R&B? … No, R&D!

Slack Investor might be showing his age here … but when I think of R&B (Rhythm & Blues), it’s not Drake or The Weeknd that I think of, its “The Hardest Working Man in Show Business” that comes to mind. James Brown had a bit of a trouble in his life but there is no denying his talent and influence – 4 minutes of his genius can be seen here.

The one thing that can solve most of our problems is dancing

James Brown

But I digress, when the dancing is finished, R&D (Research and Development) is another thing that gets Slack Investor attention – especially when it comes to finding a company to invest in. Lets have a look at the world top ten spenders on Research and Development. This quality list of companies is peppered with representation from the tech, pharmaceutical and (electric) car sectors. One of the ways that a company can keep growing is to develop an upstream pipeline of products through research, patenting, and testing. It may take many years before they are released so the companies must be patient and long sighted – not all products in the pipeline will be a success.

I don’t often read company annual reports as I lack forensic accounting skills and they are usually thick and masterpieces of obfuscation. But, I am usually very impressed when, in the overview, a decent slab of profits are going back into R&D. Slack Investor would rather invest in companies that are constantly innovating, and investing in future products. Only some of these products will yield fruit, but you would hope that these high spending R&D companies would generate bigger profits than those that don’t. Although, this is not always the case! In some cases, the world of R&D can be full of questionable spending, uncertain results.

Even though R&D spending does not guarantee profitability and ever increasing stock prices, there is a correlation- future earnings are positively associated with current R&D.

Commonwealth Serum Laboratories (CSL)

Despite a 20% price fall in the CSL share price in the past 6 months, there is no thought of Slack investor selling this great company. It is one of my “Long Run” stocks. I have often written about share prices fluctuating above and below a “fair value” for a stock . This is just a characteristic of share investing – depending on the mood of the market.

CSL is not in the world R&D big spending league in dollar terms. But, in Australia, it is one of our best R&D spenders with almost a billion dollars (US) per year. This amount is very high as a percentage of its revenue, in an environment where a typical manufacturer will spend 1-2%, CSL spending on Research and Development is between 10 to 11 per cent of turnover. Slack Investor thinks this is a good thing and is happy that CSL is occupying a big chunk of his portfolio.

CSL have many products in the R&D pipeline and have a good track record of converting at least some of these products into successful earners. Some other analysts agree and have a target price of $310 on the stock. With current pricing at $253.26 (12 Mar 21) – this smells good!

I taught them everything they know, but not everything I know

James Brown

That’s right James … “Hit it”