Every stock has a story, and on this week’s episode of Rule Breaker Investing, we’re sharing some of ours. Motley Fool co-founder David Gardner, along with a few other Foolish analysts and special guest speaker Dan Pink, go through their stock stories and the lessons they’ve learned from them. Sometimes you can win big, even when you get the details wrong. Sometimes you think you’re buying too late or that you’ve sold too early, only to find that there’s still plenty of time.
Sometimes, two completely contrary positions on a stock can both end up green. Find out what ventures into Twitter (NYSE: TWTR), Canadian National, Five Below (NASDAQ: FIVE), and more have taught this motley assortment of investors.
A full transcript follows the video.
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This video was recorded on June 6, 2018.
David Gardner: Welcome back to Rule Breaker Investing! Let’s start June together! Happy June! June is always a delightful month. We have some family birthdays in our family, you might as well in yours. You might also be already at the beach as you’re hearing us do this podcast. I hope you’re enjoying better weather. That’s especially true if you’re in the northern hemisphere. Anyway, June looks like a fun month for this show.
This week, we’re going to do Stock Stories Volume II. One year ago-ish, we did our very first in this series, Stock Stories, where rather than talk about story stocks, which is a phrase that a lot of us in the investing world have heard over the years — story stocks, you know, stocks that maybe don’t have the numbers behind them, maybe that you haven’t researched that much, but it has a story. And if it has a story, it becomes a story stock, and maybe one that you could or should own. Rather than pay obeisance to that, we flip it and we make it about stock stories, with the thinking that behind every stock is a story.
Over the course of this week’s podcast, I’m going to get to introduce some wonderful guest stars. They’re going to tell the story of a stock. It might be a stock that you know of. It might not be a story that you know. But, each of us has a story to share. We have six, just like we had a year ago for Stock Stories Volume I. At the end, we have Dan Pink, the celebrated author of nonfiction works about business, work, and productivity. Dan has his stock story, and we have the pleasure of sharing that. That came from FoolFest, which is our annual conference where we invite in many of our members, many of our longtime best members, and they come together with us in Alexandria, Virginia. We have some star-studded guest speakers. Dan Pink was one of them. Dan graciously told a stock story to FoolFest last weekend. I’ll be including that on this podcast. That’s what we’re doing this week.
Next week — I already want to be previewing this, because next week, it’s back to the Market Cap Game Show, the latest episode. I’ll be bringing my friend, Matt Argersinger, back in, and we’ll be playing with you, playing at home, the Market Cap Game Show. That’s always fun, always worth looking forward to. Oh, and, by the way, Matt will be a guest on this week’s show as well, telling a stock story.
One other housekeeping note before we get started. We’re going to have a Rule Breaker extra this weekend. I really love this. I hope you’ll love it, too. If you’re around Saturday or Sunday and want to download one extra Rule Breaker Investing podcast, you’re going to get to hear the interview that my brother Tom and I did with Fred Rogers, Mister Rogers of Mister Rogers’ Neighborhood fame. Tom and I interviewed him back in the day. If you were around for a podcast a couple of months ago when we did our Blast From The Radio Past, you heard one or two Fred Rogers-isms in that podcast. We excerpted a little there. But, this week, we’re going to present the entire thing, uncut.
I know there are a lot of Fred Rogers fans out there. If you want to hear Fred with his brush with The Motley Fool, I am delighted and excited to share that with you. I thank, in advance, my producers Mac Greer and Rick Engdahl for making that possible. We are timing that up with Mister Rogers’ documentary, Won’t You Be My Neighbor?, which comes out this weekend. A little bit of publicity and a little bit of love for that documentary. I have not seen it yet. It looks spectacular! It’s kind of a Mister Rogers week here around Fool HQ, and we’re happy to share that with you as well.
Alright, stock story No. 1. For this one, I get to invite in my longtime friend and collaborator, Karl Thiel. Karl, welcome!
Karl Thiel: Thank you for having me!
Gardner: It’s a delight to have you, Karl! Before you start, I’d like you to just talk briefly about what you do around The Fool and how we’ve worked together over the years.
Thiel: I have, I guess, unlike a lot of people around Fool HQ, I’ve really done one thing for a long time. I’ve worked on Rule Breakers and I’ve worked on Stock Advisor. I now feel oddly protective about both of those things. [laughs] I just love them. But, yeah, I’m an analyst on both of those services. I have a particular sort of gravitation toward biotech and technology in general, but my work at Stock Advisor takes me all over the place, which is also, I think, good for me, and hopefully good for other people.
Gardner: You bet. Karl, it’s been a delight to work together! It seems like almost about 15 years at this point?
Thiel: I think that’s about right, yeah.
Gardner: And these days, you live in?
Thiel: I now live in Austin, Texas, after many years in Portland, Oregon.
Gardner: Which is pretty awesome. The one thing you and I haven’t really done together is work in a co-located way, Karl. But we’ve made virtual work pretty well over more than a decade now. Karl, what is the stock that you’ll be sharing a story about this week?
Thiel: The stock is Nvidia (NASDAQ: NVDA), ticker NVDA.
Gardner: Excellent! Karl, maybe start with once upon a time, and take it away.
Thiel: OK. Once upon a time — and by once upon a time, I mean earlier this afternoon — David told me that I could tell a stock story. I quickly gravitated toward Nvidia, because, for a very short moment, it makes me look really smart. So, I’m going to start with the smart part. If you take nothing else away from this, this is the part you should remember: I bought shares of Nvidia at $12.56 a piece in April 2013.
Thiel: I can pause there for a little bit of applause in the audience.
Gardner: [laughs] Since the stock’s somewhere around $250 these days, that’s been a really, really good call over five years.
Thiel: Right! This is my stock story, this is the story as it’s been for me, I think what follows next is a story of why you can be wrong on the details and still come out ahead. Unfortunately, the inverse can also be true. You can get all the facts basically right, successfully predict the future in broad terms, and still lose out. I have stories like that, too.
But, in this case, I would say that, when I decided to buy Nvidia, I had general beliefs and specific beliefs about the company. At that point, it had already been a Stock Advisor recommendation since April of 2005. It was, at that point, in 2013, outperforming the market, but not spectacularly so. I would say, my general belief could probably be summarized as something like, “Video processing, this is going to be big for more than just games.” I had specific beliefs. My specific beliefs were that the company’s Tegra processors, because of their high performance, would find an increasing role in tablets and smartphones, and maybe other areas like cars. I’d been out to CES and seen some really cool demos of their infotainment systems, really amazing tricked-out automobiles, and I was excited.
The general belief turned out to be, I think, pretty correct. The specific beliefs were really pretty wrong. [laughs] Tegra is still around. It’s incorporated into SHIELD gaming devices, it’s in the DRIVE system. It’s no slouch. Tegra revenue was $442 million in the most recent quarter, which is about 14% of total revenue. But Tegra for the most part, and most certainly smartphones, are not what catapulted the company forward.
I think, what happened in the interim is that the tablet market, which is really the only mobile market where the Tegra ever found much traction, just kind of fell apart. Then, Tegra wasn’t a good fit for most phones because it was too power-hungry and it wasn’t well-integrated enough with other components. And Nvidia even bought a company called Icera in 2011 so that it could incorporate modems and radio frequency stuff. That’s another part, I was thinking that this could finally position them to do better in the mobile market than they had, which also turned out to be wrong. Nvidia sold Icera in 2015 and essentially exited the mobile chip market at that point.
I guess, if you’re looking right now at, what is it that really ended up driving Nvidia forward, I think it started in 2015 when they launched into some of their deep learning stuff and introduced the Pascal architecture. And then, more recently, the Volta architecture, which I still think is really not appreciated for what it’s going to do.
But, I went back and I looked at the 2005 original recommendation, and that one really hit one very accurate idea. The idea was, video games are big and they’re getting bigger. I think, if you had to update that for today, it would be, artificial intelligence is big and it’s getting bigger.
Gardner: [laughs] It sure is. And it’s still so early on for AI, isn’t it?
Thiel: Absolutely. So, I think, to end this story, if there was a lesson that you wanted to draw from that, if you’re trying to predict the future, aim for a broad portrait. Don’t necessarily get too bogged down by expert details about what needs to happen in exactly what order. Make sure that the broader picture is still emerging, because that’s really what’s going to drive success or failure.
Gardner: That’s a really great point, Karl. I think about how, sometimes, you’ll talk to a friend who’s very much into a given stock, and they’ve already choreographed what’s going to happen with the next few corporate developments and the stock price. I mean, God bless that person if they’re right, but so often, we’re wrong. But the good news is for you and me, and you’re describing one of those cases where we didn’t quite get it right, yet the stock does even better than we probably thought.
Thiel: Absolutely. And in a way, maybe that’s kind of a Peter Lynch observation. You can use your own experience, even if it’s somewhat general, to make good choices.
Gardner: I really like that. I think, about Nvidia — in fact, I told the story at FoolFest to some of our members last week. Just to think, we recommended it below $7 a share back in 2005, as you referenced, and it went to $30 within two years. So, it was a four-bagger for us by 2007. Then, you and I remember what happened — well, we all remember what happened to the stock market in 2008 and 2009. It went from $30 down below our cost of $6.75 or so one year later. So, we watched it go from basically $7 to $30 down to $6, which hurt a lot. When you’ve made 4X your money, you don’t like to watch all that go away and a little bit more. You had it in 2013, right, Karl? Your cost was $12, did you say?
Gardner: It wasn’t until 2016 that the stock finally actually got back to $30, which we’d seen in 2007. And you know this because you’re on the team, we held it all the way through. In 2016, just to add a little bit to your story, the stock went from $30 to $90 that year. It tripled. It was the No. 1 performing stock for the S&P 500 that year.
And in 2017, we decided to rerecommend it right again, because we’re not afraid of things already having gone up. Usually, that’s a good sign. The good news is, we picked it there again in 2017 at $100, and it’s somewhere around $250-260 today.
It has been spectacular. But, yeah, I don’t think we were foreseeing, were we, back when we wrote that 2005 buy report, that artificial intelligence would come along, autonomous vehicles and all of these prospects for Nvidia and its graphics processing units.
Thiel: Yeah. We weren’t, but, looking back at that, I think it really did get at what was important. It was about gaming, it was about the continued rise of gaming. And that continues to be a huge driver for the company. That is a very true observation 13 years later. And in broad terms, that original 2005 recommendation was absolutely accurate.
Gardner: And at a cost of about $6.75, we’re sitting pretty on that one. Not every story has a happy ending. Today, for now, this one does. But for you, from that spectacular buy just five years ago at $12, or for some Stock Advisor members that had to wait for seven or eight years for the thing to do anything for us at all, it’s sometimes that epic Odyssey story, Odysseus making the effort to get all the way back to fair Ithaca, and all of the things that he had to do to get through. That’s how investing — which, by definition is for the long-term — feels a lot of the time.
Karl Thiel, thank you very much for joining us and sharing stock story No. 1!
Thiel: Thank you!
Gardner: And now it’s time for stock story No 2. We’re welcoming in, here in Fool HQ, my friend Matt Argersinger. Matt, how are you doing?
Matt Argersinger: I’m doing pretty well, David.
Gardner: Awesome! You and I — I already previewed this — we’re going to go back and play the Market Cap Game Show next week. I always get excited about this.
Argersinger: I’m excited about that.
Gardner: Do you get a little nervous about it, Matt?
Argersinger: I think I’m getting more and more nervous, because I have this streak going. Six out of ten. I feel like, if I don’t hit that, I’m going to be really disappointed.
Gardner: I understand. I’ll try to balance out, some hard ones with some easier ones. We’ll see how the numbers come out. But, you’ve always impressed me, because I would never have done more than about three or four out of ten. I think many of our listeners feel the same way. That’s all next week, though.
For this week, we’re going to talk about a story. Before you start, Matt, can you just briefly introduce yourself to people who have not met you before? What do you do around Fool HQ?
Argersinger: Sure! I’m an analyst in our investing team here at The Fool. I’ve actually been at The Fool for just over ten years now. It’s amazing.
Argersinger: I have the great honor of being in Supernova and on our Odyssey 1 Mission.
Gardner: The outstanding Odyssey 1 Mission. A real-money portfolio. I know we have some Odyssey 1 listeners right now. For those who’ve never heard of Odyssey 1 or Supernova, Matt, what is it that you do? You can brag a little bit, if you’d like, in terms of the performance you’ve generated for members.
Argersinger: [laughs] Supernova is a collection of real-money portfolios in missions, we call them, that are pursuing different goals. The Odyssey 1 Mission, it was one of the first real-money missions we launched in Supernova when Supernova launched in 2012.
Our goal is to help the investor who’s still saving, investing for retirement but somewhere out in the future, a wage-earning investor who’s probably adding money regularly to their portfolio. So, we’ve taken, I’d say, some fairly riskier investments, brought them into Odyssey 1 from the Supernova universe, and put together a pretty good track record. In six years, the Odyssey 1 portfolio has delivered roughly a 200% return, so roughly a triple in six years.
Gardner: Right, which has been completely awesome. The market over that time has been good, but not anything like that good, so, wonderful. I know a lot of members are very grateful for your and your team’s work, Matt.
The idea of our real-money portfolio missions is that anybody can mirror them who’s a member. If you want, Matt and his team tell you what to do ahead of time, so you can find out, what stock am I supposed to buy next? We’re always scoring ourselves at or after when you do, so anybody, truly, can mirror these portfolios. In a world where a lot of people think you can’t beat the index fund — could you? Well, the good news is, I think that Odyssey and really all of Supernova prove that yes, you can, and it’s quite lucrative to do so.
Anyway, enough with that. Matt, what is the stock you’re presenting for stock story No. 2?
Argersinger: Sure. The stock I’m bringing here today is Twitter, ticker TWTR. I think we all know what Twitter is and what it does. This is a stock we actually bought three times in Odyssey 1 over the years. I believe we’re the only Supernova portfolio mission that has recommended Twitter.
Gardner: Excellent. Matt, start us off with once upon a time.
Argersinger: Once upon a time, go back to December 2013, Twitter enters the Supernova universe via your team in Rule Breakers. At the time, the price was $64 a share. It had recently come public after much anticipation, fanfare.
We waited roughly nine months to finally bring it into Odyssey 1. This is August 2014 now. The stock price was $46. We actually added it a month later, again, in September 2014 — back-to-back months for us, we were excited about the company. I thought it was fun to go back and read some of our write-ups for Twitter at the time.
Gardner: Mm, because, not to foreshadow, but Twitter would drop some from there, wouldn’t it?
Argersinger: Yes, it would drop quite a bit. But, if you go back and read some of the things we wrote — my team and I, this is Aaron Bush, myself, Tim Beyers, and Sarah Goddard — just to give you a taste: “Twitter is the preeminent real-time communication platform of the future. The active user base of Twitter is accelerating. Revenue growth is growing over 100%. It’s the operating system of news, increasingly the way people consume news and information in real-time, and more relevant every day to individuals, corporations, sports teams, celebrities, government agencies, news feeds. And, as Spencer Rascoff of Zillow continuously emphasizes, advertisers follow audience. Twitter’s audience is growing by leaps and bounds in an almost unlimited number of verticals.”
Gardner: Now, that was pretty awesomely true back then, and some of it is definitely true today. The story may have changed a little bit in the meantime.
Argersinger: It did. You go forward, and really, the timing of that, after our second rec — so, here’s Twitter September 2014 at $52 a share, and it was pretty much downhill from there. Every quarter hence, not only did revenue growth decelerate pretty fast —
Gardner: That was a big thing.
Argersinger: — the active user base for Twitter, which, at the time, was approaching 300 million, it really flattened out. The active user base went from growing, I’m saying, at 30% year over year, it went down to about 5% year over year, eventually flattening out.
Of course, as you can imagine, this really changed the market’s perception of Twitter. It dropped quite precipitously, at one point getting as low as $14 a share.
Gardner: Yeah, I remember that!
Argersinger: That was not a fun time!
Gardner: And when was the bottom, Matt, roughly?
Argersinger: It kind of hit two bottoms. It hit one, that $14-15 bottom, in 2015, and it hit it again later on in, I believe, early 2017. So, two trips to the depths.
But, interestingly enough, we weren’t deterred by that. We actually added it a third time in December 2015, so, roughly 15 months after our last rec, specifically because Jack Dorsey, the founder of Twitter, and today the CEO once again, he came back around that time.
Gardner: Kind of like Steve Jobs coming back.
Argersinger: Right. We thought, “Here’s the founder coming back,” and he did something that we thought was tremendous at the time, he came in and he gave away $200 million of his own worth of his share ownership in Twitter to his employees at Twitter upon coming back. We thought that was an interesting move.
Gardner: One of the bigger gifts that we can think of any CEO ever giving their employees.
Argersinger: Right. And, of course, we were wrong at the time to rerecommend it, because Twitter, again, as we foreshadowed, hit another new low shortly after that. In the fall of 2016, it was interesting, it actually shot up from that low teens to about $25. This was because there was a rash of buyout rumors, if you remember, companies from Salesforce (NYSE: CRM) to Disney, there were rumors that they were bidding for the company. It shot up to $25. Of course, a buyout never materialized. The stock fell sharply after that, and slumped down again to that $14-15 range.
But, this is when you, David, and your team, Rule Breakers, in January 25th, 2017, made your second recommendation of Twitter at around $19, which I thought was incredibly prescient at the time. And, of course, it’s turned out to be an incredible investment. The reason I thought of Twitter today, or this week specifically, was because it was just announced this week that Twitter’s going to be joining the S&P 500.
Gardner: Yes, indeed! Twitter had a very nice day. In fact, the day that it was announced was Monday, I believe. We’re taping here on Tuesday, and Twitter’s up about 5% or so —
Argersinger: That’s right.
Gardner: — largely on the news, right? Because all the index funds now pile in and need to own some Twitter.
Argersinger: That’s correct. It’s nearly $40 as we tape, which I think is tremendous. Not only is it more than a double from when you last recommended it in Rule Breakers in January 2017, it’s up 60% —
Argersinger: — since our last recommendation in Odyssey 1 about two and a half years ago, and it’s actually, as of this week, above our cost basis. Our cost basis was about $38. And for the first time in roughly five years, Twitter is back above our cost basis.
Gardner: That’s great. Now, of course, I assume you intend the story to end there, Matt. I’m going to ask you about the lesson in a sec. But, there can be an epilogue here that I want to ask you about, as well, because all that really matters now, of course, is what happens going forward. First, Matt, what’s the lesson?
Argersinger: I think the lesson is, Twitter hasn’t been a great investment. It’s one of those investments, when we looked at it at the time, it had just recently gone public. The hype around the platform and how it was growing was tremendous. It looked like it was going to have the same kind of trajectory as, say, Facebook, in terms of advertising growth, user growth. There was all this excitement. It didn’t materialize.
But, never at any point, I think, in the last five years has the influence of Twitter declined at all. In fact, I think that today, all those things we said joyously several years ago are actually coming true. I do think it’s becoming that No. 1 source for most people to go when they want real-time news or real-time communication with a lot of different outlets.
So, I think, we were wrong, maybe, with our timing, as often investors are. But I think, actually, all those original stories we had are coming true, and the evolution of Jack Dorsey coming back, making the platform more interesting, connecting it to a lot of different things that we find more relevant — sports, for example, for Twitter has become a very popular vertical.
So, not a great investment. The story, I feel like we had it right, and I think it’s just starting to play out now.
Gardner: It’s funny to think that each time your team bought, Matt, it dropped from there after you did. And yet, even though you might feel like, strike one, strike two, and strike three, you’re now back to even-slash-maybe even a little bit above where you started, and that itself is instructive.
Argersinger: That’s right.
Gardner: Do you like Twitter going forward?
Argersinger: I do like Twitter quite a bit going forward. Maybe it’s just mostly anecdotal right now, but I feel like, especially with, maybe not so much the Facebook fallout, and it’s not really fallout we’re talking about, but maybe, with Facebook focusing more inwards and more on things like friends and family, relationships, I feel like there’s a big opportunity for Twitter to really now dominate the “news feed” for most people, especially as they interact with the rest of the world in real-time. So, I think I’m as excited about Twitter as I’ve ever been. And I think the business of Twitter, especially when it comes to advertisers and ad revenue and things like that, is really going to start reflecting that pretty soon.
Gardner: Matt, who are you on Twitter?
Argersinger: Well, I’m not very original, I’m @MArgersinger, which is just my first initial, Matt, and then Argersinger. So, MArgersinger.
Gardner: So, nobody else grabbed MArgersinger?
Argersinger: No. And, I’m not a verified account or anything like that, but I doubt anyone’s going to be looking for that username anytime soon. [laughs]
Gardner: Awesome, Matt. Thank you for stock story No. 2. See you next week!
Argersinger: Thanks, David!
Gardner: Now, it’s time for stock story No. 3. I get to welcome back my friend, Brendan Mathews. Brendan, how are you doing?
Brendan Mathews: Great!
Gardner: Awesome! Now, I know the company you’re talking about. You and I talked about it ahead of time. I’m not sure what the story’s going to be, but it’s Canadian National, the railroad company. CNI is the ticker symbol.
Before you start with it, though, Brendan, how long have you been at The Fool, and what do you do here?
Mathews: I’ve been at The Fool six years now. I’m part of the Stock Advisor research team, and I’m the portfolio lead for Odyssey 2 and Supernova.
Gardner: Awesome. Remind me, Brendan, is Canadian National in Odyssey 2, in our portfolio?
Mathews: It is not. I don’t believe any of the Supernova portfolio services have picked it up. It’s hard to get excited about a railroad, sometimes.
Gardner: [laughs] You say that, and yet, you’re going to make it exciting in stock story No. 3, or at least interesting. Brendan, take it away!
Mathews: Once upon a time, commodities were in a historic boom. Housing was booming, too. People were using all kinds of forestry products to build homes, and there was an outstanding railroad that connected the Pacific and British Columbia to the Atlantic and Nova Scotia, and then the Great Lakes and the Gulf of Mexico.
This time, if you might have guessed, it was 2008. That’s when you recommended Canadian National to Stock Advisor members. The shares, on a split-adjusted basis, were $28. The CEO was Hunter Harrison, who has recently passed away after being the CEO of CSX and Canadian Pacific. He was a legend in the railroading industry. He was Morningstar‘s 2013 CEO of the Year.
So, $28 a share, March of 2008. I think we all know what happens in the fall of that year. Bear Stearns is the first to fall. We see the housing market come apart. Stock market hits historic lows in March of 2009. Canadian National is not immune. Its shares fall to $16. And along with the stock market, the housing market and the commodities market both completely fall apart, and they’ve really not recovered to a huge degree.
Canadian National, shares fall to $16. But earnings actually didn’t fall that much. They had $2.1 billion in profits prior to the Great Recession. Profits fell to $1.9 billion, stayed that low until recovering in 2010. Since then, shares have chugged along from $16 lows to $82 today. Now, there were highs and lows along that way. In 2014, shares hit $71 before falling to $59 in the beginning of 2016.
Basically, this is a company where a lot of interesting and unpredictable things have happened. Hunter Harrison, the CEO I was talking about, left in 2009, shortly after we recommended the shares. The company completed a big acquisition of Elgin, Joliet and Eastern Railway around Chicago, so, they made an important acquisition. Their forestry business, shipping a lot of lumber to supply houses, that portion of their business kind of fell apart. As we’ve seen in a lot of other railroads, coal shipments have fallen off.
But, all along the way, forgive the pun, they just were kind of chugging along, from $28 to $82 a share. And along that time, they paid $8 in dividends.
Gardner: Ah, I’d forgotten that!
Mathews: That’s a four-bagger return. 316% vs. 157% for the S&P. Really outstanding returns for a company that’s not super exciting, and a lot of tumultuous and unpredictable things happened over the course of a decade.
Gardner: Brendan, the lesson may be self-evident, but can you double underline the lesson of this story as you see it?
Mathews: For me, the big lesson is, you can’t predict everything. But if you can get the big things right, you’ll do well. I think, with this stock, the one thing that we got right when I look back at your original recommendation was the quality of Canadian National’s network. They have that three-coast rail network that really nobody else has in the North American continent, and they’re just a great railroad. You can’t predict commodities booming and busting, housing, CEOs coming and going. But, you’ve really got the right railroad with the right assets, you get that right, and it worked out.
Gardner: It’s really wonderful to hear you remind me and us what’s happened over the last ten years — yep, that’s how long we’ve been holding Canadian Natty. From my standpoint, your analysis itself felt like the longer-term, bigger landscape of railroad companies themselves, talking about a big acquisition, talking about the CEO leaving within a year of our recommendation. Something delightful for us as long-term thinkers and actors, to be able to step away and see a business like this. I think what’s especially cool, Brendan, is that this is railroads! The business itself has been around for a couple of centuries now. That’s pretty cool on its own.
Mathews: Yeah, its history goes back to 1832, almost 200 years.
Gardner: Tremendous. Before I let you go, how about, talk about a recent Odyssey 2 purchase, one that you and your team like, just a little extra candy for our listeners as you depart?
Mathews: The newest stock that we’ve added to our portfolio is Salesforce. They’re the original top dog in SaaS software. They offer customer relationship management software and a couple of other things. Really just had a great quarter. If it’s possible to say a company is selling for a cheap multiple at over 8X sales, then that’s the case here with Salesforce.
Gardner: [laughs] Probably one of the best performers that’s the least acknowledged or talked about. Marc Benioff, the founder CEO, is a guy who is definitely one of the great CEOs of our time, but a name we haven’t mentioned as often on the show.
One funny stat I was looking at, Brendan, you know that we’ve counted spiffy pops for all of our stocks — when a stock makes more in a single day than our cost basis. For Salesforce, which has been thanks to Tim Beyers, who brought it into Rule Breakers about a decade ago, Salesforce is up 18X in value, but has only — and this sounds crazy to me — has only spiffy popped three times. Now, when your stock goes up 18X in value, and only on three occasions has it had enough volatility to jump over the cost basis you once paid, that’s very unusual. I was looking back, the last couple of years, it hasn’t made more than about a 4% move either way, and that’s through a pretty strong and sometimes volatile stock market. It’s a great company.
Mathews: Yeah, that’s true. It’s the amazing thing about Salesforce. They have this great backlog of business. They have future revenue in the bag. Unlike other high flyers, you don’t necessarily see those big drops when they miss earnings by a couple of pennies.
Gardner: Mm, excellent point. Thanks so much, Brendan! Fool on!
Mathews: Thank you!
Gardner: Alright, stock story No. 4. My next guest star I’ve worked with for probably longer than anybody else except maybe my brother at The Motley Fool. I think that’s fair. Rick Munarriz, welcome!
Rick Munarriz: Hi, thank you, David! Yes, I’ve been here a long time. I think 1995 was when I first started working with you guys, and it’s been an amazing run ever since.
Gardner: And you’ve added so much value to our lives, not just those of us who worked with you in Motley Fool Supernova, where you, today, manage the Phoenix 2 portfolio mission with a talented team, but, Rick, your byline appears more on our site than mine does, I think, because you’ve written so many articles over the years on so many different, and often fun, and fun to read, companies. Thank you for your great work!
What is the stock that you have for stock story No. 4?
Munarriz: Once upon a time, there was a company called Taser Systems. Of course, we know it now as Axon Enterprise, a very successful, one of the hottest stocks in the Supernova universe over the past few months, and over the past year, really. We recommended it back in late 2004 in Rule Breakers. It was rerecced nine months later in the summer of 2005, after the stock has lost almost two-thirds of its value. This was a company, back then, all they were really making were Tasers. True to their name, they were the leading stun gun maker. And when we actually sold, we recommended that our readers and subscribers actually sell the stock back in February 2009, the stock was taking a beating. This was a company that, there was a lot of negative publicity. There were some deaths related to Tasers, and that led to both the negative publicity and some lawsuits. Revenue fell in 2008. It would also go on to decline in 2010. The company was not profitable at the time.
It was pretty much a very sad stock. You almost tell yourself, “OK, let’s write this one off. Let’s never revisit it. Let’s never check into the story again.” But as investors, we have to think beyond that.
This was a stock that did not bounce back right away. It’s not like, you think of early 2009, the market was pretty rough at that time, anyone who remembers — it wasn’t a stock to just bounce back once we said let it go. The stock was actually waffling about in the mid-single-digits for more than four years. And it wasn’t until 2013 when the stock actually cracked over that double-digit ceiling again.
Let’s fast-forward to happier times. Rule Breakers, October 2015, where you recommend it again. And it’s still Taser Systems, it’s not yet Axon Enterprises, but the model itself had evolved. This was a company that was no longer relying on their stun guns, even though it was commanding the largest chunk of their revenue, and it continues to do that. But, this was a company also behind the Axon wearable body cameras that police officers and military personnel were wearing so that they could document things that happen. This was also the company that would go on to establish evidence.com, which is the cloud-based platform that a lot of this data is stored on. There’s a lot of video that gets recorded on these cameras.
Basically, they have the whole system down. They have the stun guns, they have the cameras. And these cameras, they have in-car cameras, it’s not just the body cameras. They recently signed a partnership with DJI for drones, to work in partnership with them. This is a company that’s really expanding the whole surveillance and tracking stuff. And when you think about stuff in the news, where there’s always these very unfortunate fatal encounters between officers and people on the road, whether the suspects are innocent, whatever the case may be, these are incidents that are recorded because Axon Enterprises is there recording these things.
Ever since Rule Breakers recommended it in October 2015, the stock has almost tripled. Back in early 2017, the first week of 2017, in Supernova in the Phoenix 2 mission that I’m the lead analyst for, we bought it, and it was essentially roughly at the same price as the Rule Breakers recommendation in 2015, $23 and change.
Munarriz: But the stock then has also gone on to triple. I bought it personally. I can say that I’m glad that I bought it personally. I bought it three weeks after the Phoenix 2 recommendation, and I’m up 167%. So, I’m not doing as well as Rule Breakers subscribes and Phoenix 2 subscribers that have followed us from the very first get-go, but I’m very happy to say that this is a stock that, the company is now very profitable. It’s growing. In its last quarter, revenue was up 28%, but stun guns were up 10%, and accounting for almost two-thirds of the revenue.
But the real driver here, obviously, is these wearable cameras, this evidence.com, all these new ways, the sensors and software segment of the company that exploded by 75% in its last latest quarter. This is a very dynamic company.
To me, the lesson here is, quite simply, goodbye isn’t always forever. Always remember that. Sometimes you buy a stock too soon, you buy a stock too late. You could sell a stock too soon, you could sell a stock too late. But when you recognize that the company has changed, it’s evolved into the company you always wanted it to be, it’s never too late to approach your ex-girlfriend or ex-boyfriend or ex-high school sweetheart and say, “Let’s give it another go, because I think you’ve changed.”
Gardner: [laughs] It is an outstanding tale of that, Rick. I’m really glad that you bought it. I’ve never owned it personally. I’m delighted that we’ve recommended it for Rule Breaker members who’ve benefited. I’m very happy, though, to hear that you have more than doubled.
To me, especially, I think last year was exciting for this stock, because the performance of the stock at the time was not that exciting about 12 months ago. But what was happening is, the company was getting these cameras, these police body cams, out in the field, more at cost, not making a lot of money. So, their revenues were growing, but the profits didn’t look so good. The stock was getting a little bit dinged for that. But, we were talking as a team, you and I were talking about how, it’s evidence.com, their website, where all this video goes up and lives in the cloud, and every police department subscribes to it. That’s the kind of razor and blades model that was in place for Axon Enterprises. And now, we’re benefiting from that same dynamic, where people start to realize there’s a lot of profit up there.
Munarriz: Absolutely! Axon is selling the stun guns and the body cameras, and even (unclear 39:00) cameras. They like to sell them with five-year deals. It’s a five-year deal, you pay $129 a month and you have access to the unlimited storage on evidence.com. It’s sort of like, once they get a sale, it’s almost locked in for five years, so there’s great visibility now in what Axon is doing. Not only is it growing, but it’s actually becoming a more reliable, dependable, steady company. Almost boring, but not if you look at its stock chart.
Gardner: Alright. In closing, Rick, you and I are looking backwards. Obviously, we’re telling stories of the past. But, when you consider that Axon today has a market cap of only about $3 billion, I don’t think this is a stock that anybody’s missed. I don’t think they should think, “Oh, darn it, I wish I had bought it with Rick a couple of years ago.” I think, going forward, I see a category leader. I don’t see a lot of competition. I see only a $3 billion market cap. Your thoughts?
Munarriz: Yeah, definitely. Clearly, we were way too early in 2004. But I think we were still early in 2015. I definitely think the best has yet to come for Axon Enterprise. And yes, obviously, the stock has been hot for the past year and a half. But the real big gains, I think, will come in the future. Everything that it’s doing, everything that it’s expanding, is going to play out. It’s going to work out pretty well, I hope, for investors.
Gardner: Thank you, Rick Munarriz!
Alright, stock story No. 5. This one is mine. I want to talk about two stocks, only one of which is presently in the Supernova universe. You may have noticed, the source for all of our stock stories are from our Supernova universe, stocks that we’ve picked in Stock Advisor, Rule Breakers, and Supernova. Thank you again to my previous guests for their stories.
This one is about Five Below, ticker FIVE. This is a company that is based in Philadelphia, Pennsylvania, and for quite a while now has sold stuff in stores that costs, generally, $5 or less. It’s a company that is very much in the bricks and mortar of today, which you would think wouldn’t work so well in retail. I’ll talk a little bit about Five Below in a sec.
But first, once upon a time, David and Tom Gardner were invited to give a keynote at a conference that happened to be in Puerto Rico. The year was probably around 1999 or 2000, so, around 20 years ago. We were invited by Aetna, the very large and successful insurance company.
Tom and I went and played a round of golf before giving that keynote talk to Aetna. In fact, that was the one round of golf I’ve ever played where I was bitten mercilessly by fire ants in an incident somewhere on the seventh hole, when I decided I would take a digital photo of my brother, Tom, hitting out of the rough just behind a water trap. I think it was on the seventh hole. I remember mocking a disclaimer that was in our golf cart at the time. It said something like, “Beware of fire ants.” And I thought, “You know, it’s sad how the lawyers have even gotten into our golf carts now with their disclaimers on seemingly every product and service around us.” So, I knelt down right near that water trap as Tom took his backswing, and I felt the most ungodly pain on my right knee.
Fire ants, as it turns out, all work together. They crawl up your leg, and then, through some communications device which I don’t fully understand but would be better understood by entomologists, they all communicate at the same moment, “Bite!” And at that moment, I felt a huge amount of pain. And I learned that disclaimer was in that golf cart for a good reason.
Anyway, that was all before we gave our talk to Aetna, which was later that afternoon. As we got there, some of the entourage around the CEO, including the person who was in charge of the event, some of the PR team, and the investor relations team, they said, “Oh, David and Tom Gardner, great! It’s good you guys are here! We almost cancelled you yesterday.” And, since we’d been flying on a plane to the event the day before, we said, “What?! You almost cancelled us?” And they said, “Yeah! You didn’t see the article you guys published on your site? It incensed our CEO.”
For a couple of decades now, if you’re a long-term Motley Fool or fool.com follower, you know that we write a lot of articles. Every day in the markets, we try to cover the movers and shakers, the stocks up and the stocks down, as we try to tell the story of global business through the public companies that you and I can invest in. We have a lot of contract writers who write articles on our site about all kinds of different stocks, some of which we’ve picked, some of which we never have. I had never personally picked Aetna.
But, as it turns out, that day before, the very day we flew to Puerto Rico, one of our writers had penned an article with this title: Dial 911, Aetna Needs Help. Again, this is not a viewpoint that I had. I didn’t even know that much about Aetna. It’s not one of my stock picks. But, on our website, the day before we go to speak with the CEO, keynoting at their conference, we wrote, Dial 911, Aetna Needs Help.
So, you can see how that might have upset our sponsor, but we’re happy to say they graciously still had us speak at the conference. I think we did a good job, and I’m pretty confident that Aetna still had a pretty good future, whether it needed help back in 1999 or not.
That’s all a long windup for Five Below. Earlier this year, just a few months ago, one of the things we do at The Motley Fool is, we have an internal university where we have a class of what we call fellows. And with that group of fellows, it’s kind of like a mini business school within The Motley Fool — you have some projects, you work with a team, you learn more and more about business, our business and business at large. And one of the things we’ve always done with our fellows, which we’ve graduated annually or so for some years now, is that we take them on a trip. This one was to Philadelphia, Pennsylvania. We arrived at the headquarters of Five Below. Five Below, very generously making time with its CEO and its team to meet with our fellows. Tom and I were there.
And just as we got ready to proceed over to Five Below’s lovely headquarters in Philadelphia, I noticed that Jeff Fischer, our lead advisor in The Motley Fool Pro team, had previously shorted Five Below. And I began to get a Dial 911, Aetna Needs Help vibe to this. I was giggling a little bit as I pointed out to Tom, unbeknownst to both of us, that our company had previously shorted Five Below. Now, I want to mention, this is a stock that we recommend in Motley Fool Rule Breakers. It’s been a good pick, I’m going to provide numbers in a sec. But, there we are, on our way to their headquarters with a previous short on Five Below, wondering if the CEO knew that or not.
So, here are a few numbers. On April 23rd of 2014, I picked Five Below for Motley Fool Rule Breakers. It was at $38.50. I’m happy to say, today, it’s at $79.46. In fact, as we do this taping, it has just crossed the 100% mark. It’s kind of a historic moment for me to tell the Five Below story on this day, because it’s up 100.3%. That’s 41% ahead of the market. That’s over that four-year period, so it’s been an excellent four-year stock.
But, just a few months after I picked it in Motley Fool Rule Breakers, my good friend Jeff Fischer shorted it in July of 2014. I was worried. I didn’t know if he still had that short in, and if so, it wasn’t good advice for our members.
And as I finally got to the headquarters of Five Below, I had looked it up, and as it turns out, Jeff and his co-associate Bryan Hinmon, The Motley Fool Pro team had shut down that short in December of 2015. That was held for 17 months. Amazingly, they shorted at $36 and it went down to $28.
What I love about this story is, not only was there no downside — and, I don’t think the Five Below CEO knew this or ever mentioned it at all. But, simultaneously, two Motley Fool services had different positions on Five Below. I and my team have a four-year hold that’s still in, and we’ve more than doubled our money now, which is really exciting. Meanwhile, Motley Fool Pro rode a $36 stock down to $28 and covered its short from July ’14 to December ’15. I think that’s just a delightful story.
For me, the lesson is, you don’t have to be all long or all short. You don’t have to be single-minded in terms of how you view a stock. In that particular case, as I discovered that morning in Philadelphia, Pennsylvania, as I nervously got off the bus and stepped into headquarters, as it turns out, both of our Motley Fool services had profited by taking opposite tacks over different time frames.
Sometimes, as a long, never forget that your best friend is the short. Anybody who’s short a stock has to buy that stock back over time, which means they’ll be a net buyer going forward. So, in a sense, Motley Fool Pro helped us out. And perhaps we helped them out, as well. I’m not sure. But, if you’re a member of either of those services, I think you have different views of Five Below, but you did well either way.
One thing’s for sure. Five Below, ticker FIVE, has been a fine company, in part, I think, because it’s pretty Amazon – proof. Amazon isn’t really in the business of sending off $2-3 items, where you’d have to pay for shipping or they’d have to pay it to make it free for you. Somebody has to pay the shipping. And when you’re shipping $2-4 items, it’s not that efficient. That’s why I really like and have liked Five Below as a company. And, having got to know them and their CEO and team, a couple of months ago, a little bit better, I feel really good about FIVE going forward.
Alright, that was stock story No. 5, Dial 911, Aetna Needs Help. And, as I mentioned, we’re going to close — I think I’ve saved the best for last. We have celebrated author Dan Pink, a good friend of The Fool, here with his stock story. Since I already know this one, because he told it at FoolFest last week, I’m pretty sure I can tell you, he’s going to top us all with what you’re about to hear. Dan, take it away!
Dan Pink: Once upon a time, in the middle of the first decade of this century, I wrote a book called A Whole New Mind. It had an orange cover. One of the ideas in the book, which I’m not sure is totally right anymore, was that, I had this argument that the MFA, the Masters of Fine Art, is the new MBA. The MFA is the new MBA, because a lot of MBA skills can be outsourced and automated. The skills of an MFA, the Masters of Fine Art, are harder to outsource and harder to automate, therefore they would be more valuable. The MFA is the new MBA.
That idea got me invited to a lot of art and design schools, [laughs] because everybody loves confirming their own biases. In the course of this, I went to the Rhode Island School of Design, one of the premiere art and design colleges in America. It’s an incredible institution. There, I met a young man. I’m not going to tell you his name. I’m just going to tell you, I met a young man who came up to me after the speech and talked to me a little bit, and then sent me an email afterwards and asked me some questions. And I responded to the email. He seemed like a good dude. I liked this guy, I thought he was super creative.
Maybe a year later, two years later, he emailed me. I thought he was just a super creative guy. He said, “I have this crazy idea for a business,” and he told me about the business, and I thought it was absurd, it was just an absurd idea.
But, as a way to raise money for it, because he was a pretty skilled designer and a very creative guy, he decided — this is now 2008 — to do a set of limited edition cereal boxes. This is going to sound weird. Limited edition cereal boxes, where he and some of his design colleagues created these two boxes of cereal — literally, it had cereal in it. One brand was called Obama O’s. Hope in every box. And the other one was called Cap’n McCain’s. And they said, “To raise a little bit of money, we’re going to do these limited edition cereal boxes.”
They’re actually works of art in a limited edition, and each cereal box had stamped on it, No. 4 of 500, No. 6 of 500, or whatever. And I thought, “That’s pretty good!” I actually really enjoy fine art, particularly conceptual art. Like, I like going to the Hirshhorn, and I like the more outré, forgive my French, kinds of art, and these kinds of wacky things. And they were selling it, and I like this guy, and I said, “This guy could be a famous artist one day. It’d be really cool if this guy were, like, the next Andy Warhol or Jeff Koons or something like that, and I had one of his early pieces.”
So, for a tiny little amount — literally, I think they were $75 a piece — I bought these things. And I said to this young man, “This is totally cool. I mean, it’s cool that you’re raising money for this business, but I’m buying these things because I think you could probably be a well-known artist, and this is my investment, but I would never put a cent into your company.”
So, I have in my office — I think David might have seen these — these cereal boxes. They look really nice. They’re super cool-looking. Obama O’s and Cap’n McCain. And on the top of it, it says, “A product of AirBed and Breakfast.”
So. You know that old line, the country song, it’s like, “You got the coal mine and I got the shaft?” I didn’t want to say his name to tip it, but it’s a fellow named Joe Gebbia, who is now, I don’t know, what, the 41st richest person in the world. So, Joe got the billion-dollar company that’s going to go public next year, but I have my cereal, man!
Gardner: Alright. Of all six companies that we covered this week, that’s the only one that you couldn’t have invested in that remains a private company. If it ever does come public, we’ll certainly take a hard look at it for Stock Advisor or Rule Breakers. Perhaps one day, Airbnb will be in the Supernova universe. But as of now, it’s un-investible. Although, Dan, it sounds to me like he did have a shot that he ended up not taking. Well, thank you again to Dan Pink!
As we prepare to close, one reflection back on some of the stories we heard, I heard that theme, that lesson, of trying to get the big things right. And I really appreciated how a few of my storytellers underlined that. I think that, even though I didn’t come in with that on my mind, that’s maybe the takeaway lesson for this week.
A lot of times, especially if you’re a Rule Breaker investor, you have more of a venture capital mentality, you want to ask yourself, what’s the big stuff of our time? What are the big total addressable markets and the interesting technologies? You don’t have to get all the details right. Sometimes, you don’t even have to get the timing right. But, if you get some of those bigger-picture things right, I think we heard loud and clear a few different times this week, that can be really lucrative. So, there’s a thought for you.
Two notes to close. First of all, a reminder. Mister Rogers, Fred Rogers, his brush with The Motley Fool, is our weekend extra, coming to you for Rule Breaker Investing this weekend. I also recommend, again, maybe you want to go see that documentary, I hope it’s in a local theater, Won’t You Be My Neighbor, this weekend. I’m going to try to get over there. Big Fred Rogers fan. That’s note No. 1.
Note No. 2 is that next week, as I mentioned earlier, is the Market Cap Game Show, latest episode with Matt Argersinger. And, if you’re a Dan Pink fan, you should know that the following weekend, we’re going to run that entire interview with Dan for your pleasure. In the meantime, Fool on!
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, so don’t buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brendan Mathews owns shares of Amazon, Facebook, and Salesforce.com. David Gardner owns shares of Amazon, Facebook, Walt Disney, and Zillow Group (A shares). Karl Thiel owns shares of Facebook and Nvidia. Matthew Argersinger owns shares of Amazon, Twitter, Walt Disney, and Zillow Group (A shares) and has the following options: short September 2018 $55 puts on Axon Enterprise and long January 2019 $15 calls on Twitter. Rick Munarriz owns shares of Axon Enterprise, Twitter, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Axon Enterprise, Facebook, Nvidia, Salesforce.com, Twitter, Walt Disney, and Zillow Group (A shares). The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.