Innovation in firms can come in different ways, such as organizational, technical, product or process innovation. Equity markets in the U.S. and globally offer access to a wide range of innovative companies. Therefore today, we will look at several innovative stocks and exchange-traded funds that hold them, so that investors can put in their shopping list.
A recent study conducted for the Asian Development Bank Institute by Shai Bernstein of Stanford University states that “public equity markets play an important role in innovation and entrepreneurial ecosystems … Indeed, since 1980, more than 40% of the firms that went public and transitioned to public equity markets in the United States were technology firms.”
Professor Shai continues, “Public equity markets affect the innovation process through various dimensions. Maybe the most important role is in the provision of capital to fast-growing companies. While alleviating financing constraints through public equity markets might be important for all young firms, this might be particularly true in the case of technology firms.”
Academic research also highlights the importance of leadership in innovative companies whereby. Simply put, the role management plays in the success of innovative stocks is significant.
Times of uncertainty, as we have been experiencing in 2020, are usually conducive to innovation. In fact, we have recently seen a wide range of young companies go public, either via IPOs or reverse-mergers with special purpose acquisition companies (SPACs). More established companies are increasingly looking for ways to accommodate the evolving needs of consumers during the pandemic.
With that information, here are seven innovative stocks to buy (as well as some ETFs that focus on innovative companies):
- Cognex (NASDAQ:CGNX)
- Fiverr International (NYSE:FVRR)
- Global X Internet of Things ETF (NASDAQ:SNSR)
- Phreesia (NYSE:PHR)
- ROBO Global Healthcare Technology and Innovation ETF (NYSEARCA:HTEC)
- SPDR S&P Kensho New Economies Composite ETF (NYSEARCA:KOMP)
- Vanguard Russell 2000 Growth ETF (NASDAQ:VTWG)
Innovative Stocks to Buy: Cognex (CGNX)
52-Week range: $35.20 – $71.76
Dividend yield: 0.33%
Cognex provides machine vision systems. These automation enabler products capture and analyze visual information. As a result, tasks, especially in manufacturing processes, can be automated. Such products include “lighting, lens, image sensor, vision processing, and communications.”
In late July, the company reported Q2 financial results that were not strong. Revenue came in at $169.1 million, marking a 15% YoY decline. As a result, net loss per diluted share was 1 cent, as opposed to an earnings per share of 28 cents a year ago.
During the quarter, revenue from sales to clients in the automotive industry, the company’s largest market, suffered a substantial decline. Sales in consumer electronics also felt the adverse effects of the pandemic on operations. On the other hand, growth in logistics was promising. Analysts concurred that the subdued results were in line with results from industrial companies.
Although he was not happy with the current quarter, Chairman Dr. Robert J. Shillman expressed optimism for the next quarter. He commented, “Order activity was strong during Q2 in both the consumer electronics and e-commerce markets, and we believe that bodes well for revenue in Q3. As a result, we expect to report growth next quarter on both a year-on-year and sequential basis despite tepid demand in the broader factory automation market.”
Year to date, CGNX stock is up about 19%. Potential investors may want to stay on the sidelines until the company reports Q3 metrics in a few weeks. We would look to buy if the price dips toward $60.
Fiverr International (FVRR)
52-Week range: $19.32 – $158.71
Israel-based Fiverr International is well-known as the operator of an online platform to connect businesses with freelancers. There are over 200 work and service categories, ranging from graphic design to digital marketing, programming, video and animation. Freelancers and customers span across the globe.
For some companies, the pandemic meant they were at the right place at the right time. Fiverr has been one of them since many people have been looking for alternative means of employment globally. In early August, the group released Q2 results. Revenue came in at $47.1 million, an increase of 82% year over year.
Spend per buyer was $184, compared to $157 in Q2 2019, an increase of 18% year over year. Active buyers hit 2.8 million, compared to 2.2 million a year ago. Analysts were also pleased with this increase of 28% YoY.
Although the metrics showed a quarterly adjusted EBITDA profitability for the first time ever, GAAP net loss in Q2 was $100,000. However, it compared well with the GAAP net loss of $9.4 million a year ago.
CEO Micha Kaufman said, “Fiverr has reached an inflection point in Q2, having achieved Adjusted EBITDA profitability and brought our topline scale to the next level. While the global macroeconomic conditions remain highly uncertain, we are confident that our business model, strong execution ability and financial discipline will continue to drive our growth forward.”
Investors have been thrilled with the pace operations in 2020 and the FVRR share price is up over 560%. In fact, the shares hit an all-time high on Oct. 6. Given the volatility in broader markets during this earning season, we’d look to buy this innovative stock if there is a decline toward the $140-level.
Global X Internet of Things ETF (SNSR)
52-Week Range: 14.81-27.87
Dividend Yield: 0.71%
Expense Ratio: 0.68%, or $68 annually per $10,000 invested
The past few years have seen many devices increasingly connect to the internet. Household items such as appliances, TVs, doorbells or lightbulbs now feature connectivity. The way humans interact with tech-enabled devices is changing fast. With the 5G technology underway, we can expect innovative companies to play a leading role in the Internet of Things (IoT).
According to IBM (NYSE:IBM), IoT “is the concept of connecting any device (so long as it has an on/off switch) to the Internet and to other connected devices … The information picked up by connected devices enables me to make smart decisions … Smart objects and systems mean you can automate certain tasks, particularly when these are repetitive, mundane, time-consuming or even dangerous.”
If you are interested in having exposure to innovative stocks with high growth potential in the IoT space, then you may consider researching an exchange-traded fund (ETF), i.e., the Global X Internet of Things ETF. The fund, which tracks the Indxx Global Internet of Things Thematic Index, has 47 holdings.
The top sector allocation is Information Technology (57.5%), followed by Industrials (29.7%), Consumer Discretionary (7.0%) and Healthcare (5.7%). The top ten holdings constitute over half of SNSR’s net assets, which stand around $240 million. About half of the companies are U.S-based. Others come from Switzerland, Taiwan, Austria, the U.K. and France, among others.
Switzerland-based chipmaker STMicroelectronics (NYSE:STM), Irvine, California-headquartered semiconductor firm Skyworks Solutions (NASDAQ:SWKS) and Taiwan-based Advantech, which offers IoT hardware and software solutions, top the list of companies in the ETF.
YTD, the fund is up about 13%. We’d look to buy below $25.
52-week range: $16.01 – $34.85
Phreesia offers healthcare organizations a range of software applications to manage customized patient intake and process payments. Through these applications, clients can work through set appointments, register new patients, conduct surveys, take payments, create reports and analyze data.
In early September, the company released fiscal second-quarter 2021 results. Revenue of $35 million meant a YoY increase of 14%. The number of provider clients as well as the average revenue per client also went up by 7% and 5% YoY. Diluted net loss was 17 cents per share, compared to a net loss of $10.42 a year ago. Investors were pleased with the metrics.
Although CEO Chaim Indig was upbeat about the results, management could not provide a forecast for financial and operating metrics for the rest of fiscal 2021.
Since the start of the year, PHR stock is up about 18%. Given the industry’s developments as a result of the novel coronavirus pandemic, the healthcare software company could easily become a takeover candidate. We regard a drop below toward $27.5 as a potential entry-point into the shares of this innovative stock.
ROBO Global Healthcare Technology and Innovation ETF (HTEC)
52-Week Range: $19.55 – $36.23
Expense Ratio: 0.68%
Our discussion continues with an ETF in healthcare, a sector that many investors regard as defensive and possibly somewhat boring. However, technology and innovation are increasingly changing the way the industry operates and develops. From artificial intelligence (AI)-enabled diagnostics to robotics surgery and 3D bioprinting, innovation is sweeping healthcare. For some investors, the ROBO Global Healthcare Technology and Innovation ETF could be a vehicle to capitalize on that trend.
HTEC, which has 85 holdings, tracks the ROBO Global Healthcare Technology and Innovation Index. It started trading in June 2019 and currently has about $50 million in net assets. The top ten firms constitute about 18% of the fund. As no company has a weighting over 2.1%, short-term fluctuations in the price of a single stock are unlikely to affect the value of the ETF.
Genetic-testing firm Fulgent Genetics (NASDAQ:FLGT), commercial-stage oncology company Novocure (NASDAQ:NVCR) and Quidel (NASDAQ:QDEL), which develops diagnostics tests, top the list of HTEC. A closer inspection of the holdings show that the fund is heavily tilted toward biotechnology, life science and medical technology forms.
YTD, HTEC is up 34%. Despite potential short-term pull-backs, we expect many companies in the fund to continue to do well in the coming quarters.
SPDR S&P Kensho New Economies Composite ETF (KOMP)
52-Week Range: $23.66-$45.37
Dividend Yield: 0.60%
Expense Ratio: 0.20%
One of the buzzwords of 2020 has been the “new normal,” which encompasses a wide range of trends from social-distancing to increased use of technology in every aspect of life. Now, we look at another exchange-traded fund that may be appropriate as innovation becomes the name of the game in the new economy.
The SPDR S&P Kensho New Economies Composite ETF provides exposure to U.S.-listed innovative stocks that are based in both developed and emerging markets. These businesses are likely to be part of the current technological revolution in robotics, AI and automation. KOMP, which has 396 holdings, follows the S&P Kensho New Economies Composite Index.
The fund started trading in October 2018 and has about $1.2 billion under management. The top sector allocations are Application Software (7,46%), Semiconductors (7,03%), Aerospace & Defense (5,84%), Electrical Components & Equipment (5,66%), Automobile Manufacturers (5,31%) and Interactive Media & Services (5,21%). Currently, no stock has a weighting of over $1.9% and the top ten holdings constitute around 13% of net assets. NIO (NYSE:NIO), Overstock.com (NASDAQ:OSTK) and Workhorse (NASDAQ:WKHS) head the current list of holdings.
So far in the year, KOMP is up over 23% and hit an all-time high on Oct. 6. The next few weeks may bring volatility to broader markets and many stocks in the fund. Thus, short-term profit-taking is possible, which would mean a better entry point for long-term investors.
Vanguard Russell 2000 Growth ETF (VTWG)
52-Week Range: $94.30 – $171.50
Dividend Yield: 0.79%
Expense Ratio: 0.15%
Our final discussion centers around the Vanguard Russell 2000 Growth ETF, which provides exposure innovative growth stocks in the Russell 2000 index. In the U.S., the Russell 3000 index, represents around 98% of the investable U.S. equity market. And most investors regard the large-cap Russell 1000 index and the small-cap Russell 2000 as two of the most important U.S. indices.
VTWG, which has 1122 holdings, tracks the Russell 2000 Growth Index. The ten largest stocks make up about 6.2% of net assets, which stand at $870 million. Racing, gaming and online entertainment company Churchill Downs (NASDAQ:CHDN), residential solar energy group Sunrun (NASDAQ:RUN) and LHC (NASDAQ:LHCG), which provides post-acute healthcare services to patients, top the list of holdings. In terms of industry weightings, the fund is is invested in Healthcare (32.20%), Technology (20.30%), Consumer Discretionary (14.40%), Producer Durables (10.90%) and Financial Services (8.70%).
YTD, the fund has increased 8% and hit an all-time high on Oct. 6. Investing after a potential decline toward $155 would improve the margin of safety for long-term investors.
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.