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Rule Breaker Investing's Reviewapalooza 2: Scoring 3 Great 5-Stock Samplers

By Motley Fool Staff – Sep 18, 2019 at 11:55AM

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Beating the market over the long haul is the goal. Are these portfolios delivering?

In the four-plus years since Motley Fool co-founder David Gardner began hosting Rule Breaker Investing, he has shared quite a few of his signature five-stock samplers. Using companies culled from the hundreds that he actively recommends, he has built each of those mini portfolios based on a multiyear time frame -- because investors (as opposed to "traders") buy and hold -- and usually centered each around a quirky theme. But if the Gardner brothers and their company are dedicated to picking great investments and being a bit Foolish, they are just as dedicated to the principle of keeping honest score. And that's why, around the anniversary of each sampler's debut, he tallies up their percentage gains or losses, talks about the factors behind each company's performance, and measures the portfolios against the benchmark of the S&P 500.

Sometimes, he can check in on sampler and fit something new in, too -- be it debuting a new one, or an interview. But this past week was the second time in the podcast's history when three of those anniversaries coincided. So for this episode, it's samplers, samplers, and more samplers: Five "Mm-Mm Good" Stocks; Five Great Stocks You've Never Heard Of; and the original, Five Stocks for the Next Five Years. As he and analyst Emily Flippen look back, will all three make the grade?

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 11, 2019.

David Gardner: Most financial podcasts that talk about stocks probably don't pick them formally, pick them to beat the market, pick them for three years. A lot of people will talk about stocks, but do they walk? And can you see them walk? Can you see how they're doing? Let me know if you know otherwise, but I think most financial podcasts do not pick stocks over specific defined periods, score them, talk about the score -- good or bad -- and then revisit them a year later or two or three. Most do not. But this one does. I've always done it and that's because the act of picking, of scoring, of holding yourself accountable, is really the best way I know to get better at investing. So this week, we have our latest Rule Breaker Investing Reviewapalooza. We'll look back one, two and three years to see how three different five-stock samplers have performed. Five Stocks for the Next Five Years from 2015. Five Great Stocks You've Never Heard Of from 2017. And, Five Mm-Mm Good Stocks, picked a year ago this week. Campbell's good? We'll find out on this week's Rule Breaker Investing

[...]

Gardner: Welcome back to Rule Breaker Investing! Last week, I hope you enjoyed it, Five Stocks with a Tailwind Blow. Let's hope those tailwinds keep blowing. Of course, we're measuring our performance not over days, weeks, or even months, but years. Let's hope that that five-stock sampler performs well over the next three-plus years. 

That was then. This is now. Last week we picked them. This week, we get to score them. It's a Reviewapalooza episode for Rule Breaker Investing. We've done a few of these this year. I'm really pleased to be welcomed again by Emily Flippen, who's going to help me and us talk through and think through the companies in these five-stock samplers. Emily, welcome back!

Emily Flippen: Thank you! I am also very happy to be here again!

Gardner: Excellent! Now, last time, I think we talked through three different five-stock samplers, earlier this year. I think the date was somewhere in February. I think that was actually the first time we called one of these episodes Reviewapalooza, which seemed appropriate because we are going over a lot of stocks. And you have put in some elbow grease, some extra labor, Emily. Thank you for responding to my request yesterday!

Flippen: Of course!

Gardner: And one day later, being prepared to talk about approximately 15 stocks and what's been happening with them. Really looking forward to doing that together.

Flippen: It's an easy hurdle to get over when you spend all day researching companies, in particular in your Stock Advisor and Rule Breakers universe. 

Gardner: It is true. Emily and I work together on both Motley Fool Rule Breakers and Motley Fool Stock Advisor. You know these stocks better than I do, which is really why I'm having you on the show. I pick them, but we really learn from you, Emily. Thank you very much for your time! The five-stock samplers we're going to be reviewing today, as I mentioned at the top, the most recent one is from September 5th, 2018, a year ago about this week. That's Five Mm-Mm Good Stocks. And then, one year before that, it was September 13th, 2017 when we presented Five Great Stocks You've Never Heard Of. And then the very first five-stock sampler ever picked was Five Stocks for the Next Five Years. I did that one, it was published on September 2nd, 2015. Here, we are four years later. That'll be the end of the show where we will review those. By the way, each of these is typically three years, as you know, Emily. That's kind of the game we're playing. If we made it five years all the time, there'd be so much Reviewapalooza there wouldn't be an opportunity for Authors in August or anything else, even picking new stocks. So I intentionally circumscribed it to three years. But that very first one, I said, "Hey, here are five stocks for the next five years." We'll review that at the end. 

Before we start, just a quick thought about the importance of picking stocks and scoring yourself. I have four little steps here I just want to share with all of you. They're pretty obvious and simple. But here they are. No. 1: if you're going to talk the talk, you've got to walk the walk. At the heart of our five-stock sampler, at the heart of Motley Fool Rule Breakers, Emily, and Stock Advisor, what we work on together, we're picking stocks. We're doing that every month for our members. I do think that there are a lot of people who talk a lot about the stock market. I'm sometimes wondering, what if they walked? Would they do well or not, those talking heads out there? And then there are some brilliant people who perform really well, but they don't share what they're doing. They don't actually talk the talk. They're walking the walk all the time. I would say, for all of us, if you find yourself doing more talking, start doing the walking. And if you're doing a lot of walking, start talking about it, share that out. That's step No. 1. Emily, any reflections about talking the talk or walking the walk in your life or in general?

Flippen: It's so important to score yourself, but you have to remember that we're long-term investors, too. Even looking at the stock samplers after three years -- I mean, I own a lot of Chinese companies, for instance, that are probably great investments, but haven't been over the past couple of years. Score yourself. Keep track. And if long-term, something's not working, change your process. That's a problem. But also remember that we're playing a long-term game here. We're not trying to make 30% in one year, two years. We're trying to make that over a long period of time.

Gardner: I'm so glad you said that. By its nature, we're playing a game here. Just like baseball has nine innings, unless it goes extra innings, we have to have some kind of limit. But when we say goodbye -- as we will, every three years to another one of these five-stock samplers, we play the Happy Trails music that Rick wheels out. It doesn't mean, though, that we're selling those stocks, or that we still don't like them. Usually they're still under active coverage and being held for long periods in Stock Advisor and Rule Breakers.

If step one was talk the talk and walk the walk; step two, we've already spoken to, walk, yeah, walk, but keep score. It's the importance of scoring. How much is each of us spending the time seeing, how are we doing? How is our financial advisor doing? How's that 401(k) box that we checked at work, how's that doing? Understanding the score. Imagine being a sports fan and not having any sense of what the score is like. No scoreboard. We wouldn't get smart about sports. Coaches wouldn't get better. Players wouldn't know how to grade themselves. Fans would be unclear who's actually good out there. So it's so important to score. 

Step No. 3: when you score, you learn. I think that's self-evident. It is the very act of scoring. We have some painfully bad stock picks that I've made. I've made more of them at The Motley Fool than anybody in history. I'm very aware of that. But you really have an opportunity from your winners and your losers to learn. That's the heart of these five-stock samplers and Reviewapalooza and what we're doing here.

Flippen: I couldn't agree more. So many of these companies -- even looking at the ones which I'm sure we'll talk about later that have been, horrible underperformers, let's say, I mean, you still look at the companies and you can understand the investment thesis. You can still see a reality in which it plays out. Maybe that's not true for all of them. But I think that it's great to remember, put yourself in the mindset that you had when you bought the stock a few years back. Remember what was so great about that investment. Has that changed? If it's changed, fine, that's great, you can make a different investment decision. But for the vast majority of these companies, not much has changed, just the price.

Gardner: Yeah, and it's a great point. The world is dynamic. We can't control everything that happens. We try to pick a good management team. We try to pick a good product or service. We try to play it forward in our minds and live backwards from the future and think what's going to win, and what's going to work. But we're always ready to be wrong. And we're wrong quite a lot. 

Step No. 4. This is a tip to any financial professional. I would say, if we're scoring, as I said earlier, I hope we're winning. We should be trying to get better. The best way to build trust, I think, in any field is to score and to win when you're scoring. Keeping score, and then having winning scores. Again, for any financial professional, anybody who's a mutual fund investor, hedge fund manager, financial advisor, all of us have an opportunity to be transparent with our performance. The best way you're ever going to build trust in this world is to be transparent and to win. That's the aim of these five-stock samplers. 

With that as prologue, it's time to get to the main event.

[music playing]

Alright, five-stock sampler No.1 this week. This is the debut. That's right, these stocks were picked one year ago, so this is their first time ever in Reviewapalooza. The name of this theme, Emily, was Five Mm-Mm Good Stocks. Now, we'll talk about the theme in just a sec. But the day was September 5th, 2018. Emily, can you remember what you were doing a year ago this week?

Flippen: Well, I don't take as great diligent notes as you may. But I do have a spreadsheet. Starting in September last year, I started studying for level one of the CFA program. So I was tracking my studying in a spreadsheet. I can see that on September 5th, I put in 80 minutes of reading that day. Whether that's good or bad, I don't know. I passed, so I guess it was good enough.

Gardner: Congratulations! When did you pass? This summer?

Flippen: Yes. I took the test in June.

Gardner: Congratulations, Emily! Emily Flippen, CFA?

Flippen: Eventually. Level one. Now I'm in the process of studying for level two.

Gardner: Is level two when it completes? Or level three?

Flippen: Level three.

Gardner: And then that's it, right? 

Flippen: And then four years of investment-related work experience. Then I can apply for the credentials.

Gardner: I see. Well, I'm just looking at my schedule, I was working that morning on our new mobile game app that's coming out this fall Investor Island from The Motley Fool, which I'm really excited about. It's going to debut in the Canadian App Store in a few weeks. Then it's going to hit the U.S. App Store, I think, next month. We're excited. Many of you have helped us beta test Investor Island. I was meeting with the team that morning. But later that afternoon, Five Stocks Mm-Mm Good came out. The hook here was, they're all companies that start with the letter M. Yep, it's that silly. I just thought, "I like all these M stocks." I think Rick probably came up with this, so we went with Mm-Mm Good. That's what unites this five-stock sampler.

Flippen: That was going to be my question -- who's the genius who came up with that name? And Investor Island, for that matter. Great naming skills! I'm not creative enough to have contributed. 

Gardner: [laughs] So, for each of these, Emily, we're going to look at the highlights, lowlights and then talk through the stock. Five stocks. I'll give the names right up front: Masimo Corp, Match Group, McCormick, MercadoLibre, and Momo. Those are the Five Mm-Mm Good Stocks. We'll see if they were mm-mm good. 

Let's talk first about the best one. Then we're going to talk about the worst one. The best one, picked $320 a share even at market close, September 5th, 2018 MercadoLibre.

Flippen: No surprise there!

Gardner: Today, through Monday's close, from $328 up to $571 and a little bit of change. It's up 74%. By the way, I should mention, the stock market is up 3.2% from a year ago. I love those low bogeys that we're shooting for. Just 3.2% is the hurdle we're looking for here. MercadoLibre up 74%. Off to a great start for this sampler.

Flippen: Yeah, there's really not anything bad to say about this company, at least thus far. I will say that, when you did pick it last year, the stock had already appreciated significantly. 

Gardner: I'd forgotten.

Flippen: I'm sure at the time, there were people who had googled the company, maybe saw the appreciation, looked at the P/E ratio, and thought to themselves, "This is ridiculously overvalued." But it goes to show that companies that have historically performed well tend to continue to perform well. Over the past year, MercadoLibre has really just capitalized on the emerging e-commerce scene in Latin America. It's really a huge opportunity. This is impressive, given the fact that the economies in a lot of their core countries, especially their currencies, haven't been exactly stable --

Gardner: Things are pretty unstable in South America right now. Venezuela and Colombia having some spats. Argentina with its devaluation of its currency, given worries about the election this fall. You're right.

Flippen: MercadoLibre, meanwhile -- while they operate in other markets as well, more stable markets like Mexico and Brazil -- despite the fact that they've been surrounded by countries that have really been unstable, the company itself has been relatively stable, and not in the sense that it is a stable performer, but in the fact that they've managed to continue to post amazing growth. Their gross merchandise value, their different processing platforms. Mercado Pago is doing a great job expanding into the Brazilian market, for instance. All of these things have improved drastically just over the past year. I would not feel shy, again, buying it today, even though we talked about it being up, what, 74%? Despite that great appreciation, it's a great company, it performs well, and I have no doubt it'll continue to do so. 

Gardner: I hate to overplay this, but winners do win. MercadoLibre, first picked in Rule Breakers for members February 18th, 2009 at $14.13 a share. So from $14, our original cost, up to $571. It has been the single best-performing stock in Motley Fool Rule Breakers, and it has just continued to be the gift that keeps on giving. 

From the sublime to the ridiculous, I'm sorry to say that the company arguably with the most ridiculous name here also has the worst performance: Momo, ticker MOMO. Emily, it's down 20%. It was at $45 a share a year ago. It's down about $36 right now. Down 20%, what's happening with Momo?

Flippen: It's unfortunate that the stock has responded the way it has. Momo's core business has been definitely pressured, largely because of factors that they can't control. So they actually had an impressive, astounding 40% of revenue growth over the past year. But it's a notable slowdown to the numbers that they were posting a year ago. The big story is really that the government has had a field day in regulating a lot of their businesses, notably cracking down on in-app purchases associated with their live streaming revenue. These are the things that were really lucrative for Momo and they suddenly fell off a cliff when the government decided that the content that, maybe, some live streamers were producing was not exactly family friendly. 

That being said, it does have a dominant positioning in the Chinese market. It's an interesting company. But, the macro environment, Chinese companies plus government regulations, has really pressured this company.

Gardner: Emily, I think a lot of people probably don't even know what Momo does. They hear Momo, people talk about momentum stocks, and that's what a lot of traders say when they talk about it. So, in a sentence or two, what is the business of Momo?

Flippen: Momo has often been called the Tinder of China. The premise of the company was that they had one of the most popular dating platforms, dating apps in China. It actually moved more toward a livestreaming based app with dating involved. I would suppose the closest connection it has here in the U.S. is the Tinder of China, although there are some significant differences in the business model.

Gardner: Alright. With Momo 23% behind the market, if you net out that 71% with MercadoLibre, we're looking pretty good. I'm happy to say the other three companies -- Masimo, Match, and McCormick -- are all beating the market. This is a spectacular start for Five Good Mm-Mm Stocks. I'll give the final accounting in a minute, but Match is up 54%; Massimo and McCormick both up about 26%.

Flippen: Well, I'd be remiss if I didn't talk about the actual company that owns Tinder, the Tinder of the U.S., Match Group. Over the past year, it's Tinder, Tinder, Tinder. It's really been an amazing growth driver for the company. That doesn't mean that they haven't been expanding involvement in other areas. What I found exciting was, they picked up strategic investments in new apps as well. One notable one: Harmonica, which is dedicated to helping hook up the 1.8 billion Muslims in the world. There's still lots of ways for Match Group to continue to expand its offerings as opposed to just being Tinder and Match and Plenty of Fish. The point thing there that dating isn't going anywhere, especially online dating. It's been a great performer. 

McCormick has done really well, too, because of their cost-cutting program. Despite the fact that McCormick has never been a growth company, it still has a great product. Being conscious about how they spend their money and where they spend their money has allowed them to really expand their margins. Increased cash flow to investors in the form of increasing dividends. They've actually had 33 consecutive quarters of dividend increases. It's an impressive company, as well.

Gardner: That's amazing! A lot of people would think, why do we have McCormick? Why did I pick it in Motley Fool Stock Advisor back in 2014? It seems like, as you mentioned, a real grower, and I do love companies that grow. But I also love companies that serve something special that's hard to compete against. I love the macro trend -- talk about tailwinds -- I think food is getting more and more interesting. It's getting more and more diverse. There are more choices all of us have. And spices, darn it, that's what brings the spice to food and life, spices. 

For five years now, McCormick has paid good dividends. We got it at $61.50 in 2014. Touching the scales around $150 today, it's been a winner.

Masimo?

Flippen: Masimo has also been a winner. Nothing too exciting there. Really strong demand for their core product. Great international expansion. Drastically improving their net income margin. Just a good business overall.

Gardner: Remember, this is just year one of three years of review. We hope that things will keep going this well for these five companies. I'm really happy to say, on average, they're up 32.1%. The market is up 3.2%. So, Five Mm-Mm Good Stocks sure have been 29% ahead of the market in their first year together. 

Alright, thus much for our first stock sampler. Let's next go to No. 2 this week. 

We need to go back in time. That's right, we always start with the most recent and go back to the oldest. So here we go. We're back in 2017. Emily, specifically September 13th, 2017. Now, I will admit this. I know what I was doing on almost any day of the last, I don't know, 10-plus years because I keep a minute-to-minute calendar that is really my memory. So I'm able to say, "I know exactly what I was doing on September 13th, 2017," and I'll share. I was having a wills and estates meeting. 

Flippen: That doesn't sound like fun.

Gardner: It's not the most fun thing, but it is important. As we build up assets and we have capital in this world, we really owe it to those who come after to make good decisions about it. So, while it's not my favorite thing to do, I think I was revising my will that morning. Emily, do you have any recollection, September 17th for you? 

Flippen: Yeah, it was actually a big month for me. I had just started work, my first job after college, at GE Capital in Stanford, Connecticut. I had made the move from Texas, where my family home is, up to Connecticut. 

Gardner: Wow!

Flippen: I moved from the suburbs to the suburbs. [laughs] But it was an exciting opportunity at that time.

Gardner: You did not stay at GE Capital.

Flippen: Not for very long. I enjoyed my time there. Loved the people I was doing my work with. I learned a lot. Had a lot of great opportunities. But it was very clear to me at the time that GE the company really lacked strong leadership. So, when I thought about my career five years from now, in my opinion, there was no way that I was going to stay with a company that really had no vision.

Gardner: Wow! It's such a big and impressive company, but the stock has not been very good. We're a private company. I think our Fool shares were up the last couple of years. Maybe you made a good decision there. I sure hope so, since you're a stock picker, too.

Flippen: I hope so, too.

Gardner: Alright, Emily, Five Great Stocks You've Never Heard Of. That's the theme. I should mention before we give the five stocks that the market on average for these five was up 17.2% over the period. That's what we're trying to beat. And yeah, I was picking companies that most of us wouldn't be able to recognize. If I said Littelfuse, would you -- well, you would know. But, would you, dear listener, know what Littelfuse is? Or Blackbaud? Maybe if you work within the charitable world and use their engine to help you manage grants and donations, maybe you know Blackbaud. NuVasive? The Ultimate Software Group? Orbital ATK? Those were the five companies in haphazard order. In fact, I'm going to go with reverse alphabetical order for these. So, Ultimate Software Group, Orbital ATK, NuVasive, Littelfuse, and Blackbaud. That's the order that I presented them on September 13th, 2017. 

Alright, Emily, looking over this group, I see one clear winner, and almost everything is an also-ran. Let's start with the one clear winner -- The Ultimate Software Group. We picked it at $187.19 at market closed, September 13th, 2017. The company was bought out. In fact, it was bought out within about a year. It was announced that Ultimate Software would be acquired. That deal went through on May 3rd of this year at $331.50. So, from $187 to $331.50. Maybe somebody in the private equity world was listening to this podcast because they made a bid for it and it worked. Ultimate Software up 77%.

Flippen: This was an impressive company. While people got an all-cash offer, which was I think 32% higher than what their closing price was, so a 32% premium; ultimately, we did lose a good company in this acquisition. Or, I guess we should say, took private. The company really performed well over the course of 2018. They found a way to run off of a really small salesforce, which allowed them to have really impressive margins. They kept costs really low, productivity really high. Allowed them to grow at double-digit rates without growing sales and advertising costs the same. They had a lot of success in using this model to introduce processes and new products over the past two years. Not to mention -- granted, we don't know anymore -- at the time of acquisition, they'd only penetrated a really small percentage of their entire market. I'm sure whoever bought them appreciates that purchase now. But we as investors maybe miss that company a little bit.

Gardner: Their product was UltiPro software. That was the package. It was basically, manage your workforce. It was cloud based. SaaS companies very much anchor on these days. It's somewhat volatile right now. But overall, we identified this company a number of years ago. In fact, it first came to Rule Breakers on May 23rd of 2012. So a good seven-year hold. A stock that quadrupled for members, but just for this five-stock sampler, nice to see Ultimate Software up 77%. And, yeah, taken private. We don't see them anymore as investors, but they're still out there. 

Now, I mentioned there's one major outperformer. The weakest performer here, Emily, was Littelfuse. It's down 8%. From $184, down to $170 over the last two years. 27% behind the market. That's the worst performers. Spoiler alert, we have another winner with this five-stock sampler. Again, just through two years. Emily, anything to say about Littelfuse?

Flippen: Littelfuse makes little fuses. And other things, like circuit breakers and other electrical components. 

Gardner: Now, it is spelled L-I-T-T-E-L, not L-I-T-T-L-E. But, you're right. Fuses are little, for the most part.

Flippen: I'd overlooked that. I knew the company, read the company, and I've been misspelling the company all of this time. Despite my misspelling, it's been a good performer thus far. It's not the most glamorous company. A lot of their growth was not organic growth. It was attributable to its acquisitive strategy. Despite strong revenue growth in 2018, it was actually a slowdown. Organic growth, the growth that's inside of its core business, so without the acquisitions, was declining in the most recent quarter. Guidance has been poor. It's really a cyclical business, as you might expect from a fuse and circuit breaker company. It has not beaten the market, but given the decreased purchases of cars and appliances, and maybe the potential for that to continue into the future, it makes sense given its business focus.

Gardner: I am just looking at the Wikipedia page. It was founded in 1927. It wasn't founded by somebody named Littel. It might have just been a misspelling of the founder, because their first product was indeed a small protective fuse. This is a company today that oversees like a huge number of different components. There's a lot of complexity in running this business. While it's been disappointing over the last year to see Littelfuse stumbling a bit against the market, I am happy to say that for Stock Advisor members who bought in March 2014, it is roughly a double ahead of the market. A quiet, sleepy company. I like these kinds of companies. We pick these in Stock Advisor some on my side because they're just around forever. 1927 says enough. I like how you summed it up. They make little fuses. 

Well, this was called Five Great Stocks You've Never Heard Of, so these are not necessarily the most interesting companies to talk about. The three others, Emily, Orbital ATK, NuVasive, and Blackbaud, we're going to keep moving. We don't have time to cover them all. I should point out, Orbital ATK was also bought out. Maybe we should talk about that briefly.

Flippen: Yes, they were bought out at a 22% premium by Northrop Grumman. That's an important one because it actually got a lot of criticism for being anti-competitive. It was announced right after Orbital announced a new heavy lift rocket that was designed to quote "deliberately compete for national security launches." So it was definitely a strategic acquisition on the part of Northrop Grumman.

Gardner: Orbital ATK, which started as Orbital Sciences and then merged once over the course of our holding the stock in Rule Breakers, really a cool company. I mean, rockets. It might have been a stock you've never heard of; most people hadn't. But, yes, it did get bought out. Somebody had heard of it. In fact, this company, the buyout was announced just weeks after this five-stock sampler came out. So two of our five companies here got picked off before we could even make it to the second-year review. It makes you wonder, Emily, of the three remaining, which will you predict gets bought out first? Maybe even before next year? I realize this is a ridiculous question, which is why I'm asking it, because it's Rule Breaker Investing. Which is going to go next? Blackbaud, Littelfuse, or NuVasive?

Flippen: I think Blackbaud just because we're seeing a bit of consolidation in the software industry. Given the fact that it's down significantly, it may be an easy acquisition target.

Gardner: These five stocks all taken together against a market average of 17.2%, their five returns averaged 21.5% over these two years. We beat the market with these by about 4%. Five Great Stocks You've Never Heard Of. Those who were listening to us and bought right along with this podcast -- which we don't encourage you, by the way -- two years ago, you're pretty happy right now. You've beaten the market, and you've watched two of your companies get taken out. 

I'm having a little bit of fun there saying we don't want you to buy these. Of course, we do want you to buy these. We want you to invest. Every one of the stocks that I pick in these samplers are active recommendations. The reason it's a sampler is because I'm looking at the larger services -- Motley Fool Rule Breakers, Motley Fool Stock Advisor -- and I'm just picking a handful of a few companies when I share them with you on these five-stock samplers every 10 weeks on this podcast. So all of them are active recommendations. We do like them. But I'm also the first to say -- and I've said it many times before on Rule Breaker Investing -- whichever companies speak to you, whichever you think will help make your portfolio reflect your best vision for our future, those are the ones I think you should buy. While Emily just formally call that Blackbaud as in-play on this podcast, [laughs] it doesn't mean that you should rush to buy it, even though -- what, a 30% premium, you think, Emily?

Flippen: [laughs] A 30% premium would make this one beat the market.

Gardner: That's a good point, because it's about 13% behind the market right now. Alright. Thus much, we can write, we've chiseled it into the permanent stone of this podcast, the two-year review of these Five Great Stocks You've Never Heard Of. We'll be talking about them one year from now, closing it out, and seeing how they really did end up. Whether the market's up or down over the next year, who knows? We just hope these stocks will beat the market. That's what we're trying to do at Rule Breaker Investing

Alright, if that was 2017, let's go back in time further. The very first five-stock sampler ever picked was Five Stocks for the Next Five Years, which was published on September 2nd, 2015. By the way, it's sometimes hard to look this far back on iTunes, presumably Google Play. It's hard to find more than about 100 podcasts ago. But given that we've been doing our weekly podcast more than 220 times at this point, you can imagine, a lot of our great work is buried somewhere there in the internet. But if you do know the title, like Five Stocks for the Next Five Years, you can usually Google and find the sound files for any of the podcasts that we've done in the past. This one, no exception. 

September 2nd, 2015. Emily, do you remember what you were doing that day?

Flippen: Not that day exactly. But, again, generally that month, I remember that I was a junior in college. That first semester of my junior year, I actually lived in Florence. I did a semester abroad there, which was probably the most basic -- excuse the language -- semester abroad that an American can do. I went to Florence, Italy and yes, I did drink a lot of wine and eat a lot of pizza.

Gardner: [laughs] I love that you're calling that your semester abroad, because your entire four years was abroad. You went to NYU Shanghai.

Flippen: I needed a break from the four years of Chinese food, so I did take a semester and I went to Florence, and I treated myself.

Gardner: Well, that does sound absolutely delightful! I did go to my calendar, and I see that that morning, I was rooting about the basement of my house, trying to clean things up, specifically looking for Magic: The Gathering cards that a numbskull friend of mine had left in a bag somewhere on the first floor of my house years ago. For anybody who follows Magic: the Gathering, and there are not that many of them -- although Richard Garfield, its founder, is a past guest on the show. Really enjoyed having Richard on last year to talk about his most recent game design. Anyway, Magic: the Gathering. Those cards appreciate over time, kind of like a good baseball card. Some of the earliest days of the beta -- I have some beta Magic: the Gathering cards. And this friend of mine was like, "Hey, I left some of those in your house. Could you find them for me?" I'm happy to say I did ultimately find them. You're very welcome, my friend Tom, that you got your Mox Pearl. 

Alright, it was Five Stocks for the Next Five Years. How has the stock market done since September 2nd, 2015, four years ago, right about this week? The answer is, the market is up 51%. That's four good years. That's a higher hurdle than the 3% we needed to jump over with Five Mm-Mm Good Stocks. Emily, let's see how we've done here. 

What were the five stocks? Well, alphabetically by company name, they were Activision Blizzard, Casey's General Stores, [whispering] FireEye, MercadoLibre, and Middleby. Sorry, did I skip one? I did say it, didn't I? I did say the company name. 

Flippen: I heard it slipped in there. 

Gardner: Good. So, those are the five. [whispering] FireEye. One of them has been really, really bad. That's one whose name I won't say on this podcast because of how deeply upset I am at the company and how it's performed. [whispering] FireEye. It has the ticker symbol FEYE. Let's start with the worst. Worst is first, Emily. The stock was at $37.47 in 2015. It's down to $13 and change today. Down about 63% when the market was up 51%. Five Stocks for the Next Five Years? Not that one.

Flippen: Yes. He who shall not be named was a good idea that was just executed poorly. This particular company, [whispering] FireEyefaced significantly higher costs than expected when they migrated to their cloud based model. Their renewals just became abysmal. The top line growth really dropped off a cliff. And they really needed some inept competitors, and what they got was some really strong competition. 

Gardner: Cyber security, a big field these days.

Flippen: When you look at the field, even today, they're operating in a field that is presumably, and should be, a very, very lucrative field to be in. The problem is, when you operate in a lucrative field like that, other people aren't unaware of the fact that that is an area that is growing and have high demand. Palo Alto Networks really put the nail in the coffin for FireEye. Oh no, I said it! [laughs] That's not to say that they're completely buried in the ground yet. It is to say that Palo Alto Network's suite has really trumped this company's product. Stolen all their customers.

Gardner: I am happy to say that Palo Alto Networks is a stock pick for Motley Fool Rule Breakers. I wish I'd selected it for this sample. I sampled improperly. We've also had some nice winners. Fortinet has been a very fine stock for Motley Fool Stock Advisor members. I tried to make up for this inadequate early cyber security pick by picking a few others along the way. But that doesn't help this five-stock sampler. So, that puts us minus 114% in the hole. Let's add further to that hole with The Middleby Corporation, which is a company that we admire. In fact, its longtime CEO recently came on The Motley Fool board, Selim Bassoul. We're really happy to have Selim on our board. He's a remarkable man. Maybe in part because he recently retired as CEO, but I don't think, really -- anyway, the stock up only 9% when the market was up 51%. That's 42% more against us, Emily.

Flippen: I will say that this manufacturer of commercial cooking equipment and appliances does operate in a very cyclical business, as you might expect. It faces a lot of those same problems that we talked about earlier. Before this earnings call, the stock was actually an outperformer. It wasn't until the most recent earnings call the stock has really been hammered for Middleby. That's largely because of a few different reasons. They have exposure to the European market. Concerns about Brexit and slowdown there has hurt their exposure in that regard. Slowdown in demand for U.S. industrial purposes as well. Not to mention the impact of tariffs, which people are always concerned about with companies like this. It's really hurt their short-term margin expansion. 

Here's what I will say. My parents have recently purchased a townhome in Dallas, moving down to the city. My mom was pumped because it came with a Viking range in it. That's one of Middleby's namesake brands.

Gardner: That's right. Acquisition a few years ago. It's probably its biggest, best-known brand.

Flippen: That brand in particular has been performing really well for them. If my parents have anything to say about it, this one might come back yet.

Gardner: Unfortunately, your parents, as good as they are, can't help --

Flippen: Not yet.

Gardner: So, we're minus 156% with three stocks left. Let's take them alphabetically. Activision Blizzard. Really happy to say this longtime video game entertainment leader is up 95%. That's 44% points ahead of the market over the last four years.

Flippen: Despite all of its controversies that we've seen over the past few years, 2015, 2016, 2017, even were great years for Activision Blizzard. You can think back to the success of a lot of their brands like Overwatch and Diablo. More recently, the relaunch of Classic World of Warcraft. These are all great legacy brands that kept bringing in recurring revenue, recurring subscribers. To be clear, it was down 26% in 2018 alone. So it's not been an easy ride for investors. 

Gardner: That's right. 

Flippen: The majority of these gains were gained in 2016 and 2017, back when there were fresh installments of a lot of these games. But it does go to show the fact that this company does tend to move not only with gamer sentiment -- I wouldn't call it investor sentiment. Gamer sentiment -- but also with launches of their popular brands.

Gardner: Our cost originally for Activision Blizzard for Stock Advisor members, August 9th, 2002 $3.14. Actually, six months later, it was down, cut in half, so I added at $1.60 or so. Today, around $56, it has been a mega-winner. It's a reminder that a big, vital business, and a leader like this, held over time, can do fantastic things for your portfolio. But you're right, Emily, it was down with the video game doldrums. It seemed like every was playing Fortnite last year, no one was talking about anything else. Companies like this company were harmed a little bit as a consequence. But, this remains a long-term buy and hold, big-time winner. And, I'm happy to say for this five-stock sampler, it's up 44% on the market, which means we're now at minus 112% with two left. 

Casey's General Stores is next. Emily, sad to say, it's only 9% ahead of the market. It's up 60% or so. 9%, not bad. Not really helping this five-stock sampler that much. Any thoughts briefly on Casey's?

Flippen: Let me first say that I was raised in Texas, so I'll always be a loyal Buc-ee's fan. But until Buc-ee's becomes publicly traded, I will settle for its Midwest equivalent, which is Casey's General Stores. It actually didn't really start to outperform until recently, until the end of May this year when they started to let some of that revenue slide to the bottom line. They had some gross profit increase, which helped. Gross margin expansion. Cost-cutting measures. In fact, same-store sales during May were up nearly 6%. Great recent performance from this company.

Gardner: Thank you! I have not been to a Buc-ee's. 

Flippen: You should go, if you're ever in Texas.

Gardner: Does it have pizza? Casey's has great pizza.

Flippen: Buc-ee's has great everything else. Honey roasted nuts, for instance. More Texas-based food.

Gardner: Sounds good! Speaking of sounding good, I've got one final stock that's part of this five-stock sampler. Emily, are you familiar with the concept of the deus ex machina?

Flippen: I am, and I'm trying to figure out how you're going to relate it. 

Gardner: My recollection from my undergraduate studies is, this typically would happen at the end of ancient Greek plays, when something would swoop in at the end and save the day. I believe it comes from the Latin "God out of the machine." So, a machine is wheeled on the stage, and out comes somebody God-like to save everything. The name of this godlike company, the fifth stock that was included on Five Stocks for the Next Five Years: MercadoLibre. I'm really happy to say that MercadoLibre four years ago was at about $110. Today, at $571, this stock is up 420%. For listeners, that's 369% ahead of the market. Three of these companies did beat the market, but this one stock has caused this first-ever five-stock sampler to average a gain of 103.9% against the market's 51%. These five stocks, as a sampler, are 53% ahead of the market four years later.

Flippen: That's generally how the market works as well. The vast majority of companies in the market do not perform well, but the ones that do really do. We're happy to have MercadoLibre in here. Since we already talked about it a little bit before, I'll just bring us back to 2015. Let's look at some of the numbers that MercadoLibre was posting in 2015. Back then, the day it was picked, revenues were only 30% of what they were today. The earnings call that was published only a few days before recording that podcast four years ago, MercadoLibre was doing $1.65 billion in gross merchandise value, with payment transactions of about $18 million. Now, that $1.65 billion in GMV grew to $3.4 billion, and that $18 million in transactions volume, now $6.5 billion. This company looked like a riskier bet back in 2015, and it's really expanded on its value proposition.

Gardner: And it's been a spectacular company. A true blue Rule Breaker. It only takes one. Now, we are not premising to just try to roll the dice and hit a home run once. In fact, I'm happy to say that, not just in this group of five stocks, the majority of them did beat the market. But all three of these samplers well ahead of the market, powered by a number of stocks, but when you have a single home run stock -- and we have a knack for finding those at Rule Breaker Investing -- they were really can power your overall returns. So, you see -- admittedly, only in a group of five stocks. There'll always be a lot of luck in any group of five, for better or for worse. But we're awfully fortunate to have had MercadoLibre called out four years ago this week. 

Well, Emily, thank you very much for joining me again on Rule Breaker Investing this week!

Flippen: Thank you again for having me!

Gardner: A lot of good work there. I do see, there are a whole bunch of notes you took that we couldn't even cover because we wanted to keep the format moving this week, which I hope we did a good job with.

Well, next week, yep, it's that time of quarter. It'll be The Market Cap Game Show. Now, Emily, you have distinguished yourself as an all-star on The Market Cap Game Show.

Flippen: I wouldn't go that far!

Gardner: There's no doubt in my mind. The stats will show it, and we're all about scoring and learning. But next week, I'm going to have Aaron Bush. Aaron was on a quarter ago, and he had the best performance we've ever seen on the show.

Flippen: Ever. I'm so looking forward to seeing if he can replicate that amazing performance!

Gardener: I am as well! So many of us rocked the #ILostToAaron because he got nine out of 10 right. Yep, it's our game show, The Market Cap Game Show, that we play four times a year on this podcast, next week. 

Well, this was super fun! I'm really happy to say that all three of these five-stock samplers have outperformed the market, and two of them really handily. It is, I hope, a reminder to all of you of the power of choosing stocks directly. In a world where so many people seem to be mailing it in, giving their money over to the index fund. I've said in the past, I really do believe -- and I think we prove it every week here and every year for years of The Motley Fool -- that if you are selective and actually pick this stock, not that one, because this one's a great company and that one's not; this ain't rocket science, I think you can and will outperform the market. Certainly, these five-stock samplers are good reminder of both how fun and how profitable that can be.

Emily, thank you again!

Flippen: Oh, thank you!

Gardner: And thank you to all of our listeners. Look forward to The Market Cap Game Show on Rule Breaker Investing next week. In the meantime, Fool on!

As always, people on this program may have interest 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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Gardner owns shares of ATVI, GOOGL, GOOG, FEYE, MASI, MTCH, MELI, MIDD, and NUVA. Emily Flippen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends ATVI, GOOGL, GOOG, MASI, MTCH, MELI, MIDD, and PANW. The Motley Fool recommends BLBK, CASY, FEYE, FTNT, LFUS, MKC, MOMO, and NUVA. The Motley Fool has a disclosure policy.

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