Innovation: The Breakfast of High Performance Stocks
Recently on a Saturday morning as I was getting ready to have breakfast I pulled a box of Wheaties out of the pantry and my 4 year old son asked, “What is that?” I told him it is Wheaties: “The Breakfast of Champions.” Then I went on a 2 minute lecture on how if you want to be a champion in sports and get stronger you have to eat a good breakfast like Wheaties. I went on to explain to him how Wheaties are like the fuel for your body to help you perform when doing “BABOOM” (this is what my sons calls mixed martial arts ) and playing outside. After listening to me rant, he asked for some in his cup and ran off to tell his 6 year old brother how he was going to be a champion because he is eating his Wheaties. That is one powerful brand.
As I laughed to myself I began to think; “What is the breakfast of champions in terms of stocks?” What is the fuel that drives high performance? Innovation. If you look at the history of some of the greatest performing growth stocks over the years the majority had innovating products and services that changed the way we live or do business. We have been doing research on this for quite some time looking at various ways to try and track innovation both qualitatively and quantitatively. We have found that companies sometimes have a problem looking into the future because they are hanging onto the past. However, the companies that recognize that the ability to innovate is really truly the only competitive advantage are the ones who thrive.
It is the ruthless cannibalization of one’s own products, services, and processes that lead to some of the greatest innovations. This is what many companies find hard to do. I remember I didn’t buy another ipod because I was waiting for the iphone? I am sure Apple knew that the iphone could slow down the ipod’s growth yet when the sales and profits where bringing in a ton of cash they had the courage to charge forward and introduce a product that could potentially challenge one of their all time greatest innovations. That is what high performing growth stocks do they continue to innovate. It is the fuel for their sales, earnings, and cash flow growth.
Sometimes it is easy to spot an innovation; cell phones, pcs, internet, ipod, etc. Other times it may not have been so easy. What if it is something boring like tire cords. Richard Foster in his book Innovation: the attackers advantage tells the story of how Dupont was the leader in nylon tire cords and was surpassed by Celanese who took 75% of the market in 5 years with their polyester tire cords. Dupont chose to ignore the threat, didn’t innovate and lost. This was the example of the large company who thought they could control the pace of innovation. Then you had Michelin creep into the U.S. market with what most thought at the time was an inferior product “radials” and in the blink of an eye they were the leader. Have you been studying the tire market lately to see if there are any innovations around the corner? Probably not because it isn’t something most people think about or research too often. This is something I think we fail to recognize: the amount of Innovation that is happening all around us. When we hear about things like Peak Oil I have a hard time ignoring the history of the United States and it’s ability to innovate. For example, if you go and read How I Trade and Invest in Stocks and Bonds by Richard D. Wyckoff a book first published in 1924, you will see he quotes the President of Standard Oil Company who estimates that by 1925 the U.S. will require 675,000.000 bbls. of crude oil against the 376,000,000 produced in 1920–an increase of 78%. The book states, “He asks where such an enormous quantity of oil is coming from. If he cannot tell, you and I need not guess.” Well when you look at how much oil we consume today I would have to say someone figured out how to harness the power of innovation.
How about Wheaties? Even the folks at General Mills realize that in order to compete like a champion sometimes you have to create new products that may compete with your existing ones.
Watch out for our future post when we talk about the different types of innovations the incremental and the game changers, Sign Up Today for Our Free Updates so we can keep you Posted