In this week's episode of Industry Focus: Healthcare, Kristine Harjes talks with special guest David Kretzmann about his week at CES 2016, what Under Armour (NYSE:UAA) unveiled at the Show and how it's probably going to fit into the company's overall strategy; the future of Fitbit in the wake of new competition; the most promising application of 3D printing; and how new investors might want to think about investing in biotechs, from allocation to risk management.
A full transcript follows the video.
This podcast was recorded on Jan. 13, 2016.
Kristine Harjes: Healthcare takeaways from CES. This is Industry Focus. Hi, everyone, welcome to Industry Focus, healthcare edition. I am joined today by special guest David Kretzmann, who works at The Motley Fool at our Rule Breakers service, as well as our Supernova service. Very excited to have you on the show today.
David Kretzmann: Great to be here Kristine. Thanks.
Harjes: So, the reason I wanted to bring David in, among other reasons, was because he has just returned from Las Vegas, which of course, means, filled with good stories.
Kretzmann: Not too many good stories, thankfully.
Harjes: Not that good. But there were some interesting takeaways from this conference, which, if you don't know, is huge in the world of tech. And there are some very specific ways that it related to healthcare. So, first off, what is the show, what does CES stand for, what's it all about?
Kretzmann: CES is Consumer Electronics Show. It's an annual show, it takes place in Las Vegas, I think this year it attracted 150K people. I think 2.2M sq. feet of convention space, different sessions and breakouts, a huge amount of exhibits. So, it's called the Consumer Electronics Show, but it branches out pretty far beyond consumer electronics. We had the major auto-makers there, you have a lot of drones, virtual reality, a lot of cameras, just about anything you can think of that's related to technology, you'll probably find it at CES.
Harjes: So, I know on last Friday's tech edition of Industry Focus, Dylan and Sean talked plenty about CES. They covered a little bit about wearables. What did you see, as it related to wearables?
Kretzmann: What most interested me when it comes to wearables was what Under Armour is doing. Under Armour is a company that we follow pretty closely in Rule Breakers and Supernova. It's been a great stock in the last five or six years, it's been a wonderful performer. But over the past couple years, the company has really amped up its focus on what it called 'connected fitness,' or integrating technology into what's traditionally been an apparel company. So, over the past couple years, the company has actually spent $710M acquiring three different connected fitness platforms, or digital apps that help people track their healthcare data.
So, MapMyFitness and Endomondo and MyFitnessPal. Under Armour spent over $700M to acquire those three platforms, but then it wasn't totally clear how the company would monetize those platforms. Now, those platforms have over 160M users. So, clearly, there's a lot of appeal there. People are using those platforms increasingly. But, this week, with CES, the company launched more connected fitness products. It has connected sneakers, it has a wristband, all these different technology products that are integrated into its apparel and connected back to those connected fitness platforms. So, for me, it's still kind of a question for Under Armour, because the company went into more debt than it's ever had before to buy those connected fitness companies. And the balance sheet, for that company, isn't as strong as it was three or four years ago.
So, the company is making a huge bet on this space. This is the first step for them to monetize it. So for me, as a shareholder and someone who follows Under Armour, it was reassuring to see them taking initial steps to monetize connected fitness. But it will be interesting to see how successful they are with it, because they definitely are trying to be a leader and a pioneer in that space. And whether or not this grabs hold, I think, will have some pretty big implications for connected fitness.
Harjes: Do you think that Under Armour is poised to take Fitbit down?
Kretzmann: I don't know. There's definitely increasing overlap between but those two companies to. I would never bet against Kevin Plank, who's the founder and CEO of Under Armour. He's one of those entrepreneurs and those founder-CEOs who's just so determined. And he takes that competitive aspect of athletics and treat business, I think, like a sport. That's how he acts with his company. So, I don't know. I would argue that Under Armour has a much stronger brand than Fitbit does at this point. Fitbit has a higher likelihood of getting squeezed out by competitors like Apple or anyone else than Under Armour at this point.
Harjes: That's really interesting. So, looking back at CES from last year, one of the big themes was 3D printing. From what I've heard from Motley Fool's coverage of the conference, that was not really as much of a trend this year. But one of the things I think is interesting about the space is how it relates to healthcare. Do you see any opportunity there going forward?
Kretzmann: Certainly. We talked about Under Armour, which has been a big winner in Supernova and Rule Breakers. When you look at the other end of the spectrum for a big loser, look no further than 3D Systems (NYSE:DDD), which is the company that, a couple years ago, was hyped up quite a bit, 3D printing with the next big thing, everyone was going to have a 3D printer in their home. 3D printing was the sexiest thing you could find in the business world.
Two years later, though, reality has come back. 3D Systems and one of its biggest competitors, Stratasys, they'd acquired a ton of 3D printing companies. Now they've essentially pretty much written off most of those acquisitions, basically admitting that they really overpaid for these companies, and the space was just getting way ahead of itself.
Harjes: Yeah. Since this time last year, 3D Systems is down 73%.
Kretzmann: That hurts.
Kretzmann: A little bit. But, one of the segments for 3D Systems that's actually growing the fastest is health applications. It's still about 15% of the company's overall sales, but it's growing pretty quickly. They had some examples on the floor at CES. One of our colleagues, and one of my fellow analysts in Supernova, Brendan Mathews, he went and checked out their booth, and they actually have a set up now where a patient can get an MRI, and 3D Systems can print replicas of the patient's actual body parts and organs. The company has a facility in Colorado.
This benefits doctors and physicians, because they can practice and determine the best way to approach a surgery or procedure. So rather than ... not guessing, but, it gives you something physical you can work with so you can actually look at the patient's physical body parts and have an exact replica that's 3D printed thanks to that MRI scan. And yeah, that has some pretty interesting implications for that healthcare space. So, I think, that's a more realistic and powerful application for 3D printing than say, printing tchotchkes in your home.
Harjes: Yeah, exactly. A little more niche-y than was initially expected, but still could be a huge opportunity. Definitely something to keep an eye on.
Kretzmann: Yeah. When you're thinking of 3D printing, obviously, the commercial implications, I think, are a lot more realistic and far-reaching than the consumer side of it, and certainly, with healthcare, I think there are a lot of cases like that. A lot of cases in that medical space. I think 3D printing can improve a lot of processes, and save a lot of lives.
Harjes: Cool. So, you mentioned a couple times the services you work on, Rule Breakers and Supernova. One of the main reasons I wanted to have you on today of all days was because Supernova was open to new members as of today, which is very exciting. This is a product that's not always open for new people to join. Starting today, you can join. Listeners, if you're interested in learning some more about Supernova, you can go to supernovaradio.fool.com. I'll do my best to take it that in the description of this show, so you can reference it there. If you driving, don't go right now on your phones. So, David, can you tell us a little more about this? Why people should check it out?
Kretzmann: Yeah. I think of Supernova as really David Gardner's service. Some of the listeners of Industry Focus might be members of Stock Advisor or Rule Breakers, Supernova is essentially the entire collection of David Gardner's stock recommendations over the past 12 years in Rule Breakers and Stock Advisor. So, when you think Supernova, think David Gardner. And David Gardner, by all measures, at least here at The Motley Fool, he's the best investor at our company. He has phenomenal returns. He's someone who found Amazon in 1997, he found Starbucks early on. He's really great at identifying these early runners early, and finding these game-changing companies when they're still young, buying positions in those companies and holding them for, in the case of Amazon, for nearly two decades now. It's just been a phenomenal performance from David Gardner over the past one to two decades.
So, in Supernova, we have different missions. We love the space theme, thus Supernova. Each mission, we have these real money portfolios managed by teams of analysts that are hand-picked by David Gardner and we actually give portfolio allocation advice. So, with Stock Advisor and Rule Breakers, we'll give two recommendations a month.
But it's not always clear to members. "Should I put 4% of my portfolio into Facebook? Should I have 10% in Netflix?" In Supernova, we have analysts who are actually looking at portfolio allocation. We tell people, "This is why we're putting 2% in company X this week, and here's why we think you should do the same." So, it's a little bit more hands-on. It gives people a model portfolio to follow, rather than just giving people recommendations and leaving them on their own to figure out how much to allocate to these different companies.
Harjes: Again, if you're looking to learn some more about what this is all about, it's at supernovaradio.fool.com, it's a landing page with a ton of videos from David Gardner and the team. It's a lot of good free content. Of course, the service is not free. But if you go to the landing page, I think you'll be surprised at how much awesome free content is on there.
Kretzmann: And a lot of our stuff from CES as well. We were liveblogging the whole time. So, a lot of cool stuff to check out there as well.
Harjes: So, one of the things that really piqued my interest when thinking about Supernova and how it would relate to this healthcare show was fitting in healthcare as an industry or sector to a broader portfolio. We talk a lot on this show about specific stocks and it's more Stock Advisor, Rule Breakers-y, where we're like, "Oh, we're really bullish on Gilead Sciences," but we don't ever really talk about how you would fit that into the broader portfolio, and what you should be thinking about when you look to allocate specific percentages to different companies. So, what is the strategy are and how do you use it for healthcare?
Kretzmann: Sure. Taking a step back, as I mentioned, Supernova is really David Gardner's service. We're following his growth investing style. Within the Supernova universe, which is about 200 companies -- again, these are all the companies he's recommended over the past 12 years or so -- a good chunk of those are healthcare or biotech companies, and they've actually outperformed the Supernova universe as a whole. So, the biotech stocks have outperformed the rest of the stocks by a decent margin. But then, on the flip side, the amount of members we see following those biotech stocks is much less than the other stocks. So there's kind of a disconnect there.
Harjes: It's understandable, it's a complicated space, it's hard to really know what you're doing and it.
Kretzmann: Right. Because, obviously, a consumer facing companies like Chipotle or Under Armour, those are companies we see everyday. But unless you're a scientist or doctor or, in some cases, maybe a patient, you're not going to have that hands-on experience with these different drugs and these drug developments.
Harjes: Yeah, buying a burrito is a little easier to understand than developing a CAR-T receptor.
Kretzmann: Just a bit, yeah. So, part of what we're doing in Supernova with our newest real-money portfolio, Odyssey 2, which I'm heading up, we actually have a team member, Brian Orelli, who happens to have a PhD in cancer biology from the University of Chicago. So, he's someone who has a lot of expertise with biotech in the healthcare space. So, we've been talking to Brian, "How do we fit these biotech stocks, which have been historically great performers within Supernova, into real money portfolios like Odyssey 2, when we're just starting out, launching today?" And I think the conclusion that Brian reached and we reached is, obviously, we're not going to put 50% of the portfolio into biotech stocks, just like we're not going to put 50% of the portfolio into any one industry or another. So, you might see between 10-25% of the portfolio put into biotech stocks. We're not going to have a hard number, there are a lot of nuances to investing.
But then, you have to take a step back and think, "Okay, are we focusing on early stage biotechs that don't even have a product on the market yet, vs, the more established players like Biogen, Gilead, Celgene." So, talking with Brian, he was like, "No, maybe we should have some core positions in some of these more-established biotechs like Celgene or Gilead or Biogen. Then, maybe start with 4-6 smaller positions with companies like Ionis Pharmaceuticals (NASDAQ:IONS), companies that have a lot of drugs in development but don't necessarily have revenue coming in from drugs that are selling right now.
So, figuring out that distinction between the more established players that have drugs on the market, they have a pretty deep pipeline, vs. those early stage biotechs. And starting with smaller positions in those early stage biotechs, maybe a little bit of bigger positions in those more established players.
Harjes: For folks who have been listening to us for a while, you've heard us talk about Ionis Pharmaceuticals by the name Isis Pharmaceuticals. They recently changed their name for pretty obvious reasons. Interestingly enough, after saying some quote about, "Oh, people are not going to confuse us," a couple months later, they decided that you don't want to take that risk.
Kretzmann: Probably the right call on their part.
Harjes: So, this is Ionis Pharmaceuticals now. The ticker is IONS, as opposed to ISIS. So, yeah, they're all interesting companies that you mentioned. I really want to highlight the difference in how you would approach something like your big biotechs, your Celgenes and Biogen and Gilead vs. looking at filling out a portfolio of Ionis or some other of the smaller players. Within Supernova, are you considering doing all of that at once?
Kretzmann: Well, Supernova, especially with Odyssey 2, we start with a relatively smaller base of capital. Again, it's a real money portfolio. The Motley Fool is investing this money. We start with a relatively smaller base of capital, but then we're adding new cash to the portfolio on a bi-weekly basis. So, we have regular cash coming in. So, the approach that we take in Odyssey 2 is, starting with relatively small positions and building them out over time as we follow the companies, get more confident in the leadership, get more conviction in the companies.
On the flip side, if we invest a small amount in a company, and the investing thesis isn't grabbing hold, or things take a turn that we don't really like or agree with, then we can sell off, or, at least, we haven't bet a huge amount on that company. So, I think that style is really especially helpful when you're looking at biotech companies, because biotechs can be very volatile. So, we're not going to put 5% or 10% of the portfolio into these companies at once. We're going to start small. In the case of a more established player like Gilead or Celgene, these are companies that have very successful drugs on the market. They have a pipeline. We might be comfortable putting 4-5% of the portfolio. But if you're looking at a smaller company like Bluebird or Ionis, we might start with a 1-2% position. So, that way, you don't have as much capital of the portfolio at stake.
But then, over the next 3-5 years, as we get more comfortable with these companies -- again, we're business folks, investors, we're looking at the long-term -- with those smaller players, if we have more conviction in the companies, or they have some successful drug trials, then we might boost that, add a little bit more into that position. So, we're definitely not afraid to start small, build that position over time. That's a good way to approach investing in any industry, but especially when you're looking at these biotechs, which can be a little more of a scary place to jump in, especially for new investors.
Harjes: I think it's definitely, as you said, something that is a little bit intimidating to first get into. So, I really like that strategy, and I think it's something that individual can also mimic, where, OK, you bought a couple shares of Bluebird, all the sudden you're following Bluebird. You've got skin in the game, so you're more inclined to actually follow the industry. I've personally found this in other industries, where I don't really know much about X sector, but then I buy my first stock in it, and all of the sudden, I'm following it. So, it's a good way of approaching healthcare, big scary biotech.
Kretzmann: Yeah, absolutely. You can compare it to other industries in Supernova like semiconductor companies. Realistically, everyday consumers are not going to know a whole lot about companies like NXP Semiconductors or Ambarella. We won't necessarily know the engineering behind how this works, unless you're actually in that industry. It's sort of the same way. We'll start small which companies or industries we are not quite as familiar with, that we can't grasp the burrito of Chipotle or the clothing of Under Armour, but you start small and as you get more confident in the company and that industry, then you can increase the allocation that you have to those companies in industries in the portfolio.
So, I think that's how we'll start with biotech in Odyssey 2. We're not going to put the whole portfolio or a substantial portion of the portfolio in one company or one industry like biotech. But we'll start small, get more comfortable with it over time, and as we find the companies that we really have high conviction in over the long term, we'll be comfortable building that position over time.
Harjes: And of course, the research that individuals can find thought services like Supernova should be immensely helpful in figuring out, "Hey, what does a semiconductor do again?" Keep in mind, folks, as always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so do that research. Don't buy or sell based solely on what you hear on this program.
One more thing before we wrap up, I just wanted to mention, The Motley Fool's 2015 Foolanthropy partner, The Fistula Foundation. Every year, The Motley Fool partners with a different charity. This year, it was The Fistula Foundation. And I realize I would be remiss if I didn't mention this on the show, because it really is an amazing organization. It provides hope for women who suffer from a childbirth injury known as obstetric fistula, which leaves them incontinent and often outcast in their society. But, it's totally treatable with a $450 surgery. But yet, a million women in the world who are living with this treatable injury. So, The Motley Fool has raised a little bit over $80K so far in our holiday drive. The drive is going on all the way into the end of January. Our stretch goal is $100K. Shoot me an email at firstname.lastname@example.org for a link to our Motley Fool fundraising page, or just search for The Fistula Foundation and donate directly. It really is an amazing cause. You have until the end of the month, if you want to help us make our goal. But of course, their doors are always open. So, definitely check them out.
David, thank you so much for being here today. Folks, I really hope you found this interesting and informative, looking at how you would fit healthcare into a broader portfolio, and also some fun CES takeaways. Thanks so much.
Kretzmann: Thanks for having me, this was really fun. I appreciate it.
Harjes: Folks, thanks for listening and Fool on!
David Kretzmann owns shares of 3D Systems, Amazon.com, Ambarella, Chipotle Mexican Grill, Facebook, Gilead Sciences, Netflix, NXP Semiconductors, Starbucks, and Under Armour. Kristine Harjes owns shares of 3D Systems, Apple, and Gilead Sciences. The Motley Fool owns shares of and recommends Amazon.com, Ambarella, Apple, Celgene, Chipotle Mexican Grill, Facebook, Gilead Sciences, Netflix, NXP Semiconductors, Starbucks, and Under Armour. The Motley Fool recommends 3D Systems, Biogen, Bluebird Bio, Ionis Pharmaceuticals, and Stratasys. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.