For Better Returns Buy These Boring But Innovative Companies

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David Evanson and Oliver Pursche, Winter, 2012

Sixteen years ago, Apple teetered on the brink of bankruptcy, while Eastman Kodak (EK) reached the highest stock in its storied history (just above$80 a share) and stood in the pantheon of American capitalism as a Dow component stock.

Today the tables are turned as once-venerable Eastman Kodak teeters and Apple (AAPL) is the most valuable technology company on the planet. The fates of these companies rested on a single factor: innovation.

For investors it’s important to understand that innovation is not the sole province of technology companies. In fact, the application of innovation among lower and no tech companies can lead to superior returns. This leads to my list of Boring But Innovative companies that I’ve been buying: Raytheon (RTN), Chevron (CVX), Boeing (BA), Exxon Mobil (XOM), E.I. du Pont, (DD), Procter & Gamble (PG) and Unilever (UL).

Testimony to the innovative spirit of these companies recently arrived in the form of the Thomson Reuters Top 100 Global Innovators for 2011, of which they were a part. The algorithm used by Thomson Reuters looked at the incidence of success in securing patents, overall volume of patents, degree of influence (i.e. how often a company’s patents are cited in other companies inventions) and the number of “quadrilateral patents” (i.e., patents for the same invention at the Chinese Patent Office, the European Patent Office, the Japanese Patent Office and the United States Patent Office).

On a broad-brush level, innovation has served these companies well as, according to Thomson Reuters, the leading global innovators outperformed the S&P 500 in market cap gains by a lot: 12.9 percent v. 7.2 percent, respectively:

What I’ve observed about innovative companies is the following:

They gain market share, not by cutting costs, but by offering a better more compelling product than their competition.

They adapt their strategy to different markets and different economic environments, often choosing flexibility over efficiency.

They are restless. Management is always striving to come up with better, newer products.

So, here’s the innovative companies I’ve been buying for the GMG Defensive Beta Fund.