Innovative Companies to Invest in Now

Michael Lippert loves companies that shake things up. They don’t just amble along. They innovate, transform and race ahead. Their products and services reshape global industries and change the way we live and behave. And they have the potential to grow tremendously.

That’s why, the mutual fund manager says, you need to find just a few of these companies over the course of your investing life to achieve market-beating returns.

In the past, companies that shook up their industries have included stock market winners such as Apple, ­Netflix, Priceline.com and Whole Foods, all of which the Baron Opportunity Fund, run by Lippert, began investing in years ago.

Bottom Line/Personal asked Lippert which modest-sized companies today could become the innovation stars of tomorrow…

THE BIGGEST TRENDS

Innovation is not confined to companies with the next popular high-tech gadget. There also are highly innovative companies in sectors such as health care, financial services and industrial manufacturing. The companies that I look for must have the potential to grow fast enough to double their size—and their share prices—within the next five years regardless of how the economy is doing or what goes on in Washington, DC. They can do this because these companies are all tapping into major consumer and business trends.

While some trends, such as the proliferation of mobile ­communications and online social networking, are well-known to investors, others get less media attention but are becoming just as pervasive in our lives. These ­include the growing popularity of genetic testing…digital cash replacing paper ­money…the everyday use of satellite data for maps and driving directions…and the shift to cheaper, environmentally friendly food packaging.

Innovative companies don’t just profit from trends—they also are heavily influencing them with revolutionary products and services. Think how ­Amazon.com disrupted the
way we shop for retail items…and how Whole Foods turned organic food into a mainstream supermarket experience. These businesses aren’t content to just create a successful product or business model and stick with it. They keep reinventing themselves in order to push into more and more new markets and attract consumers and business clients who must have what they are ­selling.

Investing in companies that are so innovative does carry risks. Many aren’t household names yet, and because they take big chances, their stock prices can be very volatile. Also, these stocks aren’t meant to be held in your portfolio forever. When companies get very large, they often become less daring because they have so many employees and so much market share to protect. Their ability to innovate diminishes.

Example: I sold all of my fund’s ­Apple holdings in 2012, several months after the death of its brilliant founder and innovator, Steve Jobs. Apple hasn’t released a truly ­transformative ­product since the iPad premiered in 2010, and it recently elected to return $100 billion to shareholders in the form of dividends and stock buybacks rather than use the money for new acquisitions or for research and development. Its stock price has plunged over the past year.

MY FAVORITE STOCKS

The following stocks look attractive now…

Berry Plastics (BERY). Glass, metal and traditional plastic packaging are increasingly expensive and regarded as harmful to the environment. This Evansville, Indiana, packaging company serves more than 13,000 clients including Burger King, Colgate-­Palmolive, Hershey’s, Pillsbury and Procter & Gamble. Among its many patented products: Its new plastic Versalite cup, which has insulation characteristics that are far superior to Styrofoam and paper, is expected to shake up the disposable-cup market. Recent share price: $24.04.

DigitalGlobe (DGI) is the world’s largest provider of commercial high-resolution Earth-imagery products and services. Its five satellites collect geospatial data on millions of square miles of Earth every day, allowing clients to view conditions and changes in the planet’s landscape that can help save lives, evaluate geopolitical and business risks, and optimize natural resources and infrastructure planning. Although more than half of the company’s ­annual revenue comes from US government defense and intelligence agencies, DigitalGlobe is rapidly diversifying. Major clients include the government of India…AutoNavi, which is China’s digital map and navigation ­giant…and Google, which licenses images for Google Earth and Maps. The company, based in Longmont, Colorado, recently purchased its major competitor, GeoEye, creating a US monopoly with little international competition. Recent share price: $33.99.

Guidewire Software (GWRE) provides computer software systems for just one industry—property and ­casualty insurance. By specializing in that industry, Guidewire, which was established in 2001 and began offering publicly traded shares of stock last year, is able to convince insurers to replace their outdated systems for tasks ranging from underwriting and policy administration to billing and claims management. Guidewire, based in Foster City, California, has more than 100 clients, including such major players as Amica, Nationwide, Hartford Mutual Insurance Companies and Zurich Insurance, but it has barely penetrated the $15-­billion-a-year market for insurance software and ­information-technology services, leaving plenty of room for growth. Most of the 7,000 major insurers around the world still use homegrown software. Guidewire also is expanding its consulting services, analyzing insurance customer and company performance data to help improve pricing and efficiency in writing policies, dispatching adjusters and settling claims. Recent share price: $46.76.

Illumina (ILMN) is the leading manufacturer of instruments, test kits and supplies used by scientists and research laboratories for DNA analysis and genetic testing, including screening for cancer and prenatal testing. The San Diego–based company often is referred to as the Apple of the genomics industry. About 90% of the world’s DNA sequencing is now done on ­Illumina machines, and the company is trying to become a one-stop shop for all genetic research needs. This is the largest position in my portfolio because I think Illumina will play a major role as the health-care industry around the world moves toward personalized medicine, which involves designing drugs to target specific mutations of diseases based on a person’s own DNA. Recent share price: $83.52.

Xoom Corp. (XOOM) is a pioneer in international money transfer, offering a faster, more convenient way to send money to family and friends via the Internet or mobile phone at any time. Customers, often professional workers who migrate to the US from developing nations and regularly send cash back home, can wire money from their bank accounts, credit cards or PayPal accounts to recipients’ cell phones in 30 countries on six continents. Recipients can then withdraw the cash at participating stores or banks. Recent share price: $31.48.

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