Companies investing heavily in research and development achieved a return of more than 25% last year, nearly twice as much as the S & P 500 ( SPX ) an index created by a strategist of the Nomura subsidiary Instinet. The group also outperformed the 19% plus for the tech-heavy index Nasdaq 100 ( NDX ) .
The index was prepared by Joseph Mezrich, Head of Quantitative Investment Strategy at Instinet. It looked at companies in the Russell 1000 and weighted them by how much they spent on research and development as a percentage of their total value compared to similar companies in their respective industries.
The "Innovation Index" by Mezrich also has a long track record. For the past 1
0, 20 and almost 40 years, it has outperformed the broader market. Since 1990, the innovation index has averaged a 20% return, compared to 10% for the S & P 500 and 15.6% for the Nasdaq 100.
Mezrich told CNN Business that these results clearly show that To reward investors who are constantly trying to find New products and growth paths instead of companies that use their capital primarily to repurchase shares. The latter strategy could only give a stock a short-term boost.
"It's always good to be innovative," said Mezrich. "A company needs to constantly make decisions, whether to buy more shares or invest in research, that's the excitement."
Smaller Enterprises are Larger Innovators
Technology Enterprises Dominate the Innovation Index: Qualcomm ( QCOM ) Juniper Networks ( JNPR FireEye (19459004] FEY ) Western Digital ( WDC ) and Symantec ( SYMC ) belong to the 10 largest stocks.
All these companies surpassed even the largest technology companies, including Microsoft [ MSFT ) Apple ( AAPL ) Amazon  [ AMZN ) Google Owner Alphabet ( phonetL ) Facebook ( FB ) and Netflix ( NFLX ) . None of this is one of the top positions of the index.
Smaller companies need to innovate to compete with competitors who are much larger and have the resources to spend more on acquisitions and marketing. Qualcomm competes with the heavyweight Intel ( INTC ) while Juniper Networks has to compete with the much larger Cisco ( CSCO ) . Both Intel and Cisco are Dow components.
But innovation is not just a matter of technology.
Take a look at the food industry, for example. Mezrich mentioned two companies that have gone in opposite directions.
" Kraft Heinz ( KHC ) was crushed this year while Beyond Meat ( BYND fluctuates", He said that the former focused more on cutting costs than on new products, while the latter is a leader in the burgeoning vegetable food market.
"One invested in innovation and the other did not," said Mezrich.
Beyond Meat is too young for a company to stand in the index – it's only recently gone public However, there is a food stock among the top 20 stocks: Kellogg [ K )
. [In19659004] In 2017, the company bought the startup Chicago Bar Company, which owns the popular RXBar. Produces protein bars Kell ogg has focused more on protein bars, nut spreads and other food products that grow faster than packaged cereals.
Mezrich said the focus has helped Kellogg's shares outperform the makers of other staple supermarket staples, including Kraft Heinz and Campbell Soup. (19459004) . .
Old industrial companies succeed
Mezrich said that perhaps the biggest surprise in creating the innovation index is how many older industrial companies are in it.
There is a larger percentage of commodity companies than, for example, technical hardware companies. And capital goods companies are more important in the index than software. AGCO AGCO is the fourth largest stake. This is particularly interesting as its bigger rival Deere ( DE ) has been struggling lately with poor tractor sales and concerns over Chinese tariffs% this year AGCO is around 20% up. AGCO has used augmented reality technology in the manufacture of tractors and has combine harvester harvesters that can be operated with touchscreen tablets.
Other companies in the index that may surprise you when they reach a high level of innovation: Petroleum Additives Company NewMarket ( NEW ) ; Terex ( TEX ) Manufacturer of cranes and other construction machinery; and engine manufacturer Cummins ( CMI ) .