Six years ago this week, Netflix
I know this because I'm still a member today, and Netflix maintains a full record of my activity. My girlfriend has since become my wife, and we've since lived in six different apartments in three different cities. Our career paths have totally changed, too. One of the few things that's remained relatively constant in our lives (save for a brief deactivation of our account while living abroad) is our Netflix subscription.
Now, I can't fairly kick myself for not buying shares of Netflix in late 2004, when shares traded around $12.50, because I wasn't even investing in individual stocks at that point. My interest in David Lynch far exceeded my interest in Peter Lynch.
By the summer of 2005, though, it's safe to say that I could have picked up shares of Netflix. By then I'd rented about 50 DVDs, and I was totally hooked on the service, whose underlying economics were easy enough for even a newbie investor like me to understand. It's around that time that I also made my first stock purchases. I very realistically could have purchased shares for around $17 during that summer.
At today's price, that's more than a tenfold return that I've missed out on. Worse still, the market offered up another bite at the apple much more recently. On several days in late 2008 -- the sorts of days in which anything with decent liquidity was sold indiscriminately by portfolio managers meeting margin calls -- Netflix shares closed below $20.
By that time, I think even my parents had subscribed. And we didn't even have a microwave when I was growing up. The late adopters had officially arrived. Netflix was growing like a demon and clearly eating the lunch of rental chains like Blockbuster, which recently filed for bankruptcy. And yet, I still did not buy.
Just to underline the fact that all the above is not some theoretical exercise, I'd like to point out that my colleague Jim Mueller actually did land this particular 10-bagger. So, kudos to Jim for swinging at the fat pitch.
Simple, but not easy
Let's go back to those two guys named Lynch (no relation). The famous director's films tend to tackle elements of the human psyche that are too complex for words. The famous money manager's books advise investing in businesses simple enough that they can be illustrated with a crayon.
There is often tremendous value to be found in securities as complex as Mulholland Drive. Bill Ackman's investment in General Growth Properties
"For a mere mortal with an average intelligence, it takes a long time to try to put all the pieces together. It's all there to be put together, it's just that you need to have no social life and not too many investments."
If you have the time and the motivation, this style of investing could work for you. For most of us, though, the Peter Lynch approach of keeping it simple and sticking to what you know makes a lot of sense.
Today's Netflix, and the next Netflix
In my view, the Netflix story is getting less simple as the company shifts to digital content delivery. There are intelligent investors out there arguing that the content licenses Netflix needs to acquire to stream digital content will get much more expensive and compress future margins. The current valuation doesn't appear to leave much room for error. (Then again, this stock never looked cheap, did it?)
For turbocharged returns, I think investors are much better off looking for situations akin to Netflix circa 2005. That's to say, an understandable business with demonstrated success and compelling economics, but which is still at an early stage of market penetration.
I actually bought a business like this back when I started investing. The company was Intuitive Surgical
When I invested, Intuitive was doing $175 million in annual revenue. That figure is now $1,347 million. Importantly, the firm's free cash flow margin has also more than doubled. With a relatively large installed base now in place, those higher-margin recurring revenues have turned the afterburners on cash earnings.
I've really gotten away from this style of investing in recent years, focusing more on special situations and companies trading at deep discounts to tangible assets. Buying dollars for $0.50 is pretty satisfying, but I'd be lying if I said I didn't miss the sort of multibagger returns that a well-chosen growth stock can produce. I'm not interested in boxing myself in as an investor, so I'm officially keeping my eyes open for another Netflix-like opportunity.
Not an obvious successor
Some people see that potential today in OpenTable
OpenTable could be a huge winner in the years ahead, but the potential seems to require a shift in the business model. I want a company that's already got the winning formula in hand, and just needs time to let the domination unfold. Something like Chipotle's
I'm certainly open to suggestions. So, which stock in your portfolio is a future 10-bagger? Make your best case in the comments section below.
The best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. Check out this special free report on 3 Stocks Warren Buffett Wishes He Could Buy.
Chipotle Mexican Grill, Intuitive Surgical, and OpenTable are Motley Fool Rule Breakers recommendations. Netflix is a Motley Fool Stock Advisor pick. Chipotle Mexican Grill is also a Motley Fool Hidden Gems selection. Try any of our Foolish newsletter services free for 30 days.
Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool owns shares of Chipotle. The Motley Fool has a disclosure policy.