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Innovate or die! five stocks which can disrupt their way to success

Following the strong run in equities companies need to innovate if they want to build on their success. GAM US equity manager Greg Woodard highlights five companies which can do just that.

Greg Woodard

Greg Woodard manages the GAM Star US All Cap Equity fund, which has returned 15.92% over the last year, versus a sector average of 11.78%.

'The 2013 equity market rally in the US was largely the result of multiple expansions. Valuations rose to the point where the overall stock market now generally appears to be fairly valued or perhaps slightly expensive.

'Barring further multiple expansion, our base case is for returns in the broad market to be modest at best, largely mirroring modest earnings growth.

'The key to generating better returns will be identifying those individual businesses that can innovate and disrupt their competitors, allowing them to create new markets, expand on existing markets or simply take share from their competitors.

'We need to look no further than recent examples such as Nokia or BlackBerry. Both companies were once widely recognised as dominating their respective markets, only to be disrupted by innovative competitors. Several companies are using innovative business models to disrupt markets, ranging from retail and employment, to travel and hospitality.'

So what five stocks does Woodard believe can innovate their way to success?

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Alere

Alere develops, manufactures and sells easy-to-use diagnostics, which include a wide range of rapid, point-of-care diagnostics for use in hospitals and other healthcare settings. We believe Alere has the opportunity to fundamentally change how healthcare is delivered to the chronically ill.

By working to improve the way in which medical ailments are diagnosed, Alere can also help to enhance treatment methods, drive efficiencies and reduce costs.

Through recent acquisitions the company has built a health management services organisation that is focused on healthcare cost-containment. We believe this infrastructure will be instrumental in bringing Alere’s diagnostic products into the home.

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Amazon

Amazon is the world’s most dominant online retailer. Amazon’s e-commerce and cloud computing platforms continue to be well-positioned to disrupt large staid markets, accelerate market share gains, and disproportionately benefit from the continued proliferation of Internet-enabled mobile devices.

In e-commerce, Amazon is growing revenue and gross profits at two to three times the rate of online sales overall, and accelerating digital media growth (driven by the Kindle franchise), demonstrating the powerful network effects in its retail businesses.

Significantly, despite what continues to be a frenetic pace of investments into the business, we believe Amazon is executing well and has continued to improve operating margins over the last several years.

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Facebook

Facebook is one of the world’s biggest social networks, with more than 1.2 billion users. In the display advertising network, Facebook has launched an ad exchange and a trial mobile ad network.

This market is a natural target for the company because it already has integration with numerous partner sites that use its social plug-ins.

We believe these respective sites and advertisers could potentially benefit from increased monetisation by leveraging the company’s rich user data to serve more relevant, targeted advertising.

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HomeAway

HomeAway is one of the world’s leading vacation rental companies and it is highly disruptive to the broader vacation and hospitality markets. HomeAway has established a unique position as a necessary intermediary between two sides of a highly fragmented network.

>We believe HomeAway has enormous growth potential in the $85 billion (£51 billion) vacation rental market, due to opportunities associated with a growing number of property owners opting to self-rent to avoid having to pay excessive property manager fees.

A growing number of professional property managers are also turning to HomeAway’s platform as a high value, low-cost marketing tool.

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Priceline Group

Priceline Group is one of the world’s most dominant online travel agencies. Its total addressable market opportunity is expanding, both organically – growth in global travel spending, increased online penetration, share gains from competitors – and also inorganically, by entering new market adjacencies – vacation rentals, car bookings.

Increasing mobile usage changes the competitive dynamic, as growth in mobile bookings will lead to a market consolidation around a handful of leading platforms that have sufficient advertising scale to orient their business for mobile environments.

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