By Michael Kaye, CFA Investors remain fixated on a company's short- and intermediate-term profitability: the amount it made in the current quarter and its prospects for the coming year. Lately, it seems a number of companies have boosted their bottom lines by slashing expenses. In many cases that means scaling back on spending to research and develop new products and services. While such moves may pad short-term profits, they do little to enhance a company's competitive standing -- or its long-term strength.
That got us to thinking: What about companies that while still profitable, continue to devote a sizable chunk of their financial resources to R&D? We at Standard & Poor's set out to screen for those that have posted profits in their last fiscal year and yet invest more than 20% of their total sales in R&D. (Of the companies in the S&P 500-stock index, 233 break out R&D spending. Their average investment compared to sales is 11.3%.)
Then, to make sure the companies we identified were attractive from a valuation standpoint, we screened for those with S&P's highest investment ranking, 5 STARS (buy). That means S&P equity analysts expect them to outperform the overall market over the next 6 to 12 months.
Since R&D efforts are particularly crucial to the long-term success of information-technology and biotech outfits, it was no surprise that the seven names that turned up came from those sectors:
5 STARS, high R&D spending
% R&D/Total sales
S&P STARS Rank
Analog Devices (ADI)
Cisco Systems (CSCO)
Gilead Sciences (GILD)
IDEC Pharmaceuticals (IDPH)
Novellus Systems (NVLS)
Kaye is a portfolio services analyst for Standard & Poor's