That which humans collect, we have a natural urge to categorize. Books, rocks, baseball cards, whatever -- and stocks are no different. Some we classify as "growth stocks," because their revenue -- and, hopefully -- earnings are rising relatively rapidly. Others are viewed as "value stocks," because based on the fundamentals, they look underpriced. If the business has been in the habit of distributing solid, often rising dividends, it might get called an "income stock."
And then there are "story stocks" -- the ones that are trading less on their current numbers, and more on the narrative that investors and the media have built to describe why eventually, the revenue and earnings will surely arrive. Paint a compelling enough picture, and investors will bid your company up on hope and faith.
But Motley Fool co-founder David Gardner sometimes takes a different view of the "story" concept -- he prefers to think about the way occasionally, an addition to your portfolio creates a story that's unique to you, and that clarifies a specific nugget of investing wisdom. In this episode of Rule Breaker Investing, he invites several analysts into the studio to share some of their favorite "stock stories," and the lessons they learned from them.
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 May 1, 2019.
David Gardner: Some people like superhero stories, and maybe spend about $1 billion at a box office to see a movie over a weekend. Others like sad stories. We all can think of a favorite bedtime story. It's often said of us human beings that we are a storytelling race. The call of the story, the prehistoric campfire where stories were acted out. Huge industries today have been built up just around celebrity stories. Or how about sports? The news, scores, results the stories we remember from our own athletic exploits, however scanty they may be, in my case. Stories, stories, stories.
Stock stories. Yep, every stock tells a story. As investors, we get to know our company's mission, maybe know their marketing tag line. That's a story. We follow the share price. We experience highs and lows, sometimes dizzying heights or cavernous losses. Sometimes both. Our experience as investors gives us the long view, the Foolish view, acquaints us with great prosperity-creating stories. Especially look across a portfolio, look up and down your brokerage statement, and I bet you see stories.
A few times a year, we focus on telling stories. We're a stock market podcast, so these are stock stories. Visiting me around the campfire this week are several talented Motley Fool contributors, each of whom has a story to tell. Five stock stories on this week's Rule Breaker Investing.
Welcome back to Rule Breaker Investing! Happy May! Yep, April's over. It's time for May! April was a wonderful month on this podcast. We had a lot of fun last week with our mailbag. In fact, I forgot to play up my overall theme that I was going to do the whole show long. I totally spaced it. But here was, for posterity's sake. I've done every one of these podcasts, a new one a week. As it turns out through, last week, 200 of them. 200 consecutive weeks. Last week was our 200th Rule Breaker Investing podcast and I was going to make a big deal about it. I was going to ask Rick Engdahl to come up with some musical theme, some fanfare, I was going to ask each guest -- because the mailbag was replete with guests, as it always is -- I was going to ask each of them what significance does the number 200 have for you. I was just going to 200 up the entire podcast. We finished the mailbag and I realized I never even once mentioned that that was our 200th podcast. But maybe that's Foolish. Maybe all the other cool kids, the people paying attention to conventional wisdom who count things and are responsible and remember things, maybe that's how they roll. But we're Fools, we do things differently. We completely forget 200th anniversaries.
And in fact, in conferring with my producer and sidekick, Rick Engdahl, Rick pointed out, hey, round numbers are overrated, aren't they? I mean, do you remember Dow Jones Industrial, it's going to hit 20,000 at some point. Or a certain company's going to go over $1 trillion market cap, but it sounds like something to wait for. And then when it finally happens, people aren't even really remembering it a few weeks later. So let's celebrate the 201st Rule Breaker Investing podcast. For those who've been with us all 201, you definitely deserve a free Starbucks on yourself, or something, some gesture of thanks for us that we're not actually going to pay for. You get an atta-Fool. We slap you on the back and say thanks a lot! And for those for whom this might be your very first Rule Breaker Investing podcast, welcome! You found us at No. 201.
I've got queued up stories. In fact, we've built a little campfire that doesn't actually exist right here in the center of our podcast studios here at Fool HQ. There's a little kindling and some embers and an occasional hiss and a pop. In fact, we can generate sound effects to make you feel that. Rick Engdahl? Thank you!
[campfire sounds -- fire, crickets]
Gardner: You're now in the mood. You're feeling it. We're talking about the stories around stocks. Each of my storytellers this week is bringing a certain stock that they have in mind, a title to their story, and then I hope a good one-line takeaway. Maybe these are didactic stories, morally instructive stories, or maybe they're just pure, silly fun. I'm not really sure. But I have asked each of our storytellers to bring it home with a line that you can remember and take away from this special campfire that we're sharing together.
This is "Stock Stories Volume III," we last did this series last summer, June 6th, 2018. History will show it was "Stock Stories Volume II." I enjoy doing this at least once a year. Without further ado, let's get started!
My first storyteller, my good friend, Aaron Bush. Aaron, welcome!
Aaron Bush: Thanks for having me! I'm so honored to be here on the 201st episode!
Gardner: Isn't that an amazing number?
Bush: It only happens once!
Gardner: Did you know that the number 201 is divisible by three?
Bush: I'd have never thought about that before.
Gardner: I know you're very talented mathematically, Aaron, so I wouldn't be surprised if you're aware of this math trick. I know many of our listeners are. If you, dear listener, were not: you can take any number and just add up the digits, and if it's divisible by three, that number is divisible by three. So when I see 201, Aaron, 2 + 0 + 1 equals...
Gardner: Is that divisible by 3?
Bush: Yes, it is.
Gardner: And so is the 201st podcast for Rule Breaker Investing! So, yes! Very, very special!
Bush: So honored!
Gardner: We bring our biggest every three. So here we are! Aaron, you brought a story to the table.
Gardner: [laughs] I already get the allusion, because many of us who follow Under Armour remember the whole "Protect This House," which was a big part of their branding, I want to say 10 years ago.
Bush: Has it been that long?
Gardner: Maybe 15. It feels like a long time ago. But you would know better than I, Aaron. This is your story, and my memory, I have to admit, is not that great.
Bush: So, before jumping straight in, let's start with the prologue. I bought my first stocks ever in 2006, 2007, which as history now notes was the calm before the worst stock market storm in decades. To make things worse, I had absolutely no idea what I was doing. But as you can imagine, that's a pretty good time period to learn.
Gardner: Aaron, how old were you in 2006?
Bush: 11-ish. Really knew nothing!
Gardner: Love it! Buying stocks at the age of 11. Keep going!
Bush: Well, it didn't start very well. At that time, I was using Value Line, using their ratings on timeliness, on safety, opportunity. I decided to buy a bunch of blue chip stocks like Johnson & Johnson and Procter & Gamble, but also -- super embarrassing to admit now -- a bunch of financial stocks like Bank of America, Merrill Lynch, AIG, do I need to go on?
Gardner: So it was rough, rough seas within 24 months of your purchasing?
Bush: It was. It was very rough! As you can imagine, that didn't end well. I had brutal losses on a bunch of stocks. A bunch of stocks I knew nothing about. Let's go and enter chapter 1 here, where Under Armour comes in. I was still learning, but based on those losses and understanding that I knew very little about those stocks, I recognized that something had to change. So what I decided is that, instead of just using these arbitrary ratings that other publications throw out, I would decide to think for myself, look for obviously great companies that I understood. And the first company that comes to mind, for me at that time period, was Under Armour. That was a stock that I bought early 2009. I had just gotten rid of a bunch of those financials stocks. I had more than enough [laughs] to do with that at the time.
Gardner: Were you wearing Under Armour as a kid? Were you seeing other kids rockin' the Under Armour logos?
Bush: Yeah, that's part of it. At the time, the stock was trading for I think a split-adjusted $3. But more importantly, I like the brand. I saw in front of my very eyes the popularity rise right in front of me at school, right as the financial turmoil was going widespread, stealing all the headlines. Under Armour wasn't in those headlines. Despite the crisis, it was actually doing pretty well, and I could see it right in front of me.
So after reflection, I bought some of those stocks, bought some shares in Under Armour. And that that really marked in my mind a radical change in my investment philosophy, from using Value Line and other people's thinking, to looking at my own life, thinking for myself, understanding more clearly what makes for a multibagger, looking for, a lot of times, small companies with long runways, swift growth, and also understanding the importance of what you cannot assign numbers to, the importance of great management -- in this case, Kevin Plank -- and then the power of a great brand, which doesn't show up in the cash flow statement in any way at all.
For years, this stock was phenomenal. It rose from about the $3 that I purchased it at, split-adjusted, up to about $50 in 2015. For a time I was earning 15X or so the money that I put in. It became very quickly a large percentage of my own portfolio. That's really because Under Armour was rapidly expanding into new countries. They were launching new verticals all the time. They were seizing major partnerships with big athletes. They even had an Olympic deal sometime in there. So what could go wrong, David? Everything was fantastic.
Well, it turns out, things can go wrong, even with great companies. In 2015, they announced the acquisition of a couple of major fitness apps, including MapMyFitness probably most notably. And that sounds fine until you realize that connected fitness was much more sizzle than steak. That business model really had nothing to do, no direct plugin --
Gardner: With the apparel industry.
Bush: Right, with selling apparel, selling shoes. They also completely decimated their balance sheet. They got rid of most of their cash, they took on a ton of debt to buy these apps that ultimately fizzled out. And there were also signs, I think at that time, very early signs that traditional retail could be problematic and decelerate growth one day.
If you take that, and then also compare it to the fact that the stock was trading for about 80 times earnings at the time, in my mind, I saw a pretty clear mismatch between, "Man, this isn't as great as everybody seems to think it is," and, "Wow, this is one of the most expensive stocks I see out there right now." And I'm a person who's typically OK, buying the stocks a lot of people think are expensive.
Gardner: As am I, and that's part of what we teach on this podcast. And I have to say, Aaron, even though I know that the next chapter of the story is hard times for the company, and in some ways, they might still be mired in chapter 2, if you will, but fortunately, it's not Chapter 11.
Bush: That is true!
Gardner: I think that Kevin Plank was trying in some ways to get ahead of where the future was going to be, and make investments in a technology platform and transition the company. At least this is what I was saying about this stock. It remains an active recommendation in Rule Breakers today.
Bush: Yeah, I do think a lot of his thinking is still prescient, it was just a mix of bad timing and poor capital allocation. Not everything was terrible. But for the sake of this company at that time, it didn't work. So, in a rare stroke of great timing on my part, which almost never happens, and I'm glad I get to tell this story --
Gardner: That's why we're telling stories! The greatest things that we can tell!
Bush: [laughs] I actually sold about 90% of my position in 2015, right near the top. I still own shares in Under Armour today. And I almost never sell like that. But I saw a very clear deterioration in the business paired with that euphoric pricing and it made me paranoid, and it was a paranoia that I couldn't quite shake.
Gardner: Wow! And this was, maybe, your biggest holding, one of your biggest holdings?
Bush: This was a top three holding.
Gardner: And you shaved 90% of it off right before the fall.
Bush: Right before the fall!
Gardner: You didn't drop me an email? Let me know? You probably did and I wasn't paying attention!
Bush: I probably should have, is the better answer.
Gardner: I owned the stock all the way through, but I've never shaved the position, and as a consequence, I haven't done nearly as well as you have, Aaron.
Bush: Well, I would say, this is one of the rare times where I timed it well on both sides, buying right in the middle of the financial crisis and being able, in a rare stroke of timing, to be able to pinpoint where trouble was about to begin. That leads to the next chapter, where trouble did strike. A lot of those concerns that I had about how their acquisition of those fitness apps and what it means for their balance sheet and missing the ball on apparel sales and such. The company's growth did decelerate. They did face issues with some of their larger retailers. Largely since 2017, from 2015 to 2017, the stock dropped about 75% or so. Since 2017, it's been the story of them recognizing their mistakes and reorienting the business for their next phase of growth.
The story isn't over. But they are refocusing on verticals that matter most to them, focusing extra on going direct to consumer, which I think a lot of companies are doing right now. You see that with Disney, for example. And they're ensuring that the right people are in the right roles. You see some leadership shakeups.
Now, I think a lot of this could have been done earlier. But I do think it is a promising sign that they are willing to admit their mistakes and correct for the future. And as I mentioned, I still do remain a shareholder. Whatever the next chapter is, I do think that Under Armour will be able to hit new all-time highs. I think the company will look different. It might take some patience, but I think it could very well happen.
Gardner: All right. So how about the one-line takeaway then, the didactic instructive moment for all of our Rule Breaker Investing listeners?
Bush: Think for yourself and stay ready to evolve as an investor.
Gardner: I have to vote for that, Aaron. Thank you for sharing that story! A little bit of pattern recognition. I mean, you're describing it as luck. But before I let you go, are there ways you can map what happened there into a more generic or abstract lesson that you can make us all a little bit smarter and have our eyes on something?
Bush: I think a lot of times -- and Peter Lynch is probably the most renowned for saying this, -- just look around in your own life. I think you'll be surprised by what you see, new brands popping up, new services, new products that you're interested in. And a lot of times, especially if you're more an early adopter, you can also become more of an early investor in those companies as well. And there's significant upside.
I don't think there are as simple of heuristics for when to sell, especially when companies look like they're excelling. I mean, I will stick with what I was saying. Just think for yourself. A lot of times, the herd moves in both ways. It moves toward being really against something to being really for it. And a lot of times, when the herd is super for something and you can start to look at the numbers that things are breaking apart a little bit or you disagree with the strategy, don't be afraid to think for yourself. Sometimes it pays off.
Gardner: All right, the stock was Under Armour. The title of Aaron's story, "I Will Protect This Portfolio," which you did, Aaron. Thank you again for the lesson! Think for yourself! Stay ready to evolve!
Bush: Thanks, David!
Gardner: All right, it's time for stock story No. 2. For this one, I go down to one of my favorite states in the union, one of my favorite people in that state. We're headed to Florida somewhere in and around the Miami area, I believe, and it's my friend Rick Munarriz. Rick, how are you doing?
Rick Munarriz: I'm doing great, David! Thanks!
Gardner: And are you in fact somewhere around Miami right now? Or are you on the road?
Munarriz: I am actually in Miami right now, yes.
Gardner: How's the weather? I cannot...anytime I fly in, I just see these beautiful blue pools all around as we start to get lower and lower, your beautiful airport there. Throw me some color, some Miami color, Rick!
Munarriz: I mean, it's beautiful as a tourist -- and it's great to live here, I'm not complaining about living here -- but these wonderful beautiful beaches, nice warm sun, when you live here day in and day out, it does feel hot even over the winter. The grass is always greener on the other side. But I love Florida!
Gardner: [laughs] The beaches are always whiter, you're saying, somewhere else?
Munarriz: [laughs] Well, not that they're whiter anywhere else, I guess when there's snow cover. But for the most part, everything gets old after a while, even beaches and sun and palm trees.
Gardner: I guess it's true, even for Miami. Rick, what is the stock you'll be presenting a story about?
Munarriz: Well, I'm going to take you far away from Florida, I'm going to take you all the way to New Hampshire to talk about Planet Fitness (PLNT 3.13%). The title of my story is "Subtraction Is the Best Addition." And the story starts with a guy by the name of Chris Rondeau. And he's a college student. He loves to work out, he had his first gym membership when he was 16 years old. So he starts working at the front desk of basically an old gym that was failing, it was bought out by two brothers. And it's sort of fashioned as the very first Planet Fitness. This is in rural New Hampshire, a city called Dover, population of about 30,000. They want to differentiate themselves from every other gym. Even in a town with just 30,000 people, there are a lot of places to work out. So they basically say, "We're going to work on price because that's always been a pressure point for people. We don't want to be just for die-hard gym workout people. We want to go in and give them a good price." So they get a low price.
But then they found in just a matter of time that instead of becoming this popular mainstream gym, they wound up attracting all the cheapskates at the other gyms. So they said, OK, we don't want that. It's not that we don't mind the lugheads, as they say, the guys and women that really like to work out and pump iron and grunt while they're doing heavy workouts. But that really wasn't what they wanted to be about. So they got rid of the heavy weights. Then they got rid of the smoothie bar. Then they got rid of the day care center, which was going to be controversial. But at the same time, they also got rid of the fitness classes. So all the stuff that your LA Fitness and whatever major fitness brands value with the traditional gym/fitness center, they said, we're not going to do it, we're just going to have great exercise equipment, it's going to be awesome, and we'll just charge $10 a month for it.
And right away, it resonated. It just started picking up steam. It's not one of these costly things, it's not a hard sell. They're not trying to set you up with a fitness trainer or some long interview. They don't tour you around the place, trying to sell you stuff. There's no smoothie at the end of the day, though they do have free pizza days every once in a while.
And then along the way, this Chris Rondeau, he becomes a club manager, then he becomes a regional manager, then a VP. And in 2013, 20 years after he was checking memberships at the store, he becomes a CEO.
Gardner: How about that?
Munarriz: Planet Fitness went public two years after that. They went public in 2015. I always look at new IPOs, and this is company that intrigued me, even though I'll admit, I'm an LA Fitness member, only because they're about two blocks away from me. I'm know I'm speaking from the wrong side of this argument. But I really enjoy what they're doing. And most impressive to me was how fast they were growing. They have a couple of company stores, but it's mostly franchisees who are pulling the weight here. That was in '16, and they paid out like a $2.78 a share dividend just a year later to distribute stuff as things went out.
But then the company, when we discovered it on the Rule Breakers end on the Supernova side, the stock was actually just about where it was when it went public. So this wasn't some scintillating hot stock out there, I think was actually below the IPO price when we first recommended it. Ever since then, the stock's been on fire. I mean, this is a stock that's basically more than quadrupled since going public. It's at $75 now. This was a stock that was at $16 four summers ago, and even lower than that. It was a broken IPO for a while, and it's clearly done everything right.
The most impressive thing to me about Planet Fitness is their comps. You're thinking, comparative-store sales, it's a term you usually see with restaurants or with retail stores. But it's important for gym memberships, because this is an industry where people say, "Oh, it's fickle. People sign up over the holidays. They overeat, in January, they have a New Year's resolution." In Time Square, Planet Fitness was a sponsor there right when the ball dropped, there was a big Planet Fitness billboard over the New Year's this year. But it's not the case with Planet Fitness. They've had 48 consecutive quarters of comps [growth]. So we're now up to 1,742 Planet Fitness gyms located around the country, and they're starting to expand internationally, on a small scale. But this is the same company, the guy who basically started working the desk at one gym is now running the company that's now 1,742.
And revenue keeps growing. It's double-digit consistently. Last year was its strongest growth in more than four years, with earnings growing even faster. So basically, here's a company that could disrupt the gym system to make it accessible to the 80% of people that wouldn't be caught dead in the gym or signing up for these $60-a-month memberships that are high-pressure, and you're just looking around and saying, "I don't feel good about myself, everyone here looks so much better than me." They have posted across all their gyms "judgment-free zone." They basically try to police that. They know that they're cashing in on young people that are very health-conscious and self-conscious about what they look like, the Instagram selfie generation, and the older people who just want to stay fit. But they don't want people bragging about it or anything like that. So it's just a cool company that has struck a great core, cashing in in rural America, and urban American, basically the whole country, finding their pockets in these strip malls in the suburbs where big retailers are moving out and there's a lot of space for them to come in and get in cheap and basically move over with their 10,000 square feet of heavy equipment.
Gardner: And growing they are. Rick, you brought this stock to Motley Fool Rule Breakers. I'm seeing right now, the publishing date of that was January 27th, 2016. We're talking about just over three years. And yeah, the price that day was $11.93. I had forgotten that the company IPO-ed higher than that. Turns out, you don't have to buy every IPO in those first few days or even months. But it's remarkable to watch that ascent, from about $12 a share to about $75, as you mentioned, today. I know it's exceeded your expectations. Mine as well. It's a six-bagger. But a company that illustrates a lot of what we're talking about in Rule Breakers, which is finding companies that improve the world, brands that you recognize, often driven -- and I love the story that you told of Dover, New Hampshire. These are real people, flesh and blood, our fellow Earthlings, who are coming up with ideas and building great companies around them and helping out the world. I think Planet Fitness is a lot of what we're about, a lot of what you do as a great stock picker for Rule Breaker Investing.
Rick, let me ask you in closing, what's a one-line takeaway that I as a listener should remember from the story of Planet Fitness?
Munarriz: Sometimes the best way to step up as a disruptor is to take a step back. If you want to revolutionize an industry, you don't have to make things more complicated. In the case of Chris Rondeau and everyone at Planet Fitness, they just basically scaled back to the essentials of what a gym is all about. And sometimes that's enough.
Gardner: Companies and brands that democratize the world make it simpler. Think about how simple Apple has made computers or Netflix made finding good entertainment. You don't have to go down to the store anymore, pay late fees, it's all just a click away, and it keeps getting better seemingly. So these are some of the great companies of our time. And darn it, these are all active recommendations that we have in Motley Fool Rule Breakers and Stock Advisor, thanks in part to people like you. Rick Munarriz, thank you for your story about Planet Fitness!
Munarriz: Thank you, David!
Gardner: All right, stock story No. 3. From Miami to another great American city: Austin, Texas, and another great stock picker and fellow Fool. Karl Thiel, welcome!
Karl Thiel: Thank you for having me!
Gardner: Karl, it's great to have you! You were part of the Dream Team a few weeks ago on this podcast. I know you think and talk a lot about biotechnology. I know the stock that you have for us this week is not a biotech company, about which you know reams, but still within the medical field. I think it's one of my favorite stocks. I don't know if it's one of yours. We're going to find out. Karl, you're presenting... ?
Thiel: Intuitive Surgical (ISRG -0.24%).
Gardner: Awesome! And what is the title of your story?
Thiel: The title of my story is "Disruption Surprises Nearly Everyone, Especially the Disrupted."
Gardner: Awesome! Go!
Thiel: OK, so my story begins around 10 years ago when I was having some minor elective surgery done that meant spending some quality time in the presence of a urologist.
Gardner: [laughs] OK.
Thiel: [laughs] I'll just apologize for the TMI for our more sensitive listeners, but it is relevant.
Gardner: Sounds like you'd had enough kids at that point.
Gardner: All right, keep going!
Thiel: So, Intuitive Surgical had already been on our scorecard for around four years at that point. But if you recall, 2009, you'll know I wasn't the only person feeling pretty vulnerable that day. The market was in disarray. It just seemed like everything could just drop forever. Intuitive Surgical had been a multibagger for us. You probably remember this well. This is one of your many great picks. Our Rule Breakers original cost point was just under $15 a share. And the stock had run up to a high of around $120. It had gone up like eightfold. And then just dropped. Dropped way back to the point that, I think it got back down to around $30. So it was still a nice winner for us, but boy, a lot of money have been taken off the table.
Gardner: Yeah, down about 75% doesn't feel good, even we still have a two-bagger! [laughs]
Thiel: Right. And to make it perhaps worse than that, by 2009, it was a four-time recommendation. I think one or maybe two of those positions were actually losing money at this point. Anyway, since I had some time on my hands, I was asking the urologist about the da Vinci system, since he also did other kinds of surgery. I wanted to know about its uses. At the time, you may also recall, that really, the da Vinci was finding its way in prostatectomy, which is the surgical removal of the prostate. It wasn't really being used for a whole lot else in volume, but that was really where it was finding a home. And this urologist who did those surgeries told me, "No, it's a flash in the pan. It doesn't let you do anything that a competent surgeon can't do themselves. The machines are expensive, you use a lot of expensive accessories with them. It still requires a lot of the same expertise and training. It's not going to be successful."
Gardner: I remember that. I'm not going to say that was the party line, because the medical world is full of many different viewpoints and different practitioners and professionals. But it wasn't uncommon back then. Even still sometimes we hear it today, Karl, from people who are surgeons in the field, who say, "That robot is not necessary. It's expensive. By the way, it might not be something I'm trained on, it might be disrupting my whole field. Maybe I've been around for a few decades doing the work." Regardless, that was back then, I would say, probably the dominant viewpoint. It sounded disruptive and a little crazy to have a surgeon use the da Vinci Surgical robot, which was Intuitive Surgical's big product.
Thiel: Right. So, sitting there, thinking about this, I know this is a person, obviously, with an expert opinion, and has a heck of a lot more reason than I do to know where the field is going. So that's an influential thing to hear. But I ultimately -- and I hate to say this, but I foolishly have never personally owned Intuitive Surgical. But I was really trying to think about the best way to cover it for members. And we talked about it on the boards at the time, but I ultimately decided that is a single data point, let's dismiss it. This was a guy who was entrenched in a way of doing things. He had a lot of an investment in the expertise that he's already gotten. I'm glad to say that he proved to be a very competent surgeon. [laughs] But he wasn't a known thought leader in the field, who maybe would weigh a little more heavily at that.
So I ultimately ended up deciding, this is a blip, don't take it too seriously. Listen, obviously. Put it out there, let people talk about it. But don't take it too seriously. I don't have to say that, A, the da Vinci did not turn out to be just about doing urological procedures. It's used for a lot more than that. B, the stock is over $500 today.
I think about this, because it's come up, actually, with our most recent recommendation, ShockWave Medical, which just went out. I have heard expert opinions from heart surgeons both for and against already. I am very interested to hear what those opinions are and why, but it's not going to necessarily weigh too heavily until it really becomes more than a single data point.
Gardner: Maybe I can guess at it, Karl, but what's the big one-line takeaway for listeners?
Thiel: One expert opinion is still just one data point.
Gardner: [laughs] Part of the benefit of the discussion boards that we've hosted on fool.com for a few decades now is that a lot of us do just have one data point. It might be our own opinion, or it might be a professional in our life -- a lawyer, a money manager, or in this case, a doctor. It's hard for us to know what anybody else thinks of things until we start to use social media or discussion boards, join a community -- the Fool community is a great one for me anyway -- and hear other people's viewpoints. I think ultimately, the reason that we recommended Intuitive Surgical in the first place is because we heard a wider array of viewpoints and started to realize that this disruptive technology really might change the world. I'm really happy to say yeah, you're right, the stock had gone from $15, where we recommended it, to $120, as you mentioned, then down to $50 at the time you were having that conversation. And today, it's $500 a share. It has absolutely rocked! Thank you for that lesson, Karl! I really do believe that a single data point is just that. I think we owe it to ourselves, especially with our money in our portfolios, to seek more opinions, sometimes ones that might surprise us or be different from our own. All right, so Intuitive Surgical. Karl, your title, "Disruption Surprises Nearly Everyone, Especially the Disrupted." Thank you very much for joining me, once again, on Rule Breaker Investing!
Thiel: Thank you!
Gardner: All right, stock story No. 4. Emily Flippen in the house. Welcome back to Rule Breaker Investing!
Emily Flippen: Thank you again for having me!
Gardner: I'm delighted to have you again! Emily, I'm tempted to ask you about the market cap of the company you're going to be telling a story about, but we're not going to do that right now.
Flippen: That's good! I don't think I know it! [laughs]
Gardner: [laughs] Yeah, right! All right, what is your stock story?
Flippen: Today, I'm going to be talking about a stock that has been a silent performer, that a lot of people, unless you are a hardcore Rule Breakers follower, may not be aware of.
Gardner: Love it!
Flippen: It's New Oriental Education (EDU 10.80%).
Gardner: New Oriental Education, yep, a stock that we recommended years ago. As you're mentioning, it's quiet. I have to admit right now, I don't know exactly where the share price is. I think it's been a quiet winner. Maybe that's part of the story. Emily, what's the title of your story?
Flippen: The title of my story is "The Super Short: A Story of Hope, Loss, and Redemption in China."
Gardner: Awesome! "The Super Short." It's like The Big Short. Is this a play on words of Michael Lewis' book?
Flippen: It's kind of like The Big Short, but hopefully it doesn't cause a recession and we all come out of it better.
Gardner: [laughs] All right. Start!
Flippen: Sure. The year is 2006, and we have a small Chinese education company come public on U.S. markets. Needless to say, the market's been doing well, the valuation looks a little lopsided in their favor, and investors are very fearful. Not just fearful because maybe this is a pricey stock for a company that just teaches Chinese people how to speak English. But, this is a Chinese company, and it's a small Chinese company.
Gardner: Lots of questions about, is this even real? Can I believe the balance sheet or the numbers? These kinds of concerns.
Flippen: Exactly! So when they come public, there's a lot of interest, but also a lot of fear. And there's a lot of people out there saying, "This is clearly a fraudulent company. If it's not just because the company is lying, inflating its numbers, it's because the Chinese government is lying and controlling the company with their back hand." It's a company that a lot of investors are extremely nervous about. And if you take the time to go back and read a lot of these articles written about New Oriental Education --
Gardner: Maybe you did that in preparation, I'm not expecting you did, that's above and beyond what we would ever expect on this podcast, because I'm most of the time just shooting from the hip and making up all my stories, in fact -- but, Emily, thank you for going back if you did, because I always think we don't do that enough in our society today. We tend to just, what's the next headline? But we learn so much by remembering what people were saying back in the day.
Flippen: Exactly! And if you go back and read these articles, which I definitely encourage anybody who's listening to do, you'll see that things were not looking great for New Oriental. There's a lot of investor fear. And despite the stock having a nice run-up from 2006 -- it did manage to survive our pullback here in the U.S. -- there was still a lot of investor fear for years leading up to this.
What happened is, in 2012, we got a short report. It was really only a matter of time before a short report on this company came out, or really any small-cap Chinese company.
Gardner: Now, when you say "short report," do you mean what I would characterize often as a short attack?
Flippen: A short attack is an aggressive way to say it, but undoubtedly. Muddy Waters reported it. Of course, they are short the stock, so they have economic interest in pushing the stock price down. But this report comes out and says some very egregious things about the company, essentially saying they're lying not only about the way they make money, but about the way they report money. They're lying to their auditors, they're lying to their investors, they're lying to the government. These are huge claims. It sends the stock plummeting.
Gardner: I remember we first recommended this stock, it was in fact pretty much this week, just about April 28th, 2010, it was nine years ago, pretty much this week. The stock was at $22 back then. Do you remember where it dropped after or around that 2012 report?
Flippen: It had just been off of its 52-week high, around $32. So, just off that high. Within a matter of days, there was an investigation into their accounting in this short report, which sent the stock down to $11.
Gardner: Wow! I had forgotten. That probably hurt. I forgot the pain I was feeling at the time, because we were up 50%, and all of a sudden, we were down 50%, from $22 down to $11.
Flippen: Exactly! And needless to say, if you look at a graph of New Oriental Education's stock price today, I dare you to even find that 50% drop. After that drop, the company went on to be a clear outperformer. Now it's at a price of about $95. I think its high was around $108. If you look at this price, it's just a 50% drop, which at the time felt like the end of the world for this company. Accounting errors, lying to the investors -- to turn around and report amazing results for years afterwards, really showing that this was just a blip in an otherwise kind of flawless radar.
Gardner: Now, Emily, those who've gotten to know you may remember that you were a Motley Fool intern in the year 2016, and now, happy ending -- a really happy beginning -- you're a full-time employee here at the Fool. But I know you spent some years in China. Did you ever see the New Oriental Education and Technology Group name or brand? Were you aware of the company when you were in China?
Flippen: I was aware of it just from a perspective of seeing it around me. I don't think it ever really occurred to me when I was there that this was a public company in the U.S., which, at the time, it was. But it was everywhere. So, hindsight looking back, you think, well, of course it's a legitimate business. I saw the people, I saw the stores, the customers, the teachers, I had friends who worked with the organization on a freelance basis. But hindsight really is 20/20. It's interesting, because while this is just one story about one stock, it can really be applied to how we're seeing Chinese companies today. Going back to reading those articles about New Oriental, I see the same things happening to many of the Chinese companies that are going public recently. There's always questions about, how much can you believe? Are they defrauding investors? Are they lying? Are they even a legitimate business in China? So, it's really funny to see how we see these same concerns rear their head over a decade later.
Gardner: What's the one-liner takeaway that you want us to remember from this story?
Flippen: I'd have to say that it's really that history repeats itself. Sometimes that's good, sometimes that's bad. But anytime you're thinking, "This is the end of the world," your stock is down 50%, remember, history shows it's not.
Gardner: New Oriental Education and Technology Group, ticker EDU, which is a pretty good description of what the business does. Even though they were a Chinese company, they were the ones who got EDU on the New York Stock Exchange. And yes, they've been operating for quite a while and very successfully, and Emily, as you mentioned, very quietly. Most people don't know that stock or company even today. And yet it's gone from $22 to around $95 as we speak today, a wonderful long-term hold, which is what we do at Motley Fool Rule Breakers and Motley Fool Stock Advisor. That's what The Motley Fool is teaching the world. Play for the only term that counts, the long term. Emily, thank you!
Flippen: Thanks for having me!
Gardner: All right, stock story No. 5. This one's mine. The company is Booking Holdings (BKNG 1.07%), ticker BKNG. The title of my story, "I'd Rather Be Lucky and Good." Booking Holdings, not a company name that comes trippingly off the tongue. Not one of the better-sounding corporate names. I think it doesn't conjure up images like Disney or Apple for many of us. But if you remember Priceline, which is certainly still a going concern, an important one today, but this is the company that ultimately, buying out booking.com, which was the Priceline, the travel booking platform for Europe, ultimately, Priceline decided to take on Booking's name. So today, we say Booking Holdings for a company that has ownership interests in similar platforms in the United States, in Asia, and in Europe. A substantial and remarkable American company.
Well, my story begins on May 21st, 2004. Yep, that was the first day that we published our recommendation of Priceline. I picked it that day. What I want you to know now is, I had the thesis completely wrong. At the time, I was thinking that this company, which was coming off of the ruins of 2001 -- it was one of those dot-com dot-bombs. You may remember William Shatner singing in its ads. Priceline was a big deal in the late 1990s. An early mover in the travel space. But 2001 hurt everything. I remember Amazon.com went from $95 to $7 that year. Priceline was no exception. It had been devastated by the stock market, and perceptions about the internet, and really the staying power of the internet. Like, will this whole internet thing even work? Yeah, people were still wondering that in 2004, when we found Priceline.
Now, my wrong thesis at the time was, it was the third player in its industry at the time, and I was thinking, "This company probably will get bought out." So, that's what we wrote up at the time. In fact, since I'm a board gamer, I know many of you know that, I was likening it to the game of Acquire, for those who know. I'm not going to teach the rules of Acquire right now. But suffice it to say that one of the ways to play the board game, the classic board game, the Sid Sackson board game Acquire, is to buy little spaces on the board, little companies, little hotel chains, that you then hope will get eaten, bought out by the bigger hotel chains that are growing on the board in front of you as we lay tiles, because you're investing in each of these chains that we're building together on the board in front of us as we play the game of Acquire. And I thought Priceline was one of those little companies that you want to own the shares of in the game of Acquire because it's going to get bought out. Instead, what ended up happening, history will show, is that it became the biggest company and began to acquire others.
So, while I'm tempted to already give you my one-line takeaway, I'm even more tempted by the notion of giving you a few different takeaways from this one, because I think it's so instructive and rich. But from $23.71 in 2004, the price meandered. It didn't do much. Then, all of a sudden, it started skyrocketing in the late 2000s. By 2010, the stock had hit $193. It was from $23 to $193 as it became the world leader. It was at that moment that we rerecommended the stock. I remember at the time, people were saying, "Hey, guys, it's already up eight times in value. You think that we should be buying this one here?" I'm really happy to say that now, nine years later, it's gone from $193 to about $1,866.
Now, I could tell more about the story, but A, we're late in this podcast anyway; and B, a lot of you already know the business and the nature of what Priceline and Booking are doing. But I do see several lessons I want to share. The first one is, of course, add to your winners. One of the big themes of this podcast in 2018. Say it with me: winners win. It is our very nature as Rule Breaker investors to look for companies that are doing well and add to them. While I'm certainly proud that we recommended the stock way back then, 15 years ago, at $23 a share; in a way, weirdly, maybe, I'm even prouder that we added at $193, seeing where it is today. I think it reminds us how to invest that way. And in fact, one of my favorite podcasts we did in 2018 was the "Six Hows of Rule Breaker Investing." You can go back to September 19th, 2018, and hear me go through the six traits that each of us should exhibit as investors, ourselves. One of them, No. 2 specifically, is don't double down, add up, add to your winners, in a world where other people seem to want to double down on their losers. That was clearly here.
A second quick takeaway: Names change over the course of time. When you tend to hold stocks for long periods of time, the names will change. What started as Priceline is now a different ticker symbol and a different company name. In some ways, it's hard to follow long-term stories when the names change. Investors have a hard time seeing the full graphs on certain sites that'll only show it from BKNG, not back in its PCLN days. Or, I think of one of our better stock picks, Marvel, which was an amazing stock pick for us in Stock Advisor. Today, that's Disney. We see that as Disney. So some of the names start to change, especially from those of us who are long-term oriented, by definition, Foolish investors. So there's one.
Two more quick lessons. First is: Foolish investing will often, especially when practiced properly over time, blow away your expectations. I had no idea when we picked this stock at $23.71 that it would be anything like what it is today, let alone have a different name and have done as well as it did. But when you stick with our principles, and you find the great companies, and you exhibit the "Six Hows of Rule Breaker Investing," you should be prepared to have your expectations blown away.
But the one caveat to that is: It really takes time. The classic thing about trying to get rich quick, we have gotten rich, but we haven't done so quickly. But it's a really steady and wonderful way to watch these numbers compound and roll up over time. Foolish investing can blow away your expectations.
But the real takeaway I want you to get is that you can get the story wrong. I really did. I misread Priceline. But with good habits, your returns can still be oh, so right!
All right, there you have it: five stocks and five stock stories. We lead off with Aaron Bush, Under Armour. Think for yourself and stay ready to evolve, Aaron taught us. Second, Rick Munarriz, Planet Fitness. Rick said sometimes the best way to step up as a disruptor is to take a step back. Yep. Some of the companies that are the most powerful today don't make our lives more complex when they disrupt an industry; they make our lives, especially as consumers, simpler. Story No. 3 came from Karl Thiel, Intuitive Surgical. Arguably a little bit of a TMI story, but we're OK with that on this show. Karl did a great job illustrating that one expert opinion is still just one data point. Story No. 4, Emily Flippen brought us New Oriental Education. History repeats itself. And she's right. What people were saying about Chinese stocks 15 years ago -- that they're dodgy -- sounded true 10 years ago as well, and then five years ago, and it's still an argument often made today. It's not to say that Chinese accounting is, in every case, blameless; or that every company in any country is worthy of your investing. But when you're looking for the Rule Breakers, the companies that are out front leading new industries, whether it was Baidu, which is one of our best Rule Breaker picks ever -- a Chinese company -- or the quiet New Oriental Education that Emily brought for us, history repeats itself. Pay attention! And finally, I closed it all out with Booking Holdings, ticker BKNG. You can get the story wrong, but with good habits, your returns can still be oh, so right!
All right, in closing, if you haven't already, please subscribe to this podcast and all Motley Fool podcasts on iTunes, Spotify or Google Play, wherever you find podcasts. You can also follow us on Twitter at @RBIPodcast. Follow me on Twitter if you like @DavidGFool. Finally, I hope you'll give us a review. Throw me some stars. Let us know how we're doing. I read every comment.
Next week, we're going to be reviewing one of my five-stock samplers from a few years ago, "Five Winners in a Thinking World." I definitely think it's true that the world has got think-ier, but have these winners won? We'll talk about that next week. In the meantime, Fool on!
As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com.