Stock Stories to Make You Smarter, Happier, and Richer

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David Gardner: Some people like superhero stories and at least pre-pandemic would spend about a billion dollars at a Box office to see a movie over a single weekend. Others like sad stories. We all can think of a favorite bedtime story, it’s often said of us human beings that we are a storytelling race, the call of the story. The prehistoric campfire where stories were acted out. Huge industries today have been built up just around celebrity stories, or how about sports, the news scores, results. The stories we remember from our own athletic exploits, however scanty they may be in my case, stories, stories, stories. Stock stories. Yeah, every stock tells a story. As investors, we get to know our company’s mission. Maybe know their marketing tag line. That’s the story. We follow the share price. We experience highs and lows, sometimes dizzying highs or cavernous lows, sometimes both. Our experience as investors gives us the long view, the capital F, Foolish view acquaints us with great prosperity creating stories. Especially when you look across the portfolio, look up and down on your brokerage statement, and I bet you see stories. Well, for the sixth time in this podcast history this week we focus on telling stories. We’re a stock market podcast, these are stock stories. Visiting me around the campfire this week are several talented Motley Fool contributors, each of whom has a story to share with you. Five-stock stories to make you smarter, happier, and richer only on this week’s Rule Breaker Investing. [MUSIC]

Welcome back to Rule Breaker Investing. Thanks so much for joining us this week. Getting our story on. I’m really looking forward to this. I have four of my friends from The Motley Fool coming in to share their stories. I’ll throw in one myself, and that makes five stock stories for this Volume 6 of our stock stories, episodic series. Anybody who’s spent any time with this podcast knows that I love episodic series. I think by my count, I racked up about 22 or 23 different series and we just bring them back. In this case, this is just once a year, so this is a little bit special for us to be talking about stock stories. Before we get started, I want to mention the opposite of stock stories. At least the linguistic inversion, and that would be story stocks. Now I think a lot of people recognize that story stocks can be good or bad. Story stocks are the ones where you don’t necessarily check the numbers, you don’t necessarily hold near-term results or any real feet to the fire. There’s not necessarily a lot of accountability on your part in terms of management, or where they are today with the company, because there’s a story there. You’re driven to invest perhaps by the story you see in that stock. I think that can cut both ways. That can get you sometimes over the hump with your eyes closed because the valuation just looks too high and you’re like, I’m going to buy it because I like the story, and that can help.

It can also hinder. Sometimes we buy stocks that are just stories and maybe they sounded good for a little while, but it turns out there wasn’t a lot to that story or maybe not much behind that story. The phrase story stock is one with the neutral connotation for me, but let’s invert those words again. Now, I like stock stories. Having invested for a few decades, perhaps you have two or even if it’s just for a few years, you probably already have a few of the classic stories. Maybe like the one that got away story or the big fish that you’re bragging about that you’ve caught story. Or maybe 13 other different versions because a lot of these are just patterned, templated stories that we recognize. I don’t know, from Greek epic right through to Saturday night live comedy. I think we can pull other stories and see some of our own stocks within those stories. But in particular, this week I’ve asked my friends and fellow analysts here at the Fool to tell the story of the stocks. They’re not just going to be talking about the company, although they will be because we love business-focused investing here.

But in particular, I’ve asked each of them to identify where the stock was at a few different points. Include the stock in your story. If we do our job this week, we’ll make you smarter, happier, and richer. You will be enriched by these stories. As we get prepared here, I have an exciting announcement. Due to the growth of this podcast, we can now afford more sound effects than we could in past years, and so my talented producer Rick will be bringing some sound to the stories that you hear. Now, we’re going to keep it simple and augment over time. Rick, I’m going to ask you to queue up the single sound effect to start story Number 1. That helps me start to get in the mood here as I welcome my friend Sanmeet Deo. Sanmeet, great to have you back to Rule Breaker Investing.

Sanmeet Deo: Thank you, David. Great to be back.

David Gardner: Thank you. Sanmeet, could you remind us, what are you doing around the Fool today? Where do you come from pre-Motley Fool?

Sanmeet Deo: Pre Motley Fool, I actually owned my own kickboxing gym, but I was also working in investment industry as an analyst. When I was also a 20-year member, maybe more of Motley Fool various services, Hidden Gems, Stock Advisor, Rule Breaker, and I go back all the way as far as reading fool.com articles on AOL. [laughs] I go way back.

David Gardner: You don’t look that old to me Sanmeet, but that’s because you’re staying in shape; the whole kickboxing thing.

Sanmeet Deo: Yeah, exactly. I hope so. Now at the Fool being a member turning to analyst, I am working on Blastoff, Platinum and any other things around the Fool that need my assistance or I feel excites me.

David Gardner: Wonderful. Before we get you started with your story, Sanmeet, what is one comparison you can make one similarity between kickboxing and investing.

Sanmeet Deo: Well, it does take discipline. Kickboxing is all about technique, discipline. Investing as well if you want to do it right and be successful at it, technique, discipline helps you through the emotional waves that stock investing can take you on.

David Gardner: Excellent. Thank you for preparing your story. It’s a company that I certainly esteem. I’m a shareholder. I’m a huge fan. I bet you are too, although you don’t have to be, we’ll see, we’ll hear that shortly. But for each of our stories, Sanmeet, I asked each of us to have a title for our story. Could you provide the title of your story?

Sanmeet Deo: The title of my story is when picking stocks, sometimes it pays to invest with your gut.

David Gardner: Excellent. I believe that the ticker symbol and question here is CMG, and really hardcore stock market fans will know that that is the ticker symbol of?

Sanmeet Deo: Chipotle Mexican Grill.

David Gardner: Let’s get it. Yeah. A lot of us just say Chipotle. I often forget the Mexican Grill part but the ticker symbol helps me remember that CMG. Sanmeet, take it away.

Sanmeet Deo: Once upon a time, in Denver, Colorado on July 13th, 1993 founder Steve Ells, founded Chipotle Mexican Grill as one store, grew it to 16 in the local area of Denver and made it a success. In conjunction with that, later on, in 1998, McDonald’s actually invested in Chipotle, giving access to capital, a massive supply chain, and help with sophisticated restaurant operations. This helped it to grow to over 500 locations by 2006.

David Gardner: I’d forgotten about the McDonald’s tie-in. Yeah, they were a strategic partner. They owned a lot of Chipotle early back in the day.

Sanmeet Deo: Yeah. It was actually a great investment for Chipotle to help them succeed in the long run. In conjunction with Chipotle’s early growth in the early 2000s, myself a bright-eyed bushy-tailed college student at UT, Austin discovered my burrito place [laughs] while I was on the search for lunch option. The first Chipotle in Austin, I believe was located just off-campus on a street famously called The Drag. It’s a strip where there’s lots of coffee shops, restaurants, clothing stores, and I immediately fell in love with the food. There was lines; it was popular. Even though it’s relatively pricey for a college kid, I loved going there.

David Gardner: The thing I love about Chipotle is as long as the lines were, they always moved fast.

Sanmeet Deo: Yes, absolutely. That was one of the amazing things about it. A lot of people actually would see the lines and say, “I don’t want to go.” But when you actually stood in line, you’d be surprised how quickly it went, so that was amazing about it. Now you can imagine my delight when I heard that Chipotle announced to go public and they went public in an IPO on January 26 of 2006. When they announced to go public, I knew about the restaurant already. I felt it was succeeding in Austin where Tex-Mex and burritos were plenty. There was a competitor chain called Freebirds, which was popular and it competed very well with that chain as well. I thought it could succeed almost anywhere and potentially be a nationwide chain.

David Gardner: I feel like you were right about that. Keep going.

Sanmeet Deo: [laughs] Yes. Now, I was right about that, but I wanted to buy the stock, but I didn’t. In a hindsight, that was a mistake. I don’t remember the exact reason. It could’ve been my view at the time of wanting to jump right in on IPOs or maybe getting lost in the weeds of detailed numbers or market commentary about the stock. The interesting thing too is that having experienced the brand coming to New York, where first I was, when the company went public, no one really knew about Chipotle back then, the Wall Street analysts were “Oh, Chipotle, is it going to succeed? How is it going to succeed?” I wanted a bit of knowledge of being in college, seeing it succeed, made me feel like it would. On the first day of its IPO, it doubled, closing at 44. It priced at 22, closed at 44, making it the best US based IPO in six years at the time, and it was the second best restaurant IPO after Boston Market, which made me kick myself for not buying it. But after it went public, the stock rose to a peak of about 151.88 on December 28th, 2007, producing double-digit same-store sales growth and doing very well. Now, this was around the time of my personal career journey, when I used Chipotle as a stock write-up and a model to land my first research job at a start-up investment firm.

I can’t remember now if I actually had owned the stock at the time, but I know I really liked the stock and the company. Then I got the job. The great financial recession hit, and we all know about that. Stock bottomed on November 25th, 2008, to about 44.80, close to its first day IPO price. Now, even with the great financial crisis, the company continued to deliver positive same-store sales growth. The company itself was doing well, but the stock was taking a hit because of all of the environmental issues going on with the financial crisis. Now, when it hit the market bottom in March 2009, Chipotle’s stock, along with the rest of market, continued to ascend on it’s path, business was doing well. Then, as we all probably remember in late-2015, nearly 500 people were estimated to have gotten sick in a series of E.coli, norovirus, and salmonella outbreaks. Confidence and trust in the brand eroded. Their same-store sales dropped significantly. Its future was uncertain. Many people were saying, stay away, this is done. They’re not going to get away from this. It was a tumultuous time for the company. Then on February 8th, 2016, they actually closed all the restaurants nationwide for a few hours during the morning for an all staff meeting on food safety. I don’t know how much impact that had, but they did something. They were just trying to get confidence back and show that they can get a handle on this.

David Gardner: It’s funny Sanmeet, because I feel as if there was so much media coverage, it’s almost hard to know what it would’ve been like inside the company or how impactful all these things really were. But in terms of the media coverage and the damage to the brand and just the constant, “Oh my gosh, wait, did somebody just get sick in that Chipotle, in that state or that market?”, and all of a sudden that would become part of a national story. Some of it was probably tentative and maybe not even true in the end, I’m not sure, but certainly the threat was real. They had made mistakes, and like some other great companies over the course of the time, they knuckled under. They took the hits and they said, “We need to fix this”.

Sanmeet Deo: Yeah. In December of 2016, the co-CEO Monty Moran, stepped down, 11 months later, the founder, Steve Ells, stepped down, and the search for a new CEO began. Then over the next several years, the stock crashed from a high of 731.19 on September 21, 2015, to 251.33, on February 13th, 2018. Now, this was around the time when I thought, I believe in this brand, I believe in this business model. There’s other restaurant companies like Jack in the Box, for example, that had come back from food crises. The business model wasn’t broken, it was just a safety, and with Chipotle, they use fresh food. They had a commitment to food with integrity. Some of that was at play in terms of organic food being part of their ingredients that caused a little bit more problems. I actually went ahead and bought some shares at around 251 in February 2018.

David Gardner: Wow, that was basically right at that bottom, Sanmeet.

Sanmeet Deo: Yeah. Lo and behold, the next day, I think it was literally that afternoon or the next day, they announced that Brian Niccol, the former CEO of Taco Bell, was going to be the CEO. The stock popped almost like 10 percent that day. Then from there it’s been off to the races, hitting as high as 1,900, and it’s around 1,800 now. It’s been a seven-bagger for me and they recover from the food scares and got back to strong same-store sales and profitability. Then they face another test in the pandemic, when everything shutdown. But they had already set up their business with digital and technology that helped them weather that storm.

David Gardner: Brilliant.

Sanmeet Deo: That’s a great story, it’s one of my favorite stories of a company that went through different growth spurts, and also my involvement in the company in various times. A main lesson of the story for me is when you know the stock from personal experience, you have a strong gut intuition on it. It could pay off to maybe put a little bit of your deep analytical work and take a small position, any position. Sometimes your gut is a better investor than your brain. Finally, another lesson was, I had owned the stock on and off previously, and I was probably trying to tie in the purchase and sales. I was getting nervous, the stock went up quite a bit, I trimmed. But if you believe in the business, you have the guts to hang on, enjoy the ride. Not all stocks are going to be winners like Chipotle, but you never know if you have a couple like those that could far outweigh the losers in your portfolio. When picking stocks, sometimes it pays to invest with your gut, as I’ve learned with the Chipotle stock story.

David Gardner: Well, thank you very much. You really told us very well-rounded story Sanmeet, you took us from the start of Chipotle. I couldn’t remember what year that was. Thank you 2006, right through some really hard times and then ultimately, at least as of now, a wonderful long-term success story. But like any long-term story, there are going to be bumps in the road. I also loved that you were a little bit part of that story. That’s some of the best stories when we notice the documentarian, all of a sudden is in the movie himself. [laughs] There you were acting on your gut. That is one thing I want each of our storytellers to do this week, and that is, give us the takeaway, and you gave us your takeaway. Sanmeet, thank you very much as well for illustrating where the stock was at different points. That’s at the heart of stock stories. Sanmeet Deo, I assume you’re going to continue to hold your Chipotle?

Sanmeet Deo: Oh, yeah, absolutely. I think it still has quite a bit of ways to go.

David Gardner: Wonderful. Well, it’s one I own too. I think a lot of Motley Fool members do, some probably longer than we have. 2006, that’s a 15 years since IPO. I think it came online for Rule Breaker somewhere around 2007, thanks to Rick Munarriz, but just delighted. I also just love the picture of you in Austin, in Texas, in college surrounded by lots of other Tex-Mex foods and going, “You know what, I think this one’s got some legs,” and it’s got some national possibilities, and boy, did it ever. Well, thank you Sanmeet for joining us this week on Rule Breaker Investing.

Sanmeet Deo: Thank you so much, David.

David Gardner: All right. Well, I mentioned upfront that yeah, we have a bigger budget than we ever had before for this podcast. We’re able to bring additional sound effects that we previously couldn’t afford. With each of our storytellers, we’re going to be adding an additional sound, again, this is all done by my brilliant producer Rick. Rick, get us in the mood here for stock story number 2, as you thread together two sound effects. Well, with the mood set, I want to welcome to this campfire, Jim Mueller, longtime analyst, friend of mine here at The Motley Fool. Jim, welcome back to Rule Breaker Investing.

Jim Mueller: Thank you, David. It’s a pleasure to be here.

David Gardner: Thank you, Jim, how are you spending your time these days around the Fool?

Jim Mueller: [laughs] Oh boy. I am now the advisor or lead advisor, I guess, you call it, for three services, Options. Future of Entertainment. I took over Options two Januaries ago. Future of Entertainment, I’ve been since summer of 2020. We just launched the Energy Insider just a couple of months ago. I’m the lead of that as well.

David Gardner: Wonderful.

Jim Mueller: Very busy.

David Gardner: We’re keeping you gainfully employed. Is that a fair generalization?

Jim Mueller: [laughs] Yeah. You could say that. I appreciate it too. [laughs]

David Gardner: It’s a win-win-win, Jim. Thank you so much for joining us for Stock Stories. This is your third appearance on this series. Anybody who enjoys Jim’s story coming up, you can go back and hear two others. I think Netflix is one of them, in past volumes of stock stories on Rule Breaker Investing. Jim, what is the stock that you are bringing us this time?

Jim Mueller: I’m bringing in Rollins, which is on the New York Stock Exchange, ticker, ROL

David Gardner: Excellent. Jim, what is the title of your stock story about Rollins?

Jim Mueller: Borrowing Can Be Great.

David Gardner: Excellent. Jim, take it away.

Jim Mueller: Once upon a time in 1901, there was a young boy named Otto Orkin. Also, when he grew up, he was known as the Rat Man and he sold poison to kill rats door to door [laughs] and did very well at it, grew as a pest control company for many years. In 1964, another company called Rollins Broadcasting, founded by John and Wayne Rollins in 1948, and at that time was primarily a radio company, owning a couple of radio companies. They took over Orkin as the first leverage buyout in the United States.

David Gardner: Oh, my gosh.

Jim Mueller: They paid $62 million and barely a penny of it was their own.

David Gardner: Jim, this was an era where companies started to acquire businesses that were outside of really their main calling and they became conglomerates. I remember Beatrice was an example, but is this the start of some of that conglomeration of American companies smashed together arguably under the same CFO maybe, but maybe not the same business models?

Jim Mueller: I don’t know. Rollins by then or shortly thereafter, got into energy. They got into marine products. Those companies still exists, but they’ve since been spun out, separated into separate companies, but Orkin was what really made the Rollins family fortune. If you’re familiar with pest-control at all, you’re familiar with the white shirt, red T-shirt, hardhat guy or gal, Orkin man or the Orkin woman. Orkin person just doesn’t sound right, but the Orkin man, Orkin woman are coming out and spraying for bugs and treating your business or your residence for cockroaches and termites and mosquitoes and bed bugs and removing raccoons or bats from your belfry or what have you. The company has grown over the years to include all that.

David Gardner: All of these services are much appreciated, not just by me, I think, but by many listening in right now.

Jim Mueller: Yes, I’m sure. You definitely don’t want to be a business that gets known for having rats or having cockroaches. If you’re a restaurant, that will get you shutdown in a New York minute. If you’re a hotel, you don’t want to bed bugs in your rooms, and so on. The business as it stands, is pretty much recession proof. Even during a recession, the hotels have to stay clean, restaurants have to stay clean. You don’t want raccoons in your attic at home and so on. The company has a bunch of recurring revenue, about 80 percent of its revenue is recurring. People getting these treatments over and over overtime. As Gary Rollins, the CEO likes to say, “Cockroaches don’t read the Wall Street Journal.” It’s pretty recession proof.

David Gardner: Now, I don’t know this company very well at all, so I’m really enjoying getting to know it. I always love corporate histories. I love that it starts with the door-to-door rat poisoner, but did you just say that the CEO of the company is Gary Rollins? In other words, the same Rollins from the radio company decades ago?

Jim Mueller: No, he’s their son. John and Wayne were the founder of the Rollins company.

David Gardner: No, I didn’t actually mean that older version, but this is the same family.

Jim Mueller: Same family, yes.

David Gardner: Yeah.

Jim Mueller: They’re a big name in Georgia, which is where the company is. I think it’s in Alpharetta, Georgia. I think that’s where the headquarters. Anyway, down south. [laughs] The family itself has a bit of history. One time Gary’s son, Greg, was an executive on the management team of Rollins itself, but he’s since been kicked out, probably because he and his siblings tried to actually sue the family, especially Wayne’s estate, their grandfather’s estate. He wanted to control the finances of the family down through the generations and he set up some very restrictive trusts and things like that and Greg and his siblings tried to break it. They ended up settling, but Greg lost his job at Rollins as a result, the two sons of Wayne, Randall and Gary. Randall passed away last August in 2020. He was the Chairman for 30 years. Gary has been the CEO for 30 or 40 years.

David Gardner: It’s one of those companies.

Jim Mueller: Yeah. Eighty-eight years old. He just had a knee replacement, but they just put their president and COO onto the board of directors. I think that’s a move to name this guy the new CEO.

David Gardner: Succession, so important, not just an HBO dystopian comedy, but actually realized stuff.

Jim Mueller: Yeah. I first run across this company via a screen I run that looks for companies that have moderate to high cash returns on invested capital and have that for several years in a row, either at a steady-state or slowly growing. When I found this in September of 2015 and shortly thereafter bought some shares for myself, it had had a decade of 40 percent cash return on invested capital or better. I think 39 percent was the lowest, 50 percent even was the highest for a decade. It’s done nothing but similar things since then. The screen manages to pick up a lot of Fool recommendations over the years. That’s encouraging. I’ve had some good success with picking companies out of this. At that time, in September 2015, I bought at $12.68. That’s a split adjusted. It was growing its top-line. Its revenue about seven percent a year, growing its the net income line about 10, 12, 13 percent a year, but it had been very consistent. Fifty-five quarters in a row, that was 13.75 years in a row of year-over-year revenue growth. Thirty-seven quarters in a row, that’s a little over eight years of year-over-year net income growth. This was back in 2015. It had increased its dividend by 12 percent or more for 13 consecutive years. This was a real steady company, cash flow, real predictable, and overtime, shareholders have been well rewarded. In January of 2017, I and Abi Malin managed to get it named into Stock Advisor on Tom’s side and shares at the time were $15.13. By then, it had continued its streak to 61 straight quarters of revenue growth, 42 straight quarters of net income growth year-over-year, and it continued raising its dividend. It’s expanded beyond just rats and cockroaches. It does, as I mentioned, bed bugs, mosquitoes, small creatures, has a whole bunch of brands under its name, safeguarded industry of fumigant, Trutech, All Pest. There’s a company called HomeTeam that installs in-the-wall pest control for new build homes that a new home buyer can just call up Rollins and say, “Let’s start this,” and they have that into their business. Today it operates on every continent of the world except Antarctica. There’s very few pests in Antarctica. It has had 18 and three-quarter years in a row, 75 straight quarters of year-over-year growth. It’s only had six straight quarters of net income year-over-year growth because 2019 broke the streak, but it’s paid a dividend throughout. In 2020, it had to reduce it for the first time in over a decade, so it broke its 18 years of raising the dividend.

David Gardner: Jim, give me a sense on the dividend. A lot of our listeners will know what a dividend yield is for, but for anybody who doesn’t, the dividend yield is the percentage. It’s almost like the interest rate you get paid for owning the stock from one year to the next. Owning the stock, roughly, what is the dividend yield for Rollins through these years?

Jim Mueller: The most recent dividend yield is 1.3 percent.

David Gardner: Okay.

Jim Mueller: But they were paying around two percent and I expect them to get back up to that.

David Gardner: This is clearly a company that can afford to pay that dividend. Some companies borrow money or do other crazy stuff to try to keep their dividends going. That’s not necessary for Rollins?

Jim Mueller: No, not at all. They were only paying out about 50 percent of their net income as a dividend.

David Gardner: That’s wonderful.

Jim Mueller: Very affordable. Just recently the share price is now $35.75 and both Ma and I, Stock Advisor members who followed along have done really well over the years.

Jim Mueller: While I was hoping you would provide that share price because I don’t follow Rollins, ticker symbol, ROL, so I didn’t really know where it had gone from Tom’s Stock Advisor of several years ago, 15, but it sounds pretty good for a company that’s more than doubled with a good dividend and sounds so financially stable, Jim. I’m thinking about all of the pests out there and it sounds like they’ve got them all covered. Although I didn’t hear you mention trolls. Are they able to deal with trolls?

Jim Mueller: Well, if we’re talking about billy goat, rough trolls, maybe, but the Internet trolls, no. They don’t do Internet at all.

David Gardner: Turns out all you need to do is just don’t feed those trolls.

Jim Mueller: Exactly. [laughs]

David Gardner: Good. Well, Jim, thank you very much. I’ve asked each of our analysts to pull out the didactic lesson that we should all be taking away from their story. Jim, what is the didactic lesson I should be learning from your story about Rollins?

Jim Mueller: This one, it’s boring is great. It does a necessary service, but not an exciting service. Killing bugs, come on. It’s not going to get headlines in the financial news world for sure, unlike Apple or Netflix or any of those high-flying tech companies, but you can make a lot of money and get very good returns out of a boring, cash-flow, positive, growing company over the years.

David Gardner: Wonderful. Well, Jim, thank you for starting that story at the very beginning, the founding of the company, Orkin, back in the day. I always love corporate histories. I’d say this about once or twice a year on this podcast, but if I were an academia, I would try to take up the subject of corporate histories. I feel like so much of our history is just what were the four causes of World War I and how did the Roman empire fall? It’s always about wars or politics, but my golly, how many great, especially American stories are there of companies and how they were founded and how they morphed into something totally different over the course of time? If there’s any share out there that needs to be endowed for the corporate historian, somebody who understands the business history is fascinating, I’m happy to make an annual donations. I’m just putting that out there on this podcast right now and encouraging the young academics of the next era to pay some attention to corporate histories, I do love the About Us page on most companies websites that’ll show sometimes pictures from the early days, but I really appreciate you giving us a little of the history there. Jim, keep up the great work.

Jim Mueller: Maybe next time I will bring in a company that’s been around since the 1840s.

David Gardner: [laughs] Sounds good to me. They’re out there. They’re not always American either. There’s some amazing European and Japanese and other companies that have been doing good work of different kinds for the longest time. Well, Jim Mueller, thank you very much for stock story number 2.

Jim Mueller: My pleasure, David.

David Gardner: All right, it is time for stock story number 3. Now, I assume you’ve been listening all the way through to the show. I mean, some people might just want to hear Emily’s story. They see Emily Flippen is coming to this week’s podcast, so they fast-forward to everything and just get to this place in the podcast. But for those of us who’ve gotten here slowly, second-by-second, you know what to expect. Some sound effects as we get ready for story number 3. You’re probably curious, what is that 3rd sound that Rick is going to thread in to the ambiance that we’re creating on this week stock stories volume 6? Emily Flippen, a delight to have you back on Rule Breaker Investing. You are going to tell stock story number 3.

Emily Flippen: Thank you so much for having me. It’s a pleasure to be back. It’s been a minute.

David Gardner: Thank you. Now, before you start with the story Emily, could you just update us, what are you doing in and around Fooldom these days?

Emily Flippen: Sure. A number of things, but the biggest new thing in my world is actually been working on Stock Advisors. Since you made the decision earlier this year to transition your focus, it left a little bit of a hole for some other people’s focuses to take that place. I’ve spent a lot of my time thinking about your side of Stock Advisor, what is now known as Team Breakers side of Stock Advisor.

David Gardner: Wonderful, Emily. Well, I’m delighted to know that. If I did leave a hole, it was an opportunity. Indeed, I wanted great people like you to be able to enjoy that opportunity. That was certainly part of my calculus as I thought about how I wanted to spend my 3rd chapter of my 27 years at a time chapters of my life. So thank you very much for filling that hole, and it’s been a delight to see you in the work of many other Fool analysts in that same regard. Now Emily, why don’t you share with us the stock that you’ll be telling a story about.

Emily Flippen: Sure. The business I’ll be focusing on today is actually Stitch Fix. A really interesting story that I think has some critical lessons for investors. Not just for their stocks, but for their lives as well.

David Gardner: Excellent. Ticker symbol SFIX, this is one that I picked. Not one of my better stock picks, I don’t think at this point, for Motley Fool Rule Breakers. It’s had some ups and some downs. I’m sure she’ll be talking us through that. Emily, what is the title of your story?

Emily Flippen: Stitch Fix’s Missing Thread.

David Gardner: I would say of the title so far, that’s the most convincingly literary title that we’ve had thus far. Well played, Emily. Get us started. [MUSIC]

Emily Flippen: Once upon a time, there was a girl with a wonderful idea. In fact, she brought this idea all the way through her MBA program until she was able to put it into reality. That woman was Katrina Lake, the co-founder and former CEO of Stitch Fix. Now, Katrina Lake was one of the youngest women ever, as a co-founder and CEO, to bring her company public. Stitch Fix, as many investors know, heavily focused on improving the experience for people to buy clothing by providing them boxes of clothing that both stylists and algorithms helped contribute to. Now, let me take you back to this moment, because it was November 2017. If you were an investor during this year, you may know that it was a pretty hot year for IPOs. We had Okta, we had Appian, we added Roku, and Redfin. They were all businesses that had gone public earlier that year to a lot of success. Now, Stitch Fix was a victim of that success. Expectations for Katrina Lake’s business were incredibly high heading into their IPO. But because investors couldn’t quite figure out what a tech-enabled company should be valued at, Stitch Fix actually ended up being priced the low end of their expected range going public at $15 a share.

David Gardner: I had forgotten that, Emily. Thank you for reminding me of that. I’m curious. You may or may not be putting yourself in the story, Sanmeet put himself in his Chipotle story earlier. Have you actually used, have you subscribed, have you tried the box sent to you from Stitch Fix?

Emily Flippen: After a number of listeners were frustrated about my comments on the service a couple of years ago without having ever tried it myself, I since have tried the service. Of course, it was an interesting and great experience. I wasn’t a big fan myself, but I will say my boyfriend loved it.

David Gardner: All right. Now, I’m not saying that is one of the chapters of your story, I’m not sure you’re headed there. We can at least call that a footnote, but I was curious. Carry on.

Emily Flippen: Well, I was curious as well. A lot of investors were. In this business again, going public at $15 a share was less than the $18-$20 a share that was expected initially. It’s interesting because Katrina Lake, when reflecting upon this IPO process, later said that she felt like a disappointment when in reality, that $15 a share shouldn’t have been. It was significantly higher, the highest that Stitch Fix has ever been valued. But after a really volatile first day, it was considered by some to be a little bit of a broken IPO. It closed its first day of trading at just barely above where it had listed $15.15, leading a lot of investors and Lake herself to be somewhat disappointed.

David Gardner: Earlier, Sanmeet mentioned that Chipotle’s IPO, the company doubled the first day. It was the second-best restaurant IPO of all time only to Boston Market. Of course back in those days, it was actually called Boston Chicken, which wasn’t in the end the great predictor of how Boston Market would end up. That first day can be telling, Emily, but I don’t think we should necessarily view it as predictive.

Emily Flippen: Not at all. In fact, you’ll find with the story of Stitch Fix, the first day is not representative of the reality behind the business at all. I mentioned that only because it showed how controversial the business was when it initially went public in the minds of investors. There were a lot of people who didn’t buy in to the idea, whereas other people saying this would have revolutionized the $300 billion apparel market by combining stylists and algorithms, collecting valuable data and insight. It was a very divisive company. If you actually look through the first few quarters of Stitch Fix as a public company, you’ll find that stock price really moved sideways for the first few quarters. Nothing really happened, nothing bad was happening. There were some concerns maybe around margin pressure, but the company was profitable, was posting customer growth, but people were just confused. For this first six months as a public company, Stitch Fix’s their price really stayed within a relatively narrow range of $15-$25 range, as that sentiment came and went.

David Gardner: It’s funny because I feel as if we’re talking historically about a company that’s, well, in the past, which it is; not nearly like Rollins. I mean, this is a pretty contemporary company, but a lot of these questions still remain. I think the most compelling one to me has always been, in this case Americans I think, mostly, are Americans willing to not go clothes shopping in person, but have something sent to them in a box by somebody who we hope is getting to know their tastes over time? Could that become mainstream enough to support a successful Rule Breaking business? Some things are easier to predict, like streaming. I mean, that feels like an important trend, or the Cloud, that always for us in Rule Breakers, felt like a real thing even before it existed. But even now years later, I’m still scratching my head at this one. Keep going, Emily.

Emily Flippen: A key investing principle that you always mentioned, it’s not the key investing principle of Stitch Fix, is to invest in opportunities that are obvious. I think some of what Stitch Fix struggled with, was that it wasn’t obvious. In fact, if you look at just the share prices of Stitch Fix, you may think that something really big happened in June 2018, less than a year after Stitch Fix went public. But in fact, it’s that sentiment, it’s those expectations that was driving a lot of the share price. Stitch Fix was making some headway into new initiatives, things like men’s clothing, children’s clothing, even some international expansion. Those things shifted sentiment. They weren’t being executed upon quite yet, but people started to buy into the idea of getting their clothes shipped to them in a box. In fact in June 2018, Stitch Fix’s stock price had suddenly, over a period of just a few months, risen over 150 percent. It reached a new all-time high of $50 a share in September of that year. But there really is that old adage of the faster they rise, the harder they fall. I know. I’m foreshadowing here. But it does show, again, [laughs] back to that sentiment shift. Lofty expectations meant that investors wanted to see real progress in Stitch Fix’s performance, and that progress wasn’t really materializing. People didn’t quite know what they were looking for. After one disappointing quarter, a quarter in which Stitch Fix just barely, by the way, missed on revenue and customer growth. Stitch Fix pulled back over 50 percent in less than a month. After what had started out to be a really incredible year, by the end of 2018 Stitch Fix’s share price was a measly $18 a share.

David Gardner: Well, I’d like to mention because I love to talk about my losers, because nobody else seems to, so I do. This is a great example of one. We brought this stock to Motley Fool Rule Breakers in August of that year, August 2018. Now, I know you mentioned it crested over 50 that year. We got it on the way down, which I thought was going to be good. It was at 36-and-a-half in August, but as you mentioned, yeah, just months later, we had been basically cut in half with our brand new shiny Rule Breaker. Sometimes that’s the way the cookie crumbles.

Emily Flippen: If investors were having an identity crisis with Stitch Fix, I think Stitch Fix was also going through an identity crisis of its own. I remember Tim Beyers was the analyst too. I believe was the initial catalyst behind bringing it to The Motley Fool universe and he had a very big vision for where he saw the business going. He was one of those investors that had great ideas about what Stitch Fix could become but there were some, I would say maybe inconsistencies or struggles with the identity of Stitch Fix internally. Wasn’t quite sure, was it a business whose secret sauce was the stylist and the people, or was it a business with data and AI that produce better outcomes without the need for human touch? Over the next year, all of 2019 was just such, I’ll say, a sideways year for Stitch Fix because despite rising over 40 percent that year, it just barely kept up with the broader market and ended that year at $25 a share, again, only a few bucks above where it was a year prior and really nothing had changed. That was the interesting story behind Stitch Fix was, I know Jim previously talked about boring companies. That was a boring year for Stitch Fix, 2019.

David Gardner: Very ironic because 2019 was such a dynamic year for so many Rule Breakers and then 2020, well, that was its own surprising thing in both directions for many different companies but I have to admit, since I don’t personally own Stitch Fix even though it is a losing recommendation of mine and I don’t own all my losers and I also don’t own all my winners, never bought any Shopify myself, but I’m so glad so many Motley Fool members own Shopify. I’m not really keeping up with Stitch Fix that much. What did happen in 2020?

Emily Flippen: Let’s talk about that because you could play one of two ways heading into the pandemic. Either, you could look at the lack of demand for clothing. We were all stuck at home, weren’t going outside. Who needs new clothes when you’re sitting in front of a computer monitor? But you could also say, look, Stitch Fix was already a digitally native business. It didn’t have to pivot for remote world. Actually, if you look at Stitch Fix’s performance versus other clothing retailers, 2020 was a pretty decent year for the business, while it wasn’t growing as growing faster than the industry average, which was negative growth. The fact is that Stitch Fix well, not being in the right place at the right time when it comes to the pandemic, ultimately did outperform peers, but the interesting thing about Stitch Fix was when you look at 2020, the story wasn’t COVID. It might be the first thing that your mind goes to, but the story was actually in December. All of these events accumulated as December 2020 earnings report. The business posted revenue growth of around 10 percent, a small bottom-line profitability. None of these things were new for Stitch Fix, again, performing similarly quarter-after-quarter many years. However, heading into these reports, more than 20 percent of Stitch Fix’s shares were sold short and when their quarter was better-than-expected, when they had that 10 percent revenue growth, lots of people bought the stock to cover their shorts and that created a really dynamic short squeeze and within one day, Stitch Fix’s stock rose more than 50 percent. By the end of January 2021, so this year, when the short squeeze finally came to an end, Stitch Fix’s share price had risen over 200 percent and reached an all-time high of nearly $114 a share.

David Gardner: I’m never going to be the guy who tries to sell at the top because I generally just try to hold past everybody else, whether it’s a winner or a loser usually and when it’s a winner, that really rewards you, when it’s a loser, well, it just becomes irrelevant to your portfolio because your winners take on greater size and your losers don’t. I’ve never felt guilty about not timing my exits because I don’t even think about that but wow. Now knowing where Stitch Fix is today, which you are about to mention, Emily, that $114 exit earlier this year would have been pretty sweet.

Emily Flippen: I will say if you are a passive investor holding shares of Stitch Fix or any company, it would’ve been easy to look back at January and think that something had fundamentally changed in the business that would justify such an increase in share price but to be clear, nothing really had changed. Again, the sentiment had shifted, the shorts had covered, but fundamentally nothing was different about the business at $114 a share versus $35 a share or $25 a share. But since these highs earlier this year, obviously Stitch Fix has pulled back as a result of this short squeeze, it’s fallen more than 65 percent. It trades at less than $35 a share today, about where it was this time last year. It’s weird to do the story, David, because as you know, so much of the story for Stitch Fix is probably still ahead of it.

David Gardner: It is and it’s funny also for me to think about that initial stock pick, which I’ve already bemoaned. I won’t do it one more time but to think about Stitch Fix stock, which was at 36-and-a-half as I mentioned earlier, when I picked it in August of 2018, so 36-and-and-a-half today, it’s right about 35 at market close as we’re recording here on Tuesday, November 9th. Yeah, there’s been so much drama. There has been a lot of up and down. I know you’re going to speak to this briefly as we close. There’s not the same CEO anymore and this talks about where it was just about three years ago and well, the market’s gone up, so it’s been a significant market underperformer, but it’s about flat, which is the story of Stitch Fix on the public markets.

Emily Flippen: I will say I glossed over the departure of Katrina Lake from her role as CEO, giving the spot to former President Elizabeth Spaulding. I did that on purpose because the market didn’t react strongly to this departure. Typically, when a Co-Founder and CEO leaves, there tends to be a lot of fear. I’ll say this, the stock was only down about five percent on the news of Katrina Lake’s departure. Again, going back to just how lack of a vision I think Stitch Fix had and Spaulding at least came in with a clear outline about where she saw Stitch Fix was going, although clearly, in a different direction than maybe the initial thoughts that Katrina Lake had when bringing the company public.

David Gardner: All right Emily, what are we to learn from the story of Stitch Fix?

Emily Flippen: It might sound obvious right now, but the big lesson here is that major accomplishments will always overshadow sentiment and when you look at the story of Stitch Fix, it is a story of changing sentiment, but not a ton of major accomplishments. Regardless of when you bought the stock, it was likely during one of these big shifts in sentiment, whether it be during a short squeeze, whether it be when they’re launching their men’s business, it all comes down to what is the business accomplishing and without any real big moves and becoming that disruptive market opportunity for clothing. We’ve seen the results of that in Stitch Fix’s share price.

David Gardner: Emily, I don’t think I should let you leave without asking you, do you have any predictions or thoughts about Stitch Fix going forward because this is a stock, as we mentioned, that’s in the mid 30s today. It was over 100 just months ago. New CEO, maybe new vision, who knows where this company might go in the next five years? It remains an active Rule Breakers pick.

Emily Flippen: I will say I think there is more of Stitch Fix’s story in front of it, than there is behind it. If I was a shareholder, I’d be looking forward to that unknown, that future. Although I’m, I think maybe conflicted about what I think that future could look like. A new CEO, Elizabeth Spaulding, I think has a clear vision for where she wants to bring the company in a way that I was never quite sold with co-founder Katrina Lake. But at the same time, that vision puts them in direct competition as a traditional retailer and man, I don’t know David, but that’s a hard market to compete in.

David Gardner: Well, we will keep watching and part of being invested is that you pay more attention when it’s an active recommendation of yours or a shareholding of yours than if you weren’t, than if you didn’t. I think part of the beauty of investing is being invested. We’re going to have our winners, we are going to have our losers, but boy do we learn by paying attention and there’s no substitute for paying attention than actively recommending or owning a stock. Emily Flippen, thank you. It was a delight to be with you this week on Rule Breaker Investing.

Emily Flippen: Thanks David.

David Gardner: Well, from Emily Flippen, we’re headed next to my friend Aaron Bush. Aaron will be sharing with us stock story number 4 this particular weekend. I don’t know, am I the only one who is excited to hear what the 4th sound effect that Rick Engdahl will threat in to this intro as we begin to welcome Aaron to the campfire? [MUSIC] Welcome Aaron, it’s great to be with you again.

Aaron Bush: Thanks for having me back, David.

David Gardner: You’re very welcome. Aaron, what are you doing around the Fool these days?

Aaron Bush: Well, for those who are listening, not much has changed since I answered this a couple of weeks ago, [laughs] I still am co-advising Rule Breakers and Blast Off and Platinum, so I have a handful of services overlooking, always thinking about beating the market, finding awesome Rule Breaker ideas. Still doing that.

David Gardner: You’re right, that thing hasn’t changed that much from two weeks ago when you were asked on this podcast, but not everybody was necessarily listening to Mailbag so I always like to reintro. But with that said, you’ve compelled me to ask, what has changed for you in any regard in the last two weeks?

Aaron Bush: Well, the stock we’re about to talk about has changed quite a bit in the past two weeks.

David Gardner: Yeah, that’s a good one. This is another active recommendation. This is one I own as well. The company is, Aaron?

Aaron Bush: Zillow.

David Gardner: Ticker symbol Z or ZG depending on which class of share you have but they’re both Zillow Group, Zillow. This is a long time Rule Breaker, a company that has not been shy to take risks at different points. It certainly is a disruptor and sometimes Aaron companies can disrupt themselves it seems to me. Not to steal from your didactic lesson, I’m not sure what that’s going to be but as we get ready for Zillow, what is the title of your story?

Aaron Bush: My title is, Go hard or go-home. [laughs] Once upon a time, Zillow went public on July 20th, 2011 at a split adjusted $10 a share and the story of Zillow in my mind, the stock story of Zillow really plays out in three arcs and the first arc starts at that IPO, which is what we can call the rise of Zillow 1.0. At the time, Zillow was a leader in making the residential real estate market more transparent. Zillow is known for its Zestimates, its value estimates of every domestic residential property, which were interesting to anyone who owned a home but especially useful to those who are looking to transact real estate and then Zillow used those many millions of interested eyeballs to advertise real estate agents and that agent business became the core moneymaker of Zillow’s business. Over the next few years, the company lightly expanded into adjacent offerings like rentals and connecting users to mortgage providers and the company even made a large acquisition of competitor Trulia in 2014 when the stock was around $40 a share, so about four times where it was when it went public three years prior, but the core business is still stayed pretty centered around serving agents and really this first arc of Zillow, Zillow 1.0, it ended in 2018, so about seven years post IPO when the stock was in the mid 30. Up from its IPO but still down from where it was trading four years prior.

David Gardner: You know part of the story of Zillow and help me out of here a little bit Aaron, but the founders. There was a team of founders, there’s the PayPal mafia of which Elon Musk was one, helped start PayPal and a lot of those people went on to great things. Well, this was a similar story, I remember Rich Barton in particular and I’m sure you’ll mention his name at least once during the story. He was one of the co-founders, he had helped create Expedia, so he had, and I think a few others had some experience there. I remember Spencer Rascoff another co-founder of the company, he had started hotwire.com which I remember using back in the day but I can’t even exactly remember what Hotwire was, but maybe it’s travel. Some think that I’m making that up. You don’t even need to.

Aaron Bush: I don’t know.

David Gardner: But these names are relevant because they became the leaders at different points in the chapters of Zillow.

Aaron Bush: That’s correct. In that 1st arc, Spencer Rascoff was the CEO, but really entering the 2nd arc which begins in early 2019. Again, at that time the stock price was around $35 and almost in a messianic fashion, Zillow announced that, its co-founder and Silicon Valley Legend, Rich Barton was returning to the role of CEO and not just that but he was going to usher in a new era what was since known as Zillow 2.0 and what hypothetically made Zillow 2.0 great was that it would no longer only facilitate transactions by connecting buyers and sellers to agents, but it would get in on the actual transactions itself. This has been broadly called iBuying and Zillow’s goal was to become a market-maker, buying homes on its balance sheet, rapidly fixing them up, and then quickly selling them. It’s a pretty thin-margin business, but it believed that it would provide a great convenience to sellers, which is true and that Zillow would make more money on adjacent services to boost up its overall margins. It was a huge transformational idea and many people, myself included, that suspected that Zillow had a chance. After all, it had a huge relevant user base as well as a special Founder and CEO at the helm and notably, belief in that vision peaked earlier this year. In February, the stock hit a high of $212, about five times higher than when Zillow 2.0 officially began exactly two years prior and about 21 times its IPO price. There was a lot of hope riding on this new grand plan.

David Gardner: It seems to me at the heart of Zillow, Aaron really from the earliest days was the Zestimate. This idea that the company has big data, it’s got former Microsoft executives and other things, they are crunching numbers, it’s really gutsy. They’re putting a price on every residential property around the United States of America. Sure, nobody thinks that they’ve got it right in every case, but certainly if you were a realtor, a real estate professional, you were at least aware of it, whether or not you believed it or not. Speaking of real estate professionals increasingly, because of the prominence of Zillow, realtors started to advertise, they wanted to be in that ZIP Code, the Realtor who would pop up on Zillow because so many of us, me included, were using Zillow to prospect around and look at what sorts of houses are trading for what prices these days. The Zestimate Aaron, it feels like part of the promise of Zillow smartly with AI coming in and buying homes in that new chapter of Zillow starting just two years ago, it was predicate on the idea that they really had it nailed with the Zestimate, or maybe they have the secret sauce Zestimate behind the Zestimate.

Aaron Bush: Yeah, it was really two things. I mean, one, absolutely, it can’t just be they’re generally right, occasionally wrong with the Zestimates. They have to get to a point where they can nail it pretty much every time because when you’re operating on razor-thin margins, you have to operate with precision. Then second it is just a completely new type of business with completely different skill-sets, completely different operational needs. That transition in and of itself is extremely challenging, but you’re right. The keystone of making all of that happened in the first place was this estimate itself.

David Gardner: You and I are both Rule Breakers and not just as investors, but we love innovators and disruptors and the taking of risk. We recognize that sometimes there are going to be slow-motion train wrecks or explosions, we weren’t expecting among our Rule Breakers and certainly the Rule Breakers scorecard, as winning as it is overall, has some hilarious, actually sadly hilarious flops to it. I do want to mention without fast-forwarding the story too much, that even today, after Chapter 3, after a very significant announcement that it has happened within the last couple of weeks, even then, the stock is still a seven-bagger for us, from the 2011 initial cost basis we have in Rule Breakers. The market by the way, is up five times in value. If we’re up 633 percent, that feels great. The market though is up 400 percent. It’s not like it’s been a total market crusher, but nevertheless, without trying to spoil any future part of the story, Aaron, I try to think of this as a 10-year story, but now let’s focus on last 10 days or so because something really significant happened.

Aaron Bush: You’re right. The 3rd arc of Zillow’s stock story unfortunately, began last week, after many months of hype and optimism by management that its iBuying business held a lot of potential and they could pull it off. Zillow pretty suddenly announced its intention to leave iBuying altogether. This is for many reasons, some operational, some financial, we don’t need to get into all of the weeds, I don’t think. But the long story short, the company couldn’t figure it out. It announced its intention to write-off $300 million in home inventory, it’s laying out 25 percent of its workforce, and its stock price currently sits, last I checked at $66.17, which is a 68 percent wipe out from earlier this year. Right now, the company is resetting. It’s not necessarily going back to Zillow 1.0, I don’t think, but rather in a discovery period of trying to lay out a new vision for what Zillow 3.0 is even going to be. In other words, despite the momentum getting sucked out of the business and it’s upside potential perhaps getting drastically reduced, Zillow is down but not necessarily out. I was actually going to echo some of what you were saying, David, just by saying that despite these missteps of late, like the stock is still a multi-bagger from when it went public and when you recommended it. It was also in the Odyssey One portfolio which we brought into that portfolio in 2012 and it was a winner for us there. The stock is still about double where it was when Zillow 2.0 was officially announced. It feels like a loser. Depending on when you bought, it very well could be. I feel like a loser for having recommended it and in certain cases, more recently. But again, zooming out to that longer-term, 10-year view, which again, is really what matters to us as long-term investors. It’s not as big of a loser as it seems.

David Gardner: Yeah, and not to try to suggest to you while you already had a better title than this because you had go big or go home. But I do think down, but not out is probably how I’m thinking about Zillow these days. But Aaron, what is the didactic lesson that we should be taking away, one or more didactic lessons from the story as you’ve told it for Zillow Group?

Aaron Bush: Actually, I initially wrote my lesson as something to do more with spotting warning signs and dealing with losers. But now that I’m here, I want to put a more optimistic spin on it. I think that even though swinging forward defenses may have result in more outs than home runs. Great Rule Breakers never stop breaking the rules. They continue to push and take chances and recognize that there’s always more work to do and always more value to create for the world. It can be challenging at times, like it is with Zillow right now, plans don’t always work. But the best companies, they take their hits and they find ways to get stronger as a result. Maybe that will happen with Zillow. I’m not sure, but it’s encouraging that when you zoom out to that 10-year view, Zillow is still a winner. I have a feeling maybe that when we zoom out again in 10 years Zillow still maybe a winner. It might not transform the industry like it was hoping, but it still has a chance to do a lot of good.

David Gardner: Some really interesting parallels between this and Stitch Fix both of them probably with more future than past. When we think of those companies, both of them substantially down from their January or February highs. Both of them just open questions, open books. They’re pretty transparent as companies, it’s not that hard to read their financial statements. I like those kinds of companies. They’re both Rule Breakers, certainly they’re both the innovator within their space in terms of what they’re trying to do. I think they are brand names people recognize, those who are clientele, those who are interested in buying a home, or in looking better than whatever they would’ve bought off the rack at Nordstrom. I find it really interesting that we randomly happened to have hit these two companies right next to each other. Really interesting to watch them going forward. Well, Aaron Bush. I always enjoy watching what you’re going to do going forward. Thanks a lot for joining us this week once again on Rule Breaker Investing and I look forward to your next appearance whenever that is.

Aaron Bush: Thank you, David. It was fun.

David Gardner: Well that brings us to stock story number 5. Now, before we go into that one, let me mention what we’re doing on next week’s show. It is a Review-a-Palooza. I will have some friends back with me next week to review three past five-stock samplers. Five-stock samplers from one-year ago, next week, two years ago next week, and three-years ago next week. For those keeping score at home, the one from one year ago was five stocks that will press on. We’ll find out what they were and whether they’ve been pressing on during a very interesting year for the stock market. Two years ago, next week, five stocks for conscious capitalism. Anytime I’m going to put the brand conscious capitalism out there, I’m taking a little bit of a risk because if I pick bad stocks, people might think conscious capitalism, that must not be a very good idea. We’ll keep our fingers crossed for five stocks for conscious capitalism. Then the last one will review next week from three-years ago. We’ll be sending it off to Fool Hella. That will be five stocks that got trouble. All you really need to know about that one, the secret is that all five stocks simply have a company name that starts with the letter T. That’s the brilliant theme behind that sampler. Five stocks that will press on. Five stocks for conscious capitalism. Five stocks that got trouble on next week’s Rule Breaker Investing. Well I’m the only one left around the campfire. Well, you’re still here. Thanks for being with me. It’s just you and me. You and me, and the 5th threaded additional sound effects showing off the production values that you’ve come now to expect from Rule Breaker Investing. Let’s get into it. [MUSIC] Stock story number 5, well, I get to tell this one? The title of stock story number 5, I would say, is clearly the worst of the five titles of the five stock stories this week. Because I’m going with, winners win, so do NVIDIA [inaudible 01:06:13] bunnies. That’s right NVIDIA [inaudible 01:06:17] bunnies. My stock is, of course, NVIDIA, the ticker symbol is NVDA. Let’s hope my story is better than the title. Once upon a time NVIDIA was picked on my side of Stock Advisor. The date was Tax Day, April 15th of 2005. Now this is a story I occasionally tell and retell on this show. Each time I do it, I always have one extra chapter I can add, what’s happened to NVIDIA since the last time I told the story. But I always like to start right there, once upon a time, our cost basis is $1.64. Now before we move forward, I hasten to add that, that is by no means where NVIDIA was trading.

Sometimes people here are a low cost basis and they think The Motley Fool loves penny stocks and we love to look for stocks that are trading under two dollars a share. The only reason that I’m reflecting NVIDIA at a dollar, $1.64 is because the company has had three stock splits since tax day 2005. NVIDIA has split 2-for-1. Then it split 3-for-2. Then this year it’s split 4-for-1. That means NVIDIA was actually closer to 12 times $1.64, which means that in real life it was trading right around $20 a share when we first picked it. But because of stock splits, it’s now reflected in real life terms as a $1.64 cost basis. Again, stick with me on this stock story. We’re going to have a lot of numbers. We’re really just looking at the graph. I’m not going to talk too much about the business. The business is amazing and has one of the best CEOs in America that nobody really can name. That would be Jensen Huang. But this is a company founder, this is the president, the CEO. This is one of the biggest, most relevant companies in technology in the United States of America today. I love to share what’s happened with the stock since we first picked it Tax Day of 2005. We roll forward now, it’s October 2007, and the stock in two-and-half years has gone from a $1.64 to 10. Wow, what a wonderful investment and what a happy recommendation for Motley Fool Stock Advisor members who bought because it was a six-bagger two-and-half years later, that was October 2007. My stock story by the way is really just moving along the graph of the stocks. Let’s keep going to the end of 2008, about a year later. do you remember the great financial recession, the Great Recession of 2008-9? NVIDIA drops from 10, where I just mentioned it to you, to below $1.50. That’s right. The six-bagger that we had wrapped up in two-and-half years, three-and-half years later is below cost. We’re underwater on NVIDIA stock. I’ve done that before. I’ll probably do it again. It never feels good. I remember Celera Genomics was once a 10-bagger for our Motley Fool portfolio, the Rule Breaker portfolio online, and eventually it gave it all back, and then some ended up being a loser. This can happen and it did during that era for NVIDIA. Let’s get through the great recession and fast-forward to the end of 2014. NVIDIA comes back and hits five. Five dollars a share, that’s half where it was seven years earlier, remember it hit 10. It finally in 2014, hits five on the way back up. It’s still a three-bagger by the way, from our investment nine years earlier. A three-bagger in nine years NVIDIA from $1.64 now to five by the end of 2014. 2016 comes and it crosses 10. Ten, where it had been in October 2007. We’re back, Was that Jack Nicholson, The Shining? If it was, that wasn’t much of an impression. By the end of that year NVIDIA has tripled from 7.5-22.5 The year 2016 NVIDIA as a triple becomes the top-performing stock on the S&P 500, 500 of the largest companies in America NVIDIA was on it. Stock triples, more years than not. Whatever stock triples on the S&P 500 is definitely going to be ranking way up there for performance. It was the number 1 performer for 2016. It closed the year 22.5. In one of my better moves as an investor as we began 2017, I thought what is going to be my first stock pick to start the year of 2017. I decided and I was trying to prove a point a little bit, I made it NVIDIA. The stock that we recommended at $1.64, that was already at 22-and-a-half and had just finished the top-performing year on the S&P 500. I thought starting the next year, I’m recommending it right here. I love it. In 2017, I’m happy to say NVIDIA went from 22.5-52.5. In 2018, it hits 70, so it goes up even higher. 52.5-70. 2018 was a bad year for NVIDIA. This was a year in which a lot of the expectations of the growth of cryptocurrency, a lot of the hopes that cars really might drive themselves thanks to the AI chips that NVIDIA built and could embed in cars and many other things. Unfortunately, we found out that cars wouldn’t be driving themselves all over the place quite yet in 2018. Bitcoins sold off and NVIDIA sold off as well. Whammo from 70 to $30 a share, more than cut in half the good year for the market. Although that December of 2018, that last quarter was ugly for many of our Rule Breaker stocks, but for NVIDIA overall, such a winner those previous two years, more than cut in half in 2018. In 2020, so that’s just last year, early 2020, the stock crossed back over 70 again an all-time high and by the end of last year NVIDIA closed at $130 a share right in the middle of the pandemic. Remember our cost is 1.64. Well today, after quite a run in 2021, I’m really happy to tell you, maybe you own this stock and if you do, I don’t. This is one I’ve never bought. Yeah, I don’t buy all of my biggest winners and I don’t have all of our biggest losers in some cases either, but I have enough winners.

I’m pretty happy following my own advice. I just don’t follow my own advice for all 200-plus stock picks I make over the years. Boy do I wish I’d own this one, but many Motley Fool members do, which is all that really matters to me. Today the stock has closed at about $304 a share. That makes NVIDIA 184-bagger for patient investors, especially ones who follow Motley Fool, Stock Advisor. All you had to do was hold for 16.5 years and counting. I’m saying that a little bit tongue and cheek because it’s a lot to hold any investment for that amount of time. Yet at no point did I feel as if if I snap my fingers overnight and then NVIDIA disappeared at no point did I think that, well, people wouldn’t really notice, people wouldn’t really care. My classic snap tests that I’ve talked about many times before. Every time I’ve ever snap my fingers and thought about NVIDIA, I thought the world needs NVIDIA. It needs it more in 2021 than it did in 2011 or 2005 when we first recommended it. In a lot of ways, it wasn’t that hard to hold. But the lesson that I want you to take away from this one should be pretty obvious. The ups and the downs for even the greatest stocks of an era are extreme.

You simply will never end up prospering as you could and should unless you’re willing to allow to triple back and then triple again, be a top performer and triple one more time and then give more than half of it all the way, so here we are. Just over the last two years alone, NVIDIA has risen from 50-300. It’s really been one of the best stocks you could have held. Yet you’ve had to wait years and years to get that 184-bagger. Most of those baggers happening in just the last two years, years 14, 15, and 16, that we’ve held NVIDIA stock. I still think it’s going up from here. My really lamely titled story, winners win and NVIDIA [inaudible 01:14:49] bunnies win too. It’s a reminder of the resilience that I really think you need to exhibit if you truly want to win in the best way that you can as a stock market investor. That means just hold, hold, hold, hold, not every stock, but the ones that are truly great. You will be so well rewarded and so gleeful and so satisfied and fulfilled when you’ve been through those ups and downs to get to the point where NVIDIA shareholders are today. I hope you enjoyed this edition of stock stories volume 6. If you did, there are five others you can listen to for didactic lessons in other companies in the past, including some of the same voices you heard this week, telling other stories. I sure did enjoy our incredibly expensive campfire. I hope that the sounds that you heard will only make the stories more memorable. That’s really what we want from our stories, right? The reason that I could’ve read the Odyssey and the Iliad when I went through school and probably you did too is because there is an oral tradition that handed those stories down for centuries, which means great stories need to be memorable. Those stories certainly are. We try to make them memorable, our stock stories here for you. To celebrate them, I’ll just conclude with the titles to remind you of what you’ve heard this week. Sanmeet Deo talking about Chipotle. His title was, when picking stocks, sometimes it pays to invest with your gut. Jim Mueller brought Rollins and entitled his story, boring can be great. Emily Flippen told the story of Stitch Fix. Well, the story we can tell thus far and she entitled it Stitch Fix’s missing thread. Aaron Bush of course, just came by and talked about Zillow, go big or go home. Do I have to give my title one more time? Fine. I talked about NVIDIA, winners win NVIDIA [inaudible 01:16:42] bunnies too. That’s Rule Breaker Investing for you this week. Next week again, a Review-a-palooza looking forward to five stocks that will press on, five stocks for conscious capitalism, and five stocks that got trouble. In the meantime, have a wonderful week. Fool on.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Aaron Bush owns shares of Chipotle Mexican Grill, Roku, Zillow Group (A shares), and Zillow Group (C shares). David Gardner owns shares of Chipotle Mexican Grill, Netflix, Roku, Zillow Group (A shares), and Zillow Group (C shares). Emily Flippen owns shares of Roku and Zillow Group (C shares). Jim Mueller, CFA owns shares of Chipotle Mexican Grill, Netflix, and Nvidia and has the following options: long January 2023 $210 calls on Microsoft and short January 2023 $220 calls on Microsoft. Sanmeet Deo owns shares of Chipotle Mexican Grill, Netflix, and Roku. The Motley Fool owns shares of and recommends Appian, Chipotle Mexican Grill, Microsoft, Netflix, Nvidia, Roku, Stitch Fix, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool has a disclosure policy.