Related topics: stocks, Michael Brush, entrepreneur, growth stocks, technology
Despite obvious improvements in the economy, we still hear a refrain that's all too common on the way out of a recession: America has lost its edge, so its economy is never coming back.
It sounds like former President Jimmy Carter, but this pessimistic whine now regularly emanates from conservatives, who apparently don't mind bashing America as long as it means they can take a shot at President Barack Obama.
I'll respond with one word: poppycock.
Despite the impressive growth in emerging markets, the U.S. still ranks consistently high for the kind of moxie and can-do attitude it takes to invent breakthrough technologies and products, and in creating fast-growing, job-producing companies, say academics at Babson College in Massachusetts who study these things.
A recent count, by a Babson College professor, of the most entrepreneurial companies in the world shows that 60% of them are based in the U.S., even though the U.S. accounts for only 23% of the global economy.
Michael Brush
So take a deep breath. We're not losing our edge, and entrepreneurs here are going to keep on thinking up the next big idea, to the envy of much of the world. Don't take just my word for it. Some of our best entrepreneurs, the consummate optimists who know more about these things than I do, say exactly the same thing.
"What I don't understand is where the fright comes from," says Andy Ory, the co-founder and CEO of the tech company Acme Packet (APKT, news), which plans to expand its workforce by more than 40% this year. "I think this country has an enormous opportunity."
"We definitely have challenges ahead of us, but I think people are too pessimistic," agrees Colin Angle, the co-founder and CEO of iRobot (IRBT, news). "The U.S. is the best entrepreneur incubator in the world. This is our lifeblood, and this is how we are going to win. People should get out and pursue some ideas."
There's money to be made
For investors, there's money to be made in all this, on two levels.
First, the unfounded pessimism confirms to me that not all of the expected good developments in the economy are priced in to stocks. People are still too negative. Indeed, the price-earnings ratio of the S&P 500 is at 13.7, or almost exactly where it was during the Armageddon lows of March 2009, notes James Paulsen, the chief investment strategist at Wells Capital Management. Sure-stocks are up 100%, but earnings are up a lot, too. The takeaway: You can buy stocks now for further gains this year, though a 10% correction at some point is likely.
Second, if you invest in entrepreneurial companies, you are likely to do better than the market. I base this conclusion on research by Joel Shulman, a mutual-fund manager who teaches at Babson, which consistently ranks high for its entrepreneur training programs.
Shulman, an expert on entrepreneurs, concedes that there's no way to truly identify the entrepreneurial spark in managers without talking to them in person. Since it would be tough to interview so many managers, he instead hunts for the fingerprints of entrepreneurs in company financials, by looking for the key attributes that he says show up when you have a real entrepreneur at the helm.
These include measures such as a preponderance of sales from internal growth instead of acquisitions, low costs, big ownership stakes by key managers, low executive turnover and superior return on invested capital, among others. For the past six years, Shulman has used this approach to find entrepreneurial companies and invest in them, and the results are impressive.
From August 2005 through the end of last year, his managed accounts are up an average of 12% a year, compared with a gain of 0.7% for the Russell 3000. Shulman recently launched a mutual fund that invests on this basis, called EntrepreneurShares Global Fund.
5 that exemplify
Together with Shulman, I've identified five relatively young companies whose stocks should outperform over the next several years because they are among the most dynamic entrepreneurial companies in the U.S.
The names: Chipotle Mexican Grill (CMG, news); Acme Packet, which makes gear that help phones and other devices work better on the Internet; iRobot, the robotics company; Intuitive Surgical (ISRG, news), which makes consoles that help doctors perform surgery; and Zoltek (ZOLT, news), which makes carbon fibers used in wind-turbine blades, cars, planes and other applications.
