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Checking Up on 5 Stocks That Were Riding the Bull Market, 2 Years Later

Motley Fool Staff, The Motley Fool

It's been four years since Motley Fool co-founder David Gardner began hosting Rule Breaker Investing so he could share his ideas on investing, finances, life, and much more with you. And during those years, one of the great constants of the podcast has been the five-stock sampler. Every 10 weeks or so, he has picked a new set of five stocks from among those that he actively recommends and shared it with his listeners. But he doesn't just recommend and forget; he keeps careful score, annually measuring his mini-portfolios against the yardstick of the S&P 500.

Turns out, though, that once you've been doing that for four years, the anniversaries start to overlap. So for this episode, he's reviewing the results of not one, not two, but three such samplers.

In this segment, he's harkening back just over two years to a time when the bear seemed to be hibernating. For his five stocks riding the bull market, Gardner picked smaller companies that were on fire at the time: iRobot (NASDAQ: IRBT), Pegasystems (NASDAQ: PEGA), Impinj (NASDAQ: PI), Wayfair (NYSE: W), and Zillow (NASDAQ: Z).

Last summer, this was the sampler that broke his long winning streak. But time passes -- has it since then joined the ranks of the outperformers, beating the growth of the S&P? Today, Gardner will tell us. He's joined for his review by senior analyst Rick Munarriz, who will talk about a couple of noteworthy developments at each of these companies and one thing to watch for in their futures.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on July 3, 2019.

David Gardner: Time passes from July of 2016.

And it became 2017. We flipped the calendar year. But we're right back this time. In this case, it was June 21st, 2017. Five Stocks Riding the Bull Market. Two years ago, this June, the market had been great. We all remember how bad the stock market was in 2008 and 2009. And I'm not sure pundits expected a recovery in 2010. I can't quite remember. But I'm pretty sure nobody was predicting how great the stock market would be in the succeeding seven years. By the time we get, Rick Munarriz, to the summer of 2017, stocks were riding high. Am I right?

Rick Munarriz: Yes, definitely. It was a good time for at least these stocks that you see at the time. But, yes, definitely. The market was definitely holding up nicely.

Gardner: I want to welcome, that's the voice of longtime Motley Fool Rule Breakers analyst Rick Munarriz. One of my favorite Fools because even though we've worked together, Rick, on Motley Fool Rule Breakers since its inception in August of 2004, you and I first met in a Rainforest Cafe -- remember that brand? -- back in Orlando somewhere in the mid-1990s.

Munarriz: Yes, yes, we met there. It was the grand opening of the very first Rainforest Cafe in Disney World. Now there's like three between the Disneyland and Disney World parks. But yes.

Gardner: Wow! So it kept growing, but the stock didn't seem to keep up with that growth. At least I remember it as one of my poorer stock selections.

Munarriz: Yeah, didn't do well. Got bought out by Landry's Restaurants, the seafood chain, and we've pretty much all forgotten about it now that it's all privately held.

Gardner: Well, all happy memories from the very first day I met you, Rick. Love you. Thank you much for all the great work that you've done. We've had much fun together. We've had many great winners and some great losers, too. We'll have a little bit of both on this list. The five stocks riding the bull market. Now, what I remember saying about these is, we're going to intentionally pick stocks that are on fire. These are all stocks -- I'm pretty sure; I haven't gone back personally and listened to that podcast from two years ago, but I'm pretty sure these were all at 52-week highs, probably all at all-time highs. I know they're all sub-$10 billion companies. So, we were going for smaller companies that were on fire. I'm not sure whether I was being cocky and a little too cocksure or not, but I said, we're going to show that you can pick stocks that are on fire, let a few years pass, and you're going to beat the market. So, we're going to see whether or not five stocks riding the bull market from June 21st, 2017, have been as a group a market beater or not.

Now, the first one up -- and Rick, this confuses me, because I usually try to do these alphabetical by company name, but for whatever reason, the first one was Zillow. So let's start with Zillow, ticker Z. Zillow Group. Two years ago, it was at $48.48 at market close on June 21st. Today, it's at $46.39, which means the stock is down 4.3%. Rick, the stock market since the summer of 2017, since the day we're talking about, was up 20.6%. So, this stock starts out as a minus 25%.

Rick, what are two things that have happened to Zillow and Zillow shareholders over the last two years?

Munarriz: Obviously, the biggest as far as the model change for Zillow is that they've now got into the home-flipping business. They started angling that way two years ago. But now they're going all in with what they call Zillow Offers. You can sell your house to Zillow in a growing number of cities. If you remember those old "We Sell Ugly Houses" billboards, they are that billboard, and they'll sell your pretty houses, too. They'll buy your ugly houses, buy your pretty houses. They sold 414 homes in the first quarter of 2019. Generated $128 million in revenue doing that. It is moving the needle in revenue. The only reason that revenue grew 51% in the first quarter was because of this home-flipping business. It's the lion's share of its growth.

But on the bottom line, it's just getting off the ground. Basically, its operating costs are matching the prices that it's selling it for. So it's buying houses, it's fixing them up, it's reselling them, and it obviously has a lot of outlets to sell homes. But it's basically breaking even on that right now at this small scale. And it is taking a loss of about $4,000 on each home because each house does have to pay an interest expense while it's holding the houses, as any home flipper knows. But that's clearly one big development for Zillow.

Gardner: Yeah, I'm pretty sure we were not talking about that two years ago. Not contemplating that Zillow would enter as a buyer within the business that it had primarily been receiving advertising dollars from people who were realtors who wanted to advertise on Zillow. That still happens, and that's still the bulk of this business, Rick. But that is a huge change for Zillow. I hope it works. We're going to see.

What's a second development of note in the last two years?

Munarriz: The second development is that the business that we fell in love with years ago, and you were talking about, two years ago, is obviously the Zillow online platform, the real estate agents that get to connect, people get the check what their houses are worth, they get to make connections, they get to daydream where they want to live. That business is actually slowing down. Online revenue rose just 6% in the first quarter. Premiere agent revenue, which was the big driver, the big, consistent source, even when the housing market was down, premier agent revenue was still growing because agents wanted to get noticed, they wanted to get leads even during soft housing markets. That segment only rose 2% over the past year. There has been a slowdown in the online business.

Gardner: All right. So, all of that taken together means that the stock is slightly lower than it was two years ago, which is disappointing because the market's up more than 20% over the same time. Rick, what are we watching going forward here for Zillow?

Munarriz: We've always been watching the housing market for Zillow because it matters. But now that it has so much weight -- not only is it a real estate market proxy, it actually holds real estate for several months sometimes. So it is now more susceptible to any housing slowdown. If you're a shareholder, you could have ignored it in the past because it had been an all-weather housing play. But now it's basically based on what housing prices do because it's buying prices at one time, it's holding costs as it pays interest, it's fixing them up, and if the market housing market goes south on us, Zillow is going to take a bigger hit on these sales.

Gardner: As with Alphabet in that earlier stock sampler with Karl, this is one of those bigger, better-known companies. Lots of developments. We didn't even talk about the change in CEO which happened at Zillow within the last two years. Rich Barton, now back as CEO. Very promising development for the company. We'll see. Do you own the stock personally? I own the stock.

Munarriz: I do not own it. I've owned it vicariously through The Motley Fool for so many years, but no, I do not own it.

Gardner: Sure, because you're the one who brought this to Rule Breakers, Rick. Your byline's on it from years ago. Even though it's been a disappointment these last two years, it has been a great stock pick for Motley Fool Rule Breakers members. I have a lot of hope because this is a three-year game we're playing. We're only two years in. Zillow's just a few percentage points behind the markets. It'll be fascinating to see what happens over the next 12 months for this company.

Well, let's keep moving. The next ticker -- did I ... yes, I think I did it in reverse alphabetical order. I decided A to Z is boring, so let's do Z to A with this particular stock list. It was by ticker. So, from Z, we next proceed to the letter W, another single-letter-ticker-symbol company. Experienced investors, longtime Rule Breakers, will probably recognize the ticker symbol W for Wayfair, the online furniture retailer.

Rick, Wayfair, two years ago this month, was at about $75 a share. Today, it's at $146. Makes me and a lot of Rule Breakers really happy. Big smile The stock is up 94%. The market up 21%. So we're going to give ourselves a plus 73%, which really wipes out that minus 25% that Zillow started us with. Rick, two developments for Wayfair.

Munarriz: The first development, it's more of a trend development, is that people are getting more comfortable with buying furniture online. Even back to the old Amazon days two decades plus ago, when it was, do I trust buying something online, at the time was mostly media like some CDs and VHS and DVDs. Small media, albums and CDs. But now we get to the point where people are saying, "I don't mind a big-ticket purchase. I don't mind buying a sofa, or something like a house fixture. I don't know how well it's going to look at my house. I'm willing to spend three, four digits on an online purchase." And Wayfair's gotten to do it. There were 16.4 million active customers at the end of March, which is 39% more than they had a year ago.

Gardner: Wow! All right, that's No. 1 for Wayfair. What's development No. 2?

Munarriz: One development is what hasn't developed, and that is buying furniture is still a big-ticket, infrequent purchase. Even though the customer base has grown by 39%, that actually matches the revenue in its last quarter, up 39%. The order size, the order frequency, it hasn't intensified. This isn't like binge viewing, or let's say a meal delivery service, where you get hooked on it, like an Uber or something like that. You're not going to buy a sofa every month just because you love Wayfair. You're definitely just keeping things in check with Wayfair's growth. It's limited to, its audience growth right now is dictating its revenue.

Gardner: That does make sense. It would be a stronger company and even better stock -- again, having almost doubled in the last two years -- if not only were we buying from it regularly, but we were increasing our amount of business we're doing. But yeah, how many different beds or sofas do we really need, Rick? So, there isn't that ramp-up in terms of frequency from even big fans of Wayfair, and there are a lot out there.

All right, how about one thing to watch going forward for ticker symbol W?

Munarriz: I want to talk about Wayfair walkout. This is not going to be a political point. I just want to point out that we're recording this June 28th, Friday. Two days earlier, on Wednesday, hundreds of Wayfair employees walked out because Wayfair sold $200,000 of bedroom furniture to a Texas detention facility for migrant children. There was an issue where the employees told the CEO, "Hey, stop selling to the contractor that's doing this." The CEO said, "I can't control who buys our stuff." So they walked out in protest. Again, this isn't a matter of taking one side or the other. That has nothing to do with it. But at least short-term, you'll want to see how this situation plays out from a public relations standpoint. You don't Wayfair's reputation to take a hit. If you look up Wayfair walkout, you're seeing people basically blasting Wayfair, like, "I won't buy from you again." Normally, all these things pass over time. But it's something that you should definitely watch in the near term to make sure that Wayfair doesn't lose its great standing that it has right now with consumers.

Gardner: All right, really good point. I appreciate you mentioning that. I hope when we review this for one final time a year from today, that looks like something way back in the rearview mirror. But one never knows. It's worth noticing. I will say, like a lot of our best Rule Breakers, companies that are doing important things in the world and are growing and are being noticed tend to be the ones that get this kind of extra scrutiny. Whether it's something much bigger like Facebook, but even something smaller, but a leader within what it does, people give it extra scrutiny, and they expect more from that company, even when it can't fully control who's buying its product, it ends up in the sights of our popular media. Thank you for pointing that out, Rick. Again, we're grateful for Wayfair overall. A big-time winner over the last two years.

That brings us to stock No. 3. Here's where, OK, sure, Heather, play a little bit of sad music.

Here's where, right after our best performer, we get our worst performer, which kind of like last stock sampler, basically wipes out the gains of our best performers. Stock No. 3, ticker PI. This company is Impinj, not even spelled properly. Maybe that was a dark sign I should have noticed two years ago. Impinj, two years ago, was about $54.50 at market close on June 21st. Today, $28 and change. We're going to call that minus 47.6% against the market's plus 20.6%. That's a swing of minus 68% in the loss column.

Rick, two things happening for Impinj and its shareholders?

Munarriz: Obviously, the biggest reason for the stock's setback is that mortality has set in. Revenue for 2016, which was the last full year before the podcast from two years ago, two summers ago, was up 43%. Then that slowed down to 11% in 2017. And it was a decline of 2% in 2018. Revenue turned negative at the tail end of 2017. Because of that, the fear with the RFID tags was always that it would become a heavily commoditized offering. That's pretty much what started to happen. The platform Impinj wasn't enough at that point.

Gardner: Yeah. Radio frequency identification, RFID. This technology where we put little tags on things. It might be a box that's being shipped, or it might be all of the chairs that you have at a large company. Anytime you want to put a little ID on something, those are the RFID tags. They were always commoditized. They were always pennies cheap. But Impinj, and part of the promise of the stock when I recommend it several years ago, disappointingly for Motley Fool Rule Breakers, was that it gave managers access to the data, and a better portal to see all of your assets out there, all of your RFID tags. Unfortunately, this company, which was growing like wildfire as I picked it as one of the five stocks riding the bull market two years ago this month, Rick, unfortunately, when all of a sudden, sales growth doesn't just slow, it actually reverses, and the company has a sales decline, that's going to hurt most of our upstart Rule Breakers. This stock, cut in half over the last year.

All right, that wasn't a great development. Rick, the second development, is this a better development? Or is this another not-so-great development?

Munarriz: This will turn your frown upside down, and get you happy again with Impinj. It's all about the starting line here. The stock has actually almost doubled far in 2019. I know it's lost almost half its value in the past few years, but it lost almost three-quarters of its value at the start of 2019. And basically, revenue has bounced around. Its strongest quarter in two years happened in the first quarter of this year. We're at back-to-back quarters of double-digit percentage growth. Obviously, the company is starting to get things back on track. The only difference here is that it came off the double-digit declines from a year earlier, so we're pretty much 2% to 4% higher than were two years ago as far as revenue growth. So the company's starting to claw its way back now.

Gardner: All right, yeah. A remarkable move this year. For any Rule Breakers members who bought Impinj for some reason, ticker PI, earlier this year, you are really happy. Rick, what's one thing to watch going forward?

Munarriz: Obviously, the challenge when you have sandbag growth from a year earlier, which is exactly what's happening with Impinj right now, and you've seen growth north of 30% in this latest quarter, you're thinking, "Wow, this is so sustainable," will it be sustainable a year from now when you're comparing against the 30% plus growth from a year earlier? I think that's what you need to watch here. See if the momentum can continue, if revenue will keep improving year over year, when the comparisons will get more challenging starting later this year.

Gardner: All right, thank you, Rick. That's three of our five stocks. Now, quickly, to recount here: Zillow, a minus 25%; Wayfair, a plus 73%; but Impinj, a minus 68%. Those who are quick at math will recognize that we're minus 30% overall as we hit the final two stocks. Can we get some performance here to make "Five Stocks Riding the Bull Market" a winner?

Stock No. 4, the ticker symbol is PEGA. The company is Pegasystems, the longtime but rather sleepy AI-focused company in a world where AI seems to be heating up and increasingly interesting to us all. Alan Trefler, the CEO and founder, was doing AI years ago when it wasn't so cool. Rick, I picked this stock on this podcast two years ago, as mentioned, is one of the five stocks riding the bull market, at $60. Today, it's about $71 and change. So we're giving ourselves a plus 19%. The bad news, rounding the market up, the market's up 21%. So, Pegasystems is a minus 2%. It doesn't help, but basically flat, a market performer.

Rick Munarriz, give us two developments for Pegasystems.

Munarriz: I could give you the two, one after the other, because they're sort of related in this case. The first one is that Pegasystems, they're transitioning to a cloud-based subscription sales model. Obviously, we have a lot of cloud-based companies --

Gardner: Yeah, I've heard of that concept before. Software-as-a-service, you're saying? Clouded?

Munarriz: Yes, yes, yes. It may ring a bell. But basically, with Pegasystems moving away from the old one-time legacy, you buy the software once, and then you upgrade, like the old Microsoft, with Microsoft Office versus 365, where everything is like, "Subscribe! We'll charge you monthly or annually," but they'll keep you tied to the subscription, and upgrades come with it. Pegasystems is moving to this cloud-based subscription sales model. That is definitely a big shift in how it's doing its business.

That leads to the second development in this case, which is that the shift right now is impacting its revenue. If you look at the last quarter, and you saw a 10% decline in revenue in the first quarter of 2019, you would be freaking out, thinking, "Oh, no, the company's going the wrong way." And the company's projecting flat growth for all of 2019. But that's not the case, because actual sales, how you record sales with a subscription model, is different than the one-time sale that you're selling the software and that's a big-ticket item. So, annual contract value, which is the metric that Pegasystems and a lot of these companies prefer to use, is actually up 20%. So you can ignore revenue for now. The more important thing is its backlog of business through the annual contract value, which is growing nicely for Pegasystems.

Gardner: Okay. Again, the stock has performed right about where the market's performed over the last couple of years. Rick, I'm hoping that your thing to look for going forward might be a bullish sign, might bring this stock up and bring this five-stock sampler up. But what should we look at for Pegasystems over the next year?

Munarriz: I think the key to Pegasystems right now is the Pega Cloud, which is the name of its cloud-based subscription program. That's basically the future of Pegasystems. It's obvious. A year ago, when it first started out, 50% of its new client commitments were fine with the cloud. The other half were saying, "No, we want the old way." Now it's up to 70%. As more of its clients adapt to the cloud, there'll be a lot of cost savings, the software itself will get more efficient, and we'll give them a predictable revenue stream, which is really what investors enjoy with some of these companies that are based on these enterprise software subscription programs, where it is steady revenue. That's where we're heading for, just as long as it takes off.

Gardner: Wow. So, yeah, Pega Cloud. I guess that makes sense as a brand. I'm hoping this works out like another Stock Advisor pick -- Adobe,back in the day, was not part of the cloud. Adobe as a traditional company, longer standing, like Pegasystems, made a conversion to the cloud, and the rest is history. It's been a great outperformer. So, I'm hoping this is a really good sign for Pegasystems. I'm counting on it being a good sign. Let's hope Pegasystems rides higher here, riding the bull market that we hope materializes over the next year.

Okay, to our final fifth stock now. We're 32%, summed up, down with these four stocks. Will iRobot, ticker symbol IRBT, be the rainmaker, will that be the Hail Mary pass, for this five-stock sampler? Well, iRobot two years ago this month was at $101 a share. Today it is at...$91 and some a share. Rick, unfortunately, this stock's down about 9%. We're going to round it to a minus 30% against the market.

I'll do the final numbers in a sec, but Rick, iRobot, a company that you and I have followed for a long time. Two developments of note here the last two years?

Munarriz: The biggest development -- well, not the biggest, but a major development; I'm not going to judge which is the bigger of the two or three or the four or whatever -- I think is tariff concerns. Like many companies that make actual hardware products, actual products -- in this case, iRobot makes the Roomba vacuum cleaners, the Bravos and other items, other cleaners, everything -- some of these products are manufactured overseas, particularly in China. Last year, they paid $8 million, once the tariff war started, to get the Roombas back into the U.S. A small sum for iRobot, but it did shift the company's thinking earlier this year to move some of its production away from China. That's clearly a development that'll affect -- it may increase costs as far as production costs, and in general, setting stuff up somewhere else. But over the long haul, it'll make it less prone to any tariff fisticuffs that may happen.

Gardner: Well, I don't think anybody's rooting for the trade wars to last particularly long. It's going to affect iRobot if it does further. Rick, what is your second development of note for this company?

Munarriz: This development actually started before your pick, so we already knew this was going to happen. It happened back in 2016, early 2016. iRobot sold off their military robotics division, which used to be a big part of the story years ago when we first initially recommended this stock. Now it's basically all robotic arms around their consumer products. There's a lot riding on this. And even though it's three years since they sold it off and two years since we mentioned it on the podcast, it definitely hasn't veered from this strategy. It's still consumer centric. Basically, wants to clean your house, clean your gutters, clean everything it can, clean your pools, in a way that does not have to worry right now with going out and basically slipping out military bombs, defense areas.

Gardner: Yeah. So, again, the stock is 30% behind the market over these last two years. Rick going forward, what's something to watch? Maybe we can get back to even in the next year. We'll see.

Munarriz: This could be huge or could be a nonevent, but clearly something to watch is the Terra lawn mower. You're thinking, "I would want a robot boy mowing my lawn. Who wouldn't?" And we've been talking about this, dreaming about this, for years. It's finally happening. It's going to be released in Germany. iRobot will be releasing this in Germany later this year, and in beta in the U.S. So, maybe not by this year, but by next year, maybe by the third year, when we get to that point, your lawn will be mowed by a robot. Like Rosie the Robot, except it can actually trim a hedge and stuff like that. I think this is something that could be a very big product, especially with a lot of people wanting to reclaim their time. This is clearly a product that's been in demand for a while. It could be a game changer if it works, and if it works efficiently.

Gardner: All right. What an interesting group of stocks. Dynamic companies. Zillow changing its business model, Wayfair, a huge winner, Impinj, a huge comeback this year from a really dark place last year, the Pega Cloud, and iRobot and its Terra lawnmower. But take it all in all, this group of stocks averages a gain, so that's not bad. We're up 10.2% here. The problem is, the market's up 20.6% We're going to round that to a minus 10% deficit. This, ladies, gentlemen, Fools everywhere, this is the single worst five-stock sampler I have ever picked -- so far, anyway -- on Rule Breaker Investing. Rick, I'm really sorry that you had to present that to us. Thanks for slogging through with me.

Munarriz: Don't shoot the messenger, David.

Gardner: I'm definitely not going to shoot the messenger. I'm the one who deserves to be shot, although don't shoot me yet, because we have another year. And look how dynamic some of these stocks are. Hope springs eternal, not just in the baseball world at this time of year in summer, but hope springs eternal always for patient investors and Fools looking for some of the game changers and Rule Breakers out there. We'll see if any one of these stocks can rise up and bring all the rest along with it, or what happens. I can't wait to review this a year from now. But, yeah, calling a spade a spade, this is a significant loser, this five-stock sampler. Rick Munarriz, thank you again.

Munarriz: Thank you!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Facebook, Impinj, iRobot, Walt Disney, and Zillow Group (C shares). Rick Munarriz owns shares of Alphabet (C shares) and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, iRobot, Microsoft, Walt Disney, Wayfair, and Zillow Group (C shares). The Motley Fool recommends Adobe Systems, Impinj, Pegasystems, and Uber Technologies. The Motley Fool has a disclosure policy.