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're 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 smaller low-risk stocks to buy to feed the bear. While Wall Street has rebounded nicely since then, it looks like we're back in correction mode, which makes it an interesting moment to tally up the score. And even better, it's the perfect time to recommend another set of five low-risk stocks to buy -- but this time, he'll choose from among the market's giants.
A full transcript follows the video.
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This video was recorded on Feb. 7, 2018.
David Gardner: Welcome back to Rule Breaker Investing. Hey, how about that stock market? It's been an interesting last week.
A week ago, I think I hit an all-time high for my portfolio. You might have done the same for yours. We talked about that -- how amazing the market had been. And one week later, for at least my portfolio, if I'm any kind of a bogey for you, I was down 8% from Monday to Monday. I'm taping this on Tuesday amid volatile markets, so it was a very bad week.
But let's be clear. One bad week is not a bear market. This is nothing compared to what a bear market sometimes can be or feel like. I don't think that you should start hunkering down, or think that the worst is past, or anything like that. I make no promises or predictions about the performance of the overall market going forward. I never do that -- I think you know that -- on this show. I don't think it's worth doing.
I will say when the stock market hits big headlines, it's usually negative. It's usually that the market's going down. That's why I tweeted out one of my favorite quotes a day or two ago. "Stocks always go down faster than they go up, but they always go up more than they go down."
I'll say that again. "Stocks always go down faster than they go up, but they always go up more than they go down."
You have to hold both of those seemingly opposed thoughts in your head to survive bull markets and bear. People can make bad decisions in both of them -- overspeculating in bull markets or failing to keep buying in bear markets. We don't do that as Rule Breakers. You and I -- we're committed regularly to investing in the market.
So what I would suggest that you do is that you should buy some stocks this week, and I was thinking the same last week and the week before. For a lot of us, we can't do it every week. Maybe we're getting a paycheck every two weeks. How about every two weeks, good markets and bad? I don't care where the Dow has been or where it will be going. Just buy and keep adding to the great companies that we talk about here, on this podcast, and in my services Motley Fool Stock Advisor and Motley Fool Rule Breakers.
I'll mention I think we're running a special on Stock Advisor right now. Last week, I hit a new high watermark. The average return of the stocks that I picked in Motley Fool Stock Advisor tipped over 500%. I think it's called something like the "DG 500 Celebration," and if you're not already a Motley Fool Stock Advisor member, maybe google that, or call our Member Services. Sign up because Motley Fool Stock Advisor is a tremendous service, and so is Rule Breakers. I think the key to these services is that we keep recommending stocks every single month. It's just setting the right rhythm of investing.
Speaking of stocks, I am picking stocks this podcast. It's perfect timing, I think, because I'd already mentioned to you last week we were going to pick a five-stock sampler -- five stocks going forward this week -- but what fun, in a sense, that it's happening as the markets are volatile and have made a significant drop over the last week.
But I'm not just picking stocks this week. I'm also reviewing a five-stock sampler that I picked two years ago this week. Ironically enough, the name of that five-stock sampler two years ago -- you can go back and listen to it -- its name was picked by my producer, Rick Engdahl. I had a different name for it, but Rick put this name on. And it's so perfect now -- looking backward two years later -- Five Stocks to Feed the Bear. So we're going to review, in a little bit, those five stocks and see how they've done before picking five new ones.
Now, one bookkeeping note before we get to it -- and you can file this one under "Dave is a fool." Quite a lot of the time, actually. And this makes me chuckle. I know it makes her chuckle, as well, what I'm about to share with you. But last week, on our mailbag, my biggest fan in the world, self-proclaimed, I was calling "Gum," a name that was spelled J-U-M-M. My correspondent who wrote into the mailbag -- and I shared it with you last week -- tried to explain how the name was pronounced, and so as I spoke to my "biggest fan" in the world last week, not only was I constantly mispronouncing Jumm as Gum, because sure enough, the name is J-U-M-M, but I was also saying he when, as it turns out, Jumm is a she.
So when you make mistakes, it's awfully nice -- isn't it? -- when somebody else comes along and picks you up off the floor. I received this note helping me out this week from Jumm. It reads like this:
David, thank you so very much for answering and responding to my mailbag. I'm writing this message to you because I think I failed at introducing myself to you properly.
I know after you read this you would feel bad, but please do not. I am smiling as I type this, knowing you, the man with 'extreme ownership,' you would feel bad for mispronouncing my name, but I take full responsibility for not being clear in my previous email. My name is J-U-M-M and you do say it with the 'J' sound. When I told you that it sounds like 'gum,' I referred to the vowel sound of the 'uh' part of it. See, people always say my name with the 'ooh,' like J-O-O-M, so I just thought I would let you know it's not Joom. It's Jumm.
More importantly, I failed to let you know that I am one of your female listeners. I didn't realize you called me a 'he' until I listened to the episode the second time. I was too excited to hear you read my email out loud [LOL]. Stocks and investing are somewhat perceived as male-dominated areas. I think you would be happy to know that you have female listeners and investors out there, as well. Thank you, again, for taking the time to read my email. Looking forward to more amazing episodes of Rule Breaker [Investing]. Signed, Jumm."
Who was once -- maybe still is, I don't know -- but was once, anyway, my biggest fan.
Without further ado, let's strap ourselves into the Wayback Machine. Two years ago, the podcast was published February 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, [but] 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 (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), 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 [were to] 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 Browns 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 vs. 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 (NYSE: CRI). 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 (NASDAQ: IPGP). 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 re-recommended 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 re-added it, it's now a 17-bagger.
Stock No. 3: Let's go next to stock No. 3. Stock No. 3 is Ellie Mae (NYSE: ELLI). 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 re-up 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 (NYSE: PLNT) 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 (NASDAQ: MELI).
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.
And now, five more stocks to feed the "new" bear market. I'm so glad that I'm able to recommend companies right in the teeth of what's happened over the last week or so, and as always, the stocks that I'm picking, I'm doing for the next three-plus years at a minimum. So, whether we've had a good one- or even two-year run, as we talked about earlier on the show, doesn't matter that much to me. We're playing the long game here at The Motley Fool and as Rule Breakers.
I'm going to switch up, though, the traits that I'm using for this set of stocks. I'm still going to stay with low risk. That feels good to me in down markets. But I'm going to go to the biggest of the big low-risk companies in our portfolio. It very likely means you will not see anything like the returns that patient, faithful, long-time listeners have enjoyed in "stocks that feed the bear market" of past podcasts. There's no way that the five companies I'm about to share with you could multiply in the same way that a company like IPG Photonics, or even better, MercadoLibre has done.
In fact, I was looking at a list of smaller companies, using the same traits that I picked two years ago, and the short list of companies had several of the ones that we've already covered, so if I used the exact same attributes, I would repick Carter's. I would repick Ellie Mae and Planet Fitness. One of the reasons I wouldn't be repicking MercadoLibre is when a stock almost quadruples, it's no longer going to have the market cap to stay as a small-cap company. But anyway, so a lot of the companies would just be repicked.
That's why I thought it would be more fun to have a fresh list of five new stocks for you. These are all companies with market caps of $150 billion or more, so the smallest of these is at least 30 times larger as a company, with its market cap, than any of the companies I picked two years ago.
And I'm not going to spend a lot of time explaining or previewing these companies for you. I'm going to give you the short list pretty quickly, because most of us already know these companies and what they do. Alphabetically then:
Stock No. 1: Stock No. 1 to feed the bear market is Apple. I bet you've heard of it. I just spent a happy hour-and-a-half, or so, in the Apple store last week getting my iPhone replaced. My iPhone X had developed a scary, strong pink line right down the center from top to bottom, and I was happy to say that Apple said it's still under warranty, and here you go, Mr. Gardner.
You do have to wait an hour, though, which was kind of a bummer, but in the Apple store, if you do what I do, you just start walking around and you just buy stuff. So I started buying more stuff in the Apple store. It was a brilliant strategy. It may work on other customers besides just me. Anyway, Apple.
Stock No. 2: Stock No. 2 -- Amazon. Again, I bet you've heard of it. This is a great company to own through all markets. And as wonderful as Amazon has been, looking backward, all that really matters is what happens going forward from here, and I like Amazon to beat the market the next three-plus years.
Stock No. 3: This one is third, alphabetically, with its ticker symbol GOOG, but it is first alphabetically with its name, because GOOG these days is rocking the corporate name of Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). And so yes, Alphabet is another one of those massive companies that has done so well.
And yet, ask yourself who's going to win over the next five, 10, 15 years? Do you think the company that has spread itself out into lots of different businesses probably spends more R&D [research and development] and takes more risk than any other company at that scale that I can think of? Do you think they're going to beat the market as the world increasingly adds AI [artificial intelligence] to all kinds of products and services, and surrounds us with better intelligence? Pretty sure Google's going to do well, and since that's the crown gem of Alphabet, I feel really good about Alphabet stock the next three-plus years, bear market or not.
Stock No. 4: This company is the worldwide leader treating diabetes. It is not an American company. In fact, it is based... I am going to butcher this word. Anytime you spell a word B-A-G-S-V-AE-R-D, you're going to put me in a bad place, but let's go with Bagsvaerd, Denmark. The company is Novo Nordisk (NYSE: NVO). The ticker symbol is NVO. As I share it with you, I see the stock trading just above $48 a share. That tips the market cap scales at $122 billion.
Novo Nordisk I first picked for Motley Fool Stock Advisor in September of 2015. It's up 6%. Bad news, though. The market's up about 50%, so this stock pick of mine is already 44% behind the market. But here we are. It's a new day. It's the next five stocks to feed the bear market, and I'm putting Novo Nordisk on that list, expecting better things in the three-plus years ahead.
Stock No. 5: And finally, stock No. 5. We're staying outside U.S. borders for this one, as well. The ticker symbol is TCEHY. It is one of our more recent picks. We picked this in Motley Fool Rule Breakers in September of last year. The stock's up 24% so far against the market's about 5% return, so Tencent Holdings has been a solid pick for Rule Breakers.
The company is one of the largest internet companies in the world. The WeChat mobile chat service dominates China. If you're a Chinese Rule Breakers listener, you already know WeChat. Even if you're not a Chinese Rule Breakers listener, you may well have heard of WeChat for a country that uses its mobile phones to do way more things than we in the U.S. have so far used our mobile phones to do. To pay for almost everything. To add new forms of convenience to our lives. Chinese consumers and Chinese investors are pretty happy with Tencent Holdings and WeChat, among other things.
There you have it, the Next Five Stocks to Feed the Bear Market. Closing it out, it was Apple, Amazon, Alphabet, Novo Nordisk and Tencent Holdings.
And that's what I have for you this week. I hope you enjoyed the show as much as I enjoyed bringing it to you, in a good market or a bad market. That's what we do here at Rule Breakers. We just keep investing. Finding great companies and trying to buy as much of them as we can and hold them over time.
Next week, we have a special guest -- Kevin Kelly, the co-founder of Wired. I'm going to be interviewing him at The Motley Fool ONE conference in San Francisco, and that experience I will share with you directly through this podcast next week. His book, The Inevitable, is my topic. If you've not already read The Inevitable, and you want to try it maybe with an Audible audiobook the next week or so, that's great prep reading for the interview you'll hear next week. It's an outstanding book about the future 12 technological forces that will shape our future.
In the meantime, Fool on!
As always, people on this program may have interest 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Ellie Mae, IPG Photonics, MercadoLibre, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), 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 Novo Nordisk and Planet Fitness. The Motley Fool has a disclosure policy.