In this episode of Rule Breaker Investing, we review 5 Stocks for the Coronavirus, 5 Stocks for the Age of Miracles, and 5 Stocks I Own That You Should, Too. Spoiler alert: one of these is not like the others! But did we beat the efficient market?
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This video was recorded on April 6, 2021.
David Gardner: Last April, the market was in as dark a place as any of us have seen for more than 10 years -- the 35% loss of the S&P 500 in 32 days. It was a funny time to be picking stocks. But that's exactly the discipline that I've tried to embody, and that I hope so many of you are practicing. Show up, be present, pick a stock, buy a stock. It's time in the market, the old saying goes, not timing the market, and that goes for whether the markets rose 50% over the previous year or lost 35% over the previous month, and so I picked Five Stocks for the Coronavirus, and maybe you even bought them, too.
Boy, am I glad for my every-10-weeks discipline, because they have been, well, we're going to talk about that. Two years ago, it was Five Stocks for the Age of Miracles. We're going to review those, too, and three years ago, this month, it was Five Stocks I Own That You Should, Too. Spoiler alert: One of these things has not done well.
Now, does it sound like we're going to be reviewing a lot of stock picks this week? You betcha, with three talented guest stars helping us make sense of what has happened. Three reviews, this must be a review-a-palooza episode, only on this week's Rule Breaker Investing.
Welcome back to Rule Breaker Investing, and I sure hope you enjoyed Telling Their Stories, Vol. 2 last week with my friends and yours, Jason Moser and Matthew Argersinger. That was really fun. I love that format, and I know many of you do, too. We've gotten great feedback on it. Keep that feedback coming.
In fact, I'm going to request feedback into two forms right up top for this week's show. The first is that next week is our mailbag. I'd love to hear what you think of what we've done this month. We started with Five Stocks to Teach Rule Breakers. Speaking of five stock samplers, that's how we kicked off. April we'll be reviewing a bunch of them. This week, as you already know, Telling Their Stories and then of course, review-a-palooza this week, but just four weeks in April for podcasts this month. Next week, mailbag your opportunity to give me feedback. What's working for you? What could work better? What should we start doing? What should we stop doing? I'm always open to your thoughts and feedback on our mailbag every month. Again, our email address, email@example.com --RBI, by the way, an acronym for Rule Breaker Investing. Ingenious, I know; firstname.lastname@example.org, also runs batted in for baseball fans, which I am. I think a lot of you know that. So, email@example.com, the email address. @RBIPodcast is our Twitter account for this podcast.
Then the second form of feedback: I love it when you give us reviews. Anytime that you are on Spotify or iTunes, wherever you listen, consume, as they say -- I don't like that phrase, consuming content. I don't think of myself as a consumer of content, but anyway, wherever you enjoy podcasts, if there's an opportunity to give us one, two, three, four, or five stars along with a sentence or two about why you think what you do about Rule Breaker Investing that helps other people find the show, that helps me and Rick figure out what we should be doing, and what you like, and what you don't like. Feedback, always welcomed, and thank you for it in advance.
All right, we have three past five=stock samplers to review this week, and pretty much each of these was picked just about this very week one, two, and three years ago. For each of them, I'm going to have a guest star join me. We'll typically, for our review-a-palooza episodes, we go youngest to oldest. Let's do that this week. We're going to look at Five Stocks for the Coronavirus from last year. We're going to look at Five Stocks for the Age of Miracles from two years ago, and Five Stocks I Own That You Should, Too from three years ago. If we spend a little extra time with any of these, it'll probably be the third, because we're closing that one out this episode. That's right. Typically, my five-stock samplers are a game that we play for three years, and once three-years expires, we say goodbye forever to that five-stock sampler. That's what we'll be doing with Five Stocks I Own That You Should, Too this week.
First up this week, I've got Five Stocks for the Coronavirus. These stocks were picked on April 8 of 2020. I already set the stage for that at the intro up top on this show. Yep, it was a very unusual time. Here to join me to review this five-stock sampler, my friend Tom King. Tom, welcome back to the show.
Tom King: Thank you, David.
Gardner: Thanks a lot for taking a look over these stocks. There was a lot of volatility, I should say right up front, as I do for every sampler. How did the market do? The answer is, the S&P 500 from April 8 of last year through this afternoon -- we are recording Tuesday afternoon, April 20 -- is up 50.1%. I know a lot of people are disappointed by the market's performance in the last one, two, or three months. 2021 hasn't been great at different points, but wow, 50% up for the market from a year ago. I will take that every year and every day till Sunday.
Tom, we're looking here over five different stocks, and I want to focus, first of all, on the worst performer. I'll say the names of the stocks right up front, the Five Stocks for the Coronavirus, all basically companies that I thought, these guys can make it through the hard time of the coronavirus. These are not bricks-and-mortar retailers; these are not restaurants. These Five Stocks for the Coronavirus are and were Peloton Interactive (PTON 13.60%), PTON; Roku (ROKU 3.92%), ROKU; Sea Limited (SE 0.15%), ticker symbol SE; Teladoc (TDOC 6.13%), TDOC; and finally, Zoom Video Communication (ZM 1.35%), what we're using in part to make this podcast happen. Ticker symbol ZM.
Tom, let's focus first on the worst performer, and I'm sorry to say that Teladoc is the worst performer. For this sampler so far we're just one year in out of three, but Teladoc up 29%, the market up 50%, Tom, down 21% to the market. What's been happening with Teladoc, which by the way is still up from 139% to a 179%, but just not as high as the market?
King: Yeah. I think that most people wouldn't complain of the 29% return in a year. But, obviously, we compare ourselves to the S&P 500. If we underperform the S&P 500, that is a failure in our eyes, since we're not adding value if we don't outperform the S&P 500.
Gardner: Well said.
King: Yes. Twenty-nine percent versus the markets; you said about 51%. There are probably two reasons for this. The first reason is that Teladoc merged with Livongo Health last year. Both of them were about the same size when they emerged.
Gardner: A merger of equals, if you will.
King: A merger of equals, yes. For financial analysts like us, analysis of a company becomes significantly harder after a large merger like that for a variety of reasons. Your commonly monitored metrics can be wonky for a while. You get a lot of non-recurring costs associated with that merger, and organic performance becomes a lot harder to assess. That decreases visibility, and the lower visibility increases uncertainties. It probably results in people saying, "Well, let me just sit out for a while and just see how things go in the future, and when things are clearer we'll get back in."
The second reason was probably some of its guidance that it released in the latest quarter predicting its projected performance for this year, 2021. Some of it after the rapid growth of 2020, probably seemed a bit low for analysts' likings. You rerecommended it in Rule Breakers this month, David, and as we explained in that piece, it's a very short-term outlook that the market tends to take in these things. Even if 2021 is a little bit slower than 2020, we are looking for a lot longer term.
Gardner: That is very true. I just did an interview with a CEO of a public company in the past week. One of the things he said at the end of that interview was that he'd enjoyed it in part because it wasn't all about me filling out spreadsheets, row No. 68 for my quarterly model of his company. We actually just talked about the business [laughs] and the future, and that jumped out to him as unusual in terms of the interviews that he finds himself doing.
I do agree with you, Tom, that we do take a longer-term viewpoint that helps us, by the way, look past underperformance, which is what Teladoc has presented, as surprising as that has given telemedicine and its importance over the last year and I think over the many years ahead. But Teladoc and Livongo, that was not something we were counting on when I picked this Five Stocks for the Coronavirus sampler a year ago. It's a big thing that happened, one of the big mergers, really of 2020. So far it can always be a little bit messy and a little bit of underperformance. Thank you, Tom, for reviewing this. A reminder, the stock is up 29%, so we're certainly not feeling badly about this, and I like the stock going forward.
Well, let's shift, then, from the worst, Tom, to the best. I'm really happy to say that it's hard even to identify the best among the other four because the worst of the other four is up 170%. These are eye-popping numbers. These are all real, though, and that would be Zoom is up only 170%, well outpaced by Peloton, up 283%. That's even after a tough announcement this week. But Peloton itself, Tom, outperformed by Roku, which was up 303%.
But the king of this-five stock sampler -- this is [laughs] only one year, and these numbers are just insane -- is Sea Limited, ticker symbol SE, up 417%, way ahead of the market's 50% gain. Tom, let's focus on Sea Limited. A lot of people, especially if there are Fool fans, will probably know this company, but most average investors, especially in the U.S., probably have never heard of Sea Limited, spelled SEA. But that's not about the ocean. I think that's for South East Asia, SEA Limited.
King: Yes. Sea Limited is an e-commerce company based in Singapore. It also has a big gaming operation. In 2020, it was a very good year for Sea Limited. It did really well. It doubled its revenue from $2.2 billion in 2019 to $4.4 billion in 2020. This growth was mostly organic; it spent a very small amount on acquisition. Almost all that growth came from organic expansion, which is very impressive. On the margin front, it improved its gross margin by 3% and its operating margin by 11%. Looking at the cash flow statement, 2019 was the first year the company had positive cash from operations, which is always a milestone for a new company. Then in 2020, we saw cash from operations go up nearly eight times from $70 million to $556 million.
King: Yes. A lot of that gain in cash from operations came from unearned revenue, which is a situation where a company is paid up front by its customers and receives that cash and must then deliver the service over a period of time in the future, and only once that service has been delivered do accounting rules allow the company to post that as revenue. That is two advantages for the company. No. 1, it allows Sea Limited to get that cash up front and use it to run its business, which reduces its reliance on investors for money. Second of all, it makes the future revenue stream a bit more certain. You can see that revenue is there to be earned, and investors like to see that. In summary, it grew rapidly. It strengthened its business by bringing in all this cash from operations, and it's also just benefiting from these macro tailwinds that we talk about a lot. The rise of e-commerce and increased gaming. People at home are a lot more playing a lot more games, so it's all benefited Sea Limited.
Gardner: Thank you for that analysis, Tom. It's funny. Looking back, even just over the last couple of months, the stocks got a knockdown. It hit a high of $280 in February. It's somewhere right around $235 now, so we're talking about a stock that has declined about 15%. We've seen some other Rule Breakers lose a lot more value than that just over the last two months or so. The market has been volatile, but take it all in all, take the long view. This has been a really great performer, and I want to highlight the market cap of this company is larger than most people might think.
We're not going to play the market cap game show right now with this one, Tom, but the market cap for Sea Limited is $126 billion. I think a lot of people would under-guess that, thinking this is a smaller, more emerging company, but this is a company of real size and half. Rightly so, because yes, e-commerce is a big thing for it. As you mentioned, its computer game and games division are the dog wagging the tail at this point, but they have that future positioning for e-commerce that I think is the reason we're mainly invested in Sea Limited. Anyway, I don't think anybody could have dreamed that it would be up five times in value from a year ago, when we picked it for the sampler.
Tom, before I let you go, I hate to brush over three other stocks that are two-, three-, and four-baggers on their own. I will give the final accounting for this sampler very shortly. But is there anything that you'd like to add about any of the other three stocks -- Peloton, Zoom, and Roku?
King: Yeah. Well, they all did well. With regard to Peloton, I have, and perhaps you have, too, seen the Peloton trucks around delivering the equipment, and we probably all know someone who spotted Peloton, and you've probably noticed other companies begin to offer competing products, companies like NordicTrack. One of the signs of a Rule Breaker is being top dog and first mover in an industry, and I would say that this definitely applies to Peloton.
Turning to Roku, Roku grew its number of subscribers by 14 to 51 million at the end of last year, and that was 38% growth, and streaming hours grew 55%. Streaming now has actually grown more than the number of subscribers, so from that, we can infer that people watch a bit more on Roku, and that makes sense considering how much more time that we're spending at home. It's also impressive considering how much competition emerged in the last year, particularly for Roku, so the fact that it gained people's attention is impressive.
Zoom, obviously a company we all know well. We use it. Most of us probably interact with it fairly regularly. It grew revenue by 326%. That's 3.26 times from 2020 to $2.7 billion for the whole of 2020. Of that $2.7 billion in revenue, it generated $1.4 billion in free cash flow, which was up 12 times from the prior year. It's a metric that it provides called its net dollar expansion rate was for its 11th quarter, higher than 130%. That means that in quarter four of 2020, was the latest quarter, all customers paid 30% more to Zoom than they did in the fourth quarter of 2019. This figure includes the impact of selling additional products or selling fewer products and customers who stopped using Zoom. Of that cohort of customers that remains for the entire year, all of them as a group paid 30% more to Zoom, which is a very impressive uptake of Zoom's products.
Gardner: It just is the growth that we will rarely see in the future. We're always looking for amazing stories of growth for Rule Breakers, but to have it in that compacted time because of a specific reason, really, as we all know about coronavirus. These were Five Stocks for the Coronavirus. Zoom was pushed to amazing heights, and I will say even though the company fell down once or twice, had some security problems, etc. -- boy, for the most part, it rose to the occasion, and it's amazing to think that it was $117 a year ago, $318 today, and yet it was outperformed by three other stocks in this sampler.
This one is going to go down in history as one of the great five stock samplers. I think I've had five out of the 29 we've done historically that have returned three times or more. That would be a 200% gain or better, but the others took three years to do it. For the most part, this one is up 240% on average versus the market's 50%. That's 190 points of alpha per stock. Multiplied by five, that's 950 points of alpha generated in one amazing year.
This is a fun one to lead off with, and Tom, you reminded me before the show, the last one you were on to review was Five Stocks for April, the Giraffe. Now, those of us who fondly remember April the giraffe will remember that was a great five-star sampler, too. So Tom, thank you for bringing good luck to this podcast.
King: Thank you, David, and very well done on your picks, and I think we all thank you.
Gardner: Thank you. Well, I thank you because you are working with me both on Rule Breakers and Stock Advisor, as well as all of the analysts who typically join me to review these, making great contributions to our services and our teams. Thank you again, Tom King, and Foolish best.
King: Thanks. Bye.
Gardner: All right. Well, let's go back in time in the wayback machine, if you will. Please, can we go? That's right, because we're going back one year before last April. That would be two Aprils ago, and I had biotechnology in mind that month, that week. The date was April 3, 2019, so here we are. Just past two years later, Five Stocks for the Age of Miracles, and what I was saying at the time is we're living in a miraculous age, and I do feel as if events since then have even only further proven that to think that we as a species could come up with not one, not two, not three, but four or so coronavirus vaccines within a year, and everybody deciding which one should they get here just about a year and a half later is truly remarkable from the start of coronavirus, presumably in China, to where it is everywhere in the world today, and so that's a small miracle.
My friend Karl Thiel -- joining with Karl is probably the way to think about the performance of this particular five-stock sampler because, wow, this was the 19th all-time one I've ever done. This is the single worst performer. This is going to be painful. Let's get into it.
Karl Thiel: All right.
Gardner: Let's start with the five companies. The Five Stocks for the Age of Miracles, and here they are alphabetically: Amgen (AMGN 0.02%), AMGN; bluebird bio (BLUE 6.50%), BLUE; Editas Medicine (EDIT 3.76%), EDIT; Illumina (ILMN -8.40%), ILMN; and Vertex Pharmaceuticals (VRTX 0.81%), VRTX. Every one of these, I would say an impressive company, a proud enterprise in every case. I hope. I mean, bluebird bio might be feeling a little bit worse for right now. But these companies are very impressive companies, and yet I did so unimpressively to pick them two years ago this week.
Thiel: I was a little taken aback that you said it's your worst ever, because, I mean, I hope I'm not spoiling everything if I say that the five picks are up in aggregate, barely. But I mean, they are up; they're not down. That means it could've been worse.
Gardner: Thank you, Karl. I appreciate you saying that. This is because we compare ourselves against the S&P 500, and by the way, this game is not over yet. We've got a whole 'nother year to come back, but this is at present the greatest underperformer.
I'll give away a little bit of the story here, but about 39 percentage points behind the market per stock. I guess the bad news for me is the S&P 500 went up 43% over the last two years because these stocks only went up 4% on average. I do want to say before we get into the worst performer -- and you're going to be talking some bluebird bio with me here, Karl. But before we get there, I want to say this very group of stocks was literally beating the market three months ago. I was pounding my chest happy about these stocks, and boy, what a difference, three months have made, especially for Editas Medicine, which I know we're going to talk about, but this is a very volatile sampler. Let's start now with the worst stock. Karl, two years ago, this month, bluebird bio was at about $162 a share. It's touching the scale today around $28. It's lost 83% of its value. The market up, as I mentioned, 44%. That's a huge goose egg for me in the win column. What's happening with bluebird bio?
Thiel: bluebird bio has had a lot go on, and a lot of it's negative. Some of it is of their own making. There are two major things that happened with them as they ran into regulatory and manufacturing delays, which I think you really have to lay at the company's feet. I mean, they basically weren't able to establish that their scaled-up commercial manufacturing was going to yield the exact same product as the manufacturing they did for clinical trials. I mean, that stuff is hard. These are complex biologics, but it's also like that's part of running a company. I think that's one squarely on Bluebird. It's obviously not anything we expected.
The other major event that happened just a few months ago is that they came out and said there have been two cases of cancer developing in people who were treated with our main gene therapy product for sickle cell disease. The fear here was like, not only does that scuttle this product, but it potentially scuttles the entire gene therapy platform. It might just be that it's unsafe.
Now, I am glad to say that the second problem appears to not be a problem. It's interesting that we're doing this today, because they literally just earlier today came out with an update on this following something that they said about a month ago, which was essentially these two patients, one of them, there is basically zero reason to believe that the cancer they developed had anything to do with the drug. The second one, the patient ended up not even having the condition that they felt they had.
At this point, I think they move forward with the gene therapy product, I don't think their commercial plans are necessarily all that disrupted. It's like every silver lining they have just comes with another dark cloud. I mean, at this point they've lost a lot of the lead that they once had in beta-thalassemia and sickle cell as other people move forward. So yeah, Bluebird has lost value, somewhat with good reason. I mean, I think their promise is a little bit duller now than it was before. But I mean, I also think this is one that it's going to look different a year from now, I would expect when you do your three-year review. I hope so.
Gardner: I showed you two, and we'll be closing this one down, because like most samplers, this one was picked for three years. Good news: We're only through two so far, and I'm happy to hear that good news from earlier today from bluebird bio. This is a stock, again, that has dropped from $160 or so to around $30. Basically, this used to be a $10-plus-billion enterprise judged by market cap, Karl. Just under $2 billion today.
Gardner: But maybe it's bounced back. We've seen these stories before, and it wouldn't be the last time that we might look back a year from now and go, wow, it was a great buyback there. We will see.
Well, from our worst performer, let's now move to our best performer. I've got some bad news for anybody who likes Rule Breaker Investing: Our best performer itself has underperformed the S&P 500 again. The S&P up 44%. Our best performer so far in this five-stock sampler, Karl, is Amgen, the old stalwart, the biggest company here by far. The company's stock up from $192 two years ago to $259 today. Good news, up 34%; bad news, market up 44%. This stock underperforming by 10 percentage points, but we're presenting this as the hit, as the best news for this five-stock sampler. Karl, so what positive do you have for me for Amgen in the last two years?
Thiel: Well, first of all, if you gave me a new pick and could guarantee me it's going to be up 34% in two years. I would be very excited. [laughs] I would take that. [laughs] It's really not that Amgen has done poorly. It's been a remarkable period in the market. Amgen has just been a company that's been in a painful transition phase, maybe. When it first went on the scorecard, it was this assumption that it was going to be in sort of negative or zero growth for a long time going forward. That really hasn't happened, but the problem with them is we're seeing a bunch of their really big legacy products that brought in a lot of revenue start to have biosimilar competition.
The question is, like, are they going to be able to make up new revenue as fast as they are losing old revenue? The answer, ultimately, is they have; they've managed to do it. They've gotten a little bit of luck on some of the products, and they've managed to introduce some new things and in the meantime continue to increase a decent dividend. I mean, all in all, Amgen has been, maybe not as exciting as some other companies on the technology front, but they've been doing what they needed to do, and they have some more stuff coming.
Gardner: Well, thank you for that, and yeah, the dividend on the stock at present prices about a 2.8% yield. I know many of my listeners will know what a dividend yield is, but for those who are new to this, that just means basically that if you own the stock and hold it for the next year, you can expect to be paid a dividend which equates to approximately a 2.8% interest rate. It's like comparing that to your 30-day CD, if you will. We're seeing just that you get paid some stocks for owning the stock through dividends. Of course, that's a minority of most of the stocks that I recommend and follow. Probably a minority of five-stock sampler appearances are made by stocks that pay dividends. Most don't. We love companies that are growing, and when they have that extra cash left over at the end of the day, they don't necessarily just want to pay it back to shareholders. They want to reinvest it in their growing enterprises. That's a better use of capital. But certainly a more mature company like Amgen, it is appropriate at a $147 billion market cap that Amgen can afford to pay a dividend and pays one that's attractive, especially for income-seeking investors.
A little bit of background on Amgen. Its market cap, which, by the way, Karl, before you came on, I was talking about Sea Limited with Tom King. Part of the Five Stocks for the Coronavirus, Sea Limited, market cap around $125 billion, not much smaller than Amgen. Amgen's like the big daddy of the whole industry, the longest player, one of the very biggest biotechs of all. Sea Limited, an upstart by comparison, but almost with the same market cap. It's interesting to think about the dynamics of different industries.
Thiel: Absolutely. Amgen, not just the big biotech, but really one of the biggest pharmaceutical companies around.
Gardner: Very good point. Biggest pharma. I need to get biopharma out of my mind. Remember, biopharma is pharma and it certainly does rank up there with any of them.
Karl, let's talk about some of the other stocks in the sampler before I go on to give the grisly final results. Let's specifically focus on one stock here. Editas Medicine. This stock was at $26.75 two years ago when I picked it. Three months ago, it was at $90. When I said this sampler was beating the market, Editas was at $90. Today it's at $34. It's still up 27% from two years ago, but it has made a huge drop. What has been happening with Editas Medicine, ticker symbol EDIT?
Thiel: I think when we put this on the scorecard originally, we promised excitement, didn't we? Did we not promise excitement?
Gardner: I think it's fair to say in each miracle sampler, we'll have excitement.
Thiel: Editas Medicine is pursuing a technology called CRISPR. This is a really new approach to gene editing that is commercially unproven at this point. It's scientifically unproven. There's ongoing clinical trials, so there's a lot of room for volatility in this. They had a tremendous 2020. The stock just really exploded and it has come down. I can't give you exact reasons for either of those things. I can point to some stuff. It went up in 2020 because there were advancements in clinical trials and particularly some trials looking at using CRISPR, as opposed to gene therapy in sickle cell in beta-thalassemia, the same things Bluebird's going after. Some really exciting early results from, not from Editas specifically, but from CRISPR Therapeutics. Editas is a company that we have on our scorecard, just for the record or whatever. At the time we picked it, it was the only public CRISPR company. Other companies like CRISPR Therapeutics and Intellia were not on the market at that time.
Gardner: That's right.
Thiel: But anyway, Editas has also worked in this area, also has some very impressive-looking lab results, and there's a lot of excitement about it. At some point, the wind started to come out of the sails. There was an analyst downgrade. Some people have called into question their more advanced program, which is in a specific form of blindness. It's being done in a very different way. The way that the CRISPR editing works for things like sickle cell is you're taking out patient cells; you're treating them. It's actually a lot of ways quite similar to what Bluebird's doing. It has some of the very difficult myeloablative stuff, where you're giving people loads of busulfan and stuff and putting it back in. But Editas is also doing a thing where they're just basically giving you an injection like a drug, so an in vivo approach.
That's a little bit different than CRISPR Therapeutics, and there has been some question about whether we're not sure they're getting enough editing that that's really going to work. That could be true. I don't know. It's possible that that side of the company doesn't work out as well, and I think that's been a little bit of a negative. Do not play this one for the next three months.
Gardner: Well, I think I make it hard without meaning to on my analysts who come on and try to explain why stocks have done what they've done, because it's not always cut and dried. It's not always easy to understand. Looking at Editas, a recommendation we've had for several years now and one that I hope we'll have several years more, a lot of members are going to own this stock, bouncing between $20 and $40 over the course of 2016, '17, '18, '19, '20. Depending on when you would have bought it, it might or might not have been a market beater, but it was really at the end of last year.
This looks like a meme-stock graph, but it went from $30 to $100, basically from November of last year, just a few months ago, into January -- $30 to $100, and it's retraced its way back to $34 as we're speaking right now. I don't know that that can really be that effectively explained, but Karl, if it can be, you're going to do it. If you're a little bit perplexed by it, I am, too. Maybe there's some meme-stock-crazy Reddit crowd stuff going on with Editas. I'm not sure.
I know one thing, though: We like the business. It is a speculative technology, and we will keep our fingers crossed that they hit some more of their milestones and the stock starts to go the right direction. For this five-stock sampler, though, as we close, it has about one year to look awesome, to make this five-stock sampler into a winter.
Again, for all of the stocks we're sharing with you this week, including the five that we're about to share with you as Rick Munarriz joins us very shortly, all of these are long-term recommendations. Even though I'm playing a three-year game for this podcast's purpose, these are stocks in many cases we've held for years before that, and we'll continue holding years after the three-year five-stocks-sampler game expires. I think most Fools know that. I want to make sure all Fools. capital F, know that, and so you do.
Karl, let's do the final accounting for this one. These five stocks, only one of them is actually down -- bluebird bio down 82% -- but the others all up between 17% and 34%. The problem is the market's up 44%, so all five of these underperformed on average. They're up 5%; the market's up 43%. So on average we're down 39% per stock. I'm not going to ask you to promise that they'll be better a year from now, Karl, but would you promise that they'll be better a year from now?
Thiel: I promise that they'll be different. [laughs] What the heck. I promise they'll be better.
Gardner: Thank you for that promise. I'll stick with your first promise. I certainly won't hold you to the second. It will be different. It's an interesting world, any time you're living in an age of miracles, and there are lots of incredible things happening in healthcare around us every day really.
Karl, thank you for keeping us apprised of that as a longtime teammate for Stock Advisor and Rule Breakers and joining us this week on Rule Breaker Investing. Fool on, my friend.
Thiel: Thank you.
Gardner: Well, I'm going to say we went from the sublime to the ridiculous, and now we'll go back to the sublime. Rick Munarriz, great to have you join me once again on Rule Breaker Investing. Hey, Rick.
Munarriz: Hey. How are you doing, David?
Gardner: Really well. Three years ago, it was just about today -- this is April 18 of 2018 -- the theme was Five Stocks I Own That You Should, Too. Now, I don't exactly remember what I did there. I guess I was just looking over my portfolio that day thinking, well, I own these stocks, and I'd be silly not to mention them as a five-stock sampler, because my money is where my mouth is, and so here are Five Stocks I Own That You Should, Too. They are from different industries. Rick, I don't see anything else that really unites these five.
Munarriz: You just owned them three years ago. That much for sure, so yes.
Gardner: Yes. I'm happy to say I do own all five still today, as is my wont. I typically don't sell very often, if at all. Over the past three years, then, from April 18, 2018, to market close last week, a full three years, April 16, 2021, the S&P 500 was up 55.7%. We can round that to 56. That is the number each of these stock picks was trying to beat.
All right, well, let me give the five stocks up front. They are, in alphabetical order by company name, Activision Blizzard (ATVI 0.35%), ticker symbol ATVI; Alphabet (GOOG 2.36%), GOOG; Intuitive Surgical (ISRG 1.00%), ISRG; Match Group (MTCH 2.56%), MTCH; and Zillow Group (Z 2.96%), we'll just call it the Class C stock. I think that's the one with the simpler ticker symbol of just the letter Z. Activision Blizzard, Alphabet, Intuitive Surgical, Match Group, and Zillow. Five stocks I own, still own them, that I think you should, too.
Rick, let's start focusing on the one underperformer in this group, Activision Blizzard. Man, do I love this company. I play a lot and love a lot of their games. But Activision Blizzard was at $68.69 three years ago; closed out last week at $96.48. Up 40.5%, but unfortunately, that's about 15% behind the market average. Rick Munarriz, what's happened with Activision Blizzard lo these past three years?
Munarriz: Yes. Activision Blizzard, and again, when you were talking about three years ago, obviously you're very passionate about video games and Activision Blizzard. You said at the time that you're playing Hearthstone almost every day. Are you still playing the game, David?
Gardner: I am, almost every day. That remains accurate.
Munarriz: You're not the reason why the stock has not done [laughs] well, so you're doing your part. But the company itself, again, this is a company that puts out big games -- Call of Duty, World of Warcraft, StarCraft, Diablo, and of course, Hearthstone. In 2019, revenue declined and the company told us this. It didn't surprise anyone because it did say that this is going to be a transition year.
They're doing a lot of things. While they were happening, things were happening. But all in all, the company has done sort of OK. The Overwatch League that was just starting out when you recorded the original sampler is doing just fine. Third season just wrapped up in October of last year, and it had 1.55 million viewers globally through YouTube; Huya, which is the Twitch of China; and Bilibili, which is up 38% from the viewers it had last year on ESPN and ABC.
This is a company that's doing well on some fronts, but it's disappointed the market in that it's been delaying a lot of other games. Diablo is a very big franchise for the company and people have been waiting for Diablo IV for a long time.
Gardner: Yeah. I'm one of them.
Munarriz: Yeah. Originally it was like, oh, it's going to come out in 2020, maybe 2021. But the company's considered that, hey, look, 2022 is probably going to be it, and the same thing with Overwatch. Basically, 2016 is when the Overwatch game came out, but we've been waiting for Overwatch 2, and this is also getting pushed out.
Anyone that follows these video games, whether it's Electronic Arts, Activision Blizzard, or Take-Two Interactive, where we've been waiting for the latest Grand Theft Auto for years -- for a decade, almost -- you have these delays because developers need to get these games right. That has weighed down on Activision Blizzard and also from the investing perspective. This is a time where there's a lot of other hot games out there. In the last three years, games like Fortnite have exploded. Roblox, which recently went public, is a company that is not a game itself. It's a virtual world that a lot of young users are enjoying. You do have a lot of competition right now for Activision Blizzard.
Gardner: I think a lot of parents, by the way, I'm hearing this from various young parents at the Fool, are saying things like, this is Roblox's world and I'm just [laughs] living in it, as they fork out another four bucks for their son or daughter [laughs] to buy something else in Roblox.
Well, Activision Blizzard has a lot of its own great franchises, and you're right, Rick, a couple of delays. This is one of those companies, especially the Blizzard part of Activision Blizzard, it's like, we will not put it out until it's ready. Sometimes those games take longer, but they're like Pixar. They're always shooting for a hit. They never want to miss, so they're going to try to get it right for better and for worse. Well, in its strength is its weakness, and Activision Blizzard has still been pretty strong, up 41% over these last three years. The problem is the market was up 56%, so we underperformed with this one.
Well, Rick, as we've been doing this week, let's go from the worst right to the very best. This is Match Group, ticker symbol MTCH. The global online dating platform was at $47.14 back on April 18, three years ago. It closed out last week at $145.30. That is a clean triple. Up 208% for Match Group. Rick, I don't think you or I were using Match Group, we've established. You told your story in his podcast a month or so ago. You're a happily married man, as am I, for the better part of around 30 years or so each. We're not using Match Group, but a lot of other people are using Tinder, etc.
Munarriz: Yeah, definitely. You and I got married before the App Store was around. But yeah, there was online [laughs] dating back in the '80s and '90s, when you and I were courting. But again, we found our mates the old-school way. Begging, I guess. [laughs]
Yeah. Match Group. Again, we say Match Group and it's almost like when PayPal was part of eBay and was becoming a larger part of its business. When you say Match Group these days, it's very much Tinder. Tinder is the biggest driver at Match. You also have a lot of other rising apps like Hinge, and some of the old-school apps like OkCupid and Plenty of Fish. There's a lot of stuff besides match.com, which is more of an old-school, traditional desktop now app-based platform.
But what's really made Match Group tick here is that people still want to connect with other people. Even last year, if you'd told me at the start of the pandemic, "Hey what's a company that you think is going to suffer?" I'd say, "People aren't going to go out on dates. So Match Group is going to be a tough stock." But sure enough, the revenue rose 17% last year because people were still connecting. They were still talking, discussing, and maybe saying, "You know what? We're just going to meet anyway and throw caution to the wind." But people were still establishing a lot of connections on the app. So it's really exciting how they've done stuff like this. They've also taken advantage of the climate to acquire even more properties.
Back in February, just two months ago, they acquired a company called Hyperconnect, out of South Korea, and they paid $1.725 billion in cash and stock, which is a lot of money. But this is a company behind an app that is the most popular one-on-one video and audio chat app in the world. I just really excited how they can use that to apply to their other Match Group properties to add a new dimension. So there's really some exciting things here happening with Match Group.
But yeah, I was just surprised as anyone to see -- if you would give me this list and not so much in 2018, but at the beginning of 2020, I really would've thought Match Group would have been the worst performer. Sure enough, it was the heartthrob.
Gardner: That's why it's helpful, well said. That's why it's helpful to be diversified. That's why we don't just pick one stock sampler; we pick five stock samplers. Of course, five stocks is a small number of stocks. These are samplers. Most Fools, I think, should have a minimum of 20 stocks in their portfolio. Many of our listeners will have many more stocks than that in their portfolios.
It is a great reminder that Match Group really is the global leader. When you do find the lead husky in these kinds of emergent industries that's the dog or horse that we like to bet on, because if you're not the lead husky, the old line reads, the view never changes if you're playing catch-up. It's not nearly as much fun. So finding the innovators and the leaders -- we've seen Bumble go public in the last several months. This is a more female-focused dating application, and stumbling and bumbling a little bit out of the IPO, the stock down somewhat significantly from where it IPOed. So it's hard to get it right, and it's great to be the king, and Match Group, it remains the king globally of this business, and it's been a great stock. So, really happy was part of this five-stock sampler. Really happy I own it, and that you might, too.
Let's just talk briefly about the other three for just a minute or two on each, Rick, since this is the last we'll ever talk about this five-stock sampler. We're closing it out. It ended technically last Friday. Those are the numbers I'm sharing. So let's go alphabetically through the other three. The first one we haven't talked about is Alphabet. Alphabet went from $1,072 to $2,297. It was more than a double over these three years. Thoughts on Alphabet?
Munarriz: Alphabet has clearly done well. It's a company you don't hear a lot about. Is the stuff you say, "Wait, Alphabet's doubled over the last couple of years?" Because it's such a nice slow, steady on-base, like a good base percentage hitter in baseball terms. But the thing with Alphabet is it's an online giant, and that means it's in search, it's in advertising, and it's just about everywhere.
In the podcasts three years ago, you were discussing the artificial intelligence angle, the AI angle to it. Technically speaking, AI is still a lower case in this Alphabet soup. It's OK, because Google Services, which is basically search, ads, Android, YouTube, is 92% of the business. Google Cloud, which is the cloud-based services and the enterprise software part of it, makes up most of the rest. In Alphabet, they have something called Other Bets, which is where this autonomous driving, that's Waymo, which is part of their AI initiative. A lot of these cool subsidiaries and smaller projects are less than 0.5%.
But revenue grew 13% last year -- Google and Alphabet, rather -- and it's the 11th consecutive year of double-digit growth, and 13% is actually the worst of those 13 years. So it's actually a slow year for Google, for Alphabet in general, but it's definitely a great producing company that's right in the right place at the intersection of search advertising, and it's not going away anytime soon, even though there are definitely a lot of distractions being a big tech company these days that a lot of people are cracking down on what they're able to do. But for now, Alphabet is just doing so many things right.
Gardner: Well said, Rick. Let's move next alphabetically two more here. Intuitive Surgical, ticker symbol ISRG. One of the original Rule Breakers, one of the early great picks for The Motley Fool Rule Breakers Service, a multi-rec many times since. Intuitive Surgical, $471 three years ago; $812 closing out last week. Not quite a double, but it did beat the market by 17%. Rick, Intuitive Surgical.
Munarriz: Yes. Intuitive Surgical is the company behind the da Vinci Surgical System, which is a robotic arm that helps surgeons make better, more precise incisions when they're doing surgical procedures. The number of procedures that Intuitive Surgical can do has grown over the years. The stock was our second worst performer, but the fact that it did so well when 80% of your picks are beating the market, obviously, it's a great sampler.
The company has struggled through the COVID-19 crisis. There are a lot of medical-equipment stocks that have thrived in this climate. They are the other way around. They are on the opposite end of the spectrum. Because a lot of people view their procedures, some of them, as elective procedures. So a lot of hospitals are holding back on some of the stuff that would be using Intuitive Surgical gear, and they get paid per procedure. Also, some hospitals are just budget-conscious, which is natural, were holding off on new sales, but they had back-to-back quarters of negative year-over-year revenue growth in the second and third quarter. But in the fourth quarter, they did bounce back into positive territory.
This is terrible timing on our part, but maybe beautiful timing as we are recording this right before, right as the market starts to close on Tuesday, and this is when Intuitive Surgical is going to report earnings. So basically, in half an hour, everybody else is going to know more than you and I know, David, by the time they're hearing this. But the company clearly didn't have a great 2020, but with 5,989 systems out in there, 7% more than they had a year ago -- you have to like its chances going forward as some of these procedures get back on the schedule.
Gardner: Understood. Yeah. A lot of these elective procedures can be delayed, and boy, were hospitals being used for more important purposes or more urgent purposes anyway, in 2020 certainly slowed down Intuitive Surgical, but it's a juggernaut. It's really hard to slow down at this point. It's hard for me to see any company ever presenting a legit Pepsi to this company's Coke. If this were Coca-Cola, I don't see any other competing beverage at anything like the same scale. So it remains a great stock to hold, we'll trust, over the next three years or so.
As we close this sampler out, Rick, let's talk about Zillow. Zillow was around $49 three years ago. It closed last week at $135. This stock, almost a triple, up 176%, smoking in the market by 120%. Zillow?
Munarriz: Real estate, which is Zillow's game, is hot right now. Even though that's technically a mixed bag for Zillow, and I'll get into that shortly, investors are excited about Zillow, the stock and back in 2018, in the original sampler when you introduced it, they had just started their iBuyer program, which is basically now Zillow Offers, where they are proactively seeking homes to buy. So you can sell your home to Zillow if you're in the right market, which is a game changer for Zillow as far as revenue.
Munarriz: But obviously, a big shift from what their original model, which they still do, which is allowing real estate agents to have access to people coming to their site. So the platform is still very popular. They had more than 200 million monthly active users by the end of 2020. But on the real estate side, the hot housing markets sort of burned it a little bit. I have some friends that are, like, house hunting right now in Florida. I've heard horror stories where they had to wait in like an hour-long line just to get into an open house. That's partly because of COVID because they don't want too many people in the house, but also because it's just a seller's market. One property that these couple that I know that went to go see, the very first weekend that that was available, they said, "I'm just taking backup offers because I already got a bunch of offers, sight unseen."
Gardner: My God.
Munarriz: This is great if you're selling a home. But for Zillow, which is saying, "Hey, let me sell your house," people are going to say, no, maybe I don't need you, and also the fact that, with the homes flipping so quickly, the real estate agents really don't have time to be on there and try to smoke our leads. Things are happening very quickly.
The flipside to this, of course, is that people are glued to Zillow, and that's going to be very good in the future, even though the last couple of quarters have been rough for Zillow because they stopped their home-buying program. They slowed it down just because of the pandemic. Their IMT segment, which stands for Internet, media, and technology, which is the core that we knew Zillow from way back, which is the premier agents, the online advertising, everything that made Zillow. The estimates, of all that stuff. It grew revenue by 33% in its latest quarter versus a 50% decline in the home-buying segment. It's a company that's really doing a lot of things right, but real estate is hot and that's why Zillow the stock is even hotter.
Gardner: Well, thank you for that, Rick. I do love stories that transform. Caterpillars that become butterflies. And those five companies, reflecting on them, all of them are dynamic. Each has definitely gone through a few larval stages over the last three years that we've all watched this group together. But Zillow, more than any of them, really has transformed. It may or may not still work. It's not clear that this was a great move to start, not just providing its estimate to everybody and allow Realtors to advertise in their local ZIP code, but to start flipping houses itself is flipping incredible, Rick. We're going to see how this plays out for Zillow. But so far, the returns are looking pretty doggone good in part because of a hot real estate market.
Well, again, Rick, thank you for sharing your insights. We spent a little extra time on this one because this is the last we'll ever talk about these five stocks I own that you should do. In the full accounting of these five stocks, again, the stock market averaged 55.7% over those three years, closed last Friday. This group of stocks averaged 122.3% up -- 66.6%. We'll just round that. We'll lose the fraction code -- 66% per stock, beating the market. So Rick, these were five stocks that I hope that we all own together. I'm glad I own them. I trust many of our fellow Fools listening -- Rick, do you own any of these stocks?
Munarriz: I do own Alphabet, I do own one of the five. I've loved the other four, and Zillow's a company that I have a very strong affinity for but, Alphabet's the only one that I own right now, yes.
Gardner: Well, that was a double over these last three years. That was a pretty good one to cherry-pick for the markets at large. Well, thank you again, Rick Munarriz, for reviewing this one with me. We'll call a wrap on Five Stocks I Own That You Should, Too. Fool on, Rick.
Well, some final thoughts from me here. The overall performance of our 29 five-stock samplers as of market close today, Tuesday, April 20 -- we've done this 29 times five. I think that's something like 145 stock picks. They average 101.3% each, versus the market's 37.9%. The reason that The Motley Fool exists, or a big part of the passion that Tom and I had as we started our company 27 years ago, is to go after what I consider to be one of the great misunderstandings of our time -- that conventional wisdom that you can't beat the market, except for luck. Random walk down Wall Street, efficient markets theory -- a lot of people, academia, has convinced a lot of people in the last generation that to actually beat the market is not practicable. It's not worth your time. If you do so, you're just a monkey who got lucky with the blindfold on throwing darts. I totally disagree with that.
I hope that these five-stock samplers, including the three that I shared with you today, are proof positive in a way to the world at large that the act of thinking about what company you might want to buy, not just settling for an index fund -- the Gentleman's C, as I've often said, I love them, too. People can use funds to diversify some. But the notion that you and I can beat the market averages by finding the great companies avoiding the bad ones, making your portfolio reflect your best vision for our future. I love what these five-stock samplers have said, not just one of them -- 29 of them over about six years running at this point. So a delight, then, to say goodbye once and for all to Five Stocks I Own That You Should Too -- plus-122 versus plus-56 for the market. That's a plus-66 for that sampler.
Two years ago, Five Stocks for the Age of Miracles, an underperformer, one of the five out of the historical 29 that has underperformed. So far up just 4%. The market up 43%, so a nimus-39. But then we got to this Five Stocks for the Coronavirus, as we opened up today with Tom King -- 240% versus the market's 50%; 190 points. If you were to just total up these three taken together -- plus-66, minus-39, that's a plus-27. Then we added 190% from Five Stocks for the Coronavirus; we got to 217% divided by three different samplers. These three samplers, if you just bought all 15, you average beating the market for each of the 15 stocks by 72%. Truly remarkable. Exciting performance to share.
I always rub my hands together before these review-a-paloozas. I never quite know how the numbers are going to turn out. Just as Intuitive Surgical may be up or down after hours this evening, or Editas Medicine may just be a fraction of where it was three months ago, the volatility will continue, but it's to the upside when you are a Rule Breaker using time as your greatest ally.
Two housekeeping notes at close -- a reminder, again, the Rule Breaker Investing mailbag is yours next week. Come join me next week to look through some of the best stories, questions, quotes, poems, whatever is shared. For next week's mailbag, firstname.lastname@example.org is our email address.
I will just mention finally in closing that each of the three samplers that I shared with you today was its own podcast. If you want to go back as Rick Munarriz did, he mentioned what I was saying three years ago, so he'd obviously listen to that. Well, you can avail yourself of that, too. Just Google Five Stocks for the Coronavirus, Rule Breaker Investing. You can find it on Spotify, iTunes, wherever you listen to podcasts. Those are there for all time.
What I was saying, how right I was in some cases, how wrong I was. That's all part of The Motley Fool's transparency and our commitment throughout the podcast to create great stuff for free for you.
Have a great week. Fool on!