A couple of months ago, the fund planners at Invesco PowerShares closed the book on one of the most unusual chapters in investing history, announcing a move to shut down the PowerShares Lux Nanotech Portfolio exchange-traded fund (ETF). A lack of interest was the main culprit in its demise.

#-ad_banner-#For many investors, the move signaled the end of the decade-long hype around nanotechnology stocks. Back in 2006, with nanotech mania in full bloom, Businessweek predicted that this emerging technology would represent a $2.6 trillion industry by 2014.

That prediction overestimated the industry’s potential by at least $2.5 trillion. 

A decade ago, the phrase “nano” was applied to many hot new technology developments. By some estimates, more than $20 billion in government and corporate research funds were invested in the burgeoning technology. The premise was simple. Scientists had found ways to develop ultra-tiny particles that could be used in a range of biotech, industrial and cosmetic applications. 

We’re talking smaller than “micro”… smaller than “milli.” You have to get far, far smaller than the width of a human hair, to one-millionth of a meter, to get a sense of just how tiny nano-size particles are.

So what went wrong with nanotech? Many companies found it hard to develop products based on such small form factors, and most products that did emerge in the field never saw overwhelming demand. A quick snapshot of where the remaining nanotech stocks trade in relation to their all-time highs paints a sobering picture. With the exception of FEI Co. (Nasdaq: FEIC), not one of these firms lived up to the hype.

Altair Nanotechnologies (Nasdaq: ALTI) exemplifies the industry’s challenges. The company aimed to apply nanotechnology to lithium batteries, helping electrons to flow more freely, but annual revenues never even reached $10 million. Ironically, a new and much-hyped technology known as graphene holds the same promise, and in a few years we may see huge sums of money chase after graphene companies, just as we saw with nanotechs.

Yet just as most investors have written off the notion of nano-investing, the underlying technology is being seeded in a widening range of applications. Many industrial firms such as 3M (NYSE: MMM) already derive solid recurring revenue streams from nanotechnology and are spending heavily on new products, which bodes well for the companies that make the tools to help further this technology’s development.

FEI, for example, is expected to reach the $1 billion revenue mark this year for the first time. FEI’s equipment helps other firms analyze and develop nanotechnology-based products and chemistries, mostly in the semiconductor industry. The company has delivered on the promise of nanotech, but shares appear fully valued, as top-line growth is around 10% and shares trade for more than 20 times next year’s earnings. 

A more intriguingly valued stock is Flamel Technologies (Nasdaq: FLML), a biotech firm that has developed a range of drug delivery methods to deliver nano-sized particles into the bloodstream. Though this firm could never live up to the nanohype of a decade ago — and a decade of annual operating losses will wilt any investor’s confidence — shares are starting to rebound as key products start to reach the market.

In addition to its existing Medusa and Micropump drug delivery products, Flamel has another six products being tested in clinical trials. The company’s Bloxiverz is a nanotechnology-based drug formulation that helps anesthesia to penetrate muscle tissue during surgery. Other drugs in development also utilize the company’s nano-based delivery systems.

Analysts expect Flamel’s sales to triple this year, to more than $65 million, and approach $175 million by next year. For a company that has never had more than $42 million in sales at any point in its history, those are meaningful numbers. As an added kicker, shares trade for less than 10 times consensus 2015 profits.

Investors giving a fresh look at nanotechnology stocks may also want to consider Organovo (NYSE: ONVO), which is developing 3-D printers to create human tissue at the nano molecular level.  As is the case with other 3-D printing stocks, shares of Organovo have fallen far from the 52-week high as industry hype as evaporated, providing a fresh entry point into this promising new technology company.

Risks to Consider: As noted earlier, carbon-based graphene offers similar properties as nanotechnology, and may end up acting as a replacement technology in various applications.

Action to Take –> The hype and froth is completely gone from the nanotech sector, but real business models have emerged. Research engineers continue to pour of hundreds of millions of dollars into the technology, so it pays to track the industry’s developments in search of the next potential major breakthrough. From a current investment perspective, Flamel Technologies appears to offer a nice combination of growth and value.

P.S. If you think the potential of nanotechnology is exciting, wait until you see what StreetAuthority’s Andy Obermueller has been working on. Andy has identified five “game-changing” trends with the potential to revolutionize the way we live our lives — and make early investors a killing. To learn more about these developing technologies — and the companies behind them — follow this link.