Wednesday, October 14, 2009

Ocean Tomo: Intellectual Property as Emerging Markets

If you think about it, a large proportion of the value of any company lies, not with its tangible assets, but with its intellectual property (IP). That is particularly true of pharmaceutical, technology, and consumer goods firms. A recent article distributed by Ocean Tomo makes the case that IP represents an asset class in itself--and an underappreciated one at that.

Ocean Tomo has developed a proprietary method for evaluating patents held by companies and their value. With this method, they can then rank firms (and their stocks) based upon the quality of their patent portfolios. The Innovation Ratio for each firm represents the value of its patents divided by its book value. The Ocean Tomo 300 Index (OTP) is a diversified index of stocks that score highest in their Innovation Ratios. The idea is that, over time, such an index should outperform standard market averages, as companies profit from their intellectual property.

If you scroll down on the Ocean Tomo Index page, you'll see menus that enable you to enter the names of companies and see their specific patents and their Average IPQ score. The companies are identified by sector, so that you can use the information for stock picking within industry groups. At an even more sophisticated level, you could use the information to help pick stocks for pairs trades, buying shares of high IPQ firms and selling those with inferior innovation ratios.

We tend to think of emerging markets by nationality and geography. It may be, however, that the most promising emerging markets are those based on new ideas and technologies.