Some Quiet Innovation
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Innovation is a process that is usually defined as a new method, product or idea. While a lot of people have product ideas, the truly innovative people and businesses tend to innovate the way an idea gets developed. There are times when an idea is very well developed, and times when it can easily fall apart unless it's carefully tended. In fact, that's how any at innovation usually goes. This is great for the world, but it can be costly for a company.
For every Apple (NASDAQ: AAPL) or Procter & Gamble (NYSE: PG) that turn innovation into incredible value for the shareholders, there are many other companies that work to innovate but come up losing money in the process. For over a decade, the entire nature of Apple has been to use all the power the current infrastructure has to offer in order to create products that are cool and actually work. Procter & Gamble has been making its money for well over a century by doing some of the most detailed studies on earth of unusual topics, with one notable example being women's psychological responses to "bad hair days" and how important it really is to them. P&G has also been an innovator in the field of back end systems, with top-of-the-line logistical solutions keeping every product on the shelves as efficiently as humanly possible.
Sometimes the shareholders end up baring the brunt of the losses when a company tries to do what hasn't been done before. Facebook anyone? The fact of the matter is that innovation takes some degree of risk, and risks come directly out of not knowing what the future is going to hold. A world-changing product or service is the goal, but far too often what happens is a fizzled out attempt at doing something great.
The Keys to Innovating Effectively
To creat something superior that makes a major change, a company needs to do a few things and do them well. Here they are in list form:
1. It has to be at the right moment.
Believe it or not, more than a decade before Netflix (NASDAQ: NFLX) began to stream content, there were not one but two different companies that launched video game downloading services on cable and through land phone lines, respectively. Neither one succeeded because they were too far ahead of their times. For a technology to be seen as innovative, it has to be believable to its customers. This requires being just slightly ahead of the curve in a way people are ready for.
2. It needs a solid customer base.
Like Nicola Tesla's eponymous coils, a lot of great and brilliant ideas simply don't have any customers to speak of. Without customers, even the greatest innovations are relegated to being little more than curiosities. In a stock, this manifests itself with solid sales performance over several years.
3. It has to be genuinely unique.
A lot of so-called "innovation" seems to boil down to tweaking a few details of what already exists. Make your own wise cracks about the iPhone 5 here. For real innovation, there's a real risk because no one can be certain it'll actually work. When it does, it's pretty amazing.
4. There needs to be a fallback plan.
As romantic as it is to have one unifying vision that stands alone and works to conquer all... I'm not putting my money down on that. That sounds a little too much like roulette to me. I want to own a company that has several irons in the innovation fire because several are going to be burned to ashes.
A Company I See Innovating Quietly
Not every company that's innovating is bathed in the spotlight. In some cases, it may labor in obscurity for years with the market all but ignoring it. In other cases, it's so well known you may not even realize you can own it for a reasonable price. The more I look at Siemens AG (NYSE: SI), the more I like it. Unlike a Netflix or an Apple, Siemens is more concentrated internationally, which hedges nicely against the American economy. I'm starting to think that as one of almost 200 nations in the world, the USA isn't everything. Some other things I like about Siemens AG are:
1. Reasonable pricing
I'm liking the P/E of 12 I'm seeing right now. If it gets under 10, I'm going to put it on my "buy when I have the funds" list.
2. It's diversified very nicely.
There aren't many areas of innovation that Siemens doesn't have its hand in. While this won't lead to explosive growth, I'm okay with watching it slowly creep upward in value. I see its alternative energy and healthcare segments innovating the most profitably for awhile with Obama's blessings of those industries, and these can support Siemens' potentially struggling drive and building technologies segments.
3. Plenty of international exposure
As an American Depository Receipt or ADR, Siemens AG isn't based in the States. I've too often suffered from having every company I own a stake in based here. In 2008, that bit me hard. From here on out, I'm keeping my portfolio diversified among lots of countries.
4. A decent dividend
As I write this, it's at 3.8%. That beats the stuffing out of my savings account, and I'll take a small amount of risk for this gain.
Innovation can be a lot of things. It can be glamorous and be on the cover of every magazine, or it can be a quiet vehicle that makes shareholders a fortune. In both cases, it requires careful tending to go from being a cost center to revenue generator. So make sure any "innovator" you check out can do more than just keep its lights on.
pongun has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Netflix. Motley Fool newsletter services recommend Apple, Netflix, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.