The young, little-known companies that Laird Bieger picks for the mutual fund he comanages like to shake things up a lot. They don’t offer just a slightly better product or cheaper service than competitors do. Their innovations actually disrupt how industries operate, tapping into powerful emerging trends and offering customers something brand new that may quickly become essential to their lives or businesses. And they offer attractive opportunities for investors who are willing to take a chance on stocks that largely fly under the radar.
Among the products and services these companies provide: A long-lasting, nonaddictive drug for knee arthritis pain…microchips the size of grains of sand that allow businesses to tag and track millions of items…and virtual doctors who can treat you almost anytime and anywhere. Several of the stocks held by Bieger’s Baron Discovery Fund have doubled in price just this year…but they have plenty of room for further gains.
Bottom Line Personal asked Bieger how to identify disruptive companies and which stocks he thinks are most attractive now…
Spotting Disruptive Companies
Disruptive companies can be found in many sectors, ranging from the auto industry (Tesla) and retail (Amazon.com) to lodging (Airbnb) and transportation (Uber). My comanager, Randy Gwirtzman, and I also have discovered companies transforming industries such as advertising, defense contracting and health care. As a result, the stocks have the potential to double over the next five years.
Characteristics I look for in these companies…
They are tiny and overlooked by Wall Street analysts. It’s hard for small investors to gain an edge investing in large, well-known companies. About 40% of my portfolio is in stocks with total market values of $500 million or less—considered very small by today’s standards for publicly traded companies.
Each company has a unique and enduring competitive advantage and a huge potential market for its products and/or services. Biotech companies possess patents on their drugs and treatments. Other businesses have what I call “first mover” status. They helped create their market niches, and it will take competitors years and enormous sums of capital to challenge them. Many first movers end up being bought by huge corporations that are willing to pay a 50% premium above the share price.
Reality check: As promising as these disruptive companies are, they should be reserved for the most aggressive part of your investment portfolio because they carry higher risk than larger companies do.
My Favorite Disruptive Companies
These five stocks all have the characteristics described above. Owning one or more can help boost your long-term portfolio returns.
• Flexion Therapeutics (FLXN). In 2015, more than 14 million Americans were diagnosed with osteoarthritis of the knee, and there are no safe and effective and long-lasting treatment options short of knee replacement. This small biotech firm’s only drug, Zilretta, has completed clinical trials for treatment of knee arthritis pain and has been awaiting likely FDA approval, which could reshape the standard of care in the $5 billion osteoarthritis-treatment market. The nonaddictive corticosteroid is injected into the site of the pain where a patented slow-release formula provides patients with pain reduction that is not only superior to that of traditional, once-a-month steroid shots but also has fewer side effects and lasts three to four months. Recent share price: $23.76.
• Impinj (PI). Radio-frequency identification (RFID) uses microchips that transmit radio signals to automatically identify and track the objects they’re attached to, ranging from clothing in stores and products in warehouses to hospital supplies, wandering pets and baggage at airports. The concept has been around for a few decades and always had enormous potential, but the cost of the chips was prohibitive. Impinj, which has more than 200 patents on its RFID technology, has been able to reduce the price to just pennies per microchip, and its microchips don’t need batteries because they power themselves from the base scanner’s wireless signal. The company controls 60% of the RFID-chip market and expects to ship 7.1 billion chips this year to clients ranging from Delta Airlines to the University of Tennessee Medical Center and United Technologies. Recent share price: $36.98.
• Mercury Systems (MRCY). It’s fairly certain that US defense spending will rise in the coming years—but how the money will be spent will change dramatically. The military is becoming less reliant on large-scale deployment of troops and focusing instead on electronic warfare. Mercury Systems, whose customers include the 25 top US defense contractors, is a leading supplier of proprietary circuit boards and electric subsystems that are critical to the defensive Patriot missile system, military drones and the navy’s antiship missiles. The company, with more than $400 million in annual revenue for the fiscal year ending June 30, 2017, controls about 15% of the defense electronics manufacturing market and has substantial opportunities for revenue growth. Recent share price: $47.62.
• Teladoc (TDOC). Health-care providers treating patients remotely over mobile devices and the Internet have the potential to become a $30 billion market. Patients get to “see” a doctor within minutes and can have drugs prescribed. And health-care costs for insurers and consumers are substantially lower. Teladoc, the nation’s leading provider of remote medicine by telephone and video conference, expects to connect 1.5 million doctor/patient visits this year, mostly for ailments such as colds, flu, earaches and skin rashes as well as behavioral therapy and smoking cessation. While Teladoc’s technology isn’t proprietary, the 15-year-old company controls 75% of the market including business from corporate clients such as Bank of America and PepsiCo. It draws on a network of more than 3,000 board-certified physicians and other health professionals. Recent share price: $33.
• The Trade Desk (TTD). Many of the ads that you see on your screen when you visit websites are the result of auctions among advertisers taking place in fractions of a second. This is known as programmatic advertising, a field that’s expected to grow by about 30% annually over the next five years. It’s a more cost-effective way for advertisers to target the right ad for a particular consumer, and it’s a radical departure from traditional ad buying—a field that is struggling because of the shift by marketers to online ads. The Trade Desk designs the software program that advertisers use to bid online for ad space. The software allows them to use preset criteria tailored to their budgets and strategies and to automate the entire process. The Trade Desk is likely to generate an industry-leading $320 million in revenue this year. Recent share price: $56.23.