You'd Be Crazy to Invest in This!

If you've developed as an investor on a steady diet of Benjamin Graham and Warren Buffett, you're not going to like this story. I'm going to suggest breaking just about every one of their rules:

  • Find innovative companies that aren't yet profitable.
  • Look for high P/Es.
  • Check and see whether there's a heavy short interest.

Then, buy those companies.

So which companies am I going to lay down money on, and why am I taking this approach? I'll tell you in a moment, but first, let me explain how I got started on this quest for winning stocks.

The backstory
I'm an avid fan of David Gardner's Rule Breakers style of stock picking. I once asked David, "Are you worried that the more popular your style becomes, the less profitable it might be?"

His response, generally, went something like this:

  1. "No matter how popular my style of investing gets, it will still dwarf the style used by institutional investors, who command the lion's share of the market’s money."
  2. "Because my style of investing goes against human nature (specifically, loss aversion), when the downturns hit, many people will flee this style of investing."

A crazy portfolio?
It's the second part of David's response that has really stuck with me. To invest successfully, I have to be willing to fight against my urge to flee toward "safe" investments. Or, as I like to think of it, to invest like a Rule Breaker, you have to be a little crazy.

With that in mind, I've decided to devote a part of my retirement portfolio toward Rule Breaker-type investments and name it my Crazy Portfolio. To be absolutely clear, I'm not managing the Fool's money or making official recommendations here; I'm just sharing my own personal picks.

Instead of kidding myself into thinking that I have superhuman powers that render me unaffected by normal human emotions, I'll readily acknowledge that it isn't easy being a Rule Breaker. Calling my group of investments the Crazy Portfolio will serve as a constant reminder.

A crazy portfolio!
I'm looking to create a 10-stock portfolio. Following are the first five companies I'm investing my own money in, with a quick look at what they do, what their P/Es are, and how much of their float (shares available for trading) short sellers have sold.

Company

What It Does/Sells

P/E

% of Float Short

Westport Innovations (Nasdaq: WPRT  ) Natural gas engines

NM

10.8%

Travelzoo (Nasdaq: TZOO  ) Travel and local deals

NM

64.4%

Ancestry.com (Nasdaq: ACOM  ) Genealogy website

52

13.1%

Green Mountain Coffee Roasters (Nasdaq: GMCR  ) Keurig coffee makers

114

15.5%

lululemon athletica (Nasdaq: LULU  ) Female sportswear

64

7.4%

Source: finviz.com. NM = not meaningful because of losses.

Though not profitable yet, Westport Innovations offers an enticing opportunity to invest in a company that could represent the wave of the future. Westport's team of engineers has developed engines that can be used in everything from cars to long-haul trucks. Partnerships with engine maker Cummins (NYSE: CMI  ) and General Motors make this pick look like it could be a long-term winner.

Travelzoo, on the other hand, has quietly developed into a two-headed beast that's dominating its niche of the "deals" world. For more than a decade, it's been giving its loyal subscribers travel deals that can't be found anywhere else on the Internet. Recently, it's been making even more headlines with its Local Deals service, which aims to provide two quality deals per week for every market the company serves.

If you want to know where you're from, Ancestry.com is the place to go. The company has digitized huge numbers of records from sources including Ellis Island and the U.S. census, and it has now taken its service abroad. Not only is its product gaining popularity in Europe, but Ancestry's employees have begun digitizing records from across the pond as well.

Green Mountain's Keurig coffee makers have quickly become ubiquitous in offices and kitchens across the country. Some observers think this company is wildly overvalued, yet it continues to fire on all cylinders. Partnerships with the likes of Starbucks give investors reason to be optimistic moving forward.

Finally, you can think of lululemon as an Under Armour (NYSE: UA  ) type of retailer aimed primarily at women. Originally started with a sole focus on yoga, it has expanded into running apparel, as well as products for men. The company, which still has lots of room for growth in the United States, showed a 16% increase in same-store sales last quarter and has a record for confounding Wall Street expectations.

Foolish takeaway
If you want to keep tabs on these five companies, I suggest you add them to your watchlist. If, on the other hand, you want a second opinion, I'm willing to give you access to a special free report titled "5 Stocks The Motley Fool Owns — And You Should Too." In it, you'll find a report of five companies hand-picked by The Motley Fool's top analysts. It's yours, today, absolutely free.

Many people consider Fool contributor Brian Stoffel to be crazy. He owns shares of Starbucks, lululemon athletica, Travelzoo, and Ancestry.com. He plans to add shares of Westport and Green Mountain Coffee Roasters to his portfolio.

The Motley Fool owns shares of Starbucks, lululemon athletica, and Under Armour. Motley Fool newsletter services have recommended buying shares of Westport Innovations, General Motors, lululemon athletica, Green Mountain Coffee Roasters, Under Armour, Ancestry.com, and Starbucks. Separate Fool newsletter services have recommended creating a lurking gator position on Green Mountain Coffee Roasters, as well as shorting Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (20)

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 July 19, 2011, at 2:50 AM, bikesncats wrote:

    I believe every protfolio aimed at increasing wealth requires a few "lottery tickets"...personally I do like this approach of identifying reasonable candidates.

    I believe ATPG and VLNC may fit the bill as well if one remains a little flexible on some criterias.

    Thank you for sharing.

  • Report this Comment On July 19, 2011, at 4:20 PM, jed71 wrote:

    1."No matter how popular my style of investing gets, it will still dwarf the style used by institutional investors, who command the lion's share of the market’s money."

    Did you mean for this to read "dwarf" or "be dwarfed by"? Subtle difference, but two very different meanings.

  • Report this Comment On July 28, 2011, at 3:38 AM, rodessa wrote:

    Have to be fully crazy to be long in LULU as it has a Price Earning Ratio of more than 66 for 2011 and of more than 46 for 2012, mean a ratio MUCH more than 3 times higher than NIKE or ADDIDAS, worlwide companies, not quite only implanted in the US, so suffering less of the crisis, and more able to create technical products in sportswear in YOGA and other sports.The quote of LULU has already increased of more than 500% in the past 20 months, but LULU is not APPLE.Time has come for me to be short on LULU.The insiders of LULU have already sold all their shares since several weeks, mean that they think the quote is greatly overvalued, as nothing technical in their product.With 3.60 $ of net asset per share, and adding 5 years of cash flow, the real value is less than 15.00 $

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