I've come to know the group running our Motley Fool Rule Breakers service pretty well. They're smart guys and I'm learning lots from them. What strikes me most, however, is how vastly different their investing philosophies are. For example, David Gardner tends to focus on technologies that are changing the lives of consumers. Charly Travers, on the other hand, is far more interested in biotechs that are shaking the foundations of the hallowed halls of medicine. Both approaches are working well.
Take the February issue, for example. In it, David picked Archipelago Holdings (NYSE: AX ) while Charly opted for Vertex Pharmaceuticals. Both of these picks have been stunning performers over a short time. Vertex has been the winner thus far, up more than 115%. No slouch, Archipelago has rushed forward by more than 83%. And this is in a down market!
To be fair, these picks have only been on the books for nine months. It's entirely possible that both stocks have run their course. It's also possible that I'll dress in drag and dance the cha-cha at the company Christmas party. Don't bet on either. Instead, let's figure out why David and Charly made these picks, hopefully providing us clues for finding our own ultimate growth stocks.
The price of being ignored
Let's start with Archipelago, which owns ArcaEx, one of the largest electronic stock markets. David's thesis, in a nutshell, was that investors had proved open to adopting the efficiencies offered by the Internet, and that would allow Archipelago to take more and more business from traditional stock trading exchanges such as the NYSE.
Moreover, the firm had been in business since 1997 and was so successful that it bought the Pacific Stock Exchange, which resides in my old stomping grounds in San Francisco. The deal made sense because the PCSE, as it is known, was the first exchange to create an electronic trading system.
Business was also going well. ArcaEx was processing more than 2% of the NYSE's stock trades and nearly 24% of the Nasdaq Stock Market's (Nasdaq: NDAQ ) as of David's write-up. The company, however, was still valued at less than a billion and trading a relatively modest forward price-to-earnings ratio of 17. In short, it was being ignored. David smelled opportunity. He wouldn't have to wait long.
In April, the NYSE announced it would acquire Archipelago, just days after rival Nasdaq began talks with Archipelago competitor Instinet (Nasdaq: INGP ) . The shares rocketed upwards on the news, but have since settled by nearly 20% as competition in the market proved brisk. Still, the NYSE Group -- which should formally come to life when the merger closes next year -- plans a hybrid trading system that could put huge pressure on the Nasdaq and lead to still further upside.
Low expectations, you say? Great!
Vertex's story couldn't be more different. At the time of his recommendation, Charly wrote that the depressed stock price was the result of inflated expectations from a team of wunderkinds who fled from Merck (NYSE: MRK ) in 1989 to form Vertex. Indeed, some analysts apparently thought the firm had fallen well short of its promise.
Not Charly. Instead, he focused on Vertex's existing products -- notably Lexiva for treating HIV -- and the royalty payments that were fueling top-line growth of 40% to 50% annually. He also wrote that Vertex's partnering agreements with big pharmas such as GlaxoSmithKline (NYSE: GSK ) , Avalon Pharmaceuticals (Nasdaq: AVRX ) , and Novartis (NYSE: NVS ) were saving precious cash for research and development.
And that made peering into the pipeline all the more interesting. Top of the list was the company's VX-950 drug for treating Hepatitis C, because virtually no one else was venturing into these deep waters. If successful, VX-950 could create a multi-billion-dollar franchise, Charly wrote. May brought the first signs of realizing these expectations when VX-950 passed its first clinical trials with flying colors. Now, it's on to phase 2 trials, but the encouraging early results could bode very well for patient investors.
And the better pick now?
Which one will be the winner from here? That's anyone's guess, but I'd put my money on Vertex. With Archipelago about to be absorbed into a 200-year-old institution, growth will be harder to come by. Conversely, Vertex's future doesn't depend solely on the success of VX-950. But if it comes through ... Well, look out above.
That's my opinion, of course. To hear what David and Charly think, consider a 30-day free trial to Motley Fool Rule Breakers. You'll get access to more than two dozen buy reports, deep insights on developments in biotech, nanotech, and consumer tech, and interviews with many Rule Breaking CEOs. And if you click here now, you'll be able to access the brand new issue when it is released at 4 p.m. today. There is no obligation to subscribe and all you have to lose is the prospect of better returns.
Fool contributor Tim Beyers only breaks the rules in his portfolio. Wimp. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile, which is here. Merck is a Motley Fool Income Investor recommendation. The Motley Fool has an ironclad disclosure policy.