2020 has brought uncertainty to personal and professional lives. Yet, it has also seen new trends emerge, such as “stay-at-home” and “work-from-home.” Companies that have been able to adjust to these new realities, as well as those that innovate, have seen their share prices soar to new highs. Today, we’ll discuss seven innovative stocks with their eyes on the future.
The Organisation for Economic Co-operation and Development (OECD) defines innovation as “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations.”
Innovation typically begins with an idea, sometimes a simple one. Then entrepreneurship at the firm level develops it further and adds value. Finally comes commercializing it to generate revenue and profit. Innovation is important not just for companies, but also for the society at large. Recent research by Nicholas Bloom and Heidi Williams of Stanford University and John Massachusetts Institute of Technology highlights, “Innovation is the only way for the most developed countries to secure sustainable long-run productivity growth.”
McKinsey suggests many businesses appreciate how important it is to innovate. Yet management usually falls short when it comes to execution. With that information, here are seven innovative stocks that could benefit long-term portfolios in the new decade:
- ETFMG Prime Mobile Payments ETF (NYSEARCA:IPAY)
- Intuitive Surgical (NASDAQ:ISRG)
- Invesco S&P Spin-Off ETF (NYSEARCA:CSD)
- Nvidia (NASDAQ:NVDA)
- Renaissance International IPO ETF (NYSEARCA:IPOS)
- SPDR FactSet Innovative Technology ETF (NYSEARCA:XITK)
- VictoryShares Nasdaq Next 50 ETF (NASDAQ:QQQN)
Innovative Stocks: ETFMG Prime Mobile Payments ETF (IPAY)
52-Week Range: $30.56-$57.82
Expense Ratio: 0.75%
Our first choice is an exchange-traded fund (ETF), specializing on the mobile payments industry. We’re witnessing a transition taking place from cash/physical credit card payments to a mobile/digital system. The sector — which benefits from increased e-commerce transactions, use of smartphones and the need for convenience in transactions — is expected to grow from $1.1 trillion in 2019 to around $4.7 trillion in 2025. The Asia Pacific region is the fastest growing region for the industry.
The ETFMG Prime Mobile Payments ETF provides exposure to companies that are playing a leading role in the shift from credit card and cash transactions to digital and electronic systems. These businesses focus on credit card networks, payment infrastructure, software services, payment processing services, and payment solutions (such as smartcards, prepaid cards, virtual wallets).
IPAY, which has 41 holdings, tracks the Prime Mobile Payments Index. Its sector allocation is Data Processing & Outsourced Services (81.7%), Consumer Finance (10.8%), Electronic Equipment & Instruments (2.8%), Application Software (2%), Technology Hardware, Storage & Peripherals (1.7%) and Diversified Support Services (0.3%).
The top 10 holdings constitute over 54% of IPAY’s net assets, which stand close to $800 million. Square (NASDAQ:SQ), Fiserv (NASDAQ:FISV) and Paypal (NASDAQ:PYPL) top the list of companies. In terms of country exposure, the U.S. tops the list, followed by Brazil, France, the Netherlands, Australia and Japan.
Year-to-date, this innovative stocks fund is up 9.9% and hit an all-time high in early September. I’d look to buy the dips, especially if the price declines toward $45.
Intuitive Surgical (ISRG)
52-Week Range: $360.50 – $778.83
Sunnyvale, California-headquartered Intuitive Surgical is a global leader in minimally invasive care. The company is also credited as the pioneer of robotic-assisted surgery that aims make surgeries more effective and less invasive and easier. Its “da Vinci surgical system” and the “Ion endoluminal system” are used extensively by hospitals and medical professionals worldwide.
For example, the da Vinci system offers surgeons high-definition 3D vision and magnified views, as well as robotic and computer assistance. Through specialized instrumentation (such as miniaturized surgical camera or wristed instruments, i.e., scissors, scalpels and forceps), precise dissection and reconstruction deep inside the body become possible.
In late July, the group released second-quarter results. Revenue of $852 million meant a decrease of 22% year over year. Management highlighted the decline in surgical procedures and systems placements due to the substantial disruption caused by Covid-19, while “healthcare systems around the world diverted resources to meet the increasing demands of managing” the pandemic.
Quarterly net income of $68 million translated into 57 cents per diluted share. The metrics had been $318 million, or $2.67 per diluted share, in the second quarter of 2019. It ended the second quarter with almost $6.1 billion in cash and cash equivalents. The number had been about $5.8 billion as of December 31, 2019.
CEO Gary Guthart sounded optimistic and emphasized the company’s commitment to innovation to “advance minimally invasive care and to address the long-term need to improve patient outcomes.” However, the company was not able to provide a financial outlook for the rest of the year.
Year to date, the shares have gone up by 17%. As a result, forward price-earnings and price-sales ratios stand at 50 and 18, respectively. A potential price decline toward the $600 level would offer a better margin of safety.
Invesco S&P Spin-Off ETF (CSD)
52 Week Range: $21.65 – $50.94
Expense Ratio: 0.62%
Next in this innovative stocks list, we focus on corporate spinoffs as a source for innovation. Emilie Feldman of The Wharton School, University of Pennsylvania defines corporate spinoff as a type of divestiture in which a “parent firm” distributes shares in one of its business units pro rata to its shareholders, resulting in the creation of a spinoff firm.
In other research led by John Hagedoorn of Royal Holloway University of London, we see “evidence that in general alliances of spin-offs with other firms, in particular alliances with large firms, increased their innovation performance.”
The Invesco S&P Spin-Off ETF provides exposure to businesses that have been spun off from larger corporations within the past four years. CSD, which has 33 holdings, follows the S&P U.S. Spin-Off Index.
The sector allocation is Industrials (28.3%), Consumer Discretionary (25.5%), Materials (16.9%), Consumer Staples (8.1%), Real Estate (5.6%), Energy (5%), Information Technology (3.2%), Financials (2.5%), Healthcare (2.8%) and Communication Services (1.8%).
The top 10 holdings constitute over half of CSD’s net assets, which stand around $60 million. Penn National Gaming (NASDAQ:PENN), Lamb Weston Holdings (NYSE:LW) and Otis Worldwide (NYSE:OTIS) head the list of companies in the fund. In terms of country focus, 98.47% of the companies are U.S.-based. The two other countries are Sweden and Switzerland.
So far in the year, CSD is down close to 15%. If you are an investor interested in innovative stocks who also follows technical charts, you may be interested to know that, a fall toward the $37.50 is possible in the short-run. Long-term investors may find it an acceptable point of entry from a risk/return profile.
52-Week Range: $170.13 – $589.07
Santa Clara, California-based Nvidia develops graphics and mobile processors for personal computers, workstations and wireless devices such as tablets and phones. In August, the company announced Q2 results, which saw a record revenue of $3.87 billion, a year-over-year gain of 50%. It was also up 26% from $3.08 billion in the previous quarter. Non-GAAP earnings per diluted share were $2.18, up 76% from $1.24 a year earlier, and up 21% from $1.80 in the previous quarter.
Nvidia sells two main products: graphics processing units (GPU) and Tegra processors. The GPUs are used in PCs and data centers. Tegra is a system-on-a-chip (SoC) suite developed by Nvidia for mobile devices. The company divides revenue into four segments:
- Data center (revenue was $1.75 billion, up 167% year over year);
- Gaming (revenue was $1.65 billion, up 26% year over year);
- Professional visualization (revenue was $203 million, down 30% year over year); and
- Automotive (Second-quarter revenue was $111 million, down 47% year over year).
As the numbers highlight, the data center segment is the most important one, followed by gaming. The recent growth in data center is thanks to the revenue contribution by Mellanox Technologies, which Nvidia has acquired. In fact, Nvidia is possibly best known as among gamers for its superior chips.
Its GPUs have earned a superior reputation compared to competing products, especially within the gaming industry. GPUs accelerate central processing units (CPUs), boosting the performance of video and graphics and improving a computer’s overall performance.
CEO Jensen Huang said, “Adoption of NVIDIA computing is accelerating, driving record revenue and exceptional growth. Growth in GeForce gaming accelerated as gamers increasingly immerse themselves in realistic virtual worlds created by NVIDIA RTX ray tracing and AI.”
YTD, Nvidia shares have more than doubled. In fact, on Sept. 2, they hit an all-time high of $589.07. Since then NVDA stock has come under pressure, along with the rest of the markets, especially tech shares. Potential investors may regard any drop toward the $450 level or below as a possible entry signal for the long-run.
Renaissance International IPO ETF (IPOS)
52-Week Range: $19.14 – $35.93
Expense ratio: 0.8%
Our next discussion centers around innovative businesses outside our borders. The Renaissance International IPO ETF gives exposure to a range of non-U.S.-listed newly public companies. According to Shai Bernstein of Stanford University, going public allows firms to “attract new human capital and acquire external innovations.”
The Global Innovation Index (GII) offers “metrics about the innovation performance of 131 countries and economies around the world.” Switzerland, Sweden, and the U.S. lead the list for the high-income countries. In the next tier, i.e., upper-middle income economies, China has the first place.
IPOS, which has 40 holdings, tracks the Renaissance International IPO index. In terms of sector allocation, Technology (20.6%), Consumer Services (18.9%), Healthcare (14.5%), Industrials (14.3%) and Financials (10.8%) head the list.
The top 10 companies comprise over 60% of the fund. Meituan Dianping (OTCMKTS:MPNGF), Xiaomi (OTCMKTS:XIACF), and SoftBank (OTCMKTS:SFTBY) are the top three holdings. China holds the highest weighting (over 53%) in IPOS, followed by Japan, Germany, Italy and Switzerland.
Since the beginning of the year, the fund has returned over 30%. I’d consider buying the dips.
SPDR FactSet Innovative Technology ETF (XITK)
52-Week Range: $81.50 – $183.95
Expense Ratio: 0.45%
The SPDR FactSet Innovative Technology ETF provides exposure to innovative stocks in the technology sector (including electronic media businesses) with robust revenue growth, and that may provide leading-edge products and services. For example, the pandemic has shown us how “big data, artificial intelligence, and other technologies are fueling a wave of health innovations around the world.”
XITK, which has 95 holdings, tracks the FactSet Innovative Technology Index. Top sector allocations includes Enterprise Management Software (17.2%), Web-Based Data And Services (15%), IT Infrastructure Software (14.4%), Home and Office Software (7.4%), Games Software (7.3%) and Consumer Data And Services (6.5%).
The top 10 holdings constitute around 20% of XITK’s net assets, which stand at $240 million. Zoom Video Communication (NASDAQ:ZM), Digital Turbine (NASDAQ:APPS) and Sea (NYSE:SE) are the top three companies in the fund.
So far in 2020, XITK is up almost 50% and hit an all-time high on Sept. 2. Long-term investors may regard declines of around 5%-7% as an opportunity to have a better entry point. I believe the fund deserves to be on your shopping list of innovative stocks.
VictoryShares Nasdaq Next 50 ETF (QQQN)
52-Week Range: $24.87 – $26.16
Expense Ratio: 0.18%
Innovation is a significant angle in companies’ efforts to gain competitive advantage. Lampros Pettas and colleagues highlight that innovation “can take one of the following five forms: the
introduction of a new product or product with qualitative improvements, the introduction of a new
production method, the launching of a new market, the supply of raw materials from a new source and the establishment of a new form of organization.”
I believe the final choice for today’s discussion, i.e., the VictoryShares Nasdaq Next 50 ETF, may be appropriate to research innovative stocks as per this definition. QQQN offers exposure to 50 stocks that are next in line for inclusion in the Nasdaq-100 Index. Fund Managers highlight their conviction that these firms are the new generation of innovators as they are forward-thinking and disruptive.
The ETF begins with all companies, both domestic and foreign, that are listed on the Nasdaq stock exchange and then removes all companies classified as financials. Finally, it selects the largest 50 companies, based on market capitalization (cap), that are not currently in the Nasdaq-100 Index.
Marvell Technology (NASDAQ:MRVL), Okta (NASDAQ:OKTA) and Atlassian (NASDAQ:TEAM) are the top three holdings. In terms of sector weightings, Information Technology heads the list with 45.73%. Next in line are Healthcare, Industrials, and Consumer Discretionary. QQQN allocates about 30% of net assets to the top 10 constituents.
I have to highlight that this is a young fund, launched only on Sept. 10. Therefore, there is not enough trading data to make a solid assessment. For now, investors may want to keep QQQN on their radar screen.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.