Every 10 weeks or so, Rule Breaker Investing podcast host and Motley Fool co-founder David Gardner picks a new set of five stocks he recommends. There's always a time frame, and usually a clever theme, and while some things change, one point stays constant. When the anniversary of each sampler rolls around, he tallies up the share prices, talks a bit about what's moved them, and scores those mini-portfolios against the S&P 500 -- because win or lose, Fools keep honest score.
For this episode, it's time to check in on not one but two such samplers. For this segment, his theme was...well, himself: "Five Stocks I Own That You Should, Too." Because while every stock that appears on these lists is among the 220 or so that he oversees in the Motley Fool Stock Advisor and Motley Fool Rule Breakers portfolios -- aka, the Supernova universe -- not all of those are in his personal portfolio. But Activision Blizzard (NASDAQ: ATVI), Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), Intuitive Surgical (NASDAQ: ISRG), Match Group (NASDAQ: MTCH), and Zillow (NASDAQ: Z) (NASDAQ: ZG) are. So how have they done one year later? Well, that first stock in particular got absolutely clobbered by Fortnite, but these are team efforts. And in keeping with that idea, he's brought in a teammate to help him with his review: senior analyst Jim Mueller.
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 April 17, 2019.
David Gardner: One year ago this week, "Five Stocks I Own That You Should, Too." Now, every one of my five-stock samplers -- and we've done more than a dozen on this podcast over almost four years now -- every one of them has a theme attached to it. This one was pretty straightforward. I own these stocks. I don't own every stock that I pick in Motley Fool Rule Breakers and Motley Fool Stock Advisor. I love them all. I'm accountable for them all. Our members presumably are paying us for our advice with their subscription to buy them. But I don't keep up with all 220-plus of the companies. I only have so much money in my family portfolios that I can allocate. So I thought last year this week, let me put out five stocks that I own and just say, I think you should, too. Jim, you and I are going to tick down this list alphabetically.
The first one, ticker symbol is ATVI. This company is Activision Blizzard. Activision Blizzard was first picked April 18th of last year. Right about this time last year, at $68.69. Jim, I'm really disappointed to lead off with this one because I hate to say it, but the stock has dropped from $68.69 to $45.30 as we tape. That's down, we're going to round it to 43% to the market because, and this is the key with all five-stock samplers, we always compare to the market. As you well know, Jim, that's what we do here at the Fool.
Jim Mueller: Well, that's the default other choice.
Gardner: Absolutely! Because the S&P 500, any of us could have bought that index fund. A lot of the world says just buy that, don't buy individual stocks. Of course, we don't think of that as Foolish. We've done a lot better, and my five-stock samplers I think prove this, by buying stocks individually. But we're always marking against the market.
Now, the market is up 8% from last year. Each of these five stocks we're comparing against a plus eight. A minus 35 doesn't look good at all against a plus eight. We start 43% in the hole, Jim. What has happened to Activision Blizzard?
Mueller: Activision Blizzard and their competitors, Take-Two Interactive and Electronic Arts, EA, are all down since last fall. They all did pretty well in the spring and the summer, and then, along with a lot of the market, they fell down. While most of the market has recovered --
Gardner: Yeah. Q4 was brutal, but Q1 was really nice.
Mueller: Q1 was really nice.
Gardner: To most industries.
Mueller: But not to this industry. The big story here seems to be the rise and popularity of a game called Fortnite, especially its battle royale mode, which has become quite popular and grown like gangbusters. Over 125 million players last summer. I'm sure it's done nothing more than grow since. Worries are that customers are playing that rather than Activision games.
As far as analysts are concerned, in the third and fourth quarter, the company missed on both its revenue estimates and on its earnings estimates. The second miss in Q4 was substantial, almost a 7% miss, a $200 million miss.
Gardner: Right, and this is a company that doesn't have a history really of missing its earnings forecast, for the most part.
Mueller: No. For the most part, it's pretty good. And during that call, the CEO Bobby Kotick said that the company hadn't delivered to the expected performance. They'd done very well financially, set new financial records for the company. But they said, we didn't do as well as we should have. As a result, they're making a lot of changes. Analysts and investors tend not to like uncertainty. For instance, previous CFO Spencer Newman, he was fired for cause and replaced with a former CFO, Dennis Durkin. He came back to once again lead the financial side of the company. They got rid of their deal with Bungie Studio, which made Destiny.
Gardner: Yeah. Destiny was a big title, then Destiny 2. But no longer part of the company.
Mueller: No longer part of this company, unfortunately. They're also laying off a bunch of people and there's been pushback by players of the in-game transactions. So it's a little bit uncertain about how Activision is going to go forward. Like all of this industry, it's a "What have you done for me lately? What's your next big hit?" rather than "How well are you doing now?"
Gardner: Yeah, so it's obviously been very disappointing. A year ago, we're down more than a third from where Activision Blizzard was just one year ago. And yet this has been such a spectacular long-term performer for us. I first picked Activision Blizzard at a split-adjusted $1.61 in 2003. Here we are, 16 years later, riding a 28-bagger, even having lost a third of its value over the last year. We've re-recommended it many times since, including this five-stock sampler a year ago.
I really do love this company and believe in it going forward, Jim. What are your feelings about Activision Blizzard?
Mueller: I like the company. I own shares myself, though I do have a covered call on them. If the call ever is exercised, I'll sell my shares off. I do remember there was this long period after your second or third recommendation where the share price just sat and sat and sat.
Gardner: Yeah. 2009, 2010, 2011, 2012, 2013. It did nothing for like five years while the market was rising.
Mueller: And then, all of a sudden, it shot up. That was triggered by Kotick and a group of investors that he put together buying the shares of the company away from the French company that owned --
Mueller: Yeah, they owned a good part of it. Now, whether that was the reason or not is up for debate. But that was the event where the market finally pushed the shares up. And the market might have gotten a little overenthusiastic.
Gardner: Well, it's a company that has great franchises and really makes a lot of money, not just through one great product but through many. I really do like Activision Blizzard. I still like it. I guess I like it even more right here, a third down. But I don't like it for the performance of this five-stock sampler because we started at minus 43, which is not the way I like to start a five-stock sampler.
Quick trivia, since we're talking baseball, briefly, Jim. Did you know that Bobby Kotick, the CEO of Activision Blizzard, was personally in a very well-known baseball movie from a few years ago?
Mueller: No, I don't.
Gardner: Yes, he played the role of the owner of the Oakland Athletics in the movie Moneyball with Brad Pitt. He's just early on in a scene but that's Kotick, who I think is friends with Michael Lewis or somebody who's making the movie. So the Activision Blizzard CEO makes that cameo appearance in Moneyball.
Mueller: That's awesome!
Gardner: All right, let's go to stock No. 2. All right, stock No. 2. This is alphabetical by ticker symbol because the ticker symbol is GOOG. I presented it that way back in the day, although we've since revised and we like to present by company name because we're more about company names than ticker symbols on this podcast.
Mueller: Well, Alphabet comes in alphabetically after Activision.
Gardner: That even still works! You're right! I wasn't thinking about that. That is true, Jim! So, yes, Alphabet is company No. 2. Still with that artifact of a ticker symbol, GOOG. In fact, I think that Google should consider renaming its ticker symbol. I'm going to go with ATOZ. That would be good for Alphabet, right? A to Z?
That could work! I don't think they're going to take my advice, though. A year ago, the stock was at $1,072. Today as we tape, it's right about $1230. So the stock is up 14%, the market up, as we said 8%. So this is a plus six. It brings us back from minus 43 to minus 37. Jim, what's been happening in Googleville, Alphabetville, here over the last year?
Mueller: Alphabet, as you know, is a very large company, around $850 billion market cap. The amazing thing is that it is still managing to grow its top line, its revenue line, by around 20% a year.
Gardner: It's phenomenal!
Mueller: It's done that for the last three years. That's crazy for such a huge company. That's why this company is doing so well. Revenue growth in 2018 was 23%, 22% for the fourth quarter. That's, as I said, the third year in a row of 20% or more growth. It beat revenue estimates three out of the four quarters last year. It beat earnings estimates all four times. Market loves that kind of stuff, and so it bids the price up.
Gardner: Great! I don't think we have to talk a lot more about Alphabet. It's a company that's very well-known and it's almost hard to keep track of because it owns so many different businesses -- things like Waymo, the autonomous driving software company, and then there's something called YouTube, which a lot of us may have heard of. I don't know if you know this, Jim, but on YouTube two years ago there was a live giraffe birth.
Mueller: You said something about that, didn't you?
Gardner: I think maybe I did. So, yeah, that's all brought to you by YouTube, which is owned by Alphabet. Alphabet is a massive company. It is an innovator. And I really like that you highlighted that top-line growth. That's so hard to do it at the scale at which Google/Alphabet operates.
Mueller: And they've got YouTube TV offering cable-free TV, and it sucked me back in last year, so I could watch the Olympics. And now I'm watching baseball. They've just added the Food Network. I love cooking and so yeah, I'm never going to get rid of that. [laughs]
Gardner: Yeah. I really think Alphabet might be the quintessential Rule Breaker, when you just think about the company and all the rules it's breaking across many different fronts, and not just domestically but globally. A truly phenomenal company. I'm glad that it's beating the market here over the last year.
Mueller: One of the things I like is, it's moved further and further into AI and getting more of that integrated. It's helping clean up the videos on YouTube that violate their content rules. It's making Google Assistant expand. The thing I love the most is, it's bringing the universal translator to reality from Star Trek.
Gardner: Can't wait! Babel fish from Douglas Adams as well.
Mueller: You can talk in one language, and Google Assistant is going to translate it right for you.
Gardner: I can't wait!
Mueller: I love it!
Gardner: I'm ready! You and I, we'll have our first real conversation in different languages the day that comes, Jim. What language will you be rocking?
Mueller: I took French in high school.
Gardner: That was going to be my choice. That wouldn't be as good. Actually, I would benefit from having Google Translator translate my French because it needs some help. [laughs]
Mueller: It's here already and it's only going to get better.
Gardner: OK. All right, stock No. 3, Intuitive Surgical. The ticker symbol is ISRG. This is one of our longest-running Rule Breaker picks. Yep, it's another stock I own, along with all five of these, "Five Stocks I Own That You Should, Too." This one, I'm happy to say, $471 a share a year ago. Today, tipping the scales right around $563. Intuitive Surgical is up 19%. That's 11% ahead of the market. That brings us to a minus 26 for this sampler as we struggle to get above water.
Jim, what's happening with the da Vinci Surgical robot purveyor?
Mueller: This one, the company just keeps on managing to ship more and more of those da Vinci surgical robot systems. Each quarter and year over year. Along with that, it gets more procedures done. It's expanding the reach of those procedures, what different kinds of surgeries can be done both domestically and internationally.
Gardner: Which is amazing.
Mueller: It remains debt-free. It kicks out over a billion dollars in free cash for each of the last three years. It's rocking any investor's dream right there.
Gardner: What I really love about this company as a part owner, shareholder -- Jim, do you own any shares?
Mueller: I own shares.
Gardner: So you and I are shareholders here. I love the competitive advantage that the company enjoys over almost anything that looks like it in its industry. Intuitive Surgical is spending more money on R&D per year than a lot of start-ups could even raise to try to compete, and it just keeps, as you mentioned, Jim, broadening the number on types of surgeries that can be done minimally invasively with a robot eye and incredibly fine, precise movements that the human hand could never do with a scalpel.
Mueller: There are always concerns that come up every now and then repeatedly on whether the minimally invasive procedure is the best procedure for that particular type of surgery. That's debated in the medical journals. Doctors will figure out which ones are best. But I believe there's ample proof that any sort of minimally invasive surgery is best for the patient. Less blood loss, less pain, faster healing times.
Gardner: It's true. This has actually dogged the stock some over the years. In fact, I would say a dark cloud that I can see through, that I've seen through in the past, was a perception on the part of medical professionals that you didn't get any better outcomes, you still had your prostate gland successfully removed whether it was a human hand with the scalpel or with the da Vinci Surgical robot. That was the doctors' view. As patients, which would you prefer? Would you like to be cut open and recover for several days in hospitals just to get back on your feet, or minimally invasively be up and out the next morning? I know which one I'd want. So, I always felt like some of that criticism leveled at Intuitive Surgical was not really thinking through the whole system.
Mueller: I agree.
Gardner: So, we first picked this stock at below $15 a share back in 2005. Fourteen years later, just holding, as we're wont to do as Fools, the stock is up more than 39 times in value. It's in the high 500s right now from our cost basis below $15. So this is a classic example of how The Motley Fool is helping the world invest better. By the way, since 1993, according to Alex Trebek. He nailed it!
All right, stock No. 4, ticker MTCH. This is Match Group. This is a company that owns Tinder, it owns match.com. It's a company that's bringing people together, not just here in the U.S., but worldwide, and all different types of people. Really the worldwide leader, I think, Jim. Match Group, this week last year, was just over $47 a share. Today, happy to say it's up to $58. This is the best performer in the group of five. So far, it's up 24%. 24 minus eight, that's a plus 16. If you're keeping score at home for this five-stock sampler, we're now up to minus 10 with one stock left.
Jim, it seems like Match Group, when it came public, IPO-ing only a few years ago, so much less hype than things like Uber or Lyft or the coming IPOs. There was so little talk, I thought, about Match. So when I first picked it for Stock Advisor, I was almost shocked that it had so little visibility as, to me, anyway, big, well-known brands like Tinder, doing important stuff in this world.
Mueller: Well, I've been happily married for many, many years, and never even considered using any of its products.
Gardner: I haven't, either!
Mueller: Many of our members, I'm sure, are in the same boat.
Gardner: It's true.
Mueller: I could see why it just floated out there without much excitement.
Gardner: Yeah. But a lot of us these days are swiping left or right depending on whether you like or don't like somebody, and meeting people. Match really is the dominant, I think the leading worldwide player here. I say this often on this podcast, but it's still shocking when you think in terms of global humanity, the No. 1 way that we meet our spouse is through word of mouth and friends. "Hey, I want you to meet Veronica or Bob, I think you'd really like her/him." That's No. 1. No. 2, I think I have my math right here, is arranged marriages. In countries, big ones like India, and many other parts of the world, it is common to arrange marriages. The No. 3 way that humans meet their spouse today is online and the internet. I don't think that's going to lose ground in that sweepstakes anytime soon, so I'm really glad that we're invested. Is this a company you also own, Jim?
Mueller: I might. Actually, I probably do. For a long time, I was buying your Stock Advisor recommendations on a fairly regular basis. I think Match Group was in on that.
Gardner: Awesome! You said for a long, using past tense, Jim. Did I did I lose my allure?
Mueller: No, you didn't. It's just that I had to stop doing it for a couple of reasons.
Gardner: That's fine! That's personal. We won't go into it, other than my feelings are now obviously deeply hurt. But let's just let's just, [weepy-voiced] let's keep going, Jim.
Mueller: OK. I don't have a tissue to hand over. So, Match last year has just been killing it. The last several quarters, they beat on both the top and the bottom line. They're growing revenue strongly. They still have a fairly small presence internationally. There's a good portion of growth ahead of them there. Especially like the fact that they raised guidance a couple of times last year. When they come out with original guidance, when they report fourth quarter of 2017, they say, "We're going to make this much money and have this much revenue." Then, a couple of quarters later, they said, "We're doing even better. We're going to have more revenue and more money." A quarter after that, even more money. The market loves that. Investors love that. That's one reason why it's up last year.
Gardner: That's really wonderful! It wasn't just up last year. Since we picked it in Motley Fool Stock Advisor, the year was 2016, the month was April. So it's exactly three years ago. The stock is up 458%. I'll take that for any stock over any three-year period. It far exceeds my own expectations when I first picked it. It's a reminder that when you look for leaders and companies that are doing important things in this world, sometimes in a strong market, which we've been living in, you can be shocked by how well your stock does. Imagine people who weren't coached properly on investing, who bought Match back in April 2016. It goes up 20% and they think, "Should I sell?" Then maybe it doubles. "I'll sell half and play with the house's money," one of those old saws that we don't like here at the Fool.
Mueller: Don't get me started!
Gardner: I won't get you started. But a lot of people are afraid of doing too well. But sometimes these great companies we've been talking about in this podcast, they do even better than you could have thought of, and the right thing to do has been, as long as the company continues to operate successfully, don't worry too much. Sure, stock prices can get ahead of themselves. Maybe for Activision Blizzard, we're seeing that over the last year, down a third. But we're not in it for one year or two or three. We're in it for a lifetime as investors. What a shockingly great five-bagger in just three years for Match.
Mueller: What a fantastic pick!
Gardner: That sets the stage for the final stock in this stock sampler. Jim, I have a record of almost always being able to bring in -- and this is pure luck -- winners. I almost never don't win with my five-stock samples. Now, these stocks, picked a year ago, were picked for a minimum of three years. This is premature.
Mueller: We're only one year in.
Gardner: That's right, and we always review after each year. It's fun to check and see how we're doing. Zillow is stock No. 5. I know a lot of people know Zillow. People who know Zillow well as a stock might be, like my friend Brian Feroldi, who's shortly going to be joining me for the second set, might be grimacing a little bit because I think Brian knows that unfortunately, Zillow hasn't had a great run of it on the market. That dream of always being able to bring in winning five-stock samplers, even premature reviews, that dream, if it ever existed, dies right now.
Zillow was picked just below $49 a share a year ago. Today, it is $38. The stock is down 22%, the market up eight. That's a minus 30. Our grand total then for this five-stock sampler is minus 40%. Taken together as a group, divide by five, five stocks, we average losing to the market by 8%. In fact, if you remember, the market was up 8% over the last year. That means this group, even though we had some nice winners -- and the majority were winning -- this group is at 0% return one year later.
Now, I sure hope it'll get better from here. But Jim, before we move on, what's been happening at Zillow?
Mueller: You may remember I said Activision is rejiggering itself a little bit and figuring out how it wants to proceed. Zillow is doing that squared. They're advertising-based, having realtors advertise on their site. Having such a fantastic data set, which they still do, that brings a lot of eyeballs for those realtors to hook up with. That didn't turn out as good as they had wanted it to. So they've done a couple of things. In Q2, they launched a home buying and selling service. They'll buy your home from you so you can get out of it quickly. You might not get the best price, but you'll get cash that day. Then, they have to sell the home, hopefully at a profit, and meanwhile, carry that inventory. That means it's more capital-intensive than it used to be.
Gardner: You bet. They have to have cash to buy houses, and then they sell them back and hold that inventory in the meantime.
Mueller: Right. A quarter later, in Q3, they launched a loan mortgage origination service. The big gorilla there is Quicken Loans. They're competing against them. They're competing against Redfin, another company that's playing in the same space. There's a lot of competitors there. Both of these announcements caused the stock to drop when they were announced at earnings. New business and analyst investors, wondering how well they'll do, because they're kind of outside their area of core competency by doing this. It's related business, but it's different business.
Gardner: Yeah. And the CEO has changed over. A lot of uncertainty over this last year. We've always said, it's an old saw as well, the market hates uncertainty. Certainly, the market has sold this stock off. It's lost a fifth of its value from one year ago.
Mueller: It's not a new CEO. This is the former CEO, Rich Barton coming back in.
Gardner: I hope on a high white stallion and ready to ride to victory.
Mueller: There are things that, if they work out, can do really good things for the company and for the stock. But there's a lot of uncertainty right now.
Gardner: I trust things will work out. To close this one out, first of all, thank you Jim Mueller for joining me on Rule Breaker Investing!
Mueller: You're welcome! My pleasure!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Gardner owns shares of Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Intuitive Surgical, Match Group, Zillow Group (A shares), and Zillow Group (C shares). Jim Mueller, CFA owns shares of Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Intuitive Surgical, and Match Group and has the following options: short August 2019 $52.50 puts on Activision Blizzard, short May 2019 $47.50 calls on Activision Blizzard, and short May 2019 $17 puts on RDFN. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Intuitive Surgical, Match Group, TTWO, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends EA and RDFN. The Motley Fool has a disclosure policy.