Innovation Provides Longevity in Tough Markets

Includes: AMZN, GE, MC-OLD, PG, V, WMT
by: Andrew Mickey

The market was surprised again last week, when Visa (NYSE:V) released its results from the last quarter. Visa’s earnings climbed 35% in the final quarter of 2008, which is not bad considering the U.S. GDP is declining at a rate of about 1% per quarter.

Of course, expectations for Visa’s results were pretty low. Plenty of investors must have thought, how could Visa be doing well? I thought consumers were spending less.

It makes sense on the surface. Declines in spending will surely have an impact on companies, which make money off spending, but here’s the thing, “paying with plastic” is still growing. In year-over-year terms, Visa reported growth in payment volume (12%); total cards issued (10%), and total transactions (14%). That kind of growth easily offset a small decline in total spending around the world.

The Wall Street Journal sums it up as,

The rise in the number of transactions, even as spending falls, was due to the continued transition to debit cards instead of cash. Meanwhile, consumers in distress are using plastic to manage their cash flow.

It’s all about market share, and the likes of Visa and MasterCard (MC-OLD) are winning market share. Their top competitor is cash, and as consumers use less cash and use more plastic (not necessarily credit, Visa and MasterCard aren’t lenders, they’re payment processors) they’ll continue to grow. In a downturn like this, they’ll still grow, but just not as fast.

Visa is just one example of success here. Amazon (NASDAQ:AMZN) proved its ability to grow by providing an online alternative for shoppers. It showed that by providing deep discounts, it could grow in the face of the worst retail market in decades. There are dozens more companies just like it, so the big question is, when to buy?

What makes a company a survivor? The answer is innovation. It’s the lifeblood of a business, and it’s even more important during tough times. Just look at General Electric (NYSE:GE) and Woolworth’s. GE is still going strong after more than a century in business, because it has successfully innovated from light bulbs to appliances to locomotives to nuclear reactors. It has had a rough go of it during the financial crisis due to problems at its financial division, but it will survive.

Woolworth’s is a completely different story. It failed to innovate, and couldn’t keep up with an innovator like Wal-Mart (NYSE:WMT). Woolworth’s was a Dow component up until about 12 years ago, and now, it’s just a shell of its former self.

When it comes to innovation, there aren’t many companies better than Proctor & Gamble (NYSE:PG) are. It launched the first heavy-duty laundry detergent (Tide), the first disposable diaper (Pampers), and the first ant-dandruff shampoo (Head & Shoulders), among dozens of other “firsts.” That’s how it has stayed ahead of the pack for 171 years.

A.G Lafley, CEO of Proctor & Gamble, writes in his most recent letter to shareholders:

We also involve external innovation partners to turbo-charge P&G’s internal innovative capability — an approach we call “Connect and Develop.” Six years ago, only 15% of our product initiatives included innovation from outside P&G. Today, more than half of all P&G innovation includes an external partner. In just the past year, we evaluated more than 5,000 innovation opportunities from small entrepreneurs, universities, research institutes, and large companies. This is a fourfold increase over the number of external innovations we were considering at the beginning of the decade.

As you can see, staying ahead takes a lot of work, and frankly, it takes a lot of work to uncover the early innovators. If you want to uncover the stocks, you can hold forever and who deliver 10%, 20%, and 30% per year, like the Wal-Marts and Procter & Gambles of the world, there’s never been a better time to start hunting.

Right now, it seems like everyone in the world is calling for a depression – the worst possible scenario. A few others (like us) will take this time to find the true opportunities and figure out whom the innovators are now. That’s the best thing to do in a bear market and we’ll be well rewarded, whether we’re in for a long recession or a depression.

My biggest investment wins have come from thinking of “crazy” ideas like this. I bought my first oil stocks in 1999 and loaded up on water during the tech crash.

Disclosure: None