3 Gravity Defying Stocks, and 1 Lesson Learned

Through books such as Million Dollar Portfolio, and The Motley Fool's investment newsletter services, TMF co-founder David Gardner has laid out his market-beating criteria in "rule breaker" investing.

I've learned a lot from this strategy over the years. Like many Fools, I've learned to look for "first mover" growth companies, as well as businesses with great management teams.

The biggest thing that rule breaking investing has taught me, however, is to challenge my biases. Like most investors I have an inescapable urge to sell a winning stock that has had a huge run up in price; this is an urge that's cost me a lot of money, and it has also taught me a valuable lesson.

By watching companies like Google, Starbucks (NASDAQ: SBUX  ) , and Chipotle crush the market, I've learned that great stocks don't always come back down to earth.

Here are three high-priced stocks that just might defy gravity indefinitely.

More than a hill of beans

Starbucks is a perfect example of how a company can keep shattering growth expectations without doing anything flashy. Starbucks recently reported earnings growth of 28% year over year, led by rising margins and increased foot traffic. Going forward this coffee maker should see increased growth from its newly-aquired Teavana brand, as well as an increase store-bought products (which currently account for less than 10% of sales). 

Good coffee isn't the only factor behind Starbuck's growth. The business has been on an unheralded run since Howard Schultz returned as CEO. Starbucks really owes a great deal of its growth to the passion that Schultz has for the product.

Here's a perfect example of what I'm talking about:

In 2008 Schultz ordered a worldwide, three hour shutdown of all Starbucks stores for training. The move was criticized by many investors, as closing the stores cost Starbucks revenue in the short-term. But shutting down during peak hours to "perfect the art of espresso" was exactly the kind of message that Schultz needed to send to the market.

The company recently raised its profit forecast and expects to grow earnings by double digits again this year. I've followed, and held, Starbucks for years and have heard investors call it "expensive" at $16 per share, and at $30, and at $50.

I can understand why Starbucks growth is always in doubt--many people just view it as an overpriced coffee shop, but it's so much more than that. When you buy a share of Starbucks, you're really buying a piece of Schultz. Sure the company could be overvalued now, but I feel you can't put a valuation on the passion of a founder like Schultz. I may end up looking foolish (small "f") for recommending the stock at this high of a price, but not any more foolish than those who feel it must drop in price simply because it has gone up. I won't bet against Starbucks, at least not as long as Schultz is leading the company.

High risk, high reward

After reporting second quarter earnings that were down 9%, and missing expectations, 3D Systems (NYSE: DDD  ) saw its shares tumble. In the two weeks that have followed the announcement the stock price has rebounded, but the short interest in the company still sits at a lofty 27.25%.

In my opinion, with quarterly revenue growth at 45%, you should be cheering the presence of short sellers. For truly long-term investors, the short-sellers offer a potential catalyst via a "short squeeze."

Clearly these shorts are flocking to this stock based on valuation. 3D Systems has been a phenomenal growth story in recent years, but it currently trades at a P/E of over 100. To some investors, this may be a stock that has rallied too far, too fast.

However, earnings matter a little less to a company like 3D Systems, so the P/E is less relevant. This business is in an early stage of its growth, and it needs to spend money. 3D was wise to increase spending in the second quarter, focusing on R&D and marketing instead of the bottom line.

If you believe in this stock, I wouldn't be discouraged by the quarter. If anything, you should be encouraged that management is focused more on growing the business than "looking good."

The PG-13 version of "Hooters"

Buffalo Wild Wings  (NASDAQ: BWLD  ) is another stock that seems richly valued, but may be going higher. The company resembles both Starbucks and 3D Systems in that it has a great CEO in Sally Smith, and it also has high short interest at over 10%. This wing-slinging business just reported a blow-out second quarter , with net income growth of 41%. Still, with a P/E ratio over 30 and a run up in share price of $40 just this year, some investors are calling the stock pricey.

I understand the concern over valuation, but Buffalo Wild Wings has a hidden sneaky moat that may keep competitors at bay for a while. It's a large scale wing and beer place to watch the game, but it is also family friendly. Most people wouldn't bring their kid's to Hooter's, but they can bring the kids to Buffalo Wild Wings, and that is a huge competitive advantage.

For this reason alone, I feel that any short-term price drops will be outweighed by long-term growth at Buffalo Wild Wings. Until a viable competitor offers something similar on the same scale, there's no reason that this stock can't go even higher.

Say it with me: in the stock market, gravity does not exist

It's natural to believe that a high-priced stock must come down to earth, or that a low-priced stock must bounce back, because most things in life work this way. Computers have dropped significantly in price from their early days, and everyone looks for a bargain at the super market.

But in the stock market, our instincts can hurt us. The truth is that great stocks don't always come back to earth, and an underlying businesses performance matters more to a stock than a P/E does.

If a business is delighting its customers, growing its market share, and fending off competitors, there is no reason that it cannot go higher indefinitely. 

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 22, 2013, at 10:13 AM, analyze224 wrote:

    I've been investing in, (long and short, variously), and researching 3d Systems and the industry for about a year and find this technology and its implications to be a most interesting subject.

    Two things that I can't quite resolve currently about the long thesis for DDD, specifically, and would welcome others' thoughts on are:

    1. If future prospects are genuinely positive for this company and near-term earnings are being subordinated for the sake of investing in a very bright future, why is there a decided insider sales bias? (weren't there large sales by the founder in March of 2013, followed by large sales by other mgmt insiders when the last offering of shares was made in May of 2013?)...

    Admittedly, I find the reporting of insider transactions sometimes confusing, (in regards to all co's), so I'm not certain about the above, but if I'm not mistaken... the above is correct?

    2. The huge push and great enthusiasm for DDD's future prospects seemed to center on the consumer market and the Cube. Then the Staples deal seemed a first exciting indicator of market possibilities for the Cube. The Cube was to be in some Staples stores earlier this summer, (June, I believe?).

    Are the printers actually in Staples' stores or are they only available online? If only or principally available online, is Staples assuming any of the risks related to cost of purchasing inventory or only purchasing the machines from the manufacturer as they sell?

    I hear the Cube is available elsewhere now - though the financial risk and commitment that retailers are assuming with this product is unclear to me...

    Does anyone know how well this product is selling?

    Thanks

  • Report this Comment On August 22, 2013, at 10:43 AM, TheCommonTulip wrote:

    Hello fellow Fool,

    I don't hold shares of 3D Systems, but perhaps I can be of assistance.

    To answer your first question, companies that are not far off from an IPO typically see larger insider selling. While DDD is not exactly "post-IPO" anymore, it's still a relative new comer to the public markets. Also, in general, I feel insider sells are a lot harder to judge than insider buys.

    As for your second questions, both Staples and Office Depot are set to stock the Cube this month. Sales were up 45% in the most recent quarter, and the company is investing heavily in advertising the product.

    This is a high risk, high reward play.You should not invest all of your money in this stock, and you should expect your investment to be highly volataile.

    If you would like more thorough analysis of this stock, I highly recommend subscribing to one of The Motley Fool's newsletter services that follow. It's a small cost to help you make an informed decision.

    Best of luck, and Fool on!

    Adem Tahiri

  • Report this Comment On August 22, 2013, at 12:03 PM, analyze224 wrote:

    Adem,

    Thanks for your response.

    I don't know what to make of the insider sales. As you say insider sales can be an uncertain indicator, although I tend to think generally that a closer inspection of the specifics of insider sales can yield meaningful perspective.

    If it were one or two insiders who had recently sold and if the amounts were commensurate with the purchase of a swimming pool, expensive car or home, this would be unconcerning.

    If I'm not mistaken, (my earlier caveat was that I could be misreading the insider data, though I don't think I am), these sales are of many millions of dollars of stock and were made by several insiders.

    Not sure that the recent IPO theory applies here as the company has been public for 2-3 years, I believe.

    On the Staples/ Office Depot point - do you have any perspective on what the delay has been in stocking at Staples stores? The plan, as I understood it, was to stock only in selected stores rather than all stores, so it wouldn't appear that inventory would have been a barrier.

    Also, when you look at sales on Amazon vs competitive printers, to the extent that the number and nature of comments is an indicator it looks like the competitors may have an advantage.

  • Report this Comment On August 22, 2013, at 1:27 PM, TheCommonTulip wrote:

    Greetings Fool,

    Let me start by stating that it is not my intent to cheerlead this stock, this stock has real risks involved. The purpose of the article was to speak more to the idea of "valuation" and how fruitless it is to sell a stock, simply because it has risen.

    With that said, I really wouldn't put much stake in insider sales. For instance, Reid Hoffman of LinkedIn recently had a massive insider sale that some might find concerning. But the same folks have been alarmed at his massive sales in the past...and the stock has risen after each one.

    When you're talking about large holders of a stock, eventually they'll want to spend they're money on something else. We simply cannot attempt to discover their motives with any consistency.

    As for Staples, the roll-out was late June but only for very select retail markets. Think of this like an electric vehicle, it's not going to be ready for mass adoption like a beanie baby on day 1:)...Staples will need to gauge demand.

    Even if the Cube flamed out at Staples, that may have more to do with Staples woes than 3D's.

    You're asking great questions about the underlying business, and I'd encourage you to continue doing so. If you're not sure about the stock, or if it makes you feel greatly nervous, I'd recommend just skipping it. I only say that because I wouldn't want you to panic sell on any dips....and there will certainly be dips on this high risk/high reward rule breaker.

    Wishing you many happy returns,

    AT

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