When it comes to finding market-beating stocks, or even the rare multibagger, you want to get in on an emerging trend and ride the wave for all it's worth. Those that jumped on the Netflix bandwagon at a time when Blockbuster was the big kid on the block made a boatload of money. Heck, those of us that scoffed at the idea people would pay $5.95 for a coffee on their way to work every morning missed out on Starbucks, one of the best investments over the past two decades.
However, all of those investments came with equally large risks -- risks that aren't for everyone, especially retirees. For reasons you are about to learn, Blue Buffalo Pet Products (NASDAQ: BUFF), Dexcom (DXCM 0.33%), and Yelp (YELP -0.38%) each fit the bill for such a stock, but are they right for you? Let's dig in.
Image source: Blue Buffalo's corporate website.
Daniel Miller: One company I find intriguing, but likely has too many question marks for retirees, is Blue Buffalo Pet Products (NASDAQ: BUFF). There's a wave of health-conscious consumers out there spending money, and many of them have pets they spoil rotten.
Blue Buffalo is the fastest-growing major pet food company in the U.S. and makes its money selling dog and cat food made with high-quality, natural ingredients. It's a billion-dollar brand based on sales and is the market leader in the wholesome natural market segment.
Blue Buffalo recently announced its first-quarter results, reporting that net sales rose 12.5% and net income jumped 24.3%. In terms of future growth, there should be plenty. A rising tide of health-conscious and animal-loving consumers is likely to lift the wholesome natural pet food segment as a whole, and as Blue Buffalo only owns 6% of the overall pet food industry and feeds only 2% to 3% of pets in the U.S., there should be a lot of room to grow.
However, there are plenty of risks with such a young company. There will undoubtedly be intensifying competition as longtime brands create and distribute their own healthier version of products. While Blue Buffalo has thus far fought off competition from much larger companies, it remains a risk retirees probably shouldn't take with their investments.
Another red flag for investors with Blue Buffalo is best modeled by a lawsuit from two years ago, when Nestle Purina Petcare claimed the company mislabeled products about including certain by-products. While that's since been settled, it's a risk buying into a company basing its business on providing wholesome and healthier pet food when it has previously misled consumers about what exactly is in the food.
Image source: Dexcom.
Brian Feroldi: An estimated 29 million Americans have diabetes, a chronic disease that inhibits the body's ability to regulate blood glucose levels. In the U.S. alone, we spent about $245 billion in 2012 to treat diabetes, which is about 20% of our total spending on healthcare. That's a huge market, and any company that can create an innovative treatment option for patients with the disease is bound to prosper.
That's one reason that I like Dexcom (DXCM 0.33%), a fast-growing medical device company that is focused on diabetes. Dexcom sells a continuous glucose monitor, or CGM, that is worn on the body and gives patients an almost real-time look at their blood glucose levels, which enhances their ability to make therapeutic decisions.
Dexcom's growth has been nothing short of astounding. Revenue is up more than 10 times since 2010, and the company is finally getting close to being profitable. Even still, Dexcom believes that it has only scratched the surface of what is possible in the U.S., and when you add in the international opportunity, I think that its rapid growth will continue for years.
So if everything is coming up roses for this company, why do I not like it for retirees? First, the company is competing head on against Medtronic, a deep-pocketed industry giant. Thus far Dexcom's more advanced technology has helped it run circles around Medtronic, but we shouldn't dismiss the latter's chances of catching up.
Second, Abbott Laboratories is looking to enter the market soon, which is another potential competitive threat. I have my doubts about its chances of success, but if Abbott's offerings are well liked, it could potentially dent Dexcom's growth rates.
Finally, Wall Street is well aware of Dexcom's growth prospects and has priced its shares accordingly. The stock trades for more than 11 times sales, and that's after it has fallen over 40% over the past few months.
Still, I think that Dexcom's lead is so big and that its opportunity is so massive that it's worth paying up to own shares, but I don't think this stock is a good choice for retirees. There's simply too much risk here.
Steve Symington: I highlighted Yelp (YELP -0.38%) in a similar roundtable article this past December. So with two more quarterly reports under its belt since then, I think now is the perfect opportunity to touch base and reiterate my view of the volatile local business review specialist as a stock I like -- just perhaps not as part of a retiree's portfolio.
I previously expressed concerns that, as a fast-growing, yet-to-be-profitable business that doesn't pay a dividend, Yelp "tends to suffer significant volatility" that could make it unappealing to investors working with shorter time frames. Sure enough, shares of Yelp have fallen 17% since that last roundtable, all but giving up the gains it had enjoyed following its solid third-quarter 2015 report one month earlier. For that, investors can largely thank the broader market's historically painful start to 2016 for pulling shares of Yelp down.
But that's also not to say Yelp's actual business hasn't performed admirably over the same time period. When the market was at its worst in mid-February, Yelp shares at one point were trading more than 50% lower than when I called the company out in December. But shares have enjoyed a healthy rebound since then on the heels of Yelp's solid fourth-quarter 2015 and first-quarter 2016 reports in February and earlier this month, respectively. Following the latter, Yelp stock popped more than 20% in a single day after the company announced revenue jumped 33.8% year over year, to $158.6 million, driven by a 40% increase in local ad revenue, to $138.1 million.
Yelp also raised its full-year guidance for both revenue (to a range of $685 million to $700 million), and adjusted EBITDA (to a range of $90 million to $105 million), and management reiterated their confidence the company enjoys a "long runway" for growth and will reach at least $1 billion in revenue by fiscal 2017.
At the same time, Yelp remains unprofitable based on generally accepted accounting principles, and turned in a GAAP net loss of $22.2 million last quarter alone. Of course, it's not uncommon for businesses to consciously forsake near-term profitability in their quests for revenue growth and market share in the early stages. And that's especially crucial for businesses like Yelp, which face a constant barrage of competitive threats both large and small battling for the same local ad markets. But again, this often means enduring stomach-churning volatility. And with a lack of guaranteed capital coming back to shareholders in the form of dividends, in particular, I think Yelp would be most appropriate as a smaller speculative position, or for younger investors comfortable with risk and a longer-term time frame.
