon Musk, and frankly the entire solar industry, out of the water….
“… single-layer silicon panels are extremely limited in how much energy they can capture from the sun. They’re actually capped at a maximum efficiency limit of just 29%, meaning the vast majority of available solar energy gets lost when using them.
“This means that no matter what the engineers at Tesla or anywhere else ever do, single-layer silicon panels will always fail to capture at least 70% of available solar energy. Those are simply the laws of physics. It’s the best they can do.”
I don’t know the Tesla gives a rat’s patootie what the next solar cell technology might be — they do own SolarCity now, thanks to what I’d call an egregious failure of oversight by Tesla’s Board of Directors under the sway of Elon Musk’s cult of personality, but SolarCity is a solar installation and financing company — I suppose they might see their book value fall if all the panels they installed on 20 year contracts become obsolete before then, but the risk is shared with the property owners who have to host those panels on their roofs and buy the electricity, and obviously anyone installing solar panels has to know that they improve every year — just like essentially every other technology-based product on earth. The Tesla connection is just an attention-getter, and Tesla’s exposure to solar panel technology in any real direct way is awfully limited. Anything that leads to more distributed energy generation and more energy storage is likely to be a tailwind for Tesla in general.
But anyway… more clues? What the heck are they talking about? Much of the ad focuses on the fact that photovoltaic cells are hitting against a ceiling in terms of efficiency, in that they can only convert a percentage of the sun’s power into electricity, somewhere in the 20-40% range depending on conditions.
And, of course, on this new technology that is somehow dramatically more efficient:
“… this company’s patent portfolio gives it exclusive rights to the mass production of a material that more than doubles the efficiency limits of silicon. A single layer of this material has an efficiency limit of 66%. Again, that’s compared to just 29% for today’s panels.
“Even better, this material is so efficient at capturing light energy that it works both day and night, capturing energy from the sun’s rays bouncing off the moon, and even from street lamps lining the streets.
“This material is so powerful, so groundbreaking, in fact, that it actually converts energy from light you and I can’t even see, from the ultraviolet and infrared spectrums.
“It’s no wonder Forbes recently speculated that this material could be ‘the holy grail’ of solar…”
Stutman includes a copy of part of a patent document that relates to nanoparticles, with the assertion that this document is the one that is the key to his investment thesis — one of the published versions of the patent is available here if you’d like to review the whole thing.
This is how the ad describes the technology in that patent:
“The patent you’re looking at right now describes this material as “uniform nanoparticle shapes,” but for simplicity, I like to call them nano-dots.
“Already, these nano-dots are so valuable that they sell for as much as $2,000 a gram. That’s nearly 30 times more expensive than the price of gold… and considering what they can do, it’s no wonder.
“Remember, nano-dots more than double the efficiency limit of today’s solar panels, from 29% to 66%.
“Putting it a bit more simply, they make the last half-century of solar innovation look like child’s play by comparison.
“The patent you’re looking at right now, though, is just one of many that allows the tiny, $0.15 firm I’ve been telling you about to produce these nano-dots at unprecedented rates.”
This company has apparently also “recently awarded this tiny company its annual ‘North American Enabling Technology Award.'”
And a couple other clues:
“… the firm’s CEO explains: ‘It will be very difficult for competitors to produce materials in volume similar to ours without breaching our patents.'”
And apparently this technology is valuable not just for solar panels, but for consumer electronics…
“… while nano-dots hold enormous promise to disrupt the solar energy industry and make companies like SolarCity obsolete, that’s not the end of the story.
“These nano-dots have been praised as the holy grail not just of solar, but of the consumer electronics industry as a whole.
“As Roam Consulting suggests, nano-dots are a ‘miracle of modern science.’
“That’s because nano-dots threaten to replace silicon in not just solar, but in tomorrow’s electronic devices and other applications as well.
“According to media outlet Science Alert, nano-dots ‘could change everything about how we transmit and process information in the decades to come.'”
That “Roam Consulting” piece appeared in Sound & Communications, a publication for AV folks, and it’s about using quantum dots in next-generation high definition displays.
The Science Alert piece is about quantum dot crystals replacing silicon in next generation computers, and you can see that here (though it also indicates the limits of the technology, at least so far).
And that quote from the CEO about the strength of their patents appears in this 2014 press release about an acquisition of patents from Bayer.
So yes, this is, as other readers have speculated, Quantum Materials (trades OTC at QTMM). Quantum materials has been around for a long time, with the first real surge of interest coming in 2014 when they licensed those Bayer patents and started producing some of the Quantum Nanodot materials.
I’m not going to be able to tell you whether or not quantum dot nanocrystal will become the standard for displays, which seems to be the most likely path to commercialization, or whether they eventually get a foothold in solar panels… and I especially can’t tell you how important or powerful Quantum Materials’ patent portfolio is — it’s a fast-changing field, and there’s always some risk in assessing intellectual property, particularly if you’re not at all an expert on that field. We can read that the company thinks it has foundational patents in quantum dot production… but we don’t know if that will really prove to be true, particularly given that the technology is still in its very early days.
But yes, they do have a connection to that particular patent that Stutman cites — they’ve licensed patents from Rice University, apparently including this one, and one of the named inventors, Dr. Michael Wong, is on Quantum’s Scientific Advisory Board.
My suspicion is that all of this is very early-stage stuff still, but they do say that their goal is to begin shipping commercial quantities of quantum dots in the first part of this year… and they have gotten an investment from the Chinese government to build production facilities in Beijing and Changde with a partner (that construction won’t start until late this year).
The company does have a financing deal in place with one of their institutional investors, who has agreed to buy up to $9.75 million worth of shares over the next three years (with the company saying they’ll only sell at prices above 12 cents). And they do seem to need the money, they are currently short on cash according to the latest filing — so as you consider the merits of the company, do keep that in mind: This is a very small company, and I have no idea what the financial performance might be if they begin selling their quantum dots on a commercial scale, but there’s every chance that they’ll be selling shares on a regular basis to cover their operating costs.
That’s true of lots of pre-profitability companies who, like Quantum Materials, should probably be funded by long-term venture capital investors or industry partners who know the risks and have a presence on the board, but are instead effectively funded by jumpy penny stock investors in the public markets. It can easily become a significant issue if the “story” is more compelling than the actual financial performance and they have to sell at lower and lower prices over time.
Here’s what one reader posted after sniffing around this idea:
“Did some reading / research about the Quantum Materials Corporation. I clicked on the discussion with the CEO for QMC.
“Here is what he said (Nov. 2016)…
“Do you feel that QMC has a finite window of opportunity during which it has to gain traction or risk missing key growth stages in the market?
”Yes, each market from TV to Solar to innovative uses to ensure the authenticity of pharmaceuticals, each have windows of opportunity. We are constantly monitoring these windows to make sure we’re well-positioned, and we think we are. However, as mentioned, display represents the clearest path to revenue generation. Solar provides us with longer-term potential, potential for which we could possibly self-fund based on cash flow from our display segment.”
“It is interesting to note that Samsung has been ordering their product to build their new LCD-TV’s. Companies are looking in to making solar panels with quantum dots.
“QMC stock: The low has been .06 and the high was around .20.
“Looking at Samsung, what the CEO said and the stock has been holding at .16 cents…. I think we might do a little investing. Have you had a chance to look at this stock. If so, what is your opinion?”
Me, my only opinion is that I can’t really tell you whether this company should be worth $20 million or $10 billion dollars, which means that I have no place investing in it. There’s no rational way to guess at the size of the market or the profitability of their quantum nanocrystal manufacturing unless you know a lot more about the marketplace, about other producers of similar materials, and about profitability… we’re talking about what is still effectively a startup company that might be able to produce something that has some unknown value to buyers at scale, at an unknown cost of production, and with an unclear competitive landscape, in an industry where cost pressures are overwhelming. Generally, producers of raw materials don’t make huge margins unless their production is genuinely unique, or unless they have something that is so compellingly patent-protected that they effectively get a royalty on the whole industry.
I suppose there’s perhaps some chance that this is the case with Quantum Materials, having only read up on them for a few minutes this morning, but it’s also a pretty big leap of hubris to say that you’ve identified the one stock that will dominate the production of solar cells and displays into the future because of their strong patent position and their soon-to-exist commercial production capacity … but that the giant materials companies who could swallow your firm without even chewing, have not seen fit to buy control of this technology.
And there are certainly other companies, even publicly traded ones, in the quantum nanocrystals business — Nanoco Group in the UK is one that pops up with some regularity. It’s a little bigger but still teensy and has a production deal with Dow Chemical, though I don’t know whether their product is different from Quantum’s. The other quantum dot sellers I’ve noticed so far have been tiny and private (though some certainly do sell at scale, at least for research purposes — Sigma Aldrich quantum dots and nanocrystal products from a few different producers, for example).
It can happen that new technologies come out of the lab and hit the market with a boom, and sometimes it is a small company that controls that technology… but it’s rarely that fast or clear, and in my experience the company is never this small or financially precarious — the rest of the industry isn’t staffed with dummies, they know the science a lot better than I do, and I have to assume that they (labs, display companies, semiconductor companies) would buy up financially fragile firms if the patents or technology were critical to the future, even a decade into the future. And, of course, sometimes employees on the inside buy into these stories as well, if they have the funds, so they can enjoy that market dominance — but in this case, for whatever reason, there has been no insider buying at Quantum Materials (to be fair, that’s typical — tiny firms like this often pay their employees mostly in stock or options, and employees have to sell if they want money for other stuff, whether that means groceries or new speedboats or college for the kids).
My worry is that this is a story that’s well ahead of the economics of the company, and that the enticing story of a $25 or $50 million company becoming a big player can easily make us forget that giving up those hypothetical gains in order to wait for an industry to emerge a little bit also means you avoid lots of this “cool story” risk in companies that seem to be a long way from profitability.
But that’s a general comment without having any real depth of knowledge about Quantum Materials specifically… and often that’s what I do, really, just add the skepticism — the hype and the potential promise come from the ad, and perhaps from you if you’re excited about this market, so I hope that my skepticism just adds a little ballast to keep your thinking balanced.
So what do you think? Do you know something about quantum dots and how they might sell, or whether Quantum materials has a meaningful “edge” in production or application of quantum nanocrystals? Think the company is hot stuff, or that others in the space are more compelling? Let us know with a comment below.