Underrated Investment Advice: Check Trademark Filings

Trademark filings can serve as valuable indicators for investors, according to a new study.

When comparing companies by the number of trademarks they register in a year, relative to their total assets, the stocks of companies that register the most trademarks perform better. following year, outperforming stocks of companies that record fewer, according to the study. , recently published in Management Science.

Trademarks are sought when companies introduce names, logos, colors, or symbols that distinguish a product or trademark. They offer the products and brands in question legal protection and are used to help secure future earnings, market values ​​and long-term prospects, says Siew Hong Teoh, professor of accounting at UCLA Anderson School of Management and co-author. of the study.

Companies that launch more new products and therefore have more trademark registrations, relative to their total assets, have significantly higher future profits, says Professor Teoh.

“Brand Intensity”

The researchers focused on 305,422 registrations between 1976 and 2014. They then measured each company for its “brand intensity” – a ratio that represents the annual number of its brand activities in a calendar year, divided by its total assets for the fiscal year that ended in the year. previous calendar year.

Then, to see if such a measure could predict stock returns, they created a hypothetical portfolio that buys stocks of companies ranked in the top third in terms of brand intensity over the past year and shorts stocks. shares of companies ranked in the bottom third in terms of brand intensity.

The researchers found that for the period from 1977 to 2015, using this trading strategy produced annualized returns about 7.8 percentage points higher on average than the returns of a portfolio that traded stocks with profiles similar risks without taking into account trademark registrations.

This advantage held over time even as the firms in the high and low intensity ranks changed. When a company’s brand intensity moves from the lowest third to the highest third, next year’s return on assets and return on equity increase by 1.88 and 5.08 percentage points, respectively. percentage, according to the study.

Missed opportunity

This promise of higher future profitability tends to be missed or underestimated by stock analysts, the researchers found. And because many investors rely on analyst earnings forecasts, the document says, “we expect investors to similarly underestimate” the intensity of the brand. Professor Teoh says that, to her, this suggests that an investor who buys a brand-intensive stock at the time a brand is registered will earn a higher return than investors who wait for the analyst’s opinion on this registration.

The findings also suggest, the researchers said, that the Securities and Exchange Commission and accounting regulators should consider allowing companies to include estimates of the fair value of new and existing brands on their balance sheets or as supplemental disclosures. Currently, companies do not report the value of their internally developed brands on their balance sheets.

As it stands, it would be difficult for the average investor to track brands “and understand who would win in the market”, says Professor Teoh. His study co-authors: Prof. Po-Hsuan Hsu, National Tsing Hua University; Teacher. Dongmei Li, a university in South Carolina; Teacher. Kevin Li, National Taiwan University; and Professor Qin Li, Hong Kong Polytechnic University.

Ms. Maxey is a writer in Union City, NJ. She can be contacted at [email protected].

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