A good college commencement speech is designed to inspire -- not just the recent graduates heading out into the world, but anyone who hears it. That can be a tall order, but one part of Michael Bloomberg's 2016 address at the University of Michigan provided a spark for Motley Fool co-founder David Gardner.
The idea that humanity is exiting the industrial age and entering the information age led him to craft a batch of stock recommendations for his Rule Breaker Investing podcast that were best suited to a thinking world. And right on schedule, David's back to tell us how that group has done compared to the broader market in the two years since. And it's been a particularly interesting period for this set of companies: Celgene (NASDAQ:CELG), Walt Disney (NYSE:DIS), Splunk (NASDAQ:SPLK), Twitter (NYSE:TWTR), and Zillow (NASDAQ:ZG) (NASDAQ:Z).
A full transcript follows the video.
This video was recorded on May 9, 2018.
David Gardner: The first thing you need to know -- this is the way I like to start my reviews -- is to note how the market has done in the last two years since May 4, 2016 when "5 Winners in a Thinking World" aired, and I'm just taking the closing prices from that day. And the stock market from 05/04/16 through 05/07/18 [Monday's close], the market is up 30.2%. That has been a great two years.
You and I know that the market tends to average around 10% a year. Two years with a little compounding wouldn't be much more than 20%, so this has been an above-average period, and a great time to be invested. And, you know, a lot of people two years ago were saying, "Market's going to sell off. It's going to be really bad in 2016 because it's been so good the previous years."
And yet look what's happened. Let's not look backward. Let's look forward and let's look with the eyes of history as our guide. Yes, the stock market will sell off one year in three, and definitely there will be [and have been] some down times, so let's not get too carried away with trying to guess where the market's headed based on where it's been.
Now, the five stocks were "5 Winners in a Thinking World." I was positing two years ago this week that the world has moved. I was quoting Michael Bloomberg, entrepreneur and politician. He was talking about how historically humans had started as an agrarian species after our hunter-gatherer phase, so for thousands of years we were farmers. And then for a couple of hundred years, we entered the industrial age.
But then he said [and, in fact, this was in his speech to graduating seniors at the University of Michigan a few years ago], that now we're entering the age of information. We're no longer farming as much. We're no longer as much about factory production. Now we're about the life of the mind, and the possibilities.
And so, inspired by that, I looked across the 200 or so active recommendations which I've made in Motley Fool Stock Advisor and Motley Fool Rule Breakers, all brought together in what we call Motley Fool Supernova [a service I hope many of you are enjoying]. And I looked across those 200 and I said, "Which are five companies that will benefit from this increasingly [thinking] world that we're living in?"
And I also said, "I'm not going to pick the obvious ones," two years ago. I said, "I could definitely pick Alphabet, because Google of searching and all the life of the mind that's baked into that company. Or some of the other big companies like Amazon." I said, "I'm going to restrict myself from taking those obvious, big internet players. Let's look for five other kinds of companies." And here's what they are and here's how they've done.
Stock No. 1: The first one up, alphabetically, is Celgene. The ticker symbol is CELG. Celgene, two years ago, was at $101 a share. Celgene, as of Monday's market close was down to $84.57. So, not such a great stock pick of mine. Celgene down 16%. The market up 30%. So, we're going to have to log a minus 46% to start this review of my stocks from five years ago, as Celgene has dropped a little and the market, as we've already established, has done quite well.
In case you don't know Celgene, C-E-L-G-E-N-E, this is a company that is really the worldwide leader in fighting blood cancer. Its drug, Revlimid, is the big dog and continues to be really relevant; however, the possibility of it running out of its patent and being copied by cheaper upstarts has given the market pause as it looks at Celgene stock.
So, I turned to one of my fellow analysts, Karl Thiel, and he shared that and a little bit more with you. For those of us who are interested in Celgene, Karl wrote [and I'm just going to read it out, here], "Celgene has for years, now, and without any significant stumble, put up a great financial performance. It has posted" -- get this -- "double-digit revenue growth every year since 1996. Even recent concerns about newer products like Otezla, struggling against competition, has been overblown. After a difficult quarter last year, they rebounded.
"But since so much rides on Revlimid, on track for $9.5 billion in sales this year, fears about patent expiration trumped pretty much all other concerns and, more recently, investor confidence has been shaken by some bad luck or unforced errors [a botched application for Ozanimod], an expected blockbuster in multiple sclerosis. Also, the failure of a late-stage Crohn's disease drug. Even some disappointment with a Revlimid label expansion. Management insists revenue will reach $19-20 billion by 2020, but investors worry what will happen next.
"Our feeling," Karl writes, "is that even with stumbles and setbacks, the company is setting itself up well for the post-Revlimid world. It bought Juno," [which is another one of our Rule Breakers stock picks]. "It owns a piece of what is perhaps Bluebird Bio's most exciting drug, a CAR T immunotherapy drug for myeloma." By the way, Bluebird Bio is also a Rule Breakers recommendation.
By the way, I call this Foolretsu sometimes. You may be familiar with the Japanese concept of keiretsu, where companies that might have the same capitalists backing them start to work with each other in sort of a networked, competitively advantaged way. Well, I see here, maybe, a new emerging term that I've used some over the years ... a Foolretsu ... when some of our recommendations, unbeknownst to us being to work together.
Anyway, to close Karl's thoughts and then we'll go to the next stock. "Long term, we're very confident that the company will succeed, grow, and prove to be undervalued. The problem is the transition is so uncertain, no one can be sure of when Revlimid generic competition starts. The worst case is the year 2020, with 2024 being more likely and 2026 being definitely. We can't be sure of every pipeline program, so there's definitely a bumpy road ahead as there can be with any biotech, even a gigantic one like this one." So, there's a little bit of a look back and forward at Celgene, which has started with a minus 46% in the loss column. Let's go to stock No. 2.
Stock No. 2: Stock No. 2's ticker symbol is [DIS]. Do you know what that one is? I bet you do. It's Disney. Disney two years ago this week -- think about all the Disney Star Wars movies. Think about Marvel. Infinity War. All those other Marvel movies. Think about Disney Princesses. Expansions with its theme parks. Think about all those toys produced. Think about the genius that Bob Iger has brought to overseeing this company. Two years ago, Disney was at $103.70. As of Monday's close this week, it is down to $102.48, so not down very much. Down 1%.
But down 1% when the market was up 30% has me with a little egg on my face. Just a little. It's not just a yellow egg, because this is The Motley Fool, so it's kind of a multicolored spatter of egg on my face as I look backward, now, at my "5 Winners in a Thinking World" and see Celgene down 46% to the market and Disney down 31% to the market. So, if you're keeping score at home [and darn it, I sure hope you will], I'm going take it out to one more decimal. I'm down 77.8%. We'll call that a minus 78 after these two picks.
I'm not going to spend as much time on Disney. It's a much better-known company than Celgene and some of these others. I think we can all continue to say that this is an iconic brand. This is a great, very profitable company. It is a massive company, far larger than any of the others on this list. It's a company that has guaranteed movie hits going forward about as far as I can see. Far more visibility than any other company in its industry. It's got all the great brands. It's got great management.
It does have that ESPN legacy model which continues to drag the company down some [both in terms of its results and in terms of external perception of Disney], and I think that explains, in part, the underperformance.
Disney I originally recommended not ever as Disney. The reason that it appears multiple times on Motley Fool Stock Advisor and has been a mega winner for our members is that I recommended Pixar a few times and Disney bought Pixar. And even more times than a few I recommended Marvel [since way back in the day when that first Spider-Man movie came out]. Those have been just tremendous performers, but I have six positions in Motley Fool Stock Advisor on Disney, and none of them was ever picked as Disney.
So, it kind of hurts that the stock which I picked in June of 2002 and is up 54x for our members since then; that this stock would underperform for my podcast over the last couple of years and put me deep in the hole at minus 78% before we hit our final three stocks.
And before we get to those next three stocks, I want to mention [and again, if you're a regular listener you know this] that I have, I think, an unblemished record of always beating the market with all my five-stock samplers that I've done since July of 2015 on this show. In other words, we're something like 14 and 0, and right now we're staring at the possibility that we might have our first loss; although, I will point out we're only two years in with this group of five stocks and I was picking them for three-plus years. The big question at this point is will Rule Breaker Investing -- will this podcast -- keep the streak alive?
Stock No. 3: Stock No. 3's ticker symbol is SPLK. The company is Splunk. In a world of big data, think about a thinking world and how much data we're generating. Splunk is one of those big data companies whose tools allow people to conduct better business intelligence. What are people clicking on? How are they using your website? Splunk creates colorful pictures for employees right out there on the front lines and in the field, giving infographics and other industry-leading forms of help through its core business.
Splunk is also a company with kind of a silly name, and one of my six Rule Breaker attributes is always when a company has a brand and within a space where you could just be Big Data, Inc. [BDI, let's say], this company has a little bit more personality and pep. Often a good sign of a potential Rule Breaker, and that has been Splunk.
Now, before I tell you how Splunk's done in the last two years, I should note that before I picked it two years ago, it had done something unusual for one of my picks, because it had dropped 25% in the few months leading up to me picking it two years ago. Kind of a disappointment. The company that had been public for several years -- a good Rule Breaker pick -- was in the midst of a sell-off.
Two years ago, it tipped the scales at $49 a share. On Monday it closed at $109.94. We could round that to $110, but I'll leave it hardcore and make it $109.94. That is a 124.4% gain, and that's 94% ahead of the market. So that minus 78% we were looking at just a few minutes ago all of a sudden just tipped to plus 16%.
So, where has Splunk come from and where is it going? Well, for this one I tapped another one of my analysts, Simon Erickson, and I'm going to give you a little extra, just like I did for Celgene. These are lesser-known companies to many of us [Celgene and Splunk], and I'd love for you to get to know a company like this one a little bit better. After all, it's been pretty lucrative to be a Splunk shareholder these last couple of years and we like it going forward.
When I asked Simon what had happened, he said, "Well, the need for monitoring machine data is increasing, so think of Splunk as providing the peripheral vision for a company to understand how they're actually operating. They can keep an eye on their weblogs to detect hackers and malware. They can monitor equipment performance to keep them safe. They can optimize IT performance of the data center."
And Simon says that one of his favorite use cases is how they're slicing data for Domino's, so they're monitoring in real time what pizzas people buy regionally and using that to inform their marketing promotions. There's a ton of data available out there. Companies need Splunk to find both problems and opportunities that they didn't even know they should be looking for.
I'm going to skip some of his numbers, here. If you're a Rule Breakers member, you're getting this, anyway, but they're basically getting more from existing customers which is really helping their margins. They are a cloud-based company, as well.
"And probably the most exciting development for Splunk shareholders is that they've integrated into Amazon's AWS, Amazon Web Services, and Google's cloud environments. As an example, Splunk is now powering the Amazon Echo. I'm not going to say her name and trigger it if you're listening to this podcast over that machine [the Amazon Echo, for business]. So, customers are aggressively moving their applications to the cloud and now they can use Splunk to index all that machine data that they generate and in real time."
And now back to me. Thank you, Simon, for that. That truly, to me, sounds like a winner in an increasingly thinking world. A quick side note. This company will report its first quarter earnings on May 24. So, Splunk [SPLK].
Stock No. 4: Before I say the name of this one, I'll just mention that it had declined 70% in the year leading up to me picking it two years ago on this podcast. And I teased you, if you were listening back then, by mentioning it's a name and a platform that we all know. Whether or not you use it, it is pretty much and was a household name back then. I would say it's only even more popular today. The ticker symbol is TWTR and that means it's Twitter.
Two years ago, Twitter was trading at $14.85. Today it's trading at $31.33. So, I was kind of on the precipice whether I'd beat the market or not. The game's not over yet, but Splunk took us over the hump and Twitter just stacked on [well, it's up 111%] 81% ahead of the market. Thank you, Twitter.
And the biggest change for Twitter is, of course, that its last couple of quarters it's been profitable, and I think that's something you could have foreseen. This is a stock pick we've had in for years. It's been up and down. Down for quite a while more than up.
But what I have always loved about Twitter is that it passes my "snap test." That's a phrase I've used many times before on this podcast. Our snap test is if you were to snap your fingers and cause a company [and its products or services] to just disappear overnight, and the whole world wakes up the next day, the question the snap test has for us is would anyone notice? Would anyone care?
And when you can give an emphatic yes to that; that always for me speaks to the potential strength of a stock, even a beaten-down one, which is what Twitter was. Down 70% before we picked it here for you two years ago. Twitter up 111% since then. The company has definitely become only more relevant. Only more solid. It had quite a run through the election. It has some popular politicians who tweet out. Whether or not you follow those tweets, there's something for everybody on Twitter.
I use Twitter every day just to track some of the authors and people that I admire and see what they're thinking and sometimes doing. I love Twitter and I would recommend it to you as a user if you're not already. It's been a great stock in recent years and I like it a lot over the next five years.
Stock No. 5: And that brings us to stock No. 5 before we start getting the stage cleared for Selim Bassoul. To close it out, here, the final stock is Zillow. The ticker symbol back then was [Z]. It's also [ZG] if you like. It's the same company. Just different classes of shares.
Zillow two years ago was trading at $28. I'm absolutely delighted to let you know that as of Monday's close, it closed at $55.91. I'm tempted to round that to $56, so I would have a straight double from $28 to $56, but we'll keep it true. It's up 99.7% over the last two years. Just to do some quick math, then, you add its 70% of outperformance and this group of five stocks, despite the dark start that we got, is up 167% over the market.
In other words, the market has averaged a 30.2% gain over the last two years, and these five stocks have averaged a 63.5% gain. If you want to annualize those [and why not, because it's kind of fun], those two-year annualized returns for the market 14.1% and for "5 Winners in a Thinking World," despite a couple of clunkers, so far [and, again, this game's not over], that group is up 27.9% annualized, keeping [#TheRBIPodcastStreak] alive.
Just a little bit about Zillow since it's been a hero stock. Really the last three have each just about doubled over the last two years. Rick Munarriz, one of my friends and fellow analysts, and a past guest on this show, says the stock has now more than made back the hit it took when it surprised investors by announcing that it would be expanding its Zillow Instant Offers segment, where it essentially buys and flips houses, which was announced in mid-April, just a few weeks ago. This week's quarterly report shows that Zillow's core business is growing just fine. Premier Agent revenue accounting for more than two-thirds of its entire business these days, matched the 22% growth in revenue for the quarter.
Traffic always a big thing for Zillow. Traffic across its collection of sites up 15% over the past year. There will be acquisitions, or in the case of Zillow Instant Offers, new potentially questionable ventures that may seem to be distracting, but Zillow is proving that it can still explore related revenue streams without neglecting its bread and butter business.
It remains to be seen if realtors will get ticked off if the platform that they lean on for leads starts turning into a rival, but Zillow has shown in the past that it can get the balance right. Zillow's guidance for 2018 calls for revenue growth of about 22-23% before accounting for its new-home segment, etc. This is a company that, like many of these I also own, I have good thoughts about for the year three, five going forward.
In fact, even though when I did this two years ago Zillow was the smallest of these five companies by market cap, in some ways, it has the strongest competitive advantage of any of them. When I think of Zillow, if that's the Coca-Cola of the industry, it's really unclear to me if there is a meaningful Pepsi.
David Gardner owns shares of Walt Disney, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool owns shares of and recommends BLUE, Celgene, Splunk, Twitter, Walt Disney, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool has a disclosure policy.