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 loses, 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 podcasts history when three of those anniversaries coincided. So for this episode, it's samplers, samplers, and more samplers. In this segment, he and his guest host, senior analyst Emily Flippen, look back two years to a sampler called "Five Great Stocks You've Never Heard Of." If you weren't listening that week, you might still not know Ultimate Software Group (NASDAQ:ULTI), Orbital ATK, NuVasive (NASDAQ:NUVA), Littelfuse (NASDAQ:LFUS), or Blackbaud (NASDAQ:BLKB). And in two of those cases, it's even more understandable.
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This video was recorded on Sept. 11, 2019.
David Gardner: 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.
Emily 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.
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 Sept. 13, 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 3 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 23 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.