Future Innovation Is Undervalued

Oct.25.10 | About: VanEck Vectors (BBH)

By Elliot Turner

Last week at the home of a pre-election fundraiser hosted by Google (NASDAQ:GOOG) Executive Marissa Meyer, President Obama was quoted as saying that Google “spoke to the….American idea, that if we’re innovating, if people have the tools to let their imaginations run, then there’s nothing we can’t do in this country.” President Obama continued by saying that over the past “decade…that can do spirit had been lost” and it’s his task is to alleviate the issues “that have prevented more Googles from being created” (Source: Business Insider).

Bespoke Investment Group wrote an interesting followup entitled “What Lack of Innovation?” in which they pointed out the emergence of Apple (NASDAQ:AAPL) as a tech behemoth following the iPod launch in 2001, the rise of Facebook as a groundbreaking social media tool and YouTube as an innovative means through which to share and watch video. Included in the post was a graph highlighting the growth in patent applications over the past ten years. A common theme in my writing at the WSCS (check out my first post here) is the emergence of many new innovations and companies that are facilitating quality of life and efficiency gains. I have argued over and again that there is way more to the cost cutting at US corporations than just layoffs. People and companies are now using the Web in innovative ways, that have emerged since the initial rise of the Internet.

This is all well and great. However, that being said, the mere presence of innovative companies and an increase in patent applications does not go far enough in assessing the state of innovation generally speaking. Innovation is about more than just making “new” things, it’s about making things that improve the quality of life for the masses. When it comes to the United States’ competitive advantage in trade, it requires being the world’s leader in innovation, as we all know we are not the manufacturing power we once were. Stated another way, our product to the world is innovation and when we are not leading the way, our economy will therefore suffer.

Our innovation policies have failed in several key areas, not the least of which is education. Our education system, for many reasons, has severe limitations and has steered people into the wrong areas for cutting edge innovation. The best and brightest minds went about “innovating” securitized products, rather than learning about physics, biology and chemistry. In the two most important innovative fields of the 2000s, the United States has been a serious laggard – the adoption of alternative energy and biotechnology. When it comes to alternative energy we are a technological laggard to China and are severely lagging the developed world in the adoption of alternative energy sources, while advancement in biotechnology has fallen short of our established advancement trend.

While First Solar (NASDAQ: FSLR) is a leading company in the solar industry in terms of technology, our country is severely lagging others in the adoption of cleaner energies. It’s certainly great that one of our companies is leading the way in developing and marketing solar technology; however, why is it that our country so severely lags others in the adoption of the technology itself? Other countries have adopted policies that not only directly promote the adoption of alternative energy processes (and the US is no exception), yet our government over the past decade placed great restrictions on studies relating to the necessity for the adoption of alternative energy. We did this under the guise that there is an actual debate over whether climate change is real or not.

Although the science is particularly clear on this matter, our policymakers made a deliberate attempt to not only ignore the data, they also precluded any government funding from reaching scientists engaged in exploring these questions in more depth. This policy stance was based on multiple premises, including a disbelief in the presence of climate change and additionally, the failure to recognize growing demand from emerging markets for a resource (oil) that is finite in supply. Whether one ultimately believes in climate change at this point in time is only part of the issue considering the rapid uptick in demand for all kinds of energy from emerging markets.

As for biotechnology, to a certain extent, investors left the dot.com bubble pop apathetic towards many sub-sectors of technology generally speaking and biotech was no exception. In looking at the Biotech HOLDRs ETF (NYSE: BBH) over the last decade, it is reasonable to make the assumption that forward progress in biotechnological innovation has ultimately been stagnant.

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Biotech HOLDRs Monthly Chart

We essentially completed mapping the entirety of the Human Genome by 2003, yet the results have been rather slow in translating into tangible improvements in medical treatment and quality of life gains. This is as much a failure of policy as it is science due to the expenses inherent in a system of fragmented sequencing patents over which their remain numerous outstanding legal questions (check out my Cheat Sheet to the Bilsky case which opened the door to countless patent challenges). Research in this area has suffered from major inefficiencies in the patent process–something many have called for addressing–and the invocation of social policy into the innovative arena. Stem cell research–regardless of whether one takes issue with what kinds of stem cells are used and how they are acquired–is one of the single most promising areas in terms of medical advancement, yet because of questions in the social arena, this promising area has been unnecessarily set back. Most people in this country, on both sides of the ideological divide, believe that such research should be done, but there still remain severe limitations to its advancement.

Today’s market undervalues the price of future innovation, and therein lies a significant opportunity for investors, yet although innovation was not completely lacking over the past decade, in two crucial area its progress has fallen behind its potential. This is an unacceptable outcome considering the stakes involved in these two crucial areas and it’s the job of our policymakers to ensure that such failures do not and cannot happen. In that case, it’s not incorrect of President Obama to mention the failure of innovation over the past decade as an important task for his Administration to conquer.

Disclosure: Long FSLR.