One year ago, Fool analyst Eric Bleeker said that Clayton Christensen's The Innovator's Dilemma is the one book that every technology investor must read. Now, investors are getting a chance to see where Christensen puts his own money when it comes to tech stocks and to follow in his footsteps.
The philosophy
Christensen, a professor at Harvard's Business School, details why some companies win in the quick-changing tech field while others lose. His thesis comes down to two words: disruptive innovation.
Basically, new technologies start out small -- capturing just niche markets to begin with -- but when their benefits become apparent to the mainstream market, they grab market share faster than the less-nimble behemoths of the field can adapt.
It's a little-known fact, however, that Christensen and his son Matthew have started their own fund that invests based solely on the principle of disruptive innovation. Here are five investments the fund has made that Christensen shared in an interview with Technology Review, and if you read to the end, I'll give you one extra idea to boot that matches up with the disruptive principles.
For each company, I'll quickly note what it does, why its product is disruptive to its industry, and what catalysts might exist to boost the company (and its stock) going forward.
athenahealth
- What it does: Provides medical software to doctors' offices.
- Why it's disruptive: The company is becoming a one-stop shop for all of the e-needs of doctors, especially when it comes to insurance filings.
- Possible catalyst: Federal rules are being implemented requiring all doctors' records to be fully automated.
Cree
- What it does: Manufactures LEDs.
- Why it's disruptive: LEDs last longer and use less energy than traditional lightbulbs.
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Possible catalyst: While larger competitors such as GE
(NYSE: GE) and Siemens(NYSE: SI) have LED divisions, they also have traditional incandescent bulb manufacturers. While they are worrying about cannibalization of their differing businesses, Cree will continue to grab market share.
New Oriental Education
- What it does: Online education in China.
- Why it's disruptive: New Oriental is changing the education paradigm in the world's largest nation.
- Possible catalyst: More Chinese residents coming online, entering the middle class, and looking for alternative ways to obtain an education.
NxStage Medical
- What it does: Makes portable dialysis machines.
- Why it's disruptive: Dialysis patients don't need to go to the hospital for treatment, which is both more convenient and -- usually -- more sanitary.
- Possible catalyst: Larger-scale adoption.
salesforce.com
- What it does: Cloud-based software solutions for businesses
- Why it's disruptive: Instead of buying expensive software and paying for installation, companies can simply use the programs available on Salesforce's servers.
- Possible catalyst: Has already grown substantially, but Christensen notes: "Salesforce has a lot of customers. But there are even more companies who don't use it."
A quick look at the performance of these companies shows that a three-year investment in them has paid off nicely. The equal-weighted returns would come to almost a 190% return, versus an S&P 500 return of just 46%.
athenahealth Stock Chart by YCharts
There's no way to know whether Christensen and his son held these stocks for all of the past three years, but since that's the typical time horizon we encourage Foolish investors to take, it's worth examining.
athenahealth, Cree, and New Oriental Education all provided solid returns, but NxStage Medical and Salesforce have been the companies doing the heavy lifting in the group.
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