Skip to main content

Are patents a predictor of stock performance?

The Wall Street Journal has a recurring feature where they analyze a number of technology companies and list the number of patents they have been granted in a rolling 13-week period. The Journal further goes on to rank the companies by calculating several other measures such as "Science strength", "Innovation cycle time" and "Industry impact". They then list the companies with their associated stock performance.

I was curious about how this data might look on a graph. Being a believer in technology and creativity, my expectation was that companies with the most patents should show better than average stock performance. The chart below tells a different story (the magenta line is Number of Patents and the black line is Change in Stock Price).

Chart of price chg vs patents awarded. Click to view larger image.
[ Click chart to view larger image ]

IBM has the most patents but their stock price appreciation over the last 52 weeks, while quite solid, is not a standout among this selection of stocks. Apple (AAPL), with fewer patents, has seen their stock appreciate the most. EMC is an innovative company but the level of patents they have been awarded in comparison to the others is low. Still, EMC's stock has performed second best. The biggest surprise in the pack is Digimarc (DMRC). Few patents, relatively speaking, and third best stock appreciation, almost 80%. My reaction was: who are these guys?

Digimarc Corporation supplies secure identity solutions and technologies for use in media management. Its solutions enable governments and businesses worldwide to deter counterfeiting and piracy, develop traffic safety and national security, combat identity theft and fraud, facilitate voter identification programs, manage media content, and support digital media distribution models. These solutions include secure IDs such as drivers licenses and digital watermarks which can be embedded in various forms of electronic media content, including personal identification documents, financial instruments, photographs, movies, music and product packages.

With governments and financial institutions focusing on identity theft and content providers focusing on digital rights management, Digimarc is well positioned to benefit from these parallel trends in the security technology sector. Unfortunately, the company is not profitable, having made a large investment in plant and equipment recently, and sales seem to have stalled. The stock is off its high of about $12 but it looks like it's starting to rebound. It has a reasonable price/sales ratio for a young small-cap of about 2.

Another company in the sector is L-1 Identity Solutions (ID). They are twice the size of Digimarc, show much stronger revenue growth and have a chart displaying a nice up-trend. They are also more diversified with biometric solutions in their product portfolio and operations in security consulting and fingerprint services. However, L-1 has a higher price/sales ratio (about 7) and is losing twice as much money as Digimarc.

If you are looking to add a stock to your portfolio that is in the digital security sector, either one of these stocks might fit the bill, with Digimarc more of a pure play. It is clear that there will be increasing activity in this sector as more and more transactions world wide move to electronic formats and identity solutions become as critical in rapidly developing nations like China and India as they are in the US, Europe and other developed countries. These two companies may not be consistently profitable yet but they are mining a vein of great opportunity.

And to get back to the topic that started this post, the conclusion I would draw is that the number of patents awarded to a technology company is not a predictor of superior stock price performance. But you probably knew that already...

Comments

Popular posts from this blog

Time to be conservative with your 401K

Most of the posts I and other financial bloggers write are typically focused on individual stocks or ETFs and managing active portfolios. For those folks who are more conservative investors, those whose main investment vehicle is a 401K, for example, the techniques for portfolio management might be a little different. The news of stock markets falling and pundits predicting recession is disconcerting to professional investors as well as to those of us who are watching our balances in an IRA or 401K sag. What approach should the average 401K investor take? Let's assume that the investor is contributing on a regular basis to one of these retirement accounts. There are two questions that the investor needs to ask: 1. Should I stop putting the regular contribution into stocks? My feeling is that investors making regular contributions are being handed a present by the markets. Every week the market goes down, these investors are lowering their average cost. When markets reco...

The Trouble with Trend Reversal Indicators

Many of us use various trend reversal indicators to time our trades. Our desire is to determine when prices have changed direction so that we can ride the new trend. Why doesn't it always work out? The first reason, of course, is that unforeseen events often drive prices in unexpected directions. That is something we can't change and it often makes all of us technical traders crazy. On the other hand, sometimes an unforeseen event is a prelude to a new trend. A stock spikes up on a what seems to be a one-time piece of good fortune and soon falls back. Does it start making its way back up or does it resume a previous down trend? The conflict within trend reversal indicators is that, though they can definitely tell when prices change direction, they suffer from two problems. One, they often can't determine how significant that move in prices actually will be. Two, they are often lagging indicators. As such, they can be late in providing a signal, sometimes leading the investo...

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what...