When Motley Fool co-founder David Gardner recommends stocks on the Rule Breaker Investing podcast, you can be sure of one thing: He’ll check back in regularly to tell you how they are doing compared to the market. Win or lose, he keeps score, and owns up to the results.
About two years ago, the market was in a bit of a trough, so our host offered up five stocks to buy to feed the bear, with a focus on lower-risk but smaller companies. And while stocks have rebounded nicely since then, Wall Street’s back in correction mode, which makes it an interesting moment to tally up the score on this mini-portfolio of Carter’s (NYSE: CRI) , IPG Photonics (NASDAQ: IPGP) , Ellie Mae (NYSE: ELLI) , Planet Fitness (NYSE: PLNT) , and MercadoLibre (NASDAQ: MELI) .
A full transcript follows the video.
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This video was recorded on Feb. 7, 2018.
David Gardner: Without further ado, let’s strap ourselves into the Wayback Machine. Two years ago, the podcast was published Feb. 10, 2016. At the time — I listened again to it — at the time, I was saying we’re six months into a bear market, which was probably news to a lot of people and funny to look back on because, from August 2015 to February 2016, my portfolio had dropped 25%. I don’t know about yours.
But that’s a really bad six months, so I always smile when I hear people say we haven’t had a bear market. There’s a bull market that’s been going for eight or nine years. I can assure you, my fellow Fools, you were with me listening to my podcast back then, some of you. You’ll remember that my portfolio, maybe yours, had lost one-quarter of its value in six months. Stocks like Apple , Amazon , and Disney — all three of those companies had lost more than 20% of their value in the previous three months. And it was that very week, two years ago, that I picked five stocks.
In fact, I was using this phrase. I was saying, “So, let’s pick stocks right into the teeth of this bear market.” And there were two traits that we were focused on with the five stocks. The first was stocks with low risk ratings. Lower-risk companies. That always feels good going into a bear market — to have lower-risk companies in your portfolio. All of these companies had risk ratings of five or six.
And if you’re a longtime listener, you know that we do risk ratings. I’ve done a series, here in this podcast, about our Motley Fool risk ratings, and so I was intentionally picking five and six. That’s a very low number on our zero to 25 point scale — where higher is riskier — so five and six are among the safest stocks that I think you can find.
I should mention that our definition of risk — which isn’t always a traditional one — our definition of risk is the chance that if you hold this company for a significant amount of time, that you would lose a significant amount of your capital. That’s how I think of risk. That’s the risk I’m trying to avoid, so when I’m picking stocks that are at a five or six, we’re saying there’s a very low-risk chance of that.
The second trait, in addition to low risk, that we pick — and it kind of fights against the first trait — is that I was looking at small companies. All of these companies had market caps from $1 billion-$5 billion. Now, usually bigger companies are safer. They’re The Unsinkable Molly Brown s of the investment world. Companies like, let’s say, Apple, Amazon, and Disney, which I just mentioned to you, had dropped 20% the previous three months before I did that podcast two years ago. Usually, those companies are safer bets.
To pick lower-risk companies that are small — that’s a very interesting set. And what I was saying two years ago is that since the stock market had performed so badly, often these kinds of companies can snap back faster and better from smaller market caps than the big dogs. So those were the two traits that I was picking toward, and now we’re going to review, two years later, how they’ve done.
I should first mention that I did review their performance last year, so one year ago today, on this podcast, I went over it and they were doing really well. In fact, their average performance was up 51% in that year following versus the market, which had also been very strong, up 25%. So pretty awesome. Those five stocks up 51%, on average, vs. the market’s 25%, so we give ourselves a plus 26 in the win column for the average market-beating power of those stocks. Let’s fast forward one more year and see how things are going.
Stock No. 1. The first one up is Carter’s. The ticker symbol is CRI. Carter’s is the kids’ apparel brand, and when I reviewed the five stocks last year, this is the only one that was down, so far. I’m happy to say Carter’s has snapped back in the past year. Two years ago, I picked it at $84. Today it’s at $116. That’s even after a really bad market week, so Carter’s is up 38%.
That’s pretty good news. I’m glad that Carter’s has come back. At the time, I was playing up its timeless brand, the way that you can find these clothes offline and online, domestically and internationally. I was playing up, even though it’s a small company, the timelessness of its business and brand.
The good news is, it’s up 38%. The bad news is, the market now, over the two years, is up 42%, so after another good market year, Carter’s is actually behind the market. We have to put one in the loss column here. Carter’s up 38%, the S&P 500 up 42%. That’s a minus 4%.
Stock No. 2. Stock No. 2 is IPG Photonics. The ticker symbol is IPGP. Two years ago, the world leader in fiber lasers, which is what IPG Photonics is with its Russian-born, Russian-American founder, Valentin Gapontsev. Two years ago, the stock was at $80. Really happy to report to you today the stock, even after a really bad week, is at $235. So this stock is up 194%.
A pretty good two years for my second-favorite stock on this list. If it’s up 194%, since we talked about on this podcast two years ago, with the market up 42% in the meantime, we can give ourselves a plus 152%. We’ve taken a strong lead now over the market with this group. We’re at a plus 148% if you’re keeping score with me at home.
At the time, I was saying that what I liked about IPG — and I still do — is it’s a stellar, long-term performer. It has a strong balance sheet. And I did something when we first recommended it in Motley Fool Rule Breakers about 10 years ago. I did something I rarely do, which is that I picked it, and then it dropped, and then we rerecommended it and bought some more.
Any longtime Rule Breaker knows we tend not to add to our losers. However, when you do have a company with an excellent past, which IPG had at the time, and a strong balance sheet, it’s OK, sometimes, to break our rules. We’re Rule Breakers, after all, aren’t we? It’s OK, sometimes, to break our rules and I’m darn glad that we did with IPG Photonics. It has been a monster winner for Rule Breakers members, lo, these past 10 years. In fact, from that lower position when we readded it, it’s now a 17-bagger.
Stock No. 3. Let’s go next to stock No. 3. Stock No. 3 is Ellie Mae. The ticker symbol is ELLI. By the way, all five of these companies remain active recommendations in either Motley Fool Stock Advisor or Rule Breakers . If you’re a Supernova — if you’re a Motley Fool Supernova member — you’ll recognize them all as members of our Supernova universe, so they continue to be here years later.
Ellie Mae two years ago was at $62. This is the company that, through its Encompass platform, basically serves the mortgage industry. Mortgage originators. And in addition to being a leader at what it does, it took its whole business up into the cloud a few years ago, which was really smart. Good thinking ahead on their part. It’s also a subscription business — my favorite type of business model — where people reup from one year to the next if they’re happy with you.
Ellie Mae I’m pretty happy with. The stock — $62 two years ago. Today, $87. That’s a nice 40% gain, but I can’t be terribly happy with it, because I think you already know the market is up 42% over the last two years, so Ellie Mae is slightly losing to the market. That’s a minus 2%. That brings our overall return number of plus 148% down to plus 146%. Keep up the good work, Ellie Mae! I trust we will beat the market with you over the next few years.
Stock No. 4. All right, Stock No. 4. “No Lunks.” That’s the phrase that Planet Fitness has used a lot in order to democratize working out. Now, I don’t know that that’s an industry that needed to be, in my words “democratized,” but if you think about something like Gold’s Gym or those more intense gym brands and types of people who go to gyms, Planet Fitness is trying to be the gym for the rest of us.
It’s certainly been a good stock. Two years ago, it was at $13 as I picked it on this podcast. Today, it’s at $31, so take the numbers one, three and just transpose them — and you get where Planet Fitness is today. That’s a gain of 138%, so that’s been a really good stock. In fact, that’s 96% ahead of the market, which brings us up to a plus 242% — a pretty staggeringly great total for these four stocks. Thank you, Planet Fitness!
You know, I love democratizing forces in the markets in business. Even something like Netflix I think of in the same vein. Just think about how cheap Netflix is on a monthly basis, especially when you compare it to the cable bill you might have been paying. If you still are paying, you can see how Netflix has made more and better entertainment more and more affordable, not just domestically, but globally over the last 10 years or so. So democratizing forces. Companies that have a great product and bring it in at a lower price point — these are sometimes some of our best companies.
Stock No. 5. Wait! Did I just say the phrase “best companies?” Best? Good, because we’re coming up on the best stock pick that was made. Yup, we’re saving the best for last. The fifth stock that I presented two years ago was MercadoLibre.
MercadoLibre, the founder-led leader in Latin American e-commerce. One of our longtime Rule Breakers holdings. This has been a monster stock. And these last two years — I hope you were with me two years ago. And I hope, if you didn’t already own MercadoLibre, I hope you bought that day, and if you did, you paid $89 a share. Really happy to say, even after a bad market week, the stock is at $348.5.
So if you’re still with me on my running tally, we were at plus 242% before this one, but I’m happy to say that this stock, on its own, eclipses all of the other four put together. It’s at pus 292%. That’s exactly 250 points over the market.
This is almost embarrassing how good this list of stocks is. I mean, I have to be laughing a little bit as I share this with you, because I’m certainly not this good. I don’t think anybody or anyone is this good, but two years ago, for one week on this podcast, we were this good.
Yup, add ’em up: 242 plus 250 is 292% ahead of the market for these five stocks. That’s an average return of 140% — again, with the market up 42% — so we’re absolutely and utterly destroying the market with our “Five Stocks to Feed the Bear.”
Could there be any better advertisement for the stocks that I’m about to pick for you, the “Next Five Stocks to Feed the Bear,” than what you’ve just heard? I don’t think there could be. I hope it doesn’t sound like bragging, but we just need to let facts speak for themselves. It was an awesome podcast two years ago.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon, Apple, Ellie Mae, IPG Photonics, MercadoLibre, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Apple, Carter’s, Ellie Mae, IPG Photonics, MercadoLibre, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Planet Fitness. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.