Sunday, July 27, 2014

Less spent on R & D better the performance on Wall Street

Canon PowerShot A590 IS Sample - Hewlett-Packa...
Canon PowerShot A590 IS Sample - Hewlett-Packard Logo (Macro) (Photo credit: włodi)
When Meg Whitman was named chief executive of Hewlett-Packard (HPQ) in 2011, she inherited a real mess. HP’s share price had been slaughtered by the ouster of Mark Hurd and the reign of Léo Apotheker—an 11-month period that I like to refer to as the Grim Bumbling. Trying to revive hope in the company and its stock, Whitman vowed to invest in what had once made HP great. She would pour money into research and development, HP would invent wonderful things, and investors would eventually rejoice.
While this plan seemed sound enough in theory, a new study has suggested that it might have been exactly the wrong thing to do.
The data sleuths over at Bernstein Research have just issued a sizzling report with the title “Do High R&D Spenders in Tech Generate Stock Outperformance?” Even if it’s not the sexiest title, the conclusion is titillating. Bernstein examined technology companies since 1977 to measure R&D spending as a percentage of the company’s sales. The researchers found that over 1-, 3-, 5-, and 10-year periods, the companies with the lowest spending on R&D tended to perform the best on Wall Street. It really is just like Thomas Edison said: “Invention is 10 percent inspiration and 90 percent a waste of everyone’s time.”
Bernstein divided the technology companies into High, Medium, and Low R&D spenders. Roughly speaking, the high group tended to spend 18 percent to 35 percent of revenue on R&D; the medium group spent 11 percent to 17 percent; and the low group 10 percent or less. Members of the high-spending group tended to be heavy on hardware companies with names such as Nvidia (NVDA) and Intel (INTC), the middle range encompassed big names like Google (GOOG) and Microsoft (MSFT), and the low-end group included HP, IBM (IBM), and Apple (AAPL). Some companies changed groups depending on which time period Bernstein examined.
If we focus on results from the past five years, the biggest R&D spenders underperformed the other technology companies by 15 percent on average when it came to gains in share price. The middle R&D spenders outperformed the rest of the companies by 23 percent on average, while the lowest spenders outperformed the rest by 19 percent. And the majority of the low spenders—63 percent—outperformed their peers; from the middle and high spenders, only 43 percent and 40 percent, respectively, bested their peers.
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