How Disruptive is the S&P/BusinessWeek Innovation Index?

It may seem odd in a period when the stock markets are gyrating wildly and people are running scared, panicking about their 401(k)s, possibility of losing their job, companies failing, the banking system apparently on the brink, to want to talk about innovation and disruption of a different kind. However, I think this is exactly when disruptive innovation is most important.

Yes, a lot of people are going to be hurt by the current financial crisis. Yes, we're all going to be paying for the misdeeds of government bureaucrats, corrupt executives, negligent overseers, and tens of thousands of individuals who bought homes they couldn't afford and leveraged them beyond their value (even before the calamitous drop began), all on the belief that what goes up always goes up. The pain is going to last a long time as we rebuild confidence and fundamental value in institutions and systems that once seemed unshakeable and now seems unsalvageable.

The True Engine of Value and Growth

Credit and equity markets need to start functioning again, but make no mistake, they are not the engine of growth, and they will never pull us out of a crisis. The best they can do is stabilize, and restart the smooth flow of capital -- important and necessary, but not wealth building.

The only way out of this mess in the long term is through innovation, because innovation creates growth, creates new jobs, and builds competitive advantage and wealth where it didn't exist before. So, now more than ever, it's important to examine innovators, the nature of their innovations, the sustainability of their businesses and who is most likely to help us rebuild the foundations of our shattered economy.

To Disrupt, or Not to Disrupt, That is the Question

But the nature of the innovation is itself important. Disruptive Innovation matters because it is more about inherent value than about roller coaster rides, because disruption creates real growth, and that is the truest source of value for investing. Disruption doesn't depend on demographic trends, artificial supply shortages, arbitrage, political interventions and subsidies, technical trends, unemployment figures or even weather patterns. With the exception of demographics, which are fairly consistent and predictable, investing based on any of these other things is really just gambling by another name, and after the nonsense in the mortgage markets which has caused the crash we are now experiencing, you'd think most rational investors would have had enough of that.

So, I'm going to continue on with my plan for this blog to keep focused on disruptive innovation, the value it creates, and the business strategies that enable it. The next series of articles was always intended to examine, evaluate and score disruptors using my Disruption Report Card. Given the current financial crisis, I've decided to start with a set of well-known companies that most agree are among the most innovative. Namely, those companies that comprise the S&P/BusinessWeek Innovation Index.

Those companies, and the stock price at market close yesterday are listed below.

Company	Symbol	Exchange	10/07 Close	P/E Ratio
3M Co	MMM	NYSE	63.00	11.55
Amazon.com Inc	AMZN	NASDAQ	53.82	42.56
Apple Inc	AAPL	NASDAQ	89.16	17.43
AT&T Inc	T	NYSE	26.86	11.41
Bayerische Motoren Werke AG	BMWG.F	Frankfurt	24.34	NA
Boeing Co	BA	NYSE	51.29	8.82
General Electric Co	GE	NYSE	20.30	9.44
General Motors Corp	GM	NYSE	7.56	NA
Goldman Sachs Inc	GS	NYSE	115.00	6.91
Google Inc	GOOG	NASDAQ	346.01	22.73
Hewlett-Packard Co	HPQ	NYSE	39.68	12.29
Honda Motor Co Ltd	HMC	NYSE	24.11	14.35
International Business Machines Corp	IBM	NYSE	95.65	11.79
Microsoft Corp	MSFT	NASDAQ	24.91	12.44
Nintendo Co Ltd Spons	NTDOY	OTC	40.35	NA
Nokia Oyj	NOK	NYSE	16.70	8.39
Proctor & Gamble Co	PG	NYSE	68.58	18.2
Reliance Industries Ltd	RELI.BO	Bombay	1675.40	NA
Research in Motion Ltd	RIMM	NASDAQ	59.66	17.96
Samsung Electronics Co Ltd	SAME_PQ.F	Frankfurt	90.93	NA
Sony Corp	SNE	NYSE	26.46	7.93
Target Corp	TGT	NYSE	42.35	11.89
Toyota Motor Corp	TM	NYSE	73.38	6.91
Wal-Mart Stores Inc	WMT	NYSE	57.90	16.32
Walt Disney Co	DIS	NYSE	26.57	11.52

Beginning with the next post, I'll start going through this list in alphabetical order. Since this financial crisis has us mostly concerned with American innovation and fixing our own economy first (hard to worry about anyone else's when yours is badly broken), I will skip over those companies that are only sold on foreign exchanges -- i.e. I'll only be discussing companies on either the NYSE or NASDAQ.

I will also note that, for the record, and at the risk of overstating the obvious, these are extraordinary times. We don't know if the worst is yet to come, or if it has already passed. In ordinary times, we wouldn't worry about disruptive innovators like Google (OK, I spoiled at least one surprise) losing 40% of their value in a few weeks or months. That the most important company of the internet age has dropped to a P/E ratio that would qualify it as merely a little above ordinary in ordinary times is an indicator that no matter what the future performance and innovation strengths of these companies, virtually all are vulnerable to dropping further, and virtually all will eventually rebound after reaching bottom and show above average growth in valuation for a while.

All except perhaps GM, which was on the ropes before the financial crisis, and seems unlikely to survive it, innovative or not (editorial comment: I didn't create this list, I'm simply going to be analyzing it. I'm really not sure why GM is on it.) Did I let another surprise slip out? My guess is the only ones surprised are those who put GM on the list of top innovators to begin with.

Somewhere in the middle of this, I'll take a post or two to talk about what we should expect of disruptive innovators in normal times, and what the significance for investors is now.