Can this uncommon research method predict a stocks future?

An underrated way to see what's really going on.

Hi Everyone,

in today's issue, I want to introduce you to a research approach that deserves more attention. When researching a company’s future, Wall Street analysts usually extrapolate expected sales, margins, and earnings based on estimates. These estimates go a few quarters into the future but at the end of the day, they are still estimates.

I personally do not attach much importance to such expectations. Still, I am aware that a large proportion of investors do and that the price of a share reacts accordingly, depending on whether the "expectations" are met or not. For a long-term investor, such analyses are of minor importance, as these relate to only a few quarters in the future. I prefer to look at the big picture and search for information that the rest of the investors pay little attention to. Ask yourself, what foundation is already being laid today, and what can be derived from it for the future?

There are two excellent ways to look into the future of a company:

1. Patents

It is self-explanatory that this option is better suited for technology-related companies. An insurance company or a bank does not need patent-protected inventions for its business model. Here is a step-by-step guide on how to quickly find out what a company is up to:

1. Go to USPTO’s online database

2. Choose the Issued Patents (as opposed to Published Applications) Quick Search.

3. In the right pull-down field menu, select "Assignee Name" if searching for the company name.

4. Type in the name of the inventor or company.

5. Click “search” and voila! Now you have what you need.

Now, you will notice that for a company like Apple there’s an insane amount of patents. This path is for those who want to know it precisely. For all others there is the classic shortcut to google “Company Name + Patents + Year”, in some cases you will find bloggers who summed up the most important ones. Here’s an example.

Many such patents don’t play a significant role, they are just small pieces in a bigger puzzle, but some of them give an insightful glimpse into the company’s future and even into a whole sector.

Amazon for example has patented a technology that could bring a blended-reality display into existence. All you need to do is stand in front of a mirror, and try on some virtual clothes and the display will show a customized image of the party venue. The system uses a mirror and a display to create a blended image of the reflection from the mirror and the illumination from the display. Projectors illuminate and non-illuminate (based on what it wants to reflect) the object in front of the mirror. The illumination created by the projector will then be reflected by the mirror to make a blended picture of the object. Another similar technology developed earlier by Amazon was called the Amazon Echo Look which uses artificial intelligence to help you choose what to wear.

Here is the whole document.

I cannot predict to what extent this patent will be put into practice, but I can deduce the direction in which not only Amazon but the entire fashion sector is developing.

The fascinating thing about investing is that it's like detective work, where you put together several puzzle pieces to form a big whole picture. A few months before, Amazon bought up another company called “Body Labs”.

“Body Labs also says its “SOMA Shape API” can be used to “accurately predict and measure the 3D shape of your customers using just a single image”, suggesting this can power “custom apparel” or be used by fashion ecommerce retailers wanting to offer sizing recommendations.”

It is clear what the fashion industry is heading towards. Maybe Amazon will also move to the top in this sector? And if you think a little further, you can deduce from these puzzle pieces that online retailers will become more profitable in the future because they will receive fewer returns due to wrong sizes.

Now let’s get to the second method:

2. Acquisitions

Companies buy out other companies for a variety of reasons. They could be looking for economies of scale, diversification, improved market share, increased synergy, cost reductions, or new specialized offers. The attentive investor can easily deduce from this what the management intends to do and to what extent the acquisitions make sense or fit into the company's vision of the future.

How do you know if the acquisition will bear fruit and won’t be a flop?

I follow a simple approach in this regard: How has management operated so far? Has there ever been a takeover that was successfully implemented? If management has successfully implemented plans in the past, then the probability is high that it will do so in the future as well. A management team with integrity will also clearly communicate what they intend to do with the acquisition and how well it fits into their vision. For this reason, I always recommend reading the conference calls where the management answers questions. You can use the free Quartr App for this. (A future article about how to judge if a company has overpaid for an acquisition or not is in the pipeline).

Summary

Statements about the future are often imprecise, but while Wall Street tries to make exact predictions with concrete numbers that usually don't come true anyway, I keep it simple and take a step back to look at the big picture. I prefer to own a company that’s progressing and in an upward spiral to one which struggles and is in a downward spiral. And patents and acquisitions are a great way to find out what is going on behind the scenes.

I hope you learned something today, until the next issue. 👋