By Michael Brush
A key takeaway here is that to find innovative companies, look for the ones led by people who have demonstrated a knack for innovation in the past. Innovative managers tend to keep on innovating. Boston Beer continually tests new seltzers, beers, hard ciders, distilled spirits and other drinks. Shareholders are betting they will come through again.
They’ll need the help. Boston Beer shares fell 20% on July 23 because so many competitors entered the hard cider niche. Sales grew 33% but net income fell 1.6% as the company jacked up advertising costs to try to combat the competition. The company slashed estimates for the year on an expected slowdown in sales growth.
But don’t count out this innovator yet.
“We recently announced plans to develop new innovative beverages with Beam Suntory that we are planning to launch in early 2022,” Boston Beer’s Koch said. Beam Suntory sells Jim Beam whiskey and other brands of spirits. “We believe these new beverages will further demonstrate our ability to innovate and grow our business as drinker preferences evolve.”
3. Look for companies that can create and dominate a niche
For years as the gig economy emerged, the big credit card companies didn’t really care that much if the local yoga instructor could accept payments with a credit card. Square /zigman2/quotes/205989440/composite SQ -0.68% recognized this as an opportunity. So it launched its card payment device business in 2009. Since then, it has grown by taking on larger customers, and expanding into new lines of business in financial services such as cash management, debit cards loans and tax filing. Transaction-based revenue grew 27% in the first quarter, and subscription and services revenue soared 88%.
This is a great example of a company that created a business niche. But it’s also a “land and expand” company because it grows by offering customers new services. Both qualities help companies maintain the competitive advantage Ram likes see in investments.
4. Buy companies in the early stages of rapid growth
One way to find these is to identify companies developing products that will transform an entire industry. Ram thinks that is the case with Alnylam Pharmaceuticals /zigman2/quotes/205655272/composite ALNY +0.09% . It’s developing novel therapies base on a technique called RNA interference (RNAi). Inside the body, messenger RNA (mRNA) encodes proteins we need, based on signals from RNA. Sometimes mRNA gets the signals crossed, and it encodes flawed proteins. This causes diseases.
Alnylam has developed a way to tweak the RNAi pathway to silence the flawed signaling and block the creation of disease-causing proteins. So far, Alnylam has four approved RNAi-based medicines that treat rare hereditary diseases. The company has a dozen other therapies in clinical studies, including six in late-stage development.
“This is a completely new area of therapeutics,” says Ram. “It is a platform of products that can treat a variety of conditions.”
5. Hold stocks for the long term
All of the names above are large positions in Ram’s fund, which tells me that Ram and her team think they have considerably more upside. If you buy any of them, though, remember you have to do so with a multi-year time horizon. That’s what Ram’s fund does. It has a low annual portfolio turnover of 27%. It’s important to have a long-term view, because it is so tough to call short-term moves in the stock market or in stocks, and you need to give companies time to develop.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested BAC, JPM, AMZN, GOOGL, TSLA and ALNY in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.