Did David Stick His Neck Out Too Far With This 5-Stock Sampler?

Every 10 weeks or so, Rule Breaker Investing podcast host and Motley Fool co-founder David Gardner picks a new set of five stocks he recommends and shares it with his listeners. There's always a time frame and usually a clever theme. While those things change, one point stays constant: When the anniversary of each sampler rolls around, he tallies up the share prices, talks a bit about what's moved them, and scores those mini-portfolios against the S&P 500. Because win or lose, Fools keep honest score.

For this episode, it's time to check in on not one, but two such samplers. His clever theme two years ago was "Five Stocks for April the Giraffe," the Washington Zoo favorite who was live-streamed giving birth to baby Tajiri. To honor both the mom and the month, the first letters of these tickers spelled out the word A-P-R-I-L. So how did Axon Enterprise (AXON 1.27%), Grupo Aeroportuario del Pacífico (PAC 2.17%), ResMed (RMD -0.20%), Intuitive Surgical (ISRG -0.50%), and Live Nation (LYV -1.29%) do in the two years since that episode? In this segment, Gardner and senior analyst Brian Feroldi take stock.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 17, 2019.

David Gardner: I'm just really happy to have you here reviewing Five Stocks For April The Giraffe. I think we may have even belabored the backstory to that one. Anybody who's still listening is going to know who April the giraffe is. But the key here -- because there's that theme for each five-stock sampler -- the key here, when I did this two years ago this week, I decided to make it a puzzle. I put five stocks together that seemingly had nothing to do with each other. The solution to the puzzle was, it was an acrostic. The first letter of each company name spelled April. So we're just having a little bit of fun with it. Of course, these are all companies that I love. I'm being a little silly with the theme, but each of these is a very good stock. In fact, the letter I represented in April, we've already talked about because I picked it for the sampler that Jim did, Intuitive Surgical. I'm going to love hearing your thoughts about Intuitive in a sec, Brian. Anyway, so that was why April the giraffe. The stocks spelled April, and then my talented producer Rick Engdahl noticed there was this live internet birth, etc. I think the backstory is clear to everyone.

With all that said, we've got five stocks. These are each picked two years ago so they've had a little bit more time to age than that first set. Let's see how they're doing.

The first one up is Axon Enterprise, ticker AAXN. While it initially started as Taser, and in an earlier version of Motley Fool Rule Breakers, it was one of our active picks as Taser, later, it changed its name because Axon acquired the No. 1 police body equipment cams, the cameras that do live footage when police apprehend people. That became a big part of the business. Of course, evidence.com, Brian, which I know you know, that's their cloud-based video house. They house all the videos that police departments and the courts use. That's the business today, Axon Enterprise.

Brian Feroldi: This is a super interesting company. I have to be honest, I know it's been a rec for years, I was not interested in it at all. It was one of those Rule Breaker stocks that I personally passed over. However, when you rerecced it a few years ago, you really highlighted evidence.com as their SaaS offering. And when I realized that there was a SaaS component to this business, a software-as-a-service component, I became much more interested in it.

Gardner: Wonderful! I'm happy to say, this is actually not one that I own. I sure wish I did, though. Two years ago when I picked it, the stock was at $22.73 on April 19th, 2017. Today it's gone from $22 to $61. Axon Enterprise up 170% against the market's 24%. That's the bogey this five-stock sampler is competing against, a market that's risen 24% in the last two years. That's a crushing outperformance. 170 miles 24, that starts us at a plus 146.

Brian, what has been happening for Axon?

Feroldi: This company has been just crushing it. I mean, they've been mostly beating their estimates. They've been putting up 20% revenue growth. Wall Street loves that kind of thing. But I think what's getting so excited about this company is their evidence.com platform is really becoming profitable. This is a company that has been investing heavily to build that out. They are using Tasers and their body cameras as their gateway in, and then they give, in many cases, evidence.com to police forces for free. And once a police force gets on the platform, and they get all their stuff tied into it, that becomes incredibly sticky. They just can't leave the ecosystem.

The other big thing that Axon did was, last year, they acquired their biggest competitor. They not only have a monopoly in Tasers, but they also have a monopoly in body cameras. Both those markets are growing. A lot to be excited about here.

Gardner: It is, especially in a world where we have demanded more accountability from our police, especially here in the United States of America. And rightly so in some cases, because there are unfortunately some bad actors. And when they're wearing blue with a badge, that makes things really problematic. I'm happy to say, since I've always been a fan of police forces, I'm definitely pro-police, I'll put myself out there. I really appreciate the work that they do every day. They put their lives on the line in many cases, just like our military. I also admire our military. Anyway, unfortunately, the bad actors get the headlines and it creates some distrust of police. So, Axon Enterprises there with its body cameras, to make it clear exactly who's saying what and what's happening when officers flip on that camera, when they go into a situation.

I want to put out a quick idea to our listenership. I did this a few weeks ago and I'm pretty sure any city, maybe county, in the United States, you can do this too. I signed online, and I signed up for a free ride along with a cop for a day. It was a morning. Chances are, google it, check your own local jurisdiction, I bet that there's a form there that you can fill out and say, "I would like to ride along with an officer." So I spent the morning a few weeks ago with Officer Mayberry. My stock tip for him at the end of the day was, "You should buy Axon Enterprise." He was certainly familiar with it. He appreciated the product. They use it in the D.C. Metropolitan Police Force every single day and have for a while. But that made a lot of sense for Officer Mayberry, my new friend.

Before moving on to the next stock, I asked Officer Mayberry, "I'm just curious, how many other people do this?" And he said, "You're the first one in five years." [laughs] Apparently, not a lot of people are taking advantage of this. The opportunity to really see through an officer's eyes, I doubt they're going to put you in a distressing or dangerous situation most of the time, but just to spend that time and see how the world works and what they're doing every day... I really enjoyed the empathy that I gained from that and fun experience. That was my connect in with Axon Enterprise. I wanted to share that from a few weeks ago. Anyway, what a great stock pick it was from two years ago. Plus 146 in the wind column.

Brian, let's go to stock No. 2. This one allows me to try it out my fake Spanish accent. I never did take Spanish but I'm going to go with Grupo Aeroportuario del Pacífico, ticker PAC. As you well know, Brian, because you've done a little studying up for us here, this is a company that operates a lot of Mexico's prominent airports and is positioned to benefit from all that money -- airports these days aren't even airports, they're malls in a lot of cases. That's part of their business. The stock two years ago this week was $99.50. Today, it's at $101. So it's up a couple of percentage points. Unfortunately, when the market's up 24% this one's up 2%, that's a minus 22% performance for PAC, Grupo Aeroportuario del Pacífico. That brings us down to plus 124 as we keep score. Brian, what's happening in Pac land?

Feroldi:  Can we just pause for a second and say that was a phenomenal job with the pronunciation there? I think that was spot on!

Gardner: I'm honored. I don't even know because I'm definitely not a native speaker. I did take French as I've established earlier and I could barely speak it after a few years. That's not on my teachers, that was on me. I'm not very good at languages. But thank you!

Feroldi: No, that was great! I'll just call it Pac. They own some of Latin America's most popular airports -- Guadalajara, Tijuana, Los Cabos, Puerto Vallarta in Mexico. More recently, they've been expanding out into other countries actually. They operate Sangster International in Montego Bay, Jamaica, and they recently just were awarded a new contract for a second Jamaican airline that is coming online in October of 2019.

If you look at the company, the company's results have been pretty solid. This is a company that's growing revenue at 20% because passenger volume is just increasing. They make money in two ways. Two-thirds of the revenue comes from the passenger, facility fees, airline, landing fees, parking, security, that's the bulk of their business. But they also, as you mentioned, have malls on-site, where they basically have restaurants and stores and lounges. That's one-third of their business. And they have these properties that have huge fixed costs. As they are utilized more, that is just driving outsized returns on the bottom line. So this company has grown its top and bottom line very nicely over the last couple of years.

Gardner: I'm really glad to know that. I first picked this for Motley Fool Stock Advisor members in October 2016. You might notice that was timed just before the election in the United States of America. The winner of the election, President Trump, didn't have kind things to say about Mexico; in many cases, still doesn't. That really dunked the stock hard those first few months. It's been coming back ever since. The stock pick for Stock Advisor is up 8% with the market up 43% since then. It's still a laggard, but at least it's not a loser like a few of the others that we talked about earlier. I do really favor Mexico. I think it's very well positioned. There's a lot of great tourism, lots of reasons to go to Mexico. Occasionally, it's needed some more police, maybe with some more body cams. That's a worry for the country. But for the most part, I'm a real believer in that area of the world. I like this company going forward. Even though -- well, it's up 2%, so it's not down -- it's been lagging here for the last few years.

Feroldi: If you look at international stocks in general, they have lagged the U.S. markets over the last couple of years. But the nice thing about this company is, if you widen the lens to a little bit further out -- three years, five years -- it is more of a market-beater. So I think it's more of a fact that we're just looking at the last two years than anything else.

Gardner: Yeah, like when I picked it, for example. Three years ago, when I picked it. You're right, if you dial it out further, it has been a very fine investment. It's just I haven't done a great job for my members; or in this case, my listeners, as it is, happy to say here, the one laggard from this five-stock sampler. A little foreshadowing for where we're headed.

OK, company No. 3, ticker RMD, the company is ResMed. It is a San Diego California based medical equipment company. Now, this gets into an area of expertise and interest for you, Brian. You have been in the past a medical equipment professional.

Feroldi: Yes, I spent a decade selling medical devices. I know the space very well.

Gardner: Fortunately, I've not had to use this equipment. We all love our medical equipment makers. The less we have to use the equipment, the better probably. But when we do need it, it's awfully good to have great equipment, whether it's a da Vinci surgical robot, or in this case, for people who have sleep apnea, sleep-related breathing disorders, ResMed is the leader. It operates in a hundred countries worldwide, combating sleep apnea.

Two years ago, the stock was at $69.10 a share. Today as we tape, it's just over $102, so it's a 48% against the market's 24%. That's plus 24. So that takes us back to 148% of outperformance from these three so far. Brian, what's been happening for ResMed?

Feroldi: This is a company that pioneered the use of CPAP machines, continuous positive airway pressure, like you said for people with sleep-disordered breathing. The nice thing about this business is, they sell the machines themselves, but they also sell masks, tubings, and accessories that have a more limited shelf life to them. So they're not a one-time sale, they are a repeat purchase sale.

This is a company that has grown steadily because the potential market for sleep apnea is enormous, and it's an incredibly under diagnosed disease.

Gardner: Under diagnosed disease.

Feroldi: As more people go to doctors and are becoming aware of the disease, that's naturally pushing them toward CPAP machines. ResMed is one of the leaders and pioneers in this space is directly benefiting.

Another thing I want to point out about this company, it's actually getting into the software game. It has been very acquisitive in recent years, buying software companies that deal with out of hospital settings. They've also been getting into the electronic health records business. They've been making a couple of acquisitions there. One of the things that they've done is, they've created an app that you can use at home and it actually listens and uses it to see if you might have sleep apnea. So they're, in a way, creating demand for themselves by building up their software component.

Gardner: What I like about this company is, it's the leader what it does. So often, that's what we're looking for in Rule Breakers. First trait of a Rule Breaker, the top dog and first mover in an important emerging industry. Certainly, this is an important industry. In a sense, it is still emerging. We've talked about how under diagnosed sleep apnea is worldwide. It's awesome to be invested in a company that is the leader worldwide in combating it. ResMed, good on you! Up 48%, 24% ahead of the market.

Company No. 4 is next. We talked about this earlier, because the eye in April for April the giraffe -- by the way, I occurs twice in the name Tajiri, April's offspring. I don't know if you knew that.

Feroldi: I did not.

Gardner: How about that?

Feroldi: Unlike you, David, I am a terrible speller. My name is TMFTypeoh for a reason. I am not the spelling bee champion of The Motley Fool like you are.

Gardner: Well, thank you! I'm honored! You do spell it type-oh, which I thought was fun. You're having some fun there.

Feroldi: Yes, purposely misspelling typo.

Gardner: You are one of our most appreciated writers, Brian, a prolific writer on the site. You can play yourself up as not a words guy, but you're putting it together every single day out there for lots of people reading fool.com. So thank you, sir!

Intuitive Surgical, I was talking with Jim Mueller about this company earlier, of course. It was up about 19% from last year. 11 ahead of the market. But if we dial it back a little bit, we know the market's up 24% since two years ago this week. I'm happy to say that Intuitive Surgical has gone from $269 when it was picked on this podcast two years ago this week, to $558. Yep, that's just a little bit more than a double, up 109%. That's a plus 85 in the win column, a huge win for a stock that has even as a large company and a leader, doubled in the past year.

Brian, we'll talk a little bit about the medical equipment. Jim and I already did some of that. But before we do that, how about your own experience selling medical equipment? What was the hardest thing for you to do when you were the sales guy going into a doctor's office or a hospital?

Feroldi: By far the hardest thing was if the device you have requires the doctor to change something about the practice, change something about the way they currently operate, you have an enormous task. In so many cases, they've invested a huge amount of their time, they've trained their staff on the way to do one thing. And if you have a solution that slightly alters that, there are enormous barriers, even if your solution is better for the patient, better for the insurance company, better for humanity. The doctors many times have enormous resistance to anything that's new. Plus, in many cases, you're putting somebody's health on the line. So there's a natural resistance there.

When I personally see a medical device company that is just crushing it, that is just growing quickly, that tells me that they have an effective sales team and they're getting over that barrier. That is something that is incredibly impressive to me!

Gardner: What a great perspective! So glad to have you share that here. Somebody who, for a decade, was in doctor's offices and hospitals, having those conversations, you can see how it really does take Rule Breakers to be willing internally at a hospital or an office to say, "Hey, let's go for this! Let's try this!" But you're right, there's a lot invested in the status quo. Therefore, when rules do get broken in this field, it's very profound, usually, and we like to own those stocks.

Thinking about that, Brian, one of the companies that you worked for, I think the one for the longest period of time, which was Insulet, a company helping to treat diabetes. PODD is the ticker symbol for Insulet. It occurs to me now that there's an I in Insulet and a P in the ticker symbol. This could easily have been a stock for April the giraffe itself. Insulet is an active Rule Breaker pick. For our members, the stock is up from $36 to $90 since May of 2014. It's been a spectacular, more than a double for members. This is the company that you left to come work at The Motley Fool?!

Feroldi: Crazy, right? The stock has been a home run since I left. So you're welcome, investors!

Gardner: [laughs] Do you own some shares?

Feroldi: I actually sold them off. I've always thought it was a great company. But my personal view is, I'd rather have it invested in other companies.

Gardner: Fair enough! That's part of what we do here at The Fool. We try to identify the best places for your money. Interesting to hear you say that. This is an active recommendation that has done well for Rule Breakers, but I respect your opinion.

With that said, enough on medical devices. Any additional thoughts beyond what Jim and I talked about when you think about Intuitive Surgical?

Feroldi: This is one of my favorite companies of all time. What they've done is so incredibly impressive. They have almost 5,000 da Vinci systems that are in place everywhere. This is a business that has tremendous optionality with the number of procedures that they can come up with, with the number of accessories that they can add on. I just love companies with recurring revenue, and this is a company that, more than 70% of the revenue is recurring in nature. A lot to like here.

The thing that excites me is that their most recent version of the device is called the da Vinci SP. SP stands for single port. Instead of them doing a surgery and having three holes in your body, they now can do it through one. That, again, for the patient is tremendously attractive. They also flaunt a new device that goes in through the mouth and is actually used to take biopsies of the lung to diagnose lung cancer. A completely non-invasive way to diagnose lung cancer. This company just continues to break the rules.

Gardner: They really do! We talked about their big R&D budget. Clearly, it's being put to good use. They keep innovating. They're not content to just have that da Vinci Surgical robot and just leave it the same machine year after year. It really continues to broaden. The platform gets richer every day.

It is a company with that risk rating, which is something we have on the Rule Breakers site, of just seven. On a scale of zero to 25, where the higher the number, the riskier the stock, seven grades out very low. And so it is ironically one of those companies that I think you can make quite a bit of money on without that much risk, which seems to go against many people's intuition and part of the reason we love it as a Rule Breaker.

Alright, let's bring it all home, Brian. Stock No. 5. Ticker LYV, that's right, Live Nation, the L part of April. Live Nation, two years ago this week, was just over $31 a share. Today it is over $64. It also is more than a double. That's right, just two years ago on this podcast. With this five-stock sampler, three of the five stocks have more than doubled. This is one of our very best performers. We're giving this information away for free on this podcast.

Feroldi: Crazy!

Gardner: We should be charging for some of these podcasts, I think. I guess we probably won't anytime soon. But yeah, Live Nation, a plus 84. That brings the numbers altogether to plus 317% outperformance for these five stocks. If you divide by five, that's an average of about 63%. So the average stock here against a market that rose 24% over the last two years, is up 87%, an outstanding gift to April the giraffe and her child, Tajiri, and all of our listeners worldwide.

Now, let's talk a little bit about Live Nation. What's been happening that's been so successful right now for this longtime purveyor of rock music and other forms of entertainment?

Feroldi: For those that don't know, this is the company that owns Ticketmaster. It is the leading promoter of any huge events. Big time concerts, big time comedy acts. These guys not only represent the artists, in many cases they own or have exclusive booking rights to the venue. They get the revenue from Ticketmaster, they get revenue from advertising. They have their hand in every single part of the food chain. Their market share at the top level is extremely high. This is a company with an almost monopoly when it comes to the big businesses.

What we've seen is that, I would say especially with millennials coming out, there's a general trend in society away from owning things and toward experiencing things. People are increasingly willing to spend money on events such as concerts, and that really has played directly into Live Nation's hand. This is a company that, it's almost driven by network effects, where the biggest acts want to be with the biggest venues. That puts them into Live Nation. At the same time, concert goers want to go to the venues that have the best artists. That creates almost a double-sided network effect that allows this company to continually win.

That's what we've seen with the result, continued out performance in the top line, attracting more concert goers, rolling out more advertising and just grow, grow, grow.

Gardner: Really well put and broken down, Brian Feroldi. Thank you very much! Yeah, Live Nation exhibiting really clearly that second trait of Rule Breaker stocks. We talk about this a lot on this show. Sustainable competitive advantage. So many of the 10 stocks that we reviewed this hour on Rule Breaker Investing have an outstanding competitive advantage. You used this a couple of times, Brian, will use the word monopoly. I don't use that myself just in the sense that I don't think it is a true monopoly. Of course, there are a lot of other venues that Live Nation doesn't own, acts that they don't do. Some people buy tickets not through Ticketmaster and pay a lot less because those service fees are remarkable. Anyway, I think of it this way -- these are dominant, really hard-to-compete-against companies. But in capitalism, everyone is competing. There are a lot of players out there, but the winners among Rule Breakers are the ones that were just so good at what they do, whether it's Netflix, Amazon, or some of the companies that we talked about this week on the podcast.