In Daddy's No. 1 Stock Pick, I told the story of Shana and her father, which I'll repeat briefly here.
Shana is a Fool. Shana's father is a fellow with a little money put aside but too little time to devote to investing it. Now enter The Motley Fool and me, Tom Gardner, and a big fat notebook filled with investment newsletter issues.
This is your life
Long story short, our motley syndicate set out to invest that money. Over the next few months or so, we will gradually put $8,000 to work -- and here's the catch -- exclusively in a portfolio of stocks recommended in Motley Fool newsletters.
Just a quick disclaimer before we get on: This is strictly a family affair between Shana and her father. More importantly, you are not Shana's dad. What's right for him may be absolutely wrong for you. Enough said. Now, let's roll.
A wing and a prayer?
A while back we bought Daddy his first stock. It wasn't easy. We toyed with playing it "safe" with Anheuser-Busch (NYSE:BUD) or Coca-Cola (NYSE:KO), both Motley Fool Inside Value recommendations. Both looked like cheap, recession-proof blue chips. Plus, who's ever been grounded for buying Coke?
Instead, we pulled out the stops on an upstart called Buffalo Wild Wings (NASDAQ:BWLD). The wing bars were popping up all over, and with roughly 30% of existing locations in Ohio, there was ample room to grow into management's target of 1,000 restaurants. Four or so pitchers worth of independent onsite research confirmed that the wings were good -- and hot.
Best of all, Buffalo Wild Wings (the stock) came highly recommended by Tom Gardner (I'll tell you more about Tom's track record in a bit). In fact, Tom had recommended it with emphasis to his Motley Fool Hidden Gems subscribers not once but twice.
What we were thinking
Yet still we hesitated before taking the plunge to buy a recommended stock. But we pulled it off. And we felt good about it, too. Especially as Buffalo Wild Wings climbed from our entry price of $34-and-change to nearly $42.
Again, Daddy was building an aggressive stock portfolio, which put Hidden Gems, with its focus on underfollowed small-cap stocks, right in the sweet spot. It only stands to reason, after all, that tomorrow's big winners are smaller, underfollowed companies today.
Then Buffalo Wild Wings laid an egg. On April 27, the company reported first-quarter earnings, and the word out of Columbus wasn't pretty. Particularly distressing was the revelation that almost all revenue growth for the quarter was the result of expansion -- same-store sales were up a measly 3%.
Does it get worse?
Even more troubling were the projections for the rest of the year. After all, if sales at existing company-owned stores pack on the 4% to 5% gain management expects -- and franchise stores fare even worse -- well, let's just say, there goes our dreams of catching the next McDonald's (NYSE:MCD).
OK, I exaggerate -- but still. The question now is: What to do? Clearly, investors didn't like what they heard, promptly turning our glorious 20% gain into an ignominious 20% loss. What to tell Daddy now that his No. 1 pick was down some 33% from our peak?
Sadly for Tom Gardner, this stuff flows downhill. Another long story short, Tom and his team have torn the earnings release apart and are reevaluating their outlook. Meanwhile, Tom has spent a lot of time personally discussing the situation online with some pretty sharp knives in the Hidden Gems community (for me, that's a comforting benefit of the service on days like these).
Why Daddy and I are sitting tight
In a recent column, value investor extraordinaire and resident Wahoo William Mann pointed out that setbacks like these are not uncommon for hot, young franchise concepts. His point was that sometimes a misstep spells doom and sometimes it doesn't. The trick, he suggests, is telling the one from the other.
I suggest that you simply can't tell -- at least not yet. I suggest that it is the very rare occurrence when you can learn anything from one quarter's numbers. Zippy, nada, the goose egg. I suggest that one data point -- no matter how dire or seemingly suggestive of things to come -- does not a meaningful trend make.
Here's what kills: I get that same "long-term focus" lip service from nine out of 10 investors I talk to and yet these same folks insist on basing knee-jerk decisions on quarterly earnings reports. So, yes, I am comforted that Tom and his gang are CSI-ing this whole debacle, but Daddy, Shana, and I are sticking with the original bull thesis -- at least for now.
Because I love to see you fall
Speaking of Bill Mann, we have both sought out companies that had recently suffered from what we call "execution" glitches. I know from personal experience that tripping up or falling behind is often the result of growing too fast -- not the opposite. These trip-ups can feel like disaster at the time, but they can be great opportunities in hindsight.
After all, how many times did Microsoft (NYSE:MSFT) stumble early on, missing a deadline or failing to catch a bug? Or Intel (NASDAQ:INTC) back in the day, when a bag of bad chips could threaten the entire domestic PC market? My favorite is when the sky about fell on AOL (NYSE:TWX) when it couldn't keep pace with customer traffic.
Of course, these are extreme examples with happy endings. Sometimes these stumbles can be harbingers of big falls to come. The deadliest storm, after all, starts with a single dark cloud. In the case of Buffalo Wild Wings, I'm sticking with Tom's original long-term growth story, which I bought into in the first place.
And so the verdict is still out
Our mission with Daddy is to determine once and for all whether you can really make money using investment newsletters. I still say yes. But only time will tell.
Meanwhile, I promised to keep you posted on Tom's progress at Hidden Gems. As of May 16, 2005, Hidden Gems recommendations are up an average 27.9% vs. just 5.7% for the S&P 500 over the same period. As always, all picks and results are posted on the member website.
What to do next?
If you do want to learn more about Tom Gardner's approach to finding undervalued small-cap stocks -- or simply to see all the picks and get the absolute latest on the Buffalo Wild Wings saga -- he is offering a 30-day free trial to Hidden Gems. It really is a painless way to find out if a newsletter is right for you. Click here if you'd like to learn more.
This is a follow-up to "Daddy's No. 1 Stock Pick," which was published on Dec. 3, 2004.
Fool writer Paul Elliott owns none of the stocks mentioned. The Motley Fool is investors writing for investors and maintains strict trading guidelines for employees. See the Fool's disclosure policy here.
