In this episode of Rule Breaker Investing, Motley Fool co-founder David Gardner and Motley Fool analysts Karl Thiel and Maria Gallagher review three Five-Stock Samplers. Learn about their businesses, why they went up or down, and what lessons you can take away from this review so that you can apply them to your future investments. Finally, get a sneak peek into what's coming next week and much more.
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This video was recorded on April 21, 2020.
David Gardner: This week let's revisit the past, shall we? Three years ago this month, I picked five stocks, it was a silly theme -- I'll explain that later -- but they were all companies I believed would beat the market. And it was a three-year contest, which now means it's over; did we win or did we lose?
Two years ago this month, I picked five more stocks. This time it was called "5 Stocks I Own that You Should Too." I wonder whether you acted on that and whether you now own them. And regardless, I bet you're wondering how they've done. Well, we'll talk about that.
And one year ago this month, I picked five more stocks. 5 Stocks for the Age of Miracles. Thinking here about biotechnology. Well, it seems like the medical developments most people care about these days have everything to do with COVID-19. These five biotech stocks from last year don't really have much to do with COVID, how have they done?
Well, longtime listeners already know where we're headed this week; it's a review-a-palooza episode, we're revisiting the past to look at these three Five-Stock Samplers, but very much in the present. Because the two questions that matter most now are, how have they done and what will happen next? So, if you're a stock market junkie like me, this is your episode, because we're putting 15 stocks in play for discussion this week and we're seeing how we've done in my favorite game of all, the game of "beat the market", only on this week's Rule Breaker Investing.
Welcome back to Rule Breaker Investing. Yep, it's week, I don't know, something like seven or eight of what we'll call The Motley Fool Podcasts Lockdown, that's where we're doing all of our podcasts from our respective places of residence.
And I see Rick Engdahl with -- no one else is seeing this because we're using Zoom -- but, Rick, I see you with your classic, I'm going to call it a rural country Zoom background, I'm getting used to that for you.
Rick Engdahl: It's actually halfway up the mountain near Crested Butte, Colorado. It's a little aspen grove that I was climbing through with some friends, oh, it seems like ages ago, but, really, it's just a few months.
Gardner: Well, it's a beautiful picture. Again, I have to admit I thought it was the default Zoom background, but you're rocking your own pic there.
Gardner: Great. Looking great. Well, all of us, of course, living through an unusual time and making the best of it. And I hope our sound is good enough, and that's going to be important this week because I have three special guests joining with me to review each of these five stock samplers this episode of Rule Breaker Investing. Yup, it's our review-a-palooza. So, if you're going to pick stocks and you're going to say we're trying to beat the market, well, then darn it! You better check back a year or two or three years later and let your listeners know how you're doing and also what you're learning, more importantly. What can we learn together from stocks that have picked and that have risen or fallen, in order to make us better investors?
So, I think that's really the meta game, the game outside the game of playing beat the market, which is what we're always doing with these Five-Stock Samplers. You know, my first one I picked was in 2015. We've now done 24 Five-Stock Samplers. That's right, every nine or 10 episodes of Rule Breaker Investing, I pick another sampler. And I think it's important because I think that the premise of The Motley Fool is that by putting in your time and energy, or at least using ours if you're paying us for it, you can beat the market.
And that still runs against the conventional wisdom today. In more circles than not, it seems that the assumption is that index funds are the only thing that makes sense, they're low cost – which we love at The Motley Fool – but they help you match the market, and that's all anybody could really ever hope to do. Well, pretty sure my brother Tom and I started The Motley Fool 27 years ago to prove that wrong. We were raised by a dad who had consistently beaten the market. I shook hands with Warren Buffett as a 15-year-old. There was somebody at The Washington Post annual meeting, we were Washington Post shareholders growing up in Washington DC, there was somebody who could beat the market.
And I was raised under the assumption that everybody can beat the market. One of the best ways to do it is not to try to match it, because when you match the market, when you buy an index fund or an ETF spread across an industry or a market, you're buying everything, all the good ones and all the bad ones. Now, my belief is that we can avoid some of the bad ones and really focus on the best ones. And if we can do that well enough and use time as our ally, we can and, indeed, will beat the market.
So, each time I trot out another Five-Stock Sampler, I'm taking a new risk -- I'm starting a new game. And you can judge me or not, and our team, based on our results or not, as you wish. The most recent Five-Stock Sampler was picked just two weeks ago. It was 5 Stocks for the Coronavirus. How could it not be? I'm really happy to say, while we won't be reviewing this one for another year or so, it's off to a pretty spectacular start.
Now, no one should judge themselves, any Five-Stock Sampler or any investment results good or bad over just two weeks, but darn it! If you're going to pick stocks for a global audience through a podcast and two weeks later those stocks are up 24.5% versus the stock market that's down one-fifth of 1%, so that you're up 25% after just two weeks, well, that's not a bad way to start any contest.
So, I'm certainly not going to gainsay the results we've already had with 5 Stocks for the Coronavirus, and if you were listening and bought one or more of those, I think you're pretty happy today.
But that's just the most recent one, what we're doing today is we're looking back, we're going to go back one year, and then we're going to go back two years, then we're going to go back three years and look at Five-Stock Samplers that were picked this month in the past. We're going to talk about the theme, we're going to see how they've done, talk through the stocks, and I'm going to do it with my pals Karl, Maria and Tom. So, it's a review-a-palooza episode.
And before I welcome in Karl Thiel to review the first one, I did get a question or two in a recent mailbag saying, "Hey, David, could you just give some overall numbers in terms of how these Five-Stock Samplers are doing? It's one thing to review one or two a given week or a quarter, but how are they all doing?"
And so, I think it's fun to lead off each review-a-palooza with the global stats, because I have a spreadsheet that covers all 24 of these. So, there have been 120 stock picks made, right? Because 24 X 5 = 120. Of the 24 Five-Stock Samplers, this is an amazing stat that I myself am not worthy of, there's a lot of luck baked into this, but 20 of the 24 are beating the market. So, that is an amazing hit rate of five in six or 83%. If you're a free throw shooter in basketball, you'd be happy to shoot 83%.
Most people think, again, it's just tossing coins. So, anything better than 50% would be pretty good, but 83% is a remarkable track record for these Five-Stock Samplers. Those 120 stocks averaged a gain of 38.3%; the market versus each of them averages 12.2%. So, across 120 stock picks, we're beating the market by 26% per pick, on average.
So, it has been a remarkable five-year journey for Five-Stock Samplers. And here you are, whether you're a longtime listener or this is your first port of call with this podcast, here we are reviewing three of them.
Alright, the past is but prologue, let us get started with Five-Stock Sampler No. 1. Now, we're going to do this in reverse chronological order, last-in first-out. We're going to just look back one year with this first one, 5 Stocks for the Age of Miracles, and for it, I'd like to introduce my friend and long-term analyst at The Motley Fool, Karl Thiel. Karl, welcome.
Karl Thiel: Thanks for having me here.
Gardner: And I, of course, thought of you right away, because, Karl, one of the many things that you know, but in particular, you bring to our team is a lot of biotech savvy. So, as we review this Five-Stock Sampler, 5 Stocks for the Age of Miracles, it made a lot of sense, Karl, for me to have you on to help us talk through how these companies have done, what they do and what we can learn from them. So, thank you very much.
But before we go there, Karl, let me just ask you, how long have you been with The Fool and what do you do here?
Thiel: I have been here since, boy! 2004, so 16 years, maybe a little more than that. And I am an analyst for, both, Rule Breakers and for Stock Advisor, and I guess, to some extent, I like to think of myself as a Fool of all trades, but I certainly have an a particular love of healthcare, pharmaceuticals and biotech which is why I'm going to have to struggle to not talk too long about these companies, because they're all fascinating.
Gardner: Well, and again, anybody who has followed Rule Breakers for a long time will already know of you, you've certainly been on this podcast a number of times. We always have so many new listeners, though, here in 2020, so that's why I like to lay a little extra scaffolding down.
I would want to make sure that anybody who's ever owned Shopify knows that Karl is the reason Shopify was picked as a Rule Breaker four years ago. And it's particularly exciting to mention Shopify, it's done so well this month. It just had its 13th, and final, spiffy-pop, Karl, for Rule Breakers members making more money in a single day than we paid for it four years ago for the 13th time, what I like to call our "forget me pop." So, before we get started with 5 Stocks for the Age of Miracles, Karl, thank you for your ingenious pick of Shopify, which has been just a massive winner for so many.
Thiel: It's not a biotech.
Gardner: [laughs] Well, you are jack of all trades. All right, well, we should get into the biotech stocks, Karl, but I feel obliged to ask you, because we're all kind of living this life together these last few weeks, how have you spent the past six weeks or so of your life? What does the Thiel household look like?
Thiel: You know, this shouldn't be that different. I'm one of the Fools who is 100% work-at-home anyway, so I mean, I was set up for this. This has been my lifestyle for a long time, but you know, I'm used to being able to leave the house and do things when I'm not working. And so, I've actually become, sort of, wildly productive with house projects. I don't know, I've pressure-washed everything.
And the question, like, what needs pressure-washing? When you have a pressure washer in your hands, the answer is, everything.
Gardner: [laughs] Alright. Well, thanks for sharing that, Karl, let's get started. So, 5 Stocks for the Age of Miracles, I use that phrase because I really do think we're living in an age of miracles. Now, it's not a great time for the health of the world this particular quarter, maybe this year. But the backstory is that there are remarkable developments constantly being made progressing medicine, helping out the human condition. Again, it's an odd thing to be saying during the coronavirus, but the backstory is, that will pass, but the age of miracles is going to continue.
So, the five companies that made up this Five-Stock Sampler all have a role to play. So, let me just start by mentioning the five companies, they are, Amgen (NASDAQ:AMGN), bluebird bio (NASDAQ:BLUE), Editas Medicine (NASDAQ:EDIT), Illumina (NASDAQ:ILMN), and Vertex Pharmaceuticals (NASDAQ:VRTX).
And before we get into those five companies themselves, I probably should mention -- how has the stock market done? That's our target, right, of this Five-Stock Sampler to beat the market. Well, the market is down 4.5% from one year ago this April. So, the market is down a little.
Some of these companies are up; a few of them are down. Let's start, Karl, with the one that's most down. So, I have my eyes on you, bluebird bio, an extremely disappointing pick that I made, I even reupped it once for Rule Breakers members, my apologies for that. The ticker symbol BLUE. Karl, can you briefly lay out what's happening? What is bluebird bio and what's happening?
Thiel: I have to say, I feel like this is going to be a different conversation in a couple of years when this five-stock grab bag finally closes out. bluebird has done just about everything right. So, this is a company that's working on gene therapies, so actual cures for disease by essentially finding illnesses caused by a genetic mutation, correcting the gene and allowing somebody to go on, to the greatest extent possible, as if they didn't have the disease.
They have gotten approval for the first treatment for beta thalassemia, which is, it's a blood disease, it's closely related to sickle cell disease. They're also working on sickle cell, which is a horrible illness. So, they've been approved in Europe. They are doing a rolling submission now to get approval in the United States with that drug.
They are planning to submit for approval of another drug, another gene therapy, by the end of the year.
And finally, they also work on, kind of, a related technology called CAR T in partnership with Celgene and now Bristol Myers Squibb. That drug has been submitted for approval. So, this is going to be a company that goes to multiple approvals in the next few years.
Gardner: And yet, Karl, amazing to me to think, as you mentioned that, the stock was at $162.45 on April 3rd of last year when it was picked for its Five-Stock Sampler. From $162, it's now $56-ish today. It has been a horrendously bad year, it's down 66%.
Thiel: So, here is the dark side of the age of miracles, maybe. I think that part of what has plagued bluebird is that they are actually working on curative treatments. It's a completely new paradigm, and they're very expensive, obviously. So, even $100,000/year or $200,000/year cancer drugs, now you're talking about, you know, well over $1 million for a therapy that I think is actually good value in the end, when you consider the cost to the healthcare system that's being avoided, but I think it's very difficult to see how that's going to play out.
Now, there's one really good example of this, which is a drug for spinal muscular atrophy, it's a curative treatment, it's doing very, very well. The problem, I think, for bluebird so far, has been that their treatment is very difficult to give, you have to harvest cells, you have to basically kill off the patient's bone marrow, which is, you know, a difficult process. And then retreat them with these altered cells in order to make the treatment work.
Gardner: And you reinject it back in the body, that's how that works?
Thiel: Right. And so, not only is that, you know, by itself a difficult process, but I think it has also been disrupted by COVID. And I think that's one, sort of, interesting sideline to all of this, is that, drug companies, healthcare companies are usually thought of as being very resistant to economic turmoil, because people need to get treatments. But, I mean, in fact, they are being disrupted by this. Clinical trials are not happening. And in the case of this, no patient has yet been treated with this approved drug because of the regulatory red tape and the process that needs to be gone through and the fact that these are patients who have been being treated through blood transfusions. This is, kind of, like, not the time to change that paradigm, and so, they'd recently just kind of pushed everything out for three months.
Gardner: Wow! Alright so, bluebird bio down 66%, again, the market down 5%; we're rounding. So, we're in the hole, 61%, let's go from the worst stock to the best performer in this Five-Stock Sampler and that's Vertex Pharmaceuticals, the ticker symbol VRTX. Karl, this stock a year ago was at $188, today it is at $266, the stock is up 41%. Given that the market is down five, that's a +46% back in the win column; we're still underwater. But, Karl, what's been happening with Vertex Pharmaceuticals?
Thiel: Well, Vertex is just about as de-risked as a bio company can get. It's interesting, as you mentioned before, none of these five companies are COVID plays, right? I can think of three of them that at least have a tangential connection to COVID, but Vertex is not one of them. They are completely focused on cystic fibrosis.
And in October, they got a drug approved call TRIKAFTA, that approval was expected, but it came months ahead of time, and very quickly became their top-selling drug. And at this point, they don't have to do anything, they don't have to get any more drugs approved, they just have to sell what they have, find patients, enroll them, make sure they start getting treated, and I think they have got a pretty clear course to, kind of, $10 billion in annual revenue from last year it was about $4 billion, this year it will be well over $5 billion. There's, kind of, no more clinical trial risk left for them, they just have to work what they already have.
Obviously, they are working on some other stuff, and that's all very interesting, but this is a much less risky play than it's ever been.
Gardner: And what a wonderful stock pick this was by our former colleague Charly Travers. Charly, still today working at The Fool, lo these many years, no longer on our Rule Breakers team, but Charly was when he picked it January 19th of 2005. So, we've patiently held this stock for +15 years. It's been volatile, but our cost is $10.48 for Rule Breaker members way back in the day. So, to see it around $266 today, that's been a +25-bagger overall.
I think it's instructive though, that I still decided to pick it a year ago today. A lot of people think, well, gee whiz! It had already risen 10X, 15X in value, why would you buy it then? And yet, look, how well it's done, up 44% in the year gone by.
So, there they are, the best performer and the worst performer for this Five-Stock Sampler. Karl, let's just put the other three companies in play, and if you'd like to say anything about Amgen or Editas Medicine or Illumina, you could illuminate us?
Thiel: Sure. Amgen is one that is handily beating the market and I think that that's for a number of reasons. Maybe, most notably, there's been this threat to their top-selling drug, Enbrel. And they won an important patent case last Summer that could still be appealed, but essentially gives them protection out until the 2028-2029 timeframe, when people thought there could be competition as soon as last year.
At the same time, some of the bad news has kind of already happened. I mean, Neulasta, is their second top-selling drug, it's already seen its sales eroded by biosimilar competition. So, I mean, this is an example of a company that I just think was undervalued before, they've managed everything really well. They were, kind of, priced for zero growth. They've, in fact, managed to have positive growth, and more than that, they've managed to, really, just get more-and-more profits out of fairly low top-line growth.
And they are actually working on a COVID therapy. They recently announced a partnership with Adaptive and we'll see. I mean, they're one of, I think, over 200 companies at this point that are, kind of, throwing their hat in the ring in one form or another, but it's always good to see.
Gardner: I think, anybody who's been a longtime stock market aficionado, probably would know of Amgen, it's really one of the grand daddies of the biotech world, even going back early 1990s. I remember when biotech first made its splash in the market, Karl, Amgen was one of the players. Today, they're a $138 billion company, much larger than any of these other companies. And it has been a sterling performer for us in Motley Fool Stock Advisor. I only picked it recently, it was June 2018, but it is beating the market well.
For this Five-Stock Sampler, that stock is up 20% from when we picked it, against the market's -5%. Gives us 25% in the win column. Karl, Editas and Illumina, both interesting companies, we don't have as much time to talk about them this week, but they are comme ci, comme ça they're about market performer. So, when we take this entire Five-Stock Sampler together, these five stocks averaged a loss of 3.3%, but if there's good news there, the market is down, as I mentioned, 4.5%. So, this Five-Stock Sampler, after one year, is beating the market by 1%.
Thiel: [laughs] We'll take it. I think it'll be better a year from now.
Gardner: Well, I heard you mention that. And certainly, we hold out great hopes for all five of these companies. And, Karl, a lot of people are going to listen to this and go, "Wow! bluebird bio, that one is down 66%, maybe I should just buy that one if the team still believes in that," but we've generally been better rewarded to add to what's working in our winners. But for all five of these stocks, for anybody listening to the show, thinking about this area of investing in their portfolio, I would buy equal amounts of each of those five today. We feel really good about all five of these companies going forward, but I'd be the last to know which one's going to hit big here in 2021, too.
Karl, any parting thoughts?
Thiel: Yeah. Biotech has been in, kind of -- you know, it hit this big high in 2015, and it's never really quite gotten back to that. But if there's a silver lining to COVID, it's that I think, like, some of the incredibly negative press around the pharmaceutical industry, in general, around pricing and around other things that have kept the stocks down has actually kind of changed tone a little bit, and I think that's something that probably will be helpful, even after we come out of this.
Gardner: All right. Well, I know one thing is for sure, we'll be here next year talking about this Five-Stock Sampler and seeing how it's doing in year two and year three. Most of these 24 Five-Stock Samplers, I picked in the history of this podcast, were picked for a three-year period. Certainly, we're investing in these stocks for longer than three years. But if we didn't ever end the games, we'd be spending all time, every time, doing review-a-paloozas on this podcast. So, I keep it to a three-year game. That means 5 Stocks for the Age of Miracles have two years left. And, Karl, thank you, we'll revisit you a year from now.
Thiel: Thank you.
Gardner: Alright. Well, let's now move on to the second Five-Stock Sampler. So, it was two years ago this month. In fact, it was April 18th, 2018. Every one of the podcasts we've ever done, you can google and find, by the way. Since we've been podcasting for five years now, if you're using iTunes or something that only displays the last 100, you can miss some of our older podcasts when I was picking these stocks, but any one of these, you can certainly just google. So, if you Google "5 Stocks I Own that You Should Too, Rule Breaker Investing" you'll find that April 18th, 2018 podcast.
I want to welcome in my friend and colleague Maria Gallagher to help us look over this one. Maria, welcome.
Maria Gallagher: Hi, David. Thank you for having me.
Gardner: A delight. And, Maria, just share with us a little bit about what you do at the Fool.
Gallagher: So, I have been at The Motley Fool for almost two years now. I started out as an intern and then I worked on the Asset Management team for about six months and then I've been on the Investing team for a little over a year and I am full-time on Stock Advisor and Rule Breakers.
Gardner: And it's a delight to have you on our team anew. You've been through our Investor Development Program, Maria, and you've graduated and they put you on my team and it's our good fortune to have you. I know, I want you to share just a little bit about your background, because probably some people wonder what kind of education gets you a job at The Motley Fool as an investment analyst. What was your undergraduate major, Maria?
Gallagher: I studied psychology undergraduate.
Gardner: Which is great. It wasn't business, it wasn't finance, but how much psychology runs through the world of money and how much does it matter for good investing, and the answer is probably more than MBAs. In fact, a lot of people who get an MBA say, "I actually learn more about investing in just one afternoon of reading The Motley Fool site than I did my years as an MBA," which is not, by the way, to talk down an MBA and maybe you'd like to get one, one day too, Maria, I'm not sure. But I have to admit, I never took a single undergraduate Psychology course myself, Maria, and I realized what a deficit that was. So, I've kind of been scrambling to keep up ever since.
Gallagher: You should take some personality tests on BuzzFeed, that's part of being a psych major.
Gardner: [laughs] That's great. And I know you also have, sort of, a marketing background, don't you? That's part of your interest?
Gallagher: Yeah, the first investing firm I worked at, I worked in marketing for about six months while I was in college.
Gardner: All right. Great. And I have to ask you the obligatory question, Maria. How have the last six weeks been for you?
Gallagher: They've been OK. I really jumped on the baking bandwagon, and I live alone, so I've been eating a lot of banana bread. I made a key lime pie. I made an olive oil chocolate chip loaf, so I've been doing pretty well.
Gardner: Wow! I wish I could come out and hang out at your house. Banana bread, one of the better things on the planet. I haven't had any banana bread for a long time, sounds great.
Gallagher: Once we get back into the office, I'll bring in some banana bread for you guys.
Gardner: Excellent. Thank you, Maria. Alright, so two years ago, 5 Stocks I Own That You Should Too. I'll put, right now, out the names of the five companies. They are, in alphabetical order, Activision Blizzard (NASDAQ:ATVI), followed by Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), or Google if you will, but Alphabet; Intuitive Surgical (NASDAQ:ISRG), company No. 3; Match Group (NASDAQ:MTCH), No. 4; and company No. 5, Zillow Group (NASDAQ:Z) (NASDAQ:ZG).
Now, how has the market done since April 18th, 2018? Well, as of this recording, and we always record the podcast on Tuesday afternoons for the most part, the market is still trading, but I see the market is up 2.2% since two years ago, which is pretty disappointing, Maria, when we think about it. I mean, we've been [...] just up 2%, if you're the stock market average.
Gallagher: Yes, I guess taking into account the current volatility, it's not as bad as it was a couple days ago, but it's not ideal.
Gardner: That's true. And certainly, there have been some wonderful market years in the past, it's just interesting after a big drop to see what the last two years have been. Part of the fun of reviewing Five-Stock Samplers is just getting back in touch with where things were two or three years ago. And to think, when I did that podcast two years ago, that we would only be up 2% the following two years, I would have been surprised at the time, but that's how the market has done. Let's see how these five stocks have done.
In fact, Maria, let's start, again, with the worst performer. So, the worst performer of these five is Zillow. What can you tell us about what's happened to Zillow these last couple of years?
Gallagher: So, Zillow today is quite a different company than when you recommended it initially two years ago, it's, kind of, shifted its entire business model. It used to almost exclusively sell leads to agents and facilitate rental property transactions, but now it's, kind of, gone into buying and selling and actually flipping the houses themselves, which is a pretty different business model. And I think that's probably why it's been a pretty big loser. I don't know that the market has that much faith they can do it, if they can, it'll be a really big winner long term, but right now I think there's just a lot of uncertainty, especially, during the current volatility of what buying houses is going to be in the next couple of years.
Gardner: I think you're right. And it really was a radical shift that Zillow made. Now, it's not like the entire business shifted that way, they still continue to do the business that you're talking about, Maria, but they added this idea that if they're going to have date on homes and they have their zestimate and [...] put their money where their mouth is, get some capital and start buying houses themselves and reselling them and trying to add a whole additional business into Zillow.
So, yes, you're right, that is a big change from when the stock was mentioned on this podcast two years ago. And for the most part, it hasn't been that positively received. It is worth noticing, the stock had been much worse off with the big coronavirus sell-off, at its low, just a few weeks ago, it touched just $20 a share, it's back up to $36 right now. But that still means, Maria, from two years ago, Zillow down 26%, the stock market, as we mentioned, up 2%. So, that puts a -28% in the loss column for us.
Let's move from Zillow to the best-performer among these five, and that is Match Group. Match Group was at $47.14 at market close on April 18th, 2018, from $47-ish, it's gone to $76-ish, today up 62%, that's 60% ahead of the market. Maria, were there big developments there for Match Group or is it just more Tinder worldwide?
Gallagher: I think it's more Tinder worldwide. And they also, in 2018, acquired Hinge, which is a massive growth driver for them. And they serve over 50 countries and 40 languages. They just have such a broad array of apps and such strong network effects that their success doesn't really hinge, pun intended, on any one of their apps. And it was a really brilliant acquisition on their part.
Gardner: Actually, pun should always be intended on this show. I'm just not very good at it myself, but well played. So, yeah, Match Group somewhere around $76, $77 as we record. This is another stock that really got crushed in March. It went as low as below $50, which means it's up about 50% in just the last few weeks, but we're not playing the one week to the next game, as volatile as the market is, as you know, Maria, we're playing the longer-term game. And Match Group over the last two years really has been a stellar pick. And do you favor it, I sure do, over the next five to 10 years?
Gallagher: Yes, of course. I think that online dating is just so common now. I think app dating is, kind of, the way to go for most people. One thing I learned is that the average Tinder user logs in 11 times a day, which is very frequent. And so, I don't think that's going to change at all. And right now, I know people who are meeting and having Facetime first dates and hoping to meet in-person after coronavirus. So, I think long-term, the network effects of all Match's apps is too strong to, kind of, compete against.
Gardner: Isn't that interesting, because we were talking in the office informally, me with a few analysts a few weeks ago, about how badly Match might get hurt, because in an age of physical distancing, are people really going to date and/or use these apps as much? But you're pointing out, you cannot stop humanity from wanting to connect. And so, even if it's not across the bar, using FaceTime and other apps, just what we're doing right now, we're Zooming with each other to do this podcast, that's going to continue. And so, the business, the beat probably goes on for Match Group.
Gallagher: I would agree, yes.
Gardner: Alright, so the three other companies. And pick out any of these that you like to say something about; Activision Blizzard, Intuitive Surgical, and Alphabet, in no particular order, all three of them are a little bit ahead of the market in most cases. And I'll be giving the final results shortly for this Five-Stock Sampler, but you want to throw in any intelligence at us, Maria, around either Activision, Alphabet or Intuitive Surgical?
Gallagher: I think Activision Blizzard is really interesting, because it got hurt a little bit in 2018-2019 because they didn't launch World of Warcraft which had been a big revenue driver for them. And so, launch a new --
Gardner: ... no, new expansions, right.
Gallagher: ... no new expansions. But they are actually generating more interest in e-sports, which is going to be, I think, a pretty strong tailwind for them. So, I think that that's an interesting company to watch. And, I think, long-term, the e-sports tailwind is going to be very strong for them.
And then, for my notes for Alphabet, I wrote Google continued to be Google. It's the largest search engine in the world and generates revenues in all of their segments. But something that I found in my research in Alphabet is, did you know -- David, do you know what the original name of Google was?
Gardner: I do not, I would have guessed "Google." [laughs]
Gallagher: No, it was originally called "BackRub," which I don't think -- "let me BackRub" has a ring to it, it was called that because it was the notion of a web crawling and a nod to receiving backlinks.
Gardner: Wow! Well, it kind of makes sense in a really geeky way, but I'm glad that they went with Google instead.
Gallagher: I'm glad they changed the name, but I just thought that that was too fun of a fact to not share. [laughs]
Gardner: [laughs] And Intuitive Surgical came out with earnings results, it is, after all, earning season. So, just a few days ago, Intuitive reported -- and, in general, this is one of our biggest standing, long-term winners in Motley Fool Rule Breakers. And Intuitive Surgical had better than expected results. It did mention, certainly, to Karl's point earlier about how a lot of the medical world is slowed down to focus on COVID, it did mention some of these elective surgeries that people have maybe delayed. But ultimately, Intuitive Surgical, things, like, hysterectomies are going to happen, it's just that maybe not this quarter. So, we continue to hold out big hopes for Intuitive Surgical continuing to be the big leader that it is within its field.
So, when you take these five stocks together, they are fun companies, Maria, from a video game company, to Zillow, which is now flipping houses; to Tinder, and certainly, the world's leader in robotic surgery; and, oh, by the way, BackRub. So, take all five of these stocks together, the market up 2.2% over the last two years, these stock's average a gain of 10.3%. So, we are ahead by about 8% two years later. So, we are beating the market with these five, but certainly things looked a lot better just a couple of months ago, before some of these stocks caved in. It'll be interesting to follow them over the next year.
Alright, Maria, well, thank you very much for helping cover 5 Stocks I Own that You Should Too. This contest will end one year from now, when this Five-Stock Sampler ages out at three years. It's been a decent, if volatile, first two years. Maria, any parting thoughts?
Gallagher: Thank you so much for having me, and I think that these are really strong businesses, strong companies that will continue to be strong. And I think it's important, in this time of extreme volatility, for people to remember why they bought the underlying businesses and if they believe that those trends will still exist in the next three years. And I think that all of these seem to have strong trends and strong underlying businesses. So, thanks for having me.
Gardner: Really well put. Thank you, Maria. And in fact, I think I'm going to just do a couple of lessons at the end of this week reflecting on these three Five-Stock Sampler and I think you just reminded me of one of them right there. So, Maria, thank you for that and Fool on!
Gallagher: You too. Bye!
Gardner: Alright. Well, did we save the best for last? We're about to go three years back in time, and here we are with our final Five-Stock Sampler. The date was April 19th, 2017. So, almost exactly three years ago, this week, I picked 5 Stocks For April The Giraffe. Now, thereby hangs the tale. And let me tell the short version, and welcome back my producer, Rick Engdahl, to finish out the story. But my recollection was that I had no real theme for the five stocks that particular week, so I decided to have fun with it. I picked five stocks that, when you take the first letter of each of their ticker symbols, it spells out, in acrostic form, the word "April," which after all is the month in which I was picking those stocks in the month in which we find ourselves today.
It was a little bit of hotdogging on my part to think that I could just beat the market with five stocks that would spell out April, we'll see if it worked or not. Sometimes when I hotdog, it does work, other times it doesn't work. But five stocks for April, and that's what I conclude in that podcast, and yet, Rick Engdahl, the actual name of this Five-Stock Sampler is 5 Stocks For April The Giraffe. Could you remind us why, retroactively, we named it that?
Engdahl: Well, surely everybody remembers the internet star of the day which was April the Giraffe. A resident of the animal adventure park in Harpursville, New York who was about to give birth to a calf on YouTube and everybody was all excited about that and it was in the news. Those were gentler days, the headlines were about April the Giraffe and her offspring Tajiri born on YouTube, this day, however many years ago.
Gardner: And that was it, that was it. So, we noticed that, in addition to the five ticker symbols spelling out the word "April," that there was a big internet event, a live birth of a giraffe on YouTube. So, why wouldn't we call it 5 Stocks For April The Giraffe?
Now, I trust things have been good for that young giraffe now over the last three years. Do you have any updates for us, Rick, about the three-year-old giraffe?
Engdahl: Well, as far as I know, everything is good, but I believe that April the Giraffe is probably the only giraffe who has her own Wikipedia page. So, if you want to keep up with the doings and, I guess, the teenage years of her offspring now, go to Wikipedia and just look-up "April the Giraffe", there she is.
Gardner: Excellent. So, we've now explained why there's a silly name for this Five-Stock Sampler, but let's get a little bit more serious as I welcome in my friend and colleague Tom King. Tom, welcome to Rule Breaker Investing.
Tom King: Thank you, David; nice to be here.
Gardner: It's a delight to have you, Tom, and before we get into 5 Stocks For April The Giraffe, let me ask you the same thing that I ask Karl and Maria, starting with, what do you do here at The Fool?
King: So, I am an analyst on the Stock Advisor and the Rule Breakers teams.
Gardner: And not only that, Tom, but I think a lot of people, especially here in the United States of America, are going to detect an accent that sounds slightly foreign to us. It has a delightful lilt to it; at least to my ear. But, Tom, where do you originally hail from?
King: I love making people guess, because I find their answers very entertaining. So, I encourage you in your mind right now to make a guess about where I'm from, and the answer is South Africa.
Gardner: Excellent. Yes, indeed. I did know the answer, because we've worked together for a year or two, but it's been a delight to have you also graduate our Investor Development Program recently, Tom, and to join our team. So, thank you very much for your time today. Let me also ask you, how are you coping through these past six weeks?
King: I'm doing the best I can. I think it's not very fun for any of us. For me, the most challenging thing has been finding new ways to exercise. [laughs] Since that's something I really enjoy; I can't play any sport anymore and all that, so going and, you know, hanging off trees and trying to find things out in the world that where there aren't other people that I can try and do exercise off of has been a fairly interesting experience. And I've noticed a lot of other people out there trying to do the same thing. So, it's quite humorous [laughs] to see everybody trying to find ways to exercise in the urban environment.
Gardner: Yes, it sounds like you are taking up parkour, is that an accurate statement, Tom?
King: I don't know what parkour is, but it's possible I've stumbled on to it, yes.
Gardner: I think that you have, you definitely should look that up, because as fit as I know you are, you definitely should know of parkour, I suspect you may be doing it, so you can look that one up. But now, let's get to the stocks themselves; and thank you, Tom.
So, the five companies. Again, the ticker symbols, you'll notice spell out "April." We'll start with Axon Enterprise (NASDAQ:AXON), ticker symbol AAXN; next move to Grupo Aeroportuario del Pacífico (NYSE:PAC), whose ticker symbol is PAC; then ResMed (NYSE:RMD), RMD; Intuitive Surgical, making a return appearance in this show, also picked in the earlier Five-Stock Sampler, ISRG; and the "L" is for a really interesting company, this time of life, because Live Nation Entertainment (NYSE:LYV) has been a stellar performer, but when there are no concerts, it can put a business like that under some stress. So, Live Nation Entertainment, LYV, the fifth stock.
Tom, let's start first with how the market has done over these three years. And the stock market is up 22.8% from three Aprils ago; a lot better than the 2% from two Aprils ago, and yet, still a little bit behind the historic three-year average return for the market. So, we'll round that up to 23%. So, we're trying to beat 23% returns with these stocks. Let's start with the worst of them. Tom, which is that?
King: That is Grupo Aeroportuario del Pacífico or Pacific Airport Group, if you want to translate it into English, easier to say. Pacific Airport Group share price collapses have only occurred in the last few months. On February 11th, it closed at about $132, and today it trades at around $55. It operates airports: 12 in Mexico and 1 in Jamaica. And in the last three years, the company has grown revenue, operating income and cash from operations at a decent clip and margins are stable. All-in-all, it's doing well operationally. So, its results will certainly suffer for at least a couple of quarters as air traffic dries up, but I don't think the company is a bankruptcy case.
Gardner: And I appreciate you saying that. Certainly, anytime we're talking about anything having to do with airlines, that has to be considered, has to be mentioned, so glad that you mentioned, Tom. And I should point out, by the way, that this is the end of this Five-Stock Sampler. So, after we finish covering this, Tom and I, we will be saying goodbye to 5 Stocks For April The Giraffe. And, in fact, since I first picked these stocks on April 19th of 2017, it all ended last Friday. So, the numbers through last Friday, April 17th, 2020, Grupo Aeroportuario del Pacífico went from $99.5 down to, I have it closing at $58.10, so Tom that's [...] -$65 for this three-year return alpha against the market, very disappointing. As you point out, much of that just happened in the last two months, and what a hard two months it's been for the airline industry.
Now, this is a company that kind of works hand-in-glove with the Mexican government. So, assuming that flights aren't going away from our future, and I'm pretty sure they're not, I also do think that PAC, P-A-C, will make a comeback [...] so that's the worst-performer.
Tom, let's go now to the best-performer. And it was quite a great three years for Axon Enterprise, ticker symbol, AAXN, the former Taser, now a company that also does police body cameras and hosts in the cloud Evidence.com, all of the hosted videos of police apprehending people, as we see these days sometimes on reality TV. Well, that's Axon Enterprise's business. And, Tom, the stock three years ago was at $22.73, when we picked it for the Five-Stock Sampler; closing last week at $76.72, up 238%. A monster winner for this Five-Stock Sampler. Tom, some thoughts about Axon?
King: Well, David, I think all of us enjoy watching videos of celebrities getting arrested for public disorder. So, Axon's products make this possible via the bodycam footages on police officers, right? So, they also sell the tasers, as you mentioned. And you know, these are used by police officers, prison wardens and anybody who wants a nonlethal weapon for self-protection. But the major opportunity for Axon is to win supply agreements with big spenders, such as, Federal and state law enforcement agencies.
And in the last three years, Axon has offered free trial programs, which might hurt profits and margins in the short-term but will help it gain market share in the long-term. It also moved into related services, such as, cloud storage of body camera footage and software necessary to analyze this for evidence. In the future, it will launch a dispatch system. So, Axon's free trials bring customers in and their offering of a number of related services makes procurement less of a headache [...] Both, its innovative products and smart marketing have contributed to its success in the past three years.
Gardner: And it is worth mentioning, Tom, that this stock had just about touched $90 pre-COVID, that was its high in February. It caved in to below $55 by mid-March, but it is now, as we mentioned, back above $70. So, this is a stock that has been rocked like the rest of the market, and yet, it has really rocked the market over the last three years.
One can imagine, given this +200% return that this is a Five-Stock Sampler that has crushed the marker, which indeed, it has. And let's move on to the next company, because Axon wasn't the only stock of these five to more than double.
Let's move to ResMed, the ticker symbol is RMD. Tom, can you tell us a little bit about that business and what's happened in the last three years?
King: Yeah, sure. So, ResMed's core business is the manufacture of continuous positive airway pressure, or CPAP machines, for the treatment of sleep apnea. So, one unfortunate symptom of sleep apnea is snoring. Need I say more about why the company's products are popular?
Sleep apnea is a prevalent but undertreated affliction, and part of ResMed's challenge is to get patients to recognize they have a problem. To support this goal, the company has invested in software which monitors usage and quality of sleep. That feedback encourages patients to stick with the treatment, provides insurance payors validation that they need to justify reimbursement and gives doctors valuable information about outcomes. This data also allows the company to improve its products and allows users to easily order replacements for perishable parts such as facemasks.
The company also manufactures ventilators, which have become in high demand recently.
Gardner: And this is a stock that, again, pre-COVID, was about to touch $180, an all-time high. We first picked it at $60 in Rule Breakers in October of 2016. So, from $60, it had just about tripled. It took the faceplant, the COVID faceplant, down to $135 by late-March. And yet, as the market closed last week, and so did 5 Stocks For April The Giraffe, ResMed's final tally at market close was $165.16, so it was up a 139% for this Three Stock Sampler [Five-Stock Sampler,] (sic), more than 100% ahead of the market.
Intuitive Surgical, we'll just move quickly through that one, since we spoke to it earlier, but over the last three years, Intuitive Surgical up 73%, an outstanding last three years.
Tom, let's talk a little bit about Live Nation now, the fifth and final stock we'll mention. Over these three years, it's basically even with the market. Now, in-between being even with the market, Live Nation was way up on the market before a really tough 2020.
King: Yeah, you're right, David. On February 20th, it was trading at $75, which was up 140% from three years ago, well in excess of the market, and today it trades at half that price. Over the past three years, revenue has grown nicely and operating margin has expanded slightly, but the next few quarters will be hard for Live Nation, quite hard, and avoiding bankruptcy will be its main challenge. It does have a reasonably flexible cost structure, so this should be possible.
Gardner: Well, I sure hope so. It is a leader in its field, and certainly it's been a spectacular Rule Breaker up until the last two months, as you mentioned, Tom. I will point out again, it was up for these three years, up 23%, that's how the market did, so it's a market performer. But wow! What a dramatic 2020 rise and fall for Live Nation Entertainment.
So, Tom, take all five of these together, really happy to say that they average a 91% gain against the market's 23% gain. So, this Five-Stock Sampler outperformed the market by 68% across these three years, a truly outstanding performance. By the way, at one point, [laughs] when Live Nation was higher, these stocks were up more than 100% as a basket, but unfortunately, we have to close this one out historically at a +91%, still a really great three years.
So, Tom, I think that's the first Five-Stock Sampler you've reviewed on this podcast. You're on fire, really good luck, would you come back and do this again sometime for me?
King: Yeah, if I get the invitation, I definitely will. [laughs]
Gardner: [laughs] Excellent, yeah. Well, I already perceive you as "good luck" for this podcast, so I hope you will come back. In the meantime, stay safe out there, Tom King. Thank you.
King: Thank you. Bye-bye!
Gardner: Well, I guess that's where we'll leave it this week, having reviewed these three Five-Stock Samplers, each of which has beaten the market, some by a lot more than others. I guess the good news is, the longer the sampler, in terms of its duration, the higher the return. And indeed, that's what you would expect from the stock market, that's what you should expect from your own portfolio. Over the course of time, if you're well-invested in companies like these, you should make higher and higher highs. And that's a big reason why I don't sell into strength. In fact, I tend to add to my winners, as I think any regular Rule Breaker knows. And these Five-Stock Samplers remind us why, because great companies go up over time. And the way to really reap those rewards, and the largest rewards of all, is to buy-to-hold, to truly invest. And so, a delight to see three more of these beat the market.
And I mentioned earlier, I'm just going to draw a couple of lessons at close, and one of them came from Maria and I'll lead off with that one first. And she used the word "strong" and "strength" quite a lot toward the end of her appearance on the show, just talking about the strength of these companies. And I think it is worth remembering that you're going to do better as an investor when you look for the real strengths out there. This works in any time, but maybe especially during this time. Ask yourself, "What are the companies that are strong through 2020, that are strong through COVID-19?" Some of them may do even better in a physically distanced world, but many of these are digital companies; and it's not like I picked them two weeks ago -- well, actually you heard what I picked two weeks ago with my 5 Stocks for the Coronavirus -- but, no, these stocks I was picking three, two and one year ago with no sense of how 2020 was going to play out, and yet, I think it is the strong companies, the Intuitive Surgicals, that just keep performing in good times and bad, but especially again, in bad times.
Companies with strong balance sheets seem ideally prepared to perform even in dark times, and I think we see that running through these 15 stocks in these three Five-Stock Samplers.
And maybe lesson No. 2 is that every stock that I'm picking in Motley Fool Rule Breakers, in Motley Fool Stock Advisor, here at Samplers on the podcast, I'm trying to always think about the future, and that's the big word for me. In fact, those who know me know it's my D.C. license plate here in Washington, D.C. My car has the license plate "FUTURE." it's a really important word to me, and I think it's a really important word for your investing returns.
As I mentioned earlier in the show, I think great investing often involves trying to skate your money to where the puck is going to be three, two, one or five years from now or 10 years from now, to the extent we could look out that far. And so, with each of these samplers, I was trying to get us ahead of where the market would go and go ahead and beat the market.
Again, no one could have known what was going to happen in 2020, I certainly didn't, but I think it is consistently asking yourself, what companies will benefit in the future you and I foresee, that's going to lead us to some of our best returns? And indeed, for new stocks that I'm picking, for example, the Five-Stock Sampler two weeks ago or recent picks I've made in Motley Fool Stock Advisor or Motley Fool Rule Breakers, I'm specifically asking myself, "What stocks do I want to pick because I think they can do really well in this environment, even if it's protracted and then, of course, continue doing well past that?"
So, to summarize, lesson No. 1, look for strength and invest with strength. And lesson No. 2, always ask yourself, as I did two weeks ago, as I did one year ago, two and three years ago, ask yourself, "where's the future headed and how best shall we get our money there ahead of time?"
And so, it goes for this review-a-palooza episode, a reminder, 5 Stocks For April The Giraffe now has its returns frozen permanently 90.6% versus 22.8% for the market. It becomes the seventh of our 24 Five-Stock Sampler to be permanently closed out. And of course, it was, kind of, replaced by 5 Stocks for the Coronavirus two weeks ago.
But why am I talking about the past? Let's talk about next week. It is, of course, the final Wednesday of April, and that means it's your mailbag, our April 2020 mailbag. Our email address is RBI@Fool.com, you can always tweet us on Twitter @RBIPodcast. Maybe you have some questions about things that you heard this month. We started this month with James Clear, the author of Atomic Habits, we talked about 5 Stocks for the Coronavirus. Last week, it was Dividend Investing, and this week, of course, a review-a-palooza. So, a motley array of episodes.
If you found yourself inquisitive about any of those topics, if you were moved to tell a story about your own investing life, all of those things I enjoy sharing on the April mailbag. And, yes, sometimes I read your poetry as well. Again, the email address RBI@Fool.com.
Well, in the meantime, wash your darn hands! Stay Foolish out there. I'll see you next week. Fool on!