(By Tycoon Report) In case you didn't get the memo, "equities have reached a dead end in terms of significant appreciation," says PIMCO's Bill Gross.
In other words, they're dead. So go ahead and give up on investing in stocks. Seriously, what are you waiting for?
Don't you know that all other investors bailed already, as evidenced by August's anemic trading volumes and this year's near-record inflows into bonds? And that even institutions are joining the exodus? Since January, their average recommended allocation to stocks plummeted from 62% to 41.5%.
Clearly, all hope is lost. Or is it?
Bill Gross is Grossly Exaggerating
From where I'm sitting, stocks aren't dying. They're being reborn. And it's happening on the back of disruptive technology companies.
Consider:
For the first six months of 2012, the Russell 3000 Index rallied a respectable 11.9%. If we narrow our focus to the top 30 performers, though, they've all more than doubled in price. And guess what? Nineteen out of the top 30 are technology companies with innovative products.
Over the last year, an equal-weighted portfolio of 44 of the most innovative public companies (based on the strength of their intellectual property portfolios) is up 58.6%. That compares to a 25% return for the S&P 500 Index over the same period. Year-to-date, that same disruptive technology portfolio is up 25.1% – again, more than doubling the return of the S&P 500.
Sorry. But those don't look like the "half-sized returns" Bill Gross is warning us to expect.
Small Companies, Big Rewards
If we look at the behavior of large-cap companies, we notice signs of a rebirth, too.
Large caps – traditionally poor innovators – are increasingly acquiring smaller, innovative companies to fuel future growth. Savvy investors are being rewarded in the process.
Nowhere is this trend more pronounced than in the pharmaceutical industry.
Facing patent expirations worth $147 billion in annual sales by 2015, Big Pharma companies have a "burgeoning hunger" for acquisitions, reports Bloomberg. And they're paying top dollar to small-cap shareholders to satisfy it.
Case in point: Bristol Myers Squibb's (NYSE: BMY) $5.3 billion deal for diabetes drugmaker, Amylin Pharmaceuticals, marked the fifth billion-dollar drug deal sealed this year already. Earlier the year, Bristol Myers paid $2.6 billion for Inhibitex, handing shareholders an instant 163% gain.
"We are on the cusp of the next consolidation wave," says Seamus Fernandez, analyst at Leerink Swann & Co. "There just isn't enough top-line growth in the [pharmaceutical] industry."
He's right. Top-line growth requires innovation. And nobody's better at innovating than small caps. Pharmaceutical companies have clearly embraced this reality.
Rest assured, the trend of disruptive innovation through acquisition isn't an isolated phenomenon. It's unfolding in the broader technology sector, too.
In April, SAP AG (NYSE: SAP) launched the Startup Focus Program to help fund innovative startup companies that can add value to its business intelligence platforms. Translation: It's hunting for acquisitions before rival, Oracle (Nasdaq:ORCL), has a chance to sniff them out.
Then, on July 27, the largest company in the world, Apple (Nasdaq: AAPL), announced it was buying biometric identity and security solutions company, AuthenTec (Nasdaq: AUTH). Shares of the $225 million market cap innovator spiked 66.1% on the news.
So even the world's greatest innovators recognize the importance of disruptive technologies – and that they most often reside in the small-cap space.
Perhaps most telling, though, is this sound bite from Ernst & Young's Joe Steger. After reviewing global technology mergers and acquisitions activity in the second quarter, he said, "Disruptive technology megatrends continue to fuel strategic deal-making around the world, in spite of a difficult economic context."
In other words, while the overall economy might be stuck in a rut, the innovation economy keeps chugging along. So much so, that the world's largest companies are increasingly relying on acquiring innovation to reignite their own growth.
Buy Innovation, Not Bonds
In the end, if anything is dead, it's passive investing – or indexing. Not equities. And that's perfectly congruent with my argument that "significant appreciation" can be found in disruptive technology stocks.
As Michael Mandel, senior fellow at Wharton's Mack Center for Technological Innovation, says, "Disruptive innovations offer the distinct possibility of driving existing companies out of business."
When we index, we get the good with the bad. Meaning we get stuck holding the bag on these "victims" of disruptive technology, thereby muting our returns.
The key for us, then, is to become adept at singling out the world's most disruptive and potentially profitable technologies. Early.
Bottom line: Ignore Bill Gross' bold assertion that equities are dead. He's a bond guy, after all, and doesn't have a clue what's going on in the research labs of the world's smallest, yet foremost, innovators.
Instead, double-down on innovation. As technology becomes more and more a part of everyday life, it's the only global movement that matters. It's gaining momentum. And most important of all, it offers far superior returns than Mr. Gross' asset of choice.