Invest in innovation - 5 stock picks

Investing in the cutting edge is inherently risky. But these five firms -- either technology companies working on breakthoughs or mature businesses benefiting from new trends -- are best positioned to turn innovation into profits.

3D Systems

3D Systems stock pick

"Printing" objects out of thin air

The idea of being able to replicate an actual three-dimensional solid object from a digital model used to be something straight out of Star Trek. Today 3D printers aren't just real, they can be found at your neighborhood FedEx (FDX, Fortune 500) or UPS (UPS, Fortune 500) Store to create anything from tools to models to parts. McDonald's (MCD, Fortune 500) is even considering using 3D printers to build Happy Meal toys on site.

The hope is that soon you, too, may want a 3D printer in your home.

That is where 3D Systems (DDD) comes in. This South Carolina company has a leg up on competitors such as Stratasys (SSYS), ExOne (XONE), and Germany's Voxeljet (VJET) because it not only offers high-end devices marketed to manufacturing giants like General Electric (GE, Fortune 500), but also sells affordable, mass-market printers, says Sandy Villere, who owns the stock in both the Villere Balanced Fund (VILLX) and the Villere Equity Fund (VLEQX).

Those printers, marketed under the Cube brand, aren't cheap. The devices go for nearly $1,300 at retailers such as Amazon, Staples, and Office Depot. And that's not factoring in the cost of the cartridges with the materials required to fabricate your objects.

Related: Hershey's partners with 3D Systems on chocolate printer

As with all consumer technology, the price is expected to decline quickly as adoption grows. Last year 3D systems sold roughly 24,000 printers, up from 5,300 units in 2012, according to Bank of America Merrill Lynch analyst Wamsi Mohan. "When you look forward, I really don't think it's a question of if people will have 3D printers in the home. It's whether it will be in the garage or the kitchen," Villere says.

The big risk: Competition is heating up. Rival Stratasys recently acquired MakerBot, a hot 3D printing startup with a strong consumer business. Plus, HP (HPQ, Fortune 500) is even thinking of jumping in.

Also, this stock trades at a P/E of more than 60, based on 2014 estimated earnings. With a valuation that high, volatility is a given. For example, after the stock hit an all-time high in mid-November, it plunged 20% in just two days.

Why it's a buy: Villere notes that profits are expected to rise 25% a year for the next few years. Part of the company's secret is an old-fashioned razor-and-blade model. The big profits -- with margins as high as 75% -- are in the cartridges needed for printing. (By comparison, margins on the printers themselves are about 45%.) Wisely, 3D Systems switched over to proprietary materials a few years back.

  @lamonicabuzz - Last updated January 21 2014 04:19 PM ET
Join the Conversation
top pros

These top fund managers and foreign-stock specialists thrived amid global upheaval. Find out how they did it -- and where in the world they see opportunities.

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.