Human Capital/Culture–These intangible assets are the secret sauce for sustainable growth, especially for new-economy businesses, many ranked among the “Best Companies to Work For.” Both categories of intangibles contain factors with measurable cause-effect; higher employee satisfaction leads to better motivation and retention, which independent studies show directly translate to higher productivity, lower turnover and stronger customer loyalty.
Gauging human capital and culture is also where third-party sources, such as Glassdoor and LinkedIn, are highly effective when objectively interpreted. For instance, we have discovered that the sharpest Glassdoor predictor for stock performance is tied to its “outlook” rating, followed by factors like CEO approval (way up after Microsoft’s Satya Nadella replaced Steve Ballmer), work-life balance and the overall rating. In our view, these natural language measures of how those on the inside think and feel can be harnessed into objective indicators of profitability and return consistency.
Research & Development (R&D)–The generally accepted definition of R&D likens it to expenses to search for or discover “new knowledge.” But we believe investments in R&D can offer much stronger signals, and their added value can be quantified beyond just the pursuit of ideas or concepts. We have found that businesses that spend more on R&D end up more profitable—and for longer periods. And such firms tend to have persistent and predictable fundamentals, such as lower debt, higher growth potential, better profitability and positive market sentiment.
Patents–Beyond legal protections, a patent’s value is often the most underappreciated of all intangible assets. Patents are usually overlooked because they’re generally owned by the firm, and not recorded in financial statements. Yet, hundreds of patents are issued every year to companies ranging from information technology to industrials, according to PatSnap. Half of the stocks in the Russell 1000 Index have at least one patent, and some have dozens—each one reinforcing the barriers to entry from competitors, improving internal efficiencies and defending long-term profitability.
Brand–A company’s brand is valuable beyond just golden arches, red circles and other iconic monikers. But as an asset, brand is often mispriced by the market—especially in the short term—which creates opportunities for defensive investors who take a longer view.
Brand assets can be evaluated by looking at advertising costs, typically over the last five years. That might sound counterintuitive, because brand expenses hit a company’s annual financial statement. However, the benefits of advertising and promotion have lasting power—especially if they’re well-spent dollars. That’s why fundamental research of brand spending can be a leading indicator of top-line growth in consumer loyalty, which fuels revenues and helps stability.
COVID-19 didn’t change the nature of intangible assets—we’ve long appreciated their importance to active fundamental stock analysis. And we’re not suggesting they’re recession proof; very few stocks are. But in an unpredictable market, paying as much attention to intangible assets as to traditional defensive stocks can help investors broadly source stocks capable of reducing volatility in equity portfolios.
