O’Shaughnessy Asset Management explores how innovation, measured through patent activity, may be systematically underappreciated by markets and linked to future earnings growth. The paper argues that companies generating patents have historically outperformed, challenging the idea that innovation is already fully priced. It also suggests intangible investment signals may be more predictive than traditional valuation metrics.
Mispriced Innovation – Patents as a Leading Indicator for Earnings Growth
O’Shaughnessy Asset Management
Daniel Nitiutomo
Research
24 Pages
Key Takeaways
Patent Driven Outperformance: Firms with at least one patent outperformed broader equities by 2.2% annually and beat non-patent firms by 3.8%, with a 72.5% one-year success rate.
Innovation Intensity Matters: Top patent quintile delivered 14.6% annual returns versus 10.5% for the lowest, with a 4.1% spread tied to higher innovation output.
Selection Over Allocation: About 80% of excess returns came from stock selection within sectors, not sector bets, highlighting innovation as a company-specific edge.
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