Innovative companies are invading the rest of the market


Companies that invest heavily in research and development have performed over 25% over the last year, almost double that of previous years. S & P 500 (SPX), according to an index prepared by a strategist from Nomura's Instinet subsidiary. The group of companies also beat the gain of 19% for the technology sector Nasdaq 100 (NDX) index.

The index was created by Joseph Mezrich, Head of Quantitative Investment Strategy at Instinet. He examined the Russell 1000 companies and weighted them by the amount of their R & D expenditures expressed as a percentage of their total value compared to similar companies in their respective industries.

Mezrich's innovation index has also proven itself in the long run. He has dominated the broad market since 10, 20 and almost 40 years. Since 1990, the index of innovation has posted an average return of 20%, against 10% for the S & P 500 and 15.6% for the Nasdaq 100.

Mezrich told CNN Business that these results clearly show that investors are rewarding companies that are constantly looking for new products and means of growth, rather than companies that use their capital primarily to buy back shares. This last strategy can only give a short-term boost to a title.

"It's always good to innovate," said Mezrich. "A company must constantly decide to buy back more stock or invest in research. It's the tension."

Small businesses are great innovators

Technology companies dominate the innovation index: Qualcomm (QCOM), Juniper Networks (JNPR), FireEye (feye), Western Digital (WDC) and Symantec (SYMC) are among the 10 largest farms.
All of these companies go beyond even the largest technology companies, including Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Google Owner Alphabet (GOOGL), Facebook (FB) and Netflix (NFLX). None of these are among the top positions in the index.
Small businesses need to remain innovative to compete with much larger competitors with the resources to spend more on acquisitions and marketing. Qualcomm, without being outdone, rivals the heavy weight of chips Intel (INTC), while Juniper Networks has to deal with the significantly larger size whitefish (CSCO). Intel and Cisco are Dow components.

But innovation is not just about technology.

Take a look at the food industry, for example. Mezrich mentioned two companies that took opposite directions.

"Kraft Heinz (KHC) has been crushed this year while Beyond the meat (BYND) is booming, "he said.The first one is focused on cutting costs more than on new products, while the latter is a leader in the fast-growing food-based market. of plants. "

"One has invested in innovation and the other is not," said Mezrich.

Mezrich gave the example of two food companies whose stocks took opposite directions, mainly because one was more about cutting costs than new products, while the other was a leader in the booming market of plant-based foods.

Little Caesars tests an impossible pizza
Beyond Meat is too young to be a company in the index – it was released only recently. But there is a food stock among the 20 largest farms: Kellogg (K).

In 2017, the company acquired the start-up Chicago Bar Company, specializing in the RXBar protein bar. Kellogg focused more on protein bars, nut spreads and other faster growing foods than packaged grains.

Mezrich said the concentration had allowed Kellogg's stock to resist better than other struggling commodities, such as Kraft Heinz and Campbell Soup (CPB).

The old industrial companies succeed

Mezrich said the biggest surprise he found when he created the Innovation Index was the number of old industrial companies in it.

There is a larger percentage of basic material companies than computer hardware companies, for example. And capital goods companies have greater weighting in the index than software.

Farm Equipment Company AGCO (AGCO) is the fourth largest exploitation. This is particularly interesting since his biggest rival Deere (OF) experienced recent difficulties due to weak tractor sales and concerns over tariffs in China.

Although Deere shares fell 10% this year, AGCO is up 20%. AGCO has used augmented reality technology to help make tractors and also combines grain harvesting combines that can be used with touchscreen tablets.

Other companies in the index that you might be surprised to hear occupy a place of choice in innovation: petroleum additives company New market (NEU); Terex (TEXAS), a manufacturer of cranes and other construction equipment; and engine manufacturer Cummins (CMI).
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