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Why R&D Spenders Can Be Portfolio Winners: Unlocking Future Growth

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

 

In our quest to build winning stock portfolios, we're constantly on the lookout for companies poised for growth. Today, we'll delve into a key indicator: increasing R&D expenses.


What is R&D? R&D stands for Research and Development. It's the money a company invests in innovation – creating new products, improving existing ones, and exploring future technologies.


Why Favor Increasing R&D? Here's the logic:

  1. Future-proofing:   Companies that prioritize R&D are constantly innovating. This helps them stay ahead of the curve, adapt to changing markets, and potentially disrupt their industries. Most importantly not to be left-behind, especially when they are operating in tech related industries where rate of innovation progress at a rapid pace.

  2. New Revenue Streams:  Increased R&D can lead to the development of groundbreaking products or services, opening doors to entirely new revenue streams. This translates to potential stock price growth for investors.

  3. Talent Magnet:  Companies with robust R&D programs attract top scientific and engineering minds. This talent pool fuels further innovation, creating a positive cycle.


So, how do you use this knowledge?

  • Look for companies with a consistent increase in R&D spending over several years.

  • Research their past innovations and their success rate in bringing them to market.



How to find R&D expenses for companies?

You can find up to 10 years of past R&D expenses in sites like Stockanalysis.com.

Search for company you are interested in analysing, and look under Financials > Income Statement > look for Research & Development.




Fortinet's R&D expenses have been on a predictably increasing trend in the past 10 years which is a very good sign for its investors, especially coupled with their increasing trend of revenue & income this is a sign that the R&D efforts have been paying off.


Tesla's R&D expenses have been on a steady increasing trend too in the past 10 years.



Example of company with reducing R&D expenses.


Ascent Solar Technology's R&D expenses have been on decreasing trend in the past 10 years.


Although this may not be the sole reason on their poor performing stock, it would likely have been one of the cause.




In conclusion, increasing R&D expenses can be a strong indicator of a company's commitment to innovation and future growth.


However, it's important to remember that R&D investment needs to be coupled with strategic vision and efficient execution to translate into successful products and financial returns.

By combining R&D analysis with other financial metrics, you can make informed investment decisions and potentially identify companies poised for long-term success. Remember, this is just one piece of the puzzle – conduct thorough research before making any investment decisions.

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