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How To Spot Innovative Companies When Investing In Stocks

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Mar. 24 2016, Published 3:30 a.m. ET

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Necessity may be the mother of invention; but the innovation that it inspires is the lifeblood of investing.

Companies are constantly changing and evolving. They move into new markets and create new products. They try to stay on top of their competitors by inventing new products and creating new services. They have to innovate and adapt or, as the adage goes, “innovate or die.”

It’s this leading edge of innovation where investors can find great ideas. When a new business launches a new product or an existing business creates a disrupting innovation, investors get to consider the future value of the new product or service.

But you don’t need to be a Wall Street analyst to spot innovation. Nobody can look into the future, so professional traders have little, if any, advantage over an average investor. This is a great opportunity to find untapped value. Ask yourself – will people like and buy the new offering? When a company’s innovation creates value, investors will benefit from a higher stock price.

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Nor does innovation have to be groundbreaking. It can be subtle too. McDonalds ($MCD), for example, has been suffering at the hands of restaurants that have innovated into their space on the heels of higher quality, more healthy offerings. McDonalds has tried to push into these products, but has not been successful. But, McDonalds made a subtle shift, offering their breakfast items all day. That move has been amazingly successful. Same store sales were up 5.7 percent in the last quarter, driving its stock up almost 20 percent. Such a simple change created tremendous value for shareholders.

So where do you find these innovations? Everyone is looking for a home run, a product or service that fundamentally disrupts an entire industry. Do you remember seeing the first iPod? The product itself was revolutionary, but it also linked seamlessly with the already released iTunes. It was the harbinger of a massive content/hardware disruption that Apple ($AAPL) single handedly led. And if you had bought Apple stock when the iPod first came out, you would be up around 7,000 percent. Truly groundbreaking.

But revolution can also sometimes be a disaster. Remember New Coke? That innovation almost brought Coca-Cola to its knees. It was an unmitigated disaster.

So the key here is to watch out for innovation. It can be disruptive or it can be subtle. Keep your eyes and ears open. Make your call. And in a down market like this, you should be able to buy these innovators at bargain prices.

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