In NPR's coverage of the recently completed International Consumer Electronics Show in Las Vegas, the reporter mentioned some of the high-tech gadgets that caught his eye: an inflatable projection TV screen from a tiny private company called SimaProducts; a personal global positioning system from Garmin
All of these get points for the "cool factor." Who doesn't want to invite his friends over for the big game and awe them while pumping up the TV to 10 feet diagonally? But how can you determine which of the gadget-producing companies -- there were more than 2,500 exhibitors at the Vegas show -- are good bets for your money?
Motley Fool Rule Breakers lead analyst David Gardner has a few things he looks for in this type of company.
The first to subvert
When you break the rules, you'd better be the first to market and the best. "It is when established industries fail to evolve that opportunities arrive for the Rule Breakers," David says. "This eternally true and constant dynamic presents our so-called first-movers with their greatest advantage: the time necessary to put distance between themselves and their competition -- the time to emerge as top dogs."
Is an inflatable TV screen new? Arguably, no. Sima is just doing something nifty with existing technology. And if you type "inflatable TV screen" in Google, you get results for a number of similar products -- none of which are from Sima. Compare that with MP3 players. That was new technology. And while Apple
Tomorrow's great companies are the first to spot today's opportunity and develop the product or service to exploit it. Type "MP3 player" in Google, and Apple is right there.
Look, mom, I'm popular
So what if the company you're eyeing is the first to create a product that maybe four people in the world are actually going to buy -- say, an inflatable large-screen TV? There's no first-mover advantage if the company is moving someplace worthless.
But if the company is the first to build an online bookstore that cannot exist any other way (because it's impossible to have 2.5 billion titles in a bookstore in the real world), for example, you might have an investment on your hands. Someone who bought Amazon.com
Online brokers like Ameritrade
Or look at Apple. The company has twice been a first-mover, first with user-friendly Macintosh computers, then with its iPod. Both advances rewarded investors -- Apple was up nearly 125% in 2005.
Most Rule Breakers are consumer-facing companies with mass appeal. Otherwise, they won't get the volume necessary to generate great growth. The Rule Breaker recipe is a combination of lots of cool, lower costs, greater satisfaction, and mass appeal. Find it and you're on your way to outsized returns.
The Foolish bottom line
There aren't all that many numerical equations to value potential market caps in emerging growth situations. As David says, "Rather than use numbers, try common sense. Let's ask ourselves this simple question: What if the industry of the company I'm looking at vanished from the face of the earth tomorrow? Would everyone notice? Would anyone?"
David and his Rule Breakers team look for the companies that people notice, the ones that would cause a national or universal stir if they disappeared overnight. Each month, they present two new ideas; to date, the recommendations have delivered total average returns of 28%, compared with the S&P 500's 8% over the same period.
David's team has a bit of experience finding, identifying, and picking these winning companies. But the process is not beyond you. As you read through all the exciting gizmos and gadgets that were introduced to the world last week, all those tools to facilitate this mystical idea of convergence, think about what each of these companies might mean to the world ... and to you as an investor.
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Roger Friedman is the managing editor of newsletters and the author of Nipple Confusion, Uncoordinated Pooping and Spittle: The Life of a Newborn's Father . He does not own shares of any company mentioned in this article. Garmin and Amazon.com are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value recommendation. The Motley Fool has a fulldisclosure policy.