An Underappreciated Investing Tip: Check Trademark Filings --- A new study suggests that companies with relatively high trademark filings earn higher future profits

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

When comparing companies based on how many trademarks they register in a year -- relative to their total assets -- it is the shares of the companies that register more trademarks that do better the next year, outperforming shares of companies that register fewer, according to the study, which was recently published in Management Science.

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

Companies that launch more new products and have more trademark registrations as a result, relative to their total assets, have significantly higher future profits, Prof. Teoh says.

The researchers focused on 305,422 registrations between 1976 and 2014.

They then measured each company for its "trademark intensity" -- a ratio that represents the annual number of its trademark activities in a calendar year, divided by its total assets for the fiscal year that ended in the past calendar year.

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

The researchers found that for the period of 1977 to 2015, using this trading strategy produced annualized returns of about 8 percentage points higher on average than the returns of a portfolio that traded in stocks with similar risk profiles without regard to trademark filings.

This advantage held over time even as the companies in the high- and low-intensity ranks changed. When a company's trademark intensity increased from the lowest third to the highest third, its next year's return on assets and return on equity increased by 1.88 and 5.08 percentage points, respectively, the study found.

That promise of higher future profitability tends to be missed or underestimated by stock analysts, the researchers found. And because many investors rely on analysts' earnings forecasts, the paper says, "we expect that investors will similarly misvalue" trademark intensity. Prof. Teoh says that, to her, this suggests an investor who buys a high-trademark-intensity stock at the time a trademark is registered will earn a higher return than investors who wait for the analyst's take on that registration.

The findings also suggest, according to the researchers, that the Securities and Exchange Commission and accounting regulators should consider allowing companies to include estimates of fair value of new and existing trademarks on their balance sheets or as supplementary disclosures. Currently, firms don't report the value of their internally developed trademarks on their balance sheets.

As things stand, it would be hard for the average investor to track trademarks "and understand who would be winning in the marketplace," Prof. Teoh says." [1]

1. Personal Investing (A Monthly Analysis) --- An Underappreciated Investing Tip: Check Trademark Filings --- A new study suggests that companies with relatively high trademark filings earn higher future profits
Maxey, Daisy. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 09 May 2022: R.8.