New study shows US small caps reaping IP dividends 20 Apr 10
The IP investment bank MDB Capital Group has produced a study that it claims shows there is a predictive correlation between the strength of a company’s intellectual property and its revenue growth, gross margin and risk adjusted investment return.
The study is based on a trawl of the bank's PatentVest database, which covers 4,000 publicly quoted companies and contains information on four million granted US patents and a further two million applications. MDB scanned PatentVest to select the 100 companies which, according to its criteria, have the strongest patent portfolios, or highest tech score (HTS). It then contrasted their performance with the 100 companies which produced the lowest tech score (LTS). Among the key findings were the following:
• Superior risk-adjusted returns. Mean market return (52 week % price change) for HTS companies was two-times higher than LTS companies and nearly three-times greater than the Russell 2000. One year risk-adjusted return, or alpha, for HTS companies was 44%, compared to -7% for LTS companies with nearly identical measures of market risk, or beta.
• Increased market share. HTS companies were able to increase revenue during a period of flat GDP growth, suggesting market share gains at the expense of less innovative peers. Compared to US GDP growth in 2009 of +0.8%, HTS companies averaged +1.1% revenue growth versus an average of -9.3% for LTS companies during the same period.
• Increased pricing power. Technology leadership appeared to command a pricing premium, yielding 33% higher gross margins for HTS companies versus LTS companies.
According to the study, "patent grants were nearly 2x higher (57 vs 30) and patent applications 35% higher (22 vs 16) for HTS vs LTS companies".
Essentially, therefore, what we are being told is that small companies that spend most on R&D tend to invest most in the creation of quality patents and generate better returns, both in terms of stock price and revenues. It's not brain surgery, you would expect that to be the case - but expecting it is very different to being able to demonstrate it.
Of course, MDB has a product to sell and a certain way of looking at the world, but their message is one that will resonate with a great many people who read this blog. Namely: if you are an investor interested in the small cap technology sector, make sure you look at R&D spending levels and the quality of the patents that result from them; if you fail to do so, you may well miss a trick. And if you are an executive at such a company, the money you put into securing a quality patent portfolio could well pay dividends, all other things being equal.
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