An unorthodox way to pick investment winners

Outlining an unusual way to make up your investment portfolio.

Article updated: 7 November 2018 10:00am Author: Michael Baxter

Today’s article draws upon a report in Business Strategy; What the Top Innovators Get Right

The idea is simple, invest in innovators. Finding out who those companies are is not so simple, but I have a short-list.

It turns out that investment in R&D is not the best way to pick stocks. According to the source for this piece, there is no indication that big R&D spenders outperform other stocks.

Instead, what you need to look out for is companies that spend their R&D cash the most wisely.

Starter for three

There are a number of tell-tale signs. Maybe top of the list is companies whose CEO is closely engaged in the innovation process. So look for companies where the CEO waxes lyrical about innovation in the annual report.

Here are two examples: Apple and Stanley Black and Decker. To quote from the above report, which itself was quoting from elsewhere:

"Apple boss Tim Cook once said that innovation is in the company’s DNA. In fact, Apple’s investment in R&D relative to its size is not remarkable. But what the company does do is draw people together from different specialities. Mr Cook once said: “You look for wicked smart people...who appreciate different points of view…. The reason Apple is special is we focus on hardware, software, and services. And the magic happens where those three come together.”

Tim Hatch, chief technology officer at STANLEY Engineered Fastening, a subsidiary of Stanley Black and Decker once said: “Our CEO mentions breakthrough innovation whenever I hear him speak in a group.”

Another company that scores well for innovation is Amadeus IT. The company has created innovation champions who among other things encourage people from across the organisation to submit ideas.

How is this reflected in the share price? Well, shares in Amadeus IT are up 160 per cent in five years. Shares in Stanley Black and Decker are up by a quarter, but that is after experiencing a dip earlier this year. A few months ago they had doubled. It is worth watching them over the next few months.

As for Apple, well I probably don’t need to dwell on that one, suffice to say that shares increased three-fold in five years.

Other tell-tale signs

The Business Strategy report also highlighted companies that do the following as an indication of innovative culture:

  • They closely align innovation strategy with business strategy.
  • They create company-wide cultural support for innovation.
  • Their top leadership is highly involved with the innovation program.
  • They base innovation on direct insights from end-users.
  • They rigorously control project selection early in the innovation process.
  • They excel at each of these first five characteristics and have been able to integrate them to create unique customer experiences that can transform their market.

Top innovators in world

The top ten innovators in the world as of the most recent count, and according to the report:

  • Apple
  • Amazon
  • Alphabet
  • Microsoft
  • Tesla
  • Samsung
  • Facebook
  • GE
  • Intel
  • Netflix

Many people can get cynical about some of the companies on the list, especially Tesla. I wonder sometimes if some of the Tesla related cynicism is built upon jealousy. I guess disruptive technology is not easy to spot; if it was Blockbusters and co would still be with us; maybe such cynicism has its routes in not being able to spot the potential disruption — in the case of Tesla, the importance of speciality in AI and battery technology.

And the UK

Three UK based companies made the list of top innovators: Fiat Chrysler (not really a British company though), Hikma Pharmaceuticals (share price doubled in five years) and Sky.

I am not allowed to recommend what you buy or sell. But I don’t think anyone can criticise me for recommending doing research, and I do recommend doing that with the companies I have mentioned today, as well as the other companies referred to in the report I cited above.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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