HH Patent Filings: The Next Great Leading Indicator

For most of my career, I’ve been a tireless advocate of a single investing principle: that stock prices ultimately follow earnings.

By that I mean if a company continues to increase its earnings quarter after quarter, its stock price is bound to trade higher, too. And vice versa.

Patent Filings: The Next Great Leading Indicator

My faith, mind you, is well founded. Ironclad studies demonstrate that the price performance of the S&P 500 index does indeed track profit growth.

As a result, I consider earnings growth a reliable leading indicator when evaluating stocks. But more and more, I’m becoming convinced that an even better leading indicator may exist — patent filings.

Here’s why…

The IP Factor

Before a company can book a single penny in profit, it needs a product to sell. Yet in today’s fiercely competitive global economy, before a company can produce something to sell, it needs to patent the idea.

Otherwise, it’s too easy for competitors to knock off the product and steal market share.

In other words, being first to market is no longer enough of a competitive advantage.

Companies need to be first to market and have patents protecting their products to ensure sales and profit longevity.

Groupon (GRPN) and Apple (AAPL) serve as good examples of this new paradigm at work.

As you’re well aware, Groupon invented the daily deals market in 2008. All it took was a novel idea to connect consumers and businesses in a new way — via coupons over email.

But guess what?

Groupon didn’t have even one patent protecting its novel business model. And within four years, over 300 competitors emerged. Now Groupon doesn’t stand a chance to keep booking higher profits, let alone surviving.

Contrast Groupon’s experience with the details behind the meteoric rise of Apple and you’ll definitely get the connection between patent filings and stock price performance.

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Disclosure: None.

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