R&D Stocks: 2 Letters That Could Boost Your Trading Results

Rudy Martin

Each Friday I share with you the global trends that are taking off like wildfire in the investment world. And I often remind you to do your own due diligence before adding any sector or stock to your investing account.

Now, research may sound like a tedious task or an extra step to add to your already busy day. But while you don’t have to spend nine or 10 hours a day like I do — poring over journals, analyst reports and huge databases — my goal is to give you a running start in identifying promising investments

There’s nothing I enjoy more than discovering high-potential stocks in industries whose research turns into products that improve how we interact … add length and quality to our lifespans … and create technologies that save us time, effort and money. And if they have the potential to make us money, even better!

I’m still waiting for my "Jetsons"-like flying car, but because I do so much research, I appreciate organizations that give high priority to this tedious but critical background work that makes tomorrow’s technologies (and profits) possible sooner than we ever could have dreamed.

So today, I want to bring you my best "research" ideas … specifically, companies that devote a big chunk of their revenue to research and development, or R&D — two little letters that could change your trading and investing results.

This week I filtered a database of U.S.-listed securities, including ADRs of foreign-domiciled firms, My goal was to identify firms with these characteristics in their most recent fiscal year …

  • At least $1 billion in revenue, and
  • R&D spending of at least 6% of fiscal revenue

The table below shows you the biggest R&D spenders in percentages of revenue for selected industries.

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Internal Sponsorship

I sorted the list to show the most research-intensive industry leaders at the top. I’m confident some of them will show top investment results as their research pays off in the future.

Future-Focused Companies
R&D Leaders in Selected Industries

Click on the chart to see the full data.

Data Source: Morningstar

As you review these research-intensive stocks, keep in mind what really drives stock prices …

Expectations!

As I said in a recent column, history can help us evaluate companies and their management teams. An accurate snapshot of a company’s current condition is helpful, too.

But by far the major factor in determining its price is future growth expectations …  and companies that reinvest revenue in R&D are working to optimize those expectations.

Biotechnology is the classic illustration. Virtually every firm in the biotech industry devotes a double-digit percentage of revenue to R&D.

In fact, some well-funded startups ring up R&D expenditures far exceeding their still-embryonic product sales. Many startups would be on this table if they met the $1 billion revenue requirement.

Some Surprising Results

Until I thought about it, I was surprised to see computer gaming and multimedia at second place. I’m not a gamer myself, but I appreciate the amazing software these companies produce.

On the multimedia side — designing applications for smartphones, intelligent TVs, wearable devices, tablets and such — this group wins by hitting the books.

The semiconductor industry, as you might expect, is high on the list, but I didn’t expect to see Facebook (FB) near the top of the list. It makes sense, though — they company’s "social" growth depends on heavy investment to adapt its platform to smartphones and digital devices.

Since I know how many hours my Uncommon Wisdom Daily colleagues and I spend on research, I wondered why the "asset management" industry is missing from the list. Maybe this explains the sub-par results of so many traditional money managers.

Similarly, if R&D spawns growth, why aren’t the chemical and petroleum industries re-investing their impressive revenue in research? In fact, they are, but financial statements generally don’t categorize the huge investments in exploration and drilling as "R&D" expenditures.

I might feel a bit more comfortable aboard airliners if someone in the aerospace industry spent more on R&D. It may be another accounting quirk, or because not every listed company is included in the database I used for this study.

Geographically, the United States seems to be holding its own. Only two foreign-domiciled companies show up in the table: Japan’s Canon (CAJ) and Netherlands-based diagnostics and research firm Qiagen (QGEN).

Research Giants!

And, as far as absolute dollar amounts devoted to R&D, the dozen super-heavyweights are:

All these companies allocate major bucks to R&D! In my eyes, they’re investing in the future.

That means they are worth some research from investors like us. I look for companies like these in Global Trend Trader because research usually pays off!

Happy hunting!

Rudy Martin

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