What would you say if there was a reliable, evergreen indicator that a company will consistently out-innovate its competitors and, by extension, have a greater chance of long-term survival and market outperformance? While it may seem a pipe dream, research indicates that founder-led companies do just that, creating a unique set of parameters when looking for stocks to buy.
A 2016 study found that “the innovations of founder CEO-managed firms create more financial value than the innovations of professional CEO-managed firms;” in other words, when a company’s founder is at the helm, the company is more likely to take the types of risk that companies must embrace if they’re to maintain a competitive edge. Oftentimes, the managerial and professional CEO class is content to keep a company on the same trajectory, if not tweak operations solely for financial engineering purposes.
Just look to Google (NASDAQ:GOOG, NASDAQ:GOOGL) for proof positive of how professional CEOs can tank a company’s value proposition: Sundar Pichai made his bones with consulting firm McKinsey, whose alumni are notorious for a focus on bean counting over innovation (and even product safety), before moving up Google’s corporate ladder to his current position. Today, Google is derided for slipping search efficacy — not to mention falling behind in the race toward artificial intelligence.
In contrast, these founder-led companies remain at the cutting edge of their respective industries. And, if history is any indication, these founder-led companies are also set to outperform most.
Tesla (TSLA)
When you think of today’s top founder-led companies, the first name that likely pops up is Elon Musk. SpaceX, Neuralink, and, of course, Tesla (NASDAQ:TSLA) are just a few companies Musk founded and still runs today. And, even with the recent robotaxi delay drama, Tesla has plenty of upside in the near future.
Many point to Tesla’s recent sales slump as evidence supporting their bear thesis — whether poor product quality, Musk’s perceived inherent risk factors, or just plain antagonism toward the stock. However, looking at Tesla sales as a standalone measure is a misguided metric. Fewer than 20% of new car buyers pay cash, instead preferring financing. Today, new car loan interest rates are bumping up against 9%. Considering these macro factors, is it any wonder Tesla is selling fewer cars? As rates stabilize and fall, expect consumers waiting for improved financing terms to flock to Tesla.
Moreover, Tesla is rapidly reducing production costs, which will expand the company’s market share as it can target budget-minded buyers with lower-priced vehicles. Factor in artificial intelligence, robotics and a range of profitable peripheral endeavors and it’s clear that Musk and Tesla fit the founder-led companies paradigm to a T.
Nvidia (NVDA)
If Tesla wasn’t enough to hammer home the strength in founder-led companies, Nvidia (NASDAQ:NVDA) should do the trick. Founded more than 30 years ago by Jensen Huang, Huang’s long-term outlook, patience, and willingness to identify and innovate toward emerging tech trends — artificial intelligence in particular — benefited shareholders and customers alike.
I don’t need to rehash Nvidia’s shocking performance over the past two years, nor the catalysts, but instead want to look at Huang’s unique approach to management and steering the company forward. Huang emphasizes his humble beginnings often, pointing to time spent bussing tables as a teenager as a major contributor to today’s work ethic and willingness to dive into the dirty details to make sure products and processes are on point.
Moreover, Huang isn’t content to rest on his laurels like so much of the professional-managerial CEO class — he’s actively looking to “futureproof” Nvidia in a bid to protect his current empire and help it adapt and evolve with the times. This commitment to excellence and, more importantly, a long-term view of things is rare in a market more focused on quarter-to-quarter outcomes than multi-year game plans. That’s yet another reason to fall back on founder-led companies.
Figs (FIGS)
Figs (NYSE:FIGS) faced a particularly trying few years after peaking at nearly $50 per share following its 2021 IPO, only to drop to around $6 per share today. But the drastic per-share price dip conceals a major advantage that could reverse its fortune. Figs counts itself among founder-led companies, created in 2013 and jointly run by the founders Heather Hasson and Trina Spear today, but also facing near-inevitable market share dominance.
Figs makes higher-end uniforms for healthcare professionals, essentially trying to do for scrubs what Lululemon (NASDAQ:LULU). However, the company faced stiff competition from the nation’s largest scrubs company, Careismatic Brands, which dominates as much as half of the overall market. But Careismatic is faltering, having emerged from bankruptcy proceedings last month. Successfully navigating bankruptcy comes with a price; namely, new shareholders who helped the company continue will likely pick it apart for scrap in a bid to extract every ounce of value from the firm, long-term consequences be damned. That’s already apparent as the company lays off staff and closes distribution centers.
This shakeup, of course, works to Figs’ benefit: the company is primed to snatch up market share from Careismatic, particularly if the quality starts suffering (which seems likely, all things considered). One interview with Spear highlighted the unique approach to targeting its total addressable market (TAM) that typifies founder-led companies, as she said “lazy companies sell into TAM, and innovative companies create TAM.” Careismatic’s failings may end up creating the biggest TAM of all for Figs moving forward.
Regeneron Pharmaceuticals (REGN)
Few have as close a bead on the wider biotech market as scientists involved in the industry, making Regeneron Pharmaceuticals (NASDAQ:REGN) unique among founder-led companies. Led today by co-founders George Yancopoulos and Leonard Schleifer, the CEO and president/chief science officer, respectively. Regeneron is also unique among biotech stocks in its relative stability in a volatile sector. In fact, its beta is just 0.13, which is shockingly low for any stock — let alone one in the biotech field.
One of Regeneron’s recent successes is the August 2023 FDA approval for a high-dosage version of its eye disease treatment, Eylea. This approval strengthens Regeneron’s competitive position and helps mitigate the impact of Medicare price negotiations on the company’s revenue.
Regeneron’s future also looks promising due to its other therapeutics, especially Dupixent. Initially used to treat asthma and eczema, Dupixent is now in Phase 3 trials for chronic obstructive pulmonary disease (COPD). Early results are promising, showing a 34% reduction in symptoms. Given Dupixent’s current success, analysts project that expanding its use to COPD could drive sales to $20 billion annually.
Crowdstrike Holdings (CRWD)
As with biotech, few understand cybersecurity’s nuances as techies. Crowdstrike Holdings (NASDAQ:CRWD) is one of those high-end cybersecurity firms that also meets the parameters of founder-led companies, run today by co-founder George Kurtz.
To that end, businesses today face myriad challenges, from geopolitical conflicts and natural disasters to supply chain disruptions. However, regardless of size, cyber threats remain the top global risk for most business owners. Concerns about cyber attacks, data breaches, digital infrastructure vulnerabilities, and ransomware are paramount.
Crowdstrike is uniquely positioned to tackle these escalating threats, even beyond its status among founder-led companies. As technological advancements demand more robust security measures, Crowdstrike’s comprehensive solutions are lynchpins to company success, making switching costs too steep for most firms and further entrenching its market share positioning. The company already boasts a diverse clientele, including government agencies, corporations, small businesses, and educational institutions.
Crowdstrike’s impressive financial performance reinforces the founder-led company thesis. The company has seen significant revenue growth over the past five quarters, with the last four marking its first consecutive profitable periods. These steady income increases, especially in the current economic climate, indicate a promising future for Crowdstrike as it continues to dominate the digital security landscape.
On Holding (ONON)
On Holding (NYSE:ONON) is doing what competitors like Allbirds (NASDAQ:BIRD) and even Nike (NYSE:NKE) simply can’t these days: adapting to changing consumer trends while maintaining a sufficiently high price point and popularity to keep margins high. All three co-founders also have executive positions in the company today, making On Holding one of the top founder-led companies to watch.
Most interestingly, On’s apparel segment sales climbed 25% in the company’s first-quarter report, yet apparel makes up less than 4% of total sales. On is still a relatively new shoe brand and, on its current trajectory, will likely rapidly expand its apparel segment to more closely match shoe sales and ultimately boost top and bottom-line numbers. By comparison, Nike’s apparel segment comprised more than 25% of total sales. So, by using Nike as a basis for comparison, On Holding has plenty of room to grow peripheral sales streams even as it expands its current 8% share of the US market. To the latter point, On owns 40% of the running shoe market in its home country, Switzerland, creating a blueprint for further US penetration.
Hyatt Hotels (H)
Hyatt Hotels (NYSE:H) is a bit of an outlier on this list of founder-led companies. The brand’s first hotel opened in 1954, and Jay Pritzker brought the soon-to-be chain and rapidly turned it into an international brand. Though Jay Pritzker passed in 1999, management has kept it in the family — with Jay’s son, Thomas Pritzker, acting as executive chairman today. Hotel stocks are already seeing a resurgence if travel ETF AdvisorShares Hotel ETF (NYSEARCA:BEDZ) is any indication. Likewise, Hyatt, in particular, is set to rebound rapidly, as evidenced by its 20% gain since January.
Hyatt holds less than 10% of the global hotel market share, eclipsed by competitors like Marriott (NASDAQ:MAR) at 30%, luxury and destination brand Loews Hotels (NYSE:L) at 20%, and even Hilton (NYSE:HLT) at 13%. But that will likely change soon, as Hyatt has more than 125,000 new rooms in its development pipeline or a 40% increase over current availability. The rapid expansion of this type in a relatively constrained economy is nearly unheard of, let alone for a cyclical industry like hotels and travel — but Hyatt is bucking the wider trend in a bid to bounce back faster than competitors as wider macro conditions improve.
On the date of publication, Jeremy Flint held a long position in FIGS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
