These 5-Stock Samplers Have Gotten Whacked. And That’s OK

Our track record with 5-Stock Samplers has been simply astounding. So many times we’ve crushed the market! But remember when we said it wouldn’t always be that way? That to win we sometimes have to lose? This is that time, Fools.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was aired on May 4, 2022.

David Gardner: Thirty separate times, about every 10 weeks on this podcast over six years, I picked five stocks. I chose a theme that made sense to me at the time. Sometimes sublime and sometimes silly, and then I thought to myself, what are the five best recommendations that I can come up with for stocks that fit that theme? Aiming of course, always to beat the market, the S&P 500 otherwise. Hey, why are we bothering? Well then one year later, we review the picks and then another year passes. The two-year review, yes. Two years later, we never forget we hope you wouldn’t also, we score everything transparently and accountably because we’re Fools, you should expect that of us.

Then the three-year review, which is going to be the most telling. Why? Well first, because three years have passed since I picked the five stocks, we really can be smarter about what has happened and why and what we can learn, and that’s the smarter part. But if I’ve done my job well then we’ll also be happier and richer, too. Now that three-year review is also telling because most of the time we end the game right there, we’re going to keep holding those stocks in real life, mind you. You should do if you own them, but if I kept reviewing all 30 of my samplers in years 4, 5 and 6, etc.

Well, we wouldn’t have much time to do much else on this podcast. Thirty separate times, I’ve picked five stocks, what I’ve also called my five-stock samplers, and we’re going to review three of those samplers today. Five stocks that teach, Rule Breakers, five stocks for the coronavirus, and five stocks for the age of miracles. Review them we will, with my three analysts. Guest stars, Emily Flippen, Rick Munarriz, and Asit Sharma. Only on this week’s Rule Breaker Investing.

Speaker 1: It’s the Rule Breaker Investing podcast with Motley Fool Co-Founder, David Gardner. [MUSIC]

David Gardner: Welcome back to Rule Breaker Investing, happy May. May comes to mind each year for many different reasons for me, it’s always such a busy month, at least it is around our house, I don’t know about yours. Also, my birthday in the middle of the month, which reminds me to mention what we’re going to do next week. This is an annual tradition and it’s called What Have You Learned from David Gardner? What have you learned for me, it’s your annual birthday gift to me. I of course, really appreciate this. We’ve done it many past years. We actually skipped doing it last year because I had a big announcement about a transition in what work I’m doing at the Motley Fool. A lot of you will know that and remember that, so I skipped that all together last year and the world has changed a lot over the last year, so I’m very curious what you’ve learned from me and it’s such a pleasure to read your notes and to share them back and annually I think this is a podcast next week, which is worth listening to because it’s a good summary of so many of the cardinal points and the most important points I think that I try to convey through Rule Breaker Investing, the podcast. Here’s where you fit in, you’re my co-conspirator.

Next week’s podcast can’t really happen unless you show up in this form, write me a note, write us an email, You can also just tweet us @rbipodcast, if you like. But the emails usually give us a little bit more time and breathing space, and just tell me something that you’ve learned from me, something that’s been helpful for you. A way that I’ve made you smarter, happier, and richer. It might be about investing. That’s a big thing that I’ve done and continue to do, might be about business that matters a lot to me conscious capitalism included, or we spend one-third of our time on life in this podcast. What have you learned for me about life, we learned a little bit about death, speaking of life last month, so what have you learned from David Gardner is next week’s podcast. It sings with your help, so email us, need to have those submissions in by this weekend,

Well, enough about next week, let’s get to this week and I met a lead off this week with a spoiler alert. That is, that these three five-stock samplers picked in April 2019, April 2020, and April 2021, these three have gotten whacked. No ifs, ands, or buts about it, I will take pains not to make any excuses throughout this review, this wonderful stock-picking game we played throughout the first seven years of this podcast continues to be so interesting and I think rewarding and in particular, five stocks for the coronavirus, which will review second this week. Has the most amazing whipsaw I think that I’ve ever seen. But win or lose and I’m happy to say despite the horrible performance, review this week. I’m happy to say that we’ve won far more than we’ve lost, win or lose.

You get to learn right along with me and my team. That’s right the purpose of The Motley Fool is to make you smarter, happier and richer, and while richer has not been very easy with this stock market for about the last year or so, I definitely hope I make you smarter. We’re going to get a lot smarter with my three smart analysts this week and making me smarter does make me happier. Although I have to admit when I’m not richer, I’m not quite as happier as I might have been, and that’s how the last 12 months have felt to me, I don’t know that you so. Let me just say before we get started, Emily Flippen joining me very shortly to talk about five stocks to teach Rule Breakers. I do want to mention that after these three reviews at the end of this week’s podcast, I am going to draw a few conclusions from what happened to these three samplers and what we can learn from that. That’s the plan for this week, and without further ado, let me welcome back to Rule Breaker Investing. My pal and co-conspirator, fellow Rulebreaker, Emily Flippen. Emily, happy, May.

Emily Flippen: Happy May David.

David Gardner: What May mean for you. When I talk about the month of May, does it have certain connotations for you, Emily?

Emily Flippen: The month of May, I have to say, the only thing that comes to mind and I can’t remember if The Backstreet Boys sing song, It’s Going To Be Me, but it’s going to be May. That’s what it comes to mind immediately. I’m not sure if that’s exactly what’s you’re going or you’re not, David.

David Gardner: Words just fine. I mean, each of the months of the year has different connotations for each of us and one window in to each of us. I just learned that you’re a Backstreet Boys fan or is it NSYNC? I’m not sure. You like the boy bands?

Emily Flippen: I do. I’m a boy band fan. Although, not a fan enough to know which band played which song, apparently. [laughs] But enough of a fan to at least know the lyrics.

David Gardner: Excellent. Well, something that you and I are both fans of that I know a lot better is the stock market and Emily, what a year it has been. We’re reviewing five stocks to teach Rule Breakers, we’re about to go back in time. Let’s strap ourselves into the time machine. Get a little bit of way-back music. If you can go one year, back in time to April 2021. [MUSIC] These are picked on April 7th of last year, so we’re a few weeks after the one-year review, but here we are up to date. We are recording Tuesday afternoon, May 3rd, and Emily, as I look over this list of five companies, I mean, I like each of these companies. But I don’t love the performance, what’s happened to them and really the whole year for Rule Breaker Investing has just been brutal?

Emily Flippen: That’s a fair word, I think since February 2021, which is about when we had a lot of these growth companies that I think have become so emblematic of Rule Breakers. Since that peak, it’s been extremely challenging to be an investor in this space. Anytime we see businesses down 40 or 50 percent, a lot of investors are thinking to themselves, this is the bottom right, these are some of the best innovators. I will tell you what, a business that is down at four year 50 percent can still be down another 40 or 50 percent on top of it.

David Gardner: Don’t say that.

Emily Flippen: It’s important to remember. But I will say that when you look at five or 10 years out, this list of companies both within the Rule Breakers universe. But in particular the five that you have selected here, David, for stocks that will teach Rule Breakers, I think they all have very exciting futures in front of them. That regardless of the pullback that we’ve seen over the past year, I feel very confident to say and all of them, with the exception of maybe one which we’ll talk about, I think the future is still very much, I think the best is ahead for most of these businesses.

David Gardner: Certainly for the stock market at large, it’s easy to use the rearview mirror right now and think about what a tough 12 months it’s been. We have a family stock-picking contest that we do, my larger family, so all cousins included in, and we’ve got some pretty bright people in my family. People are good at picking stocks. Through the first four months finished April 30th of last week, I do a monthly level report to the family, and the average pick in our stock contest this year is down I think it’s 41 percent. I said, I’m not one to make market calls, especially short-term market calls. But I did say at least in my family members and I guess I’m saying it aloud here, this is not trying to be a hardcore prediction, but it’s my hunch that the market is going to be higher by December than it just closed April.

Some of the best companies I know literally cut in half in just a few months. Well, I’m not expecting anything to fix itself overnight. There are real reasons Emily, in the world today, why the market shouldn’t be at all-time highs at the same time. At the treatment that so many of these great companies have gotten is extreme and this case extremely negative. I definitely hear you on the hey, that’s down 40 percent doesn’t mean it can’t go down 40 percent more. If it does, at a certain point I’ll be adding to my losers at that point because I really do feel strongly about the strength of a lot of these companies with perhaps one exception. Let’s get into this list here, Emily. We have five companies to teach Rule Breakers. I guess, before we get into the individual covers, the first thing I want to say is all five of these companies, Emily, start with the letter A, and I was having fun a year-ago doing that intentionally.

Emily Flippen: When you send me this list over, I had not looked at the description, I had not listened to the episode last year. I thought to myself, well certainly, this is the A list. I was comparing all this wonderful commentary about how great it is to start with the beginning of the alphabet and then work your way down. Then I realized, no, these are stocks that are teaching about something much greater, which is the purposes of Rule Breaker Investing. Although I suppose alphabetic investing, at least for these five stocks, does align.

David Gardner: Thank you, and yes, the title of this sampler is Five Stocks to Teach Rule Breakers. We won’t speak that right now but maybe as we go through the companies you can mention. But I was very intentional with each of these five to convey one good lesson or truism about Rule Breaker Investing through each. As we cover them, maybe you can lightly speak to that. Now our tradition is always to start with the worst of their performers. Looking across these five companies, I’ll name them right now, alphabetically by company name, Activision Blizzard, AeroVironment, Airbnb, Apple, and Axon Enterprise. Emily, as we look over these five right now, the one that’s done worst, and it’s actually hard to pick which one because four of them have done about equally badly. But as it turns out, we’re going to pick on AeroVironment, ticker symbol AVAV. Because as we speak, stock is down 23.6 percent. By the way, the stock market is up 2.4 percent. Well, at least somebody else’s stock market, not mine. But the S&P 500, which has been very industrial heavy and has been very interesting to follow over the last years, actually up 2.4 percent. With AeroVironment down 23.6, that means we’re 26 points in the whole. Emily, looking over AeroVironment, maybe you could briefly remind us what this business is. But the real question is, what’s your best guess as to why in this case, the stocks lost about a quarter its value over the last year?

Emily Flippen: I’m going to answer both of those questions, David. But to kick it off, I want to say if this is your worst stock pick in the basket, I would actually argue that you’ve done a good job over the past year. [laughs] You did note the S&P 500 is up year over year and that would make you see, well this is underperforming in the stock market, the S&P 500 by double digits. But I actually reached out to our investing intelligence team and I wanted to get some metrics about the Nasdaq of which all five of these companies are listed. The Nasdaq is a market cap weighted index, which means that the largest companies that are listed have higher impact on the overall index performance. But I was interested in the average. The average Nasdaq listed company, how did they perform over the past year? Since you picked this basket, I believe on April 7th, 2021, over the past year, the average Nasdaq stock is down more than 28 percent. With that context, which I think is important to recognize this pick in particular, AeroVironment looks a bit better than it would otherwise. Now, we still would have outperformed the index to be clear, that’s the benchmark. But contextualizing that and contextualizing both this basket as well as individual investors portfolios makes you realize how heavily the indexes are weighted to a handful of companies and important when you’re picking these smaller companies that put AeroVironment is included to contextualize its performance against its peers.

David Gardner: Wow, Emily, thank you. That is a bomb you’ve got. You’ve brought us to this podcast this week because my producer, Rick Engdahl, typically names the podcast from one week to the next. I was going to suggest to include the word blood, [laughs] some within [laughs] the title of this week’s podcast although for sheepish listeners, that might not be the right call. But I feel a little bit better now. I did not know that the average Nasdaq stock is down 28 percent. It’s felt like that though, it sure has felt like that to me as an investor, I guess a lot of my stocks are Nasdaq stocks, not all, but these five were. So Emily, wow, to think that AeroVironment is outperforming the Nasdaq, even though it’s well out of the S&P 500, which is all that matters by the way, for this game. But yes, so in some senses, it’s ahead of the curve. What has been happening at AeroVironment that for you helps explain the loss of a quarter of the value of this small-cap company?

Emily Flippen: If I had one word to sum it up, it would be war and you wouldn’t think that that’s exactly where you would go at this stock. In fact, with its stock down as a government contractor, you think it’d be benefiting from a lot of the conflict that we’ve unfortunately seen over the past year. But being a relatively small company, it is more volatile than a lot of the other one separate going to be talking about today. For investors who aren’t aware of this is largely a government contractor business had a history designing, I believe, human-powered aircraft, but it’s bread and butter now is a supplier of small drones, unmanned for the government for the most part. You’ve picked this, you noted when you picked it last year that this was an example of strong past price appreciation, one of those critical Rule Breaker factors.

The year leading up to your pick, it was up more than 100 percent. It’s not entirely surprising to see a pullback here more than 20 percent over the past year, just within normal volatility that we see with this business. There really hasn’t been anything thesis breaking that has happened for this investment over the past year that would cause it stock price to go down. In fact, I think it was just balancing investor expectations against growth that has been historically very lumpy depending on which government contracts they have. But I will note that prior to March 2022, this stock was down nearly 50 percent. It had an incredible bump after the war in Ukraine, after Russia invaded, because there were reports that the government was sending out orders for these unmanned drones to support the military and Ukraine. It was reported that those were in fact coming from AeroVironment. It’s natural to see that stock price go up. But that level of volatility, depending on demand from the government, has been very indicative of this company.

David Gardner: What a year it’s been. Emily, I really have not paid that much attention to AeroVironment, by the way, market cap fans. This company has a market cap of 2.2 billion. That’s why Emily and I keep calling it a small-cap because it is. But wow, looking at just the stock graph over the last year, basically dropped from about 110-90, presumably after an earnings report in early September or some announcement then it dropped from 80 down below 60 in the first week of December so just two gigantic steps down. Then it raged higher as you’re mentioning, the war breaking out, stock went from basically below 60 back up to 110, middle of last month, and it’s dropped from 110-87 today. All of these moves count, but it’s this huge down, down again, backup again, down again, a lot of volatility. Emily, I guess we can expect that especially from smaller cap stocks.

Emily Flippen: Definitely. Let’s let’s look at that September and December quarters. Actually, they just reported earnings, I believe yesterday, we’re taping this on May 3rd. We’re coming out on three-quarters here. It’s not nearly as volatile today as it was back in December and September. But they actually beat expectations both in terms of revenue and earnings in both of those quarters. When we hear about beating expectations, we associate that with certainly the stock goes up and that has very much not been the case for a lot of businesses over the past year. In fact, it was guidance in both of these cases that investors we’re getting a little trepidatious about misses, largely due to a lot of the same that we’ve heard around supply chain constraints due to the pandemic, extended procurement cycles as the government slowdown it’s buying because of those same constraints. It’s always going to be a little bit lumpy, especially when you’re looking at it business that depends so heavily on things like government contracts and backlogs. But I will say the performance if you’re just looking at the business, this is a great example of when business performance has been strong, but stock performance has been weak.

David Gardner: Wonderful. Well, thank you for highlighting that. I’d forgotten that the way this stock helps teach Rule Breakers, as you mentioned, is past price performance and it had a raging good 2020 and so we pick the stock. In the face of that, it’s been the worst performer so far as I mentioned, it’s 26 percentage points behind the S&P 500. We won’t talk about the Nasdaq will just keep moving. But let’s go now to the best performer in these five, and I’m happy to say one of these stocks is actually beating the market. Is it unsurprising? It’s Apple. Apple, a year ago at $127.90, as we speak today, it’s right about 160. The stock’s up 25 percentage points, 23 percentage points ahead of the market itself. Emily, what’s been happening with Apple?

Emily Flippen: One word to describe this one, and I think every investor can predict it, it’s the iPhone. In fact, if you strip away everything else and Apple’s business, you could almost predict the up and down movements in Apple’s stock price by just looking at the popularity and demand for the iPhone, you noted that Apple is a great example of a business that has an incredibly strong consumer-facing brands. Again, very emblematic of Rule Breaker businesses. And Apple has just been firing on all cylinders in regards to that, with its most recent iPhone. I will say it’s been a steady rise for the most part since you picked it at the beginning of April last year to today. There have been some up and downs, but in comparison to the other businesses we’re talking about, Apple has been on a steady acceleration.

I think part of that is due to the low expectations investors had about the ability for Apple to continue to drive sales of things like iPhones both in a supply constraint environment, a chip constrained environment, as well as just with the consumer confidence in general weakening. But we have seen quarter-after-quarter, Apple post incredible metrics for sales of their products that almost make investors think, is this a bit more resilient to consumer spending than we initially thought? When people are scaling back their Netflix purchases, are they still buying iPhones? We had some indication that that may be the case this quarter, our most recent quarter, iPhone sales.

We had iPhone 12 leading up to your recommendation, the release of that shortly after you came out and you picked it in your five-stock sampler, they had the release of the iPhone 13 in late September 2021, and that’s the real story here. Set an all-time revenue record for the iPhone segments. Again, even more impressive because of the constraints they’re facing in that quarter. But iPhone demand has continued into this year, which is extremely impressive. I mentioned in most recent quarter, revenue from iPhone, it grew five percent and that doesn’t sound particularly fun. But this time last year, that revenue from iPhone grew 66 percent. They are selling more iPhones, even though they haven’t launched a new iPhone since September. It’s that type of consumer appeal that you just can’t create otherwise and really represents why Apple is the largest business in the world.

David Gardner: Do you rock an iPhone yourself, Emily?

Emily Flippen: I do rock an iPhone myself. I will say mine still has a home button which tells you that it is extremely outdated. I’m amazed that it still functions. I am desperately in need of an upgrade. I will say in researching for this five-stock sampler, I was tempted to grab myself one of those purple iPhone 12, I just love the color.

David Gardner: [laughs] Well, you’ve still got a chance ahead of you, and if you do, shareholders will be rewarded. Please, Emily, and everybody else, it’s time to upgrade. Actually, I think I’m going to upgrade to the 13 or maybe I’ll wait for the 14. I assume there will be a 14 at some point. Am right about that?

Emily Flippen: They haven’t released it yet, but I think it’s a safe assumption. I will say they released the purple iPhone 12. They did recently announce the green iPhone 13, so if you’re a fan of green, that may be the way to go.

David Gardner: Definitely saw those ads during March Madness, noted. Thank you, Emily, and you mentioned how does this stock teach Rule Breakers well, brands such an important consideration. Is it a company that is well-known and well-known as a great brand. I don’t think there’s a greater brand in the world full stop than Apple, and so it’s a great example. Emily, this is the one stock that is winning in this five-stock sampler. Now, we highlighted AeroVironment, made them sound bad. Highlighted Apple, made it sound good. The other three are all down between 19 and 21 percent. We basically have four of these companies well down to the market, which means this is a loser in its first year as a five-stock sampler. But let me mention the companies again, just how do you say a little bit about each of them, anything that interests you about in no particular order, Emily. Activision Blizzard, Airbnb, and/or Axon Enterprise. Give me your best thought on each of these three. Let’s start with Activision Blizzard.

Emily Flippen: I’m happy you want to start with Activision because I didn’t want to end on a bad note. I have to say, David, I’m going to call Activision your biggest miss in this sampler. Not because this is a bad business. In fact, investors may be familiar with some of the recent news around Activision, why it may not be listed at some point here in the [inaudible] .

David Gardner: Microsoft took a like into this company.

Emily Flippen: Exactly. Within itself, anytime we see an acquisition target, typically that’s an indicator that that’s a desirable business that investors and other private investors, public investors are interested in owning. But in this stock in particular, you invested in or recommended it with the context of the RB principle of good management and smart backing. There’s still some of that that exists today. But I have to say very quickly after you made this pick, there were some questioning, I guess here about the good management in this company. Unfortunately, there were allegations of poor company culture, allegations of sexual misconduct, even an argument that CEO Bobby Kotick knew about some of these allegations, but didn’t act quickly enough, so investors were very nervous about that exact thing.

David Gardner: That was very unfortunate. Obviously, Microsoft, I think in part said, well, it may be bad, but not so bad that we don’t still want to buy this company. But on the other hand, the company had been knocked down and rightly so on the market and with its reputation, and that probably helped Microsoft get maybe a more attractive price. It’s interesting to think about these dynamics. I of course remain a huge fan of the products. I’m a video gamer for life and I love so many of Activision and Blizzard’s games, but that didn’t stop this stock Emily from dropping 20 percentage points over the last year. As you note, assuming it all goes through and Activision Blizzard becomes part of Microsoft, we will reflect that on this five-stock sampler, it’s probably not going to make a full three years duration for that particular stock. Whenever it gets finally traded out, we will record the results accurately. Not every five-stock sampler do all five, make it through the three or so year period. This is probably one of those. Well, from Activision Blizzard, let’s next look at Airbnb. Emily, your thoughts, your best and most interesting take, your hot take on Airbnb.

Emily Flippen: I’m actually going to start with a question for you, David. How many times over the past year do you think Airbnb has risen or fallen more than 20 percent?

David Gardner: Well, I really have not been following on a regular basis. But that you’re asking me that question makes me think it’s surprisingly a lot and yet it’s such a big company that you might even be playing, I sounds like Wally Sean in Princess Bride, you might be playing the other side of this and that it hasn’t once done that. But I’m going to stick with my initial instinct and say, you’re asking me because it’s surprising how volatile it’s been, and so I’m going to say five times.

Emily Flippen: That’s a good guess. I apologize for springing that question on you. Your initial instinct was correct, Airbnb has risen or fallen more than 20 percent nine times over the last year.

David Gardner: Nine times, wow.

Emily Flippen: I will say, where you judge those lines can be a little bit arbitrary. I’m not talking just in a single day over periods of time, but it just goes to highlight how volatile even a large company like Airbnb has been over the past year. For clarity, six of those times were falling, three of those times were rising, and largely this has been driven by, I guess the one word I will use to describe Airbnb over the past year, which is pandemic. There’s no avoiding with Airbnb, they’ve really been unable to provide guidance for their business simply because they have no idea what travel demand is going to look like even just a quarter out, given how unpredictable the pandemic has been over the last couple of years. That uncertainty has largely been the driving force behind Airbnb’s performance.

David Gardner: Thank you. After those nine large movements, six down tells the story of the market for me in the last year. But the company has a market cap right about $100 billion or $101.4 billion as we speak. It’s a huge, very relevant enterprise. Brian Chesky, the founder, I think he recently said he’s making a point of just leading a nomadic life and just eating his own dog food, trying out his product bouncing around different Airbnbs. I like the CEOs who go out there and try their own stuff in front of the world. I wish good things for Airbnb. It certainly is a stock that can help teach Rule Breakers. Do you remember the lesson this one had in it?

Emily Flippen: It did, the top dog and first-mover in an important and emerging industry. There’s no denying that even today.

David Gardner: Absolutely right. It is an important emerging industry Airbnb, clearly the top dog and a first-mover. Yet as we move to the final stock in this sampler, Emily, and yet the stock down 19 percent over the last year, putting it up about 21 percentage points behind the market. I will be doing full tabulations in just a second, but let’s close it out with Axon Enterprise, ticker symbol AXON. Emily, what has happened with Axon that would cause it to lose 21.4 percent of its value over the last 12 months?

Emily Flippen: It’s a really boring story for Axon actually because the reason is largely valuation driven, which is what we’ve seen for a lot of these unprofitable high-growth, I’ll call this a tech company, although that’s arguable. Tech businesses over the past year, Axon’s been caught up with that. But you did recommend it and talk about it in the context of its sustainable competitive advantages. It’s interesting that exists in such a concrete fashion with this company. But it actually has been a bit of a headwind for the business because to use your example, there is no Pepsi to its Coke, but it’s already saturated the soda markets. Investors are asking what’s next. I think over the past year Axon has said, hey, look, we haven’t gotten into diet coke yet. We haven’t gotten into energy drinks or coffees. There’s so many places that Axon can move into and they’ve had numerous product launches over the past year that I think is being discounted by the market that includes services for the justice system, international growth, even a consumer-facing taser. Whether or not you agree with that is a fair enough question, but it is all to show just the power of these competitive advantages. They have a dominant market share and the niches that they pursue, and I think they can replicate that in new areas. One of my highest conviction stocks headed into 2022.

David Gardner: Thank you for that, Emily, and yes, it is. All five of these I think are completely different businesses for [inaudible], Airbnb is entirely different from Activision Blizzard and the list goes on. Axon Enterprise teaching us, reminding us of the importance of a sustainable competitive advantage. As you mentioned, there’s really no gain saying that. I guess the question is, is there more blue ocean out there in front of this company with its products and its management team and get there. It’s time for the full accounting that Emily, one-year in, so remember, we’re playing a three-year game here, five stocks to teach Rule Breakers pick April 7th of 2021.

The average stock among these five is down 11.4 percent. The S&P 500 averages a 2.4 percent gain that means we are in the hole by 13.8 percent points. Now, Emily did start with the exciting news to me anyway that the Nasdaq itself is averaging a loss of 28 percent, but that’s not the game we’re playing. I’ve always, compared to the S&P 500, I think that’s the benchmark, that’s the default we all should use. Admittedly, every index is subjective. Everything has its own implicit bias, but that’s the one I accept. Therefore, Emily, all I can say is I apologize to you as somebody who’s a fellow Rule breaker to anybody who is trying to learn about Rule Breakers through this podcast or this five-stock sampler. Five stocks to teach Rule Breakers because after one year we are in the hole. But I do have I hold out quite a bit of hope for the sampler over the next couple of years. In the meantime, Emily, keep up the great work at the Fool. I hope you’re having fun.

Emily Flippen: I have certainly always, although it’s been harder recently, I will say that. Once the market goes back up again though, then I will be having the most fun.

David Gardner: Yes. T.S. Eliot said April is the cruelest month and that’s sure is how things felt as it all crashed and ended last month. But I’m already feeling a little bit more upbeat. Maybe it’s just because it’s May, April showers after all. Then here come the flowers. But let’s keep our fingers crossed for five stocks to teach Rule Breakers. Emily, see you again on Rule Breaker Investing.

Emily Flippen: Thanks, David.

David Gardner: Well, the Reviewapalooza continues. It’s time to go to the second of the three five-stock samplers we’re reviewing this week. Let’s get back to the time machine. Let’s get that way back music going again, Rick Engdahl. [MUSIC] We’ve alighted upon April of 2020. The date was April 8th, five stocks for the coronavirus. I remember at the time I was thinking, how could I not pick five stocks for the coronavirus? It seem the obvious theme, Rick Munarriz, to speak to in that moment. Do you remember roughly where you were, what pillow you had your head under, Rick, back in April of 2020?

Rick Munarriz: I had my pillow under wherever I could get a mask at that point, I think. It was very scary. But ultimately, uplifting times. We knew things would eventually get better. Maybe it took a lot longer than we thought, but yet at the time, especially some of the stocks we are going to be talking about are the stocks that if they tick up higher, I knew that there was bad news out there concerning the pandemic.

David Gardner: Looking over these five companies, the intent was very much to think about. We’re about to go into a lockdown, a global, well pandemic by its nature means global. A pandemic and so what companies make sense within that environment? The five companies, I’ll put them out right now, alphabetically. Peloton Interactive, Roku, Sea Limited, Teladoc, and Zoom Video Communications. Now, anybody who wants to take the time to go back and listen, you can hear exactly what I was saying on that podcast, including just the tenor of the times and how it felt. I haven’t gone back to listen to that one recently, but I’ve thought a lot about these stocks, Rick, because I have never seen more volatility among any five-stock sampler. I’m not sure we would ever see this volatility. Again, I’m a never-say-never person, Rick Munarriz, but I can’t imagine over the next 20 years that you could pick five stocks that would go up and then go down as much as these five have. Let’s start with the worst performer in the group. The worst performer in this group, I’m sorry to say is Teladoc, ticker symbol TDOC. Rick, two years ago, April picked it at a $139 a share right now it’s around $39 a share. Take the one-off, the 139 in you’re left with just 39, which means this stock is down 72 percent, get this the S&P 500 from two years ago, as of now is up 51.9, we’ll round to 52 percent. For Teladoc to be minus 72 against the S&P 500’s plus 52. We’re starting in a 124-point hole, Rick, what has been happening to Teladoc?

Rick Munarriz: The one-sentence lesson in this is that the doctor is still in but the investor is out and it’s a crowded consultation room. Teladoc, at the beginning of obviously the COVID-19 crisis was a logical winner. This is a company that does telehealth, which is basically, you can consult with someone whether it’s a dermatologist, an actual medical specialist, if you have weight management. You want to consultation, even therapy like a psychiatry or something that you can communicate over from your own home from any screen. It’s something that was already out there, it’s been out there for decades. Telehealth and telemedicine have existed but obviously with the pandemic and so many doctors’ offices closed and so many doctors apprehensive medical specialists, apprehensive to have people visit one-on-one.

It became something that a lot of people turned to during the pandemic. This is a company that did really well initially. It had a surge in everything. But with Teladoc’s case in particular, then they made this huge acquisition of Livongo Health, a stock that you and I David know well, they’re a Rule Breaker stock and a very exciting company too but they paid at the time was an $18.5 billion deal for Livongo health, basically almost half of Teladoc’s value at the time. Now all of Teladoc, including Livongo health, is a $6 billion market cap, $6.7 billion enterprise value. Clearly not the smartest of looking back, but there are two very good companies in this one, Teladoc. What has happened is that over time it just become also a very competitive market. The barrier to entry is just, there’s a lot of companies from Amazon to a lot of other like basically health companies that realized, hey, we need to get in on this if this is the future of how we’re delivering help to people in consultation. It’s become a crowded market.

Teladoc is still growing and that’s the thing that’s important here with Teladoc, that there’s still growing. They’re just not growing at the same pace that they were before. A revenue rose 25 percent in its latest quarter, which of course is not as good as it was a year or two years from now ago. But it is definitely still positive growth. Even the guidance, it provided really weak guidance where basically said, we’re just going to grow 18-23 percent this year. That’s unfortunate because three months ago, it was expected to grow 25-30 percent here in 2022. It’s total visits, people are not stopping to visit these online telehealth visits. I think that’s one thing very important keep in mind with Teladoc where people say it’s OK, we’ve been vaccinated, we’ve been boosted.

We can go out in public, we can go see our doctor and our dentists and our therapist and our weight management specialist all this we can do right now. But still, Teladoc still expects to have 18.5 million to 19.5 million visits, which is up 20-27 percent in 2022. We’re not totally giving up on the convenience that Teladoc offers. But investors, they’re the ones that have said I’ve had enough. They were willing to give Teladoc a very high valuation, very high multiples, generous multiples a year or two years ago when it was the only game in town, it was necessary. But now that consumers have options, they’re willing to pay a little less for this growth. We’re seeing that in the stock that clearly has been slammed, and it was actually the worst one. A year ago, it was the worst performer of the five.

David Gardner: That’s right.

Rick Munarriz: It was up 29 percent and when you hear that what we’re getting to the spectacular one-year returns of the other four, it’s going to be jaw-dropping. But in Teladoc, they were already a laggard a year ago. The people were already starting to wonder again, think about this is April 2021 when we had that one-year review and the vaccines were already out in December, January, February, or we started general availability. Investors were already starting to pare back their Teladoc confidence. Their faith in the company being this disruptive growth stock. But yeah, it’s just an unfortunate situation, but thankfully the company’s still growing. But obviously not this dynamic growth company that we thought we had two years ago.

David Gardner: Well said, Rick. I’m just reminded how much has truly happened from the start of the pandemic to one year ago. As you mentioned, one year ago, the stock was up 29 percent, the market at the time was up 50 percent. When we review the first year of this now two-year sampler, the first year the market was already up, the S&P was up 50 percent. The stock was lagging at plus 29, but it’s gone from plus 29 to overall minus 72. Teladoc has lost three-quarters of its value. It got gut-punch last week with the disappointing earnings announcement, the stock basically got cut in half from 60-30. It has bounced back up to about 38 in intervening days, which is about a 25 percent gain from its lows of last week.

Anyway, a very volatile time, market is having a hard time recognizing whether it’s going to make money, it’s not making money. How much of being a leader in this industry, how much is that worth. Now, I certainly continue to hold out great hope, not just for Teladoc, but Rick, for all five of these stocks, let’s move from the worst, Teladoc, to the best. Now one of these five is beating the market and when you consider, and here’s the number. When you consider that one year ago, Rick, when we reviewed these five stocks for the coronavirus, as I mentioned, the S&P 500 was up 50 percent. This sampler was up 240 percent. The average stock had more than tripled in a single year. For me now to say the stock we’re about to talk about Sea Limited, ticker symbol SE. If I’m now saying that’s the only one that’s still beating the market. It is unbelievable what has happened to these five.

Let’s go to Sea Limited, Rick. Stock was at $45.45 two years ago. It’s around 87 today, just about a double. It’s up 92 percent against the market’s 52 percent. Rick, Sea Limited the only survivor here by the end of year too, it’s not over yet. We got a whole another volatile year ahead. But what’s been working at Sea Limited?

Rick Munarriz: Yeah. Sea limited. My tag line to Sea Limited in my $0.01 takeaways, sometimes the best game to play is diversification. Sea Limited, probably when you pick the two-years ago, you’re probably looking at Sea Limited more as a gaming company and of course it’s still a very strong gaming company. But this is a company that has three distinct businesses. There’s obviously the online gaming aspect of Sea Limited. There’s obviously the e-commerce, which is a very important part of it and there’s FinTech, which is the smallest part of the model, but clearly a growing market. This is a company that over the past year, it’s gaming market. The online gaming market, particularly in Asia, has taken a hit.

A lot of countries have basically China more than anybody else. They’ve gone very restrictive on how video games in China rolled out, and other countries have followed suit. It’s very difficult for a company to standout in this environment. But thankfully for Sea Limited, you have a company that’s still growing at a ridiculous clip because of the fact that it’s well diversified. Its guidance for 2022 for this year so it just recently put out a couple of months ago, put out its guidance for the rest of this year. It’s 4.6 billion in basically direct entertainment. That’s as gaming segment in bookings, I’m sorry, 4.6 billion was last year. It’s only targeting 3 billion in bookings. This is the kind of company, if it was a pure gaming company and that’s all it was. I assure you would not be the one stock in our portfolio that would be beating the market. It would be like, oh, well, it’s business is going the wrong way.

But thankfully, e-commerce, they are expecting it to be up 76 percent this year. FinTech is expected to be up a 155 percent. Even though some of these brands at Sea Limited does, are not familiar here in the US. even a place like Mercado Libre, you think Latin America, where you think basically Singapore and Latin America is so far apart geographically. Shopee, which is their e-commerce platform, is really gaining steam. It’s not at the Mercado Libre level of course, but it is making a dent. It started in Brazil in 2019 and it’s growing very quickly there. It is a company that’s a global force clearly doing well. But again, this is a company that obviously is doing well, I mean, 417 percent to be down, giving up almost all those bags is pretty rough.

David Gardner: Yeah.

Rick Munarriz: But it is doing, obviously it’s the one stock that we can say, hey, this one worked. Again, it’s fallen hard over the last year. Of course, you don’t go from a gain of 417 to just up 92 percent, but losing basically for it’s overvalue almost. But it is an exciting company that is doing a lot of things right and it’s the fastest-growing of all these companies. They are all growing, which is really the most surprising thing about this. In the latest quarter, they all had positive growth. But Sea Limited grew a 106 percent the revenue year-over-year. This was with the gaming, basically holding it back, sandbagging results in that quarter.

David Gardner: Well, thank you for that, Rick, I had forgotten this, of course, to have a basket of five stocks like this one up 240 percent on an average means somebody was up above 240 and it was Sea Limited. It had more than quintupled up 417 percent. But as you mentioned, but I’m still happy about it being up 92 percent. But man or we, well down below where we were over the last year.

A lot of people, a lot of Motley Fool fans, a lot of Rule Breakers may not have great feelings about Sea Limited right now because depending on when you bought it, you might be well, underwater, by the way underwater reminds me for those who don’t know, this company, S-E-A Limited, S-E-A is really for South East Asia and this is a company that’s trying to be an e-commerce, a platform leader for Internet commerce for that area of the world in the same way as you mentioned, Rick, that Mercado Libre is for Latin America. Although Sea Limited has a much bigger video game business than Amazon would have in the US, let’s say, or Mercado Libre in South America. Everything’s unique context counts, even if we say it’s the Elvis of Mexico. Elvis wasn’t from Mexico, whoever the Elvis of Mexico is these days, it’s not Elvis. Everything is unique and Sea Limited is one such example. Well, Rick, from the worst, Teladoc down 72 percent to the best, Sea Limited up 92 percent. Let’s just look at the others real quick. Here. We’ll take them in alphabetical order. I know you have at least one good one line takeaway for each. What do you got for Peloton Interactive?

Rick Munarriz: Peloton, Roku, and Sea Limited were all above the 240 percent benchmark that you put there. There were up 283 percent after the first year. Clearly, great companies, but my $0.01 takeaway with them was it overestimated its sustainable demand. This is a company that Peloton, it wasn’t just a pandemic play. One thing, I think it’s hard for people to wrap their heads around. They think, of course, Peloton, it was going to be a flop after things started getting better on the pandemic front. But the revenue had basically at least doubled, at least up 99 percent in each of the last four fiscal years until this past fiscal year. This is a company growing well, obviously what they’re stationary bikes and treadmills. The company has gained traction.

People were excited about these. People with the means to spend four figures, of course, on one of these treadmills or stationary bikes were excited by the prospects of a machine I can bring into my home and sort of duplicate the excitement and energy of an in fitness center in a spinning class setting without having to go out and be with people that either you’d like or don’t like or just on the open. It’s obviously some of that became very popular, but this is a company that overestimated how long it would be this trendy went out and bought a commercial fitness company to help increase its production. Instead of having to wait eight, nine, 10 weeks for your Peloton sometimes even months for your stationary bike that you’d order. They had too many bikes and you could see that it happened about a year-ago when they lowered their prices by introducing a new level of bikes. They introduced a new line of stationary bikes, new line of treadmills, and that created this whole disruption where you thought, OK, maybe they’ve already exhausted the high-end market. You also had a recall on its treadmills, which was unfortunate.

David Gardner: That hurt a lot.

Rick Munarriz: Reputations matter, especially if you’re paying up such a large amount of money. While treadmill accidents are common, if you have small kids and pets, please be careful with the treadmill. I mean, that’s happens to every treadmill maker. They had some pretty tragic accidents with the treadmill and they obviously had to recall it. People think it was the whole Sex in the City spinoff, that one of the main characters was died after a Peloton workout, but the company was falling apart well before that character died so yet really rough on Peloton.

David Gardner: It has been, as you mentioned, this was not from a Motley Fool standpoint. This was never a coronavirus play. We had picked the stock for Rule Breakers before we ever could have dreamed the coronavirus would show up. This is a company with a premium product, with a well-known brand and with an incredibly poor performing stock. I was just looking this up. Rick, I mean, August as recently as last August, yeah as in eight months ago, Peloton was trading at a $120 a share. Today it’s at $18. It has lost 90 percent of its value in just eight months.

By the way the market cap is still $6.5 billion for this company. It’s very compelling to people who like to crane their neck as they see an accident on the highway or hang out looking for drive by shootings. I don’t want to be too negative here, but I mean, this is a slow-motion train wreck. It has been ugly and painful and I’m sorry to say it was one of my five stocks for the coronavirus pick two years ago. Yeah, this one 186 percentage points behind the market because the market’s up 52 percent in the last two years and Peloton is down 34 percent from two years ago. It’s done a lot more from eight months ago. Well enough with Peloton. Again, this five-stock sampler is not over. We’re going to have a whole additional year to watch the most dramatic whipsaw that I’ve ever seen in two years. This group of stocks averaging a 240 percent gain after a single year, one-year ago. Now while I will give the numbers in a sec, but it’s negative, they’re actually negative as a group. We’ll cover that in a sec. But let’s speak real quick, Rick, to Roku, next. Ticker symbol, of course, ROKU.

Rick Munarriz: Roku, the one tag line. There’s always something good on TV but sometimes investors are the ones changing the channel or something else. This is a company that is still growing that even though a year ago, the bearish thesis was, now that the pandemic is at least we have vaccinations, we can go out to movie theaters, we can go out in public. We’re not going to spend time streaming on TV. Roku, it’s still growing and its latest quarter users 61.3 million active accounts up 14 percent. The hour streamed are 20.8 billion in its latest quarter up 14 percent. Both figures were up 14 percent which tells me the average person is watching the same amount of content and Roku’s getting better at monetizing it average revenue per user. This is an ad-driven model up 34 percent.

Services are trying to get out to getting noticed. But just by association with streaming services clearly we had Netflix a couple of weeks ago implode by coming at well short they had negative subscriber growth sequentially something that it did not forecast. It was expecting 2.5 million subscribers and we had a decline of 200,000. Clearly, people are concerned with streaming services. But again in my opinion I think this is something good for Roku because they are now going to be getting marketing dollars from all these services that want to stand out. But again investors just in general they’re saying well I don’t want to pay a premium for streaming anymore now that we see that the market is going through these growing pains. But Roku itself is doing OK. But clearly a stock that had basically more than quadrupled, it was up 303 percent at one year mark has given back essentially almost back to given them practically all those gains a year later. It’s definitely rough.

David Gardner: Yeah, speaking of stocks down from August the stock was at around 450 dollars a share eight months ago in August. It’s at 100 today. It’s $103. It’s lost three quarters its value in just eight months. When I can pick them I really can pick them, Rick. I can’t believe how many of these five companies have lost well more than three quarters of their value in less than a year after tripling or better in most cases after their first year. Now I realize hindsight being what it is, we all wonder why didn’t we just sell after everything has quadrupled in a single year, but I don’t sell in reaction to what the market does if I loved the company.

I’m intending to hold these companies for decades. So if stocks get ahead of themselves, or arguably right now, Rick, behind themselves it’s not going to make a great deal of difference to me. I keep trying to save money every two weeks from our salaries. Those of us who are wage earners and keep putting that savings into whatever your best ideas are at the time. Dollar cost average into the miracle of the stock market. Sometimes you’ll have Roku’s and other times you might have Apples or Sea Limited’s but take it all in all, Rick, even though this five-stock sampler is not looking to pretty right now, it doesn’t dissuade me from the strategy that we have used for more than 25 years to great success. Well, let’s go to the last of these and that would be Zoom Video Communications, arguably the best known of all five of these companies because Zoom is really an international phenomenon. Wow, wasn’t it a great stock that first year? I’m sorry to say that Zoom has now from a cost basis of $118 a share two years ago it’s 103 today. Down 12 percentage points overall for a stock again that had multi-bagged. Rick, what’s our takeaway right now on Zoom video?

Rick Munarriz: Yeah the one-sentence tag is you’re no longer on mute but the point is moot. In the sense that even though the company is still growing and especially large customers, the large customers that are on Zoom are up, it’s at 66 percent over the past year. The customer spending at least $100,000 on Zoom. If you have a hybrid workplace you still need Zoom around because obviously none of us are going to be at the workplace and people will call in sick and quarantine for a week or two. You need this dynamic. I mean with family reunions I know that we’re doing a lot of Zoom unions. We just get together and just talk by Zoom now because it’s there.

Obviously the company is in a much better place than it was two years ago even though the stock has basically went on a round trip to nowhere. But you do have a case where growth is slowing. Revenue rose just 21 percent in its latest quarter. It’s weakest in a long time and there are concerns of course that’s where will growth come from in the future? While Zoom the brand is obviously ubiquitous with what’s happening now where we are where the future is. It is just like everything else in this sampler, where the market was willing to pay so much more give these stocks a premium to their growth because they were so dynamic that now Zoom seems almost ordinary in the investing world. It’s unfortunate for Zoom’s but it has a reasonable valuation now if you’re going to look at it from that angle and more importantly, it is still growing which I think is an important takeaway.

David Gardner: All five of these than evincing very similar dynamics they all swooped high in their first year. They’ve all gotten crushed in their second year. Speaking of since August since it’s become a theme for this sampler, Zoom was it $400 a share in August. It’s at 103 lets rounded down to 100 today, very similar to Roku. What we’re seeing here whether it’s Peloton, Roku, Zoom, even a winner like Sea Limited, this company have been more than cut in half in just the last eight months. It doesn’t feel good at all, if you’re somebody who entered any of these stocks in 2021, you’re feeling the pain. If you started with us in 2020 or a number of these we have much lower cost basis from earlier than that then it feels more like wow, we briefly reached heaven, we touched Eden. Now we’re down back on earth again but maybe we can get back. In the end what matters most I think, Rick, is which of these companies and I’m going to ask you point blank in a sec, which of these companies is the most relevant serving the most valuable solutions to the world, not just today or in a pandemic mode but let’s say five years from now. Rick, this isn’t fair to you but part of my friendship is not being fair to you. But let me ask which of these five would you favor right now for the next five years?

Rick Munarriz: As an investment or as being an important company because I think those are two entirely different questions right now.

David Gardner: I tend to conflate them. But I would love for you to answer it in your way. Sounds like you got two different answers. Go for it.

Rick Munarriz: These are great fresh that we should have read shirted their sophomore year I get that. But if you’re asking how we think they’re going to do the junior I don’t mind being on record saying I think Roku will be the one that beats these other four in the year ahead. But as far as company and what they’re doing good obviously this is a toss-up between Zoom and Teladoc because they are doing a very important role in keeping people connected. This is coming through a time where we’re going through a lot of stuff either geopolitical or pandemic. So many things are happening where we do need connectivity, we do need a consultations both medical and Teladoc and it just face to face communication through Zoom video. I think these two are very important companies. Those are the two I would like to see succeed the most. But obviously you can tell me from a growth perspective, Sea Limited is the one that’s a sprinter that’s still running fast. It’s obviously going to be the favorite one. But I think Roku has the best shot to come back from here.

David Gardner: Well thank you for that, Rick, and we’ll watch that’s for sure. In about 52 more weeks, Rick, we’re going to get back together and we’re going to close out this five-stock sampler, five stocks for the coronavirus. Let’s do the accounting now though. From an amazing performance in which this group of stocks was up 240 percent on average one year ago versus the market’s 50 percent. These stocks against the markets now 52 percent average over these two years these stocks as a group are down 1.7 percent. What a long strange trip. It’s been two years, Rick, where we went to the moon and then came all the way back down to earth and we’re left wondering, what happened? More importantly though, what will happen next, since that’s all that really matters. We’ll be following, Rick. I really appreciate you sharing this volatility and these insights with me and our listeners. Keep up the great work and let’s keep our fingers crossed for five stocks for the coronavirus.

Rick Munarriz: Yeah, let’s go back to the moon next year.

David Gardner: All right, well, let’s go back in time one year more. [MUSIC] Here we are on April 3rd, 2019, which by the way means it concluded in early April 2022 because this five-stock samplers three-year journey is now over and the numbers I’ll be presenting you are as of market close turns out four/three this year was on a Sunday. This is through Friday, April 1st when five stocks for the age of miracles closed out. I’m going to say spoiler alert, I think I’ve already spoiled this spoiler alert. Mercifully, to these five stocks closeout, I couldn’t get them off the stage fast enough. Five stocks for the age of miracles of phrase, I still love. I still think Asit Sharma, that we are living in an age of medical miracles. A lot of it comes from the biotechnology industry. Some of it of course, as well from the medical device industry and others. But I’m sorry to say, maybe it’s because I put them on a three-year leash and that’s just too much to ask of biotech companies to strike it rich or hit it big in that time frame. But I’m sorry to say, this is my single worst five-stock sampler ever picked. Asit, I’m just so happy you’re willing to join with me to talk this one through.

Asit Sharma: David, I feel that maybe this is your single most ambitious basket. [laughs] I agree with you. I mean, we’re living in an age of miracles. We had the epidemic at the beginning of the 20th century, a pandemic that took years and years to recover from. Here we fast-forward some 100 years, we have a pandemic, we have MRNA vaccines that to a consumer like me, it’s seamless, it is magic. I go get three or four shots. I can go on vacation this summer. We’re living in an age where the progress is so astounding and so fast and backed by so much capital, we almost take it for granted and I agree with you. Maybe this basket should’ve had a longer leash. I’m excited to follow a couple of these companies well beyond today’s podcast.

David Gardner: Well, I am too. But at least one of them I’m not looking forward to following anymore at all. Let’s start with that one because as tradition has dictated, we start with the worst for each sampler. Before I say which one, let me give the company names in alphabetical order. Were going to be talking about Amgen, bluebird bio, Editas Medicine, Illumina, and Vertex Pharmaceuticals, some really great companies in that mix. Then there’s bluebird bio, ticker symbol Blue. Asit, three-years ago, when I picked bluebird bio, it showed a lot of promise. The stock was at $68.11 back on April 3rd, 2019, when this five-stock sampler closed out at the end of April Fool’s Day last month, bluebird bio was at $4.96. That’s down 92.7 percent. When you have a stock market, Asit, and everybody listening, that was up 58.1 percent over those three years and you were down 93 percent. That’s not a great way to start a sampler. Fifty-eight minus 91, that comes out to basically 150 percentage points behind the market averages.

A company, Asit, that has lost most of its value in these three-years. By the way before we move on, I want to thank a longtime Motley Fool employee, my friend, Yurvon [inaudible] . Yurvon has done so much great work tracking the performance of all of our different services, analysts, portfolios. Yurvon helped me track the performance for bluebird bio on November 5th, 2021 last year. The company, as part of the spin-off, did get this, a stock split, 1,544 shares for every 1,000 you have. We had to do some extra math to make sure we had a really bad performance accurately captured. Yurvon, both for the additional work you did, just checking out that spin-off, making sure my numbers are right. But really for all of the work that you’ve done for so many years at The Fool. What a delight it is to work together and thank you for your expertise. What has happened to bluebird bio?

Asit Sharma: David, of that downdraft since the day you recommended it, I think about 86 percentage points of the company’s loss have come in the last 12 months since last year. This is because of a single event, but let me backup for a little bit. I’m going to try to explain in layman’s terms and I say layman because I am a layman in this industry. [laughs]

David Gardner: I like that about you. I think by the way, the vast majority of people listening to you right now are also lay people not working within this industry. Use the lingua franca. Speak to us as plainly as you can.

Asit Sharma: Sure. What I understand about bluebird bio is that they basically conduct research and development and they commercialize treatments for rare genetic diseases. One of their signal drugs it’s a therapy that addresses a rare blood disorder called Beta thalassemia. Hope I pronounced that right. That disorder reduces the production of hemoglobin. They are a company, which has had a lot of this, word I will use again, ambition. The product pipeline is very ambitious. They were in commercialization phase in Europe hoping to have the same therapy then approved in the US. Last year they pulled out of Europe, they suspended all of their commercial operations. This is because this gene therapy, which goes under the name Zynteglo, is an expensive therapy. They were looking for $1.8 million per treatment in Germany.

That government offer them around $800,000 per treatment. But there’s a payoff here, if a government or a company invest in these therapies at the front-end, they get cheaper overtime. But basically in Europe they didn’t buy this risk rewards scenario for themselves. It wasn’t working out for bluebird bio. They just pulled out of that market. They do have in the US a couple of drugs that are under review by the FDA that may become commercialized next year in 2023. One of those is basically going to be the same product that goes under the name Zynteglo, renamed here in the US. But something funny happened on the way to that transition. That funny thing is cash burn. This, I think illustrates the complexities of this space.

Often at times the most promising therapies are the ones that are extremely expensive to develop. They’re very hard to get through regulation and to be approved. They take a long time to commercialize. If you have any bumps in the road, as bluebird had in Europe, it can be disastrous on your ability to keep commercializing product. This is where bluebird is now, they’ve been burning cash over the last few years, I think in the last three years. Each year they burned in hundreds of millions of dollars in net losses. Now they have next to zero revenue. The company announced this month that they are laying off about 30 percent of their workforce. They have a restructuring plan which hopefully will carry them, David, through part of 2023. Again, in layperson’s term, there’s really not enough money in the kitty to fund operations. They’re trying to downsize at the same time to get two therapies approved by the FDA for production here in the US. This is one of those instances where I think it’s fair to say, it’s really not worth hanging around. It illustrates again how difficult this sector can be. But I do like the ambition behind this. I think this cycle does translate, if you look at other companies into some winners. But we can’t put all our eggs in one investing basket in the biotech space.

David Gardner: Asit, in retrospect, I thought it was cute at the time that bluebird bio spells its name with all lower case. You can see it there on its website. It’s brand, small b, bluebird, small b, bio. But when I look at the small-cap, I’m going to say micro-cap nature of this, maybe I should not have cozied up to that branding so well, because now the company’s market cap, $293 million. This is a $5 billion company when I picked it three years ago. What a bad performance and what a horrible stock pick by me. Well, let’s next move onto the best performer. I want to mention again that even the best performer, unfortunately, Asit, was not enough to beat the stock market averages over these three years.

The company is Vertex Pharmaceuticals, a long standing Rule Breakers pick we’ve owned for almost two decades in the Rule Breakers service. We have a much lower cost basis from a way long time ago, but we’re talking here about this five-stock sampler picked in April 2019. Looking at this company, Vertex is up. It’s gone from 188, three-years ago. It closed out last month at 266, that’s a 42 percent gain. Not bad, market up 58 percent, so still down 16 percentage points to the market. But as you’ve looked at Vertex a little bit and again, as a fellow layperson, I sprung this one on you. I was like, Asit, could you research Vertex today and just be prepared to talk a little bit about it. Of course, you are. What do you have for us? What’s happened to VRTX?

Asit Sharma: David, I think that investors are becoming more and more comfortable with the way Vertex is going to distribute returns or generate returns in the future. So this is a company that’s focused on cystic fibrosis. They have three drugs that I’ll name them Symdeko, Orkambi, and Kalydeco which are aimed at cystic fibrosis specific mutations therapy. They’ve got blockbuster drug called Trikafta. I hope I pronounce that one correctly. That’s aimed at cystic fibrosis patients who are six years of older and they have one specific type of mutation.

Now, Trikafta is a powerhouse because it’s got patented protection that’s all the way out to 2037. This drug serves 90 percent of cystic fibrosis patients. So here we have a company that doesn’t have the binary outcome you often see with biotechs. Either they get that big drug approved and they’re off to the races, or the drug doesn’t perform trials and the stock head south. This doesn’t have that profile. It’s a solid cash cow business. Management has for some time stated that they are investing in future treatments for when their patent protection runs out on Trikafta. They’ve got some pretty interesting drugs in development. They’ve got a partnership with CRISPR Therapeutics, well-known company in the genomics space. That partnership is producing some therapies aimed at sickle-cell disease and Beta thalassemia, which we just talked about. They also have a very promising candidate that is targeting a gene called APOL1 that’s found only in people of African ancestry. So it’s a gene that’s been associated with high blood pressure, with kidney disease. This could be a real benefit in the African-American community. Lots of fun stuff in the pipeline. I think investors over time are becoming more comfortable with the idea that you get these great cash flows to very profitable company. David, over the last year, they’ve generated about $2.3 billion in profits. So it’s a solid company quickly growing. I think in a time over the last 12 months when many of my stocks have taken a hit because [laughs] tech and growth-oriented.

David Gardner: Mine too.

Asit Sharma: It’s refreshing to see this company up about 24 percent over the last 12 months. This is one of the companies I mentioned at the outset of this conversation. I think it’s going to be very fun to watch way past the sampler as we look forward to the next 3-5 years.

David Gardner: Well, thank you for that, Asit. This is a $65 billion company now. It’s not as well known as a company like Amgen, which is one of the big daddies and been around this industry really since the first biotechs came public, it seems around 1990. So there are some bigger, better known companies within the space, but Vertex is really making it. I’m not going to say on the Mount Rushmore of biotech grades in America, but it’s getting real near right now at $65 billion. You mentioning just the stability of its business, that patent protection for such an important product out 15 years from now. Pretty remarkable.

So I guess in large part we see the best and the worst of biotech. The worst, an under-funded company that had big dreams that didn’t pan out and now they’re having to lay off everybody and see if they have any cash left in bluebird bio. Then Vertex pharma, quite the opposite. Two plus billion-dollars earnings in just the last year and the $65 billion market cap on top of that. Well, Asit, we don’t need to go too deep on the three remaining companies. I will give the full numerical accounting shortly. But would you like to say anything about either Amgen, Editas Medicine and or Illumina, either individually or as a group.

Asit Sharma: Just to hone in on Illumina. Because again, let’s stick with this layperson theme. This is a company I can understand. They work in the genomics diagnostics market, and I loved that they supply both instrumentation and consumables for genetic testing. This is another company which isn’t quite on that Mount Rushmore, but they’re growing. They’ve been around now for more than I think 22 years. Is the company with 8,000 customers. Last year they had $4.5 billion in revenue. They’re growing at 25 year-over-year clip. If you look at their most recently reported quarter, I believe they report on their next quarter next week after this taping.

I like business models like this where you have technology that is being commercialized in a way that a lay investor can grasp. You have a component here that’s got that consumable shipments plus the instrumentation, that’s recurring revenue. It reminds me of, say, a Software-as-a-Service company. I can speak that language, at least where it hits the business model. This company has more than 80 percent recurring revenue on an annualized basis. They’re also growing that customer base. I think the customer base doubled between 2020 and 2021. At least they say that they’ve added 50 percent more new customers versus the prior year. So there’s a lot to like here in Illumina. If you follow it, you don’t have to be an expert on the technologies. You can just follow how they’re penetrating their markets and track as you would a business model that may be easier to understand.

David Gardner: You bet. Illumina really, with their genetic sequencing machines, they are the top dog and first-mover in a long-standing leader in this space. Obviously in an age of increasing understanding of genomics and genetic testing. Here we have more of a hardware-software company as opposed to, we’re hoping to find the miracle cure company. So as you mentioned, a business a lot of us can relate to more. Especially those of us who don’t have PhDs in biotechnology and just see the importance of these machines. I certainly have done 23 me myself, for example, pretty sure they use the genetic sequencing or the similar technology that Illumina has really become an important leader. By the way, $48 billion market cap so nothing to sneeze at.

Profitable company as well. Not all are and a long-standing leader. So that was good enough, Asit, for a 14 percentage point gain for Illumina over these three years, and unfortunately still behind the market’s 58 percent. By the way, the other two, just to be clear, Amgen was up 26 percent. So three of these stocks were actually up, but all five, including Editas Medicine down 24 percent, all five were behind the S&P 500. So let me conclude the full accounting. As we send this five-stock sampler off to Foolhalla. [MUSIC]

Long time listeners will know of the 30 samplers I select on this podcast. Each eventually heads to Foolhalla. That’s of course, the Valhalla, where each of these sampler heroes, goes whether hero or goat. Foolhalla, of course, the honored hall festive with mead, which all of these 30 samplers shall one day retire on saying, don’t let the door hit you as you leave five stars of miracles. Because as impressive as these technologies are, as important as these solutions are, some of them not yet emergent, some of them will never see the light of day. Unfortunately, this group of stocks was my single worst performer of all time. On average, these stocks lost 7.1 percent of their value. Not that bad, but the problem was the market was up 58.1 percent over time. So we loose by 65.2 percentage points. Not something I want to repeat again anytime soon. Asit, are you willing to invest within this industry? I know you are willing to certainly as an analyst, to look through today and help us understand a little bit more. Do you have some of these companies or do you stay well away from biotechnology?

Asit Sharma: I have some. I own Invitae, which has not performed very well for me. I own Fulgent Genetics, which I’m a big believer in, and I try to learn more about that every quarter. I think that behind every good miracle. So a lot of hard work and a lot of grief along the way. So I understand that some of that’s going to hit my own investing as well. But I’m inspired by the spirit of the sampler. I know we have no regrets sending it onward. But it’s inspiring for that next basket because this is one of the most fun parts of investing and you always teach this, David, is investing in the things that catch your interest, the catch your curiosity that helped us play our small part in changing the world. So I’m going to keep investing in biotech. This makes me feel, but look, if David Gardner can swing in with on some of these investments, I can too. It actually gives me some permission to keep investing.

David Gardner: Well. I certainly hope starting with our name The Motley Fool, I hope people understood from the beginning while we take our subject extremely seriously and our members as well, we don’t take ourselves quite as seriously. Asit, you certainly have always understood that spirit. I especially appreciate your spirit of intellectual curiosity, which is very evident as you on a regular basis present on Motley Fool Live and all of your work at the Fool. So along with Emily earlier, and Rick, our listeners have gotten in here from three wonderful Fools this week. I’m only sorry, Asit, and team, that I couldn’t actually bring some winners out this particular week. But you know what, it’s all true, it all happened. It’s all real. So we talked about and we learned from it and you helped us. So thank you, Asit, my friend and Fool on.

Asit Sharma: Awesome. Thanks so much, David. Fool on.

David Gardner: While as a horse of a different color this week, a five-stock sampler Reviewapalooza of misery. But I think there are a few things that we can learn together and I want to state them upfront. I think I have three things I want to say. Now before I go to my three things, let me just briefly remind you that next week, what have you learned for me? What have you learned from David Gardner and is our email address. Would love to hear one or more things that you’ve learned from me or this podcast that I can share back out to help a lot of people who are newer learn some of the critical lessons of Rule Breaker Investing, both investing, business and life. So thank you in advance for that. Now the concluding thoughts, reacting to what we just experienced together.

The first thing I want to say is, I think it’s really good to confront things head-on. One of the important lessons I’ve tried to model, I don’t like to model this by the way, but I’ve always tried to. Is that’s sometimes when you lose, you look really bad. Especially as a Rule Breaker investor. Some of the worst losers on the market are going to be in your portfolio. Some of the most hurtful dives that investors feel that’s going to be your dive and my dive, we’re doing together. It feels like a swan dive except that sometimes there’s not water below. It’s something a lot worse and that’s all part of an investing life. If you truly are invested as I am for your whole life in the stock market, you’re going to have the ups and the downs. I think that’s why it’s helpful for me. Even when I lose in front of you, I think it’s helpful for you to see that and understand it.

My analogy going back to the game of basketball is if you watch a great professional basketball player, even if he’s not very good from the free throw line. Even a poor free throw shooter, as a professional, probably won’t do worse than about 50 percent. Half of the balls that this unfortunate player tries to toss and hoop actually go in, and half don’t. Among professional players, that’s about the worst you can get. But among Rule Breaker investors, professionals like me, maybe like you or amateurs like all of us, it can get a lot worse than that. Yet you just need to know that going in and it won’t trouble you so much. Sticking with my basketball analogy, I’ve used this in the past in this podcast and in other essays. I liken it to the equivalent of stepping up to the free throw line and air balling a free throw, which is a little shameful. It’s a little embarrassing. We’ve all done it before, even professionals. But what if you did it again and again and one more time after that and what if 10 consecutive free throw shots, you didn’t touch the rim on any of them.

A lot of the people in the stadium will be saying, is that even a basketball player or why did I buy a ticket to watch this? How can that person call himself a professional? But that is very much how it works with Rule Breaker investing. There are periods like this last year in particular, how about just since August where it feels like nothing you do is working and indeed, if that’s the only way you’re scoring the game, if you’re just invested for eight months, which I would never suggest, then that’s the way the game can wind up scoring for you and that’s why it’s so important to be playing the long game, not a short game.

Now for each of these five-stock samplers, we’re doing them for three years, but most of these, these are stocks we’ve held well before that. Most of these will continue holding these stocks well, after the three-year game we play on this podcast. Again, to go back to T.S. Eliot and quote the great poet one more time. I think this is in his long form poem, The Waste Land. “April is the cruelest month,” and as I mentioned earlier, as April just concluded, looking at the results of the stocks that I picked, the stocks that I own in my portfolio, I think that many of us do, it really felt hard to look over those numbers. It’s been hard to share these numbers with you this week, and yet, it’s important to do so. While it would be tempting to say, hey, look, the Nasdaq’s down 28 percent and I appreciated Emily, bringing that data which I didn’t know myself. At the same time, I’m not ever moving the goalposts. I’ve always compared all of my picks against the S&P 500. I think it’s the default benchmark in the US that we can all use. Confronted, air-ball 10 times in a row, April’s the cruelest month. But as I’ve said a number of times in recent weeks, just keep swimming. That’s point number 1.

Point number 2 is, I’m going to say three-year periods are both important and not important. They’re important of course, because three years is an important passage of time. For me, it’s the minimum that you would ever want to score your investment performance on. Thirty-six months, that means the company reported 12 separate quarters and their results. To me, that’s enough of a sample size to say this company is doing well or not. I like how things are developing or not. I don’t want to judge things sooner than that and I realized we live in a world where people are often judged on three months of performance. I think three years is a radical statement and I’m saying it’s important in that regard.

I’m also saying out the other side of my mouth here with point number 2, the three-year periods are not important because again, if you’re invested for three decades, you shouldn’t care too much about any three-year period when you’re in the midst of it, especially when you’re in the midst of a very poor performing period, it hurts a lot and you can get preoccupied by it. But three-year periods are not important if you’re playing the long game of investing. Indeed I think a lot of us are going to look back in three decades and say, wow, the middle of 2022 was a great time to be buying emergent leaders and Rule Breakers as stocks because the very same stocks that are all down 75 percent from where they were eight months ago. If these companies continue providing world-class products and services, if they maintain their relevance, if they maintain their leadership and their innovation, they’re going to keep multiplying their growth from here, sometimes finding new avenues you and I couldn’t have foreseen or dreamed of. In some cases, the companies themselves don’t know what they’re in for.

I doubt when Jeff Bezos started Amazon as Earth’s biggest bookstore, that he knew Amazon Web Services would one day exist. The entire cloud was not even conceived up for years later, but they were positioned at the time that that technology did become relevant to be a real worldwide leader. Just remember, so much of the future has not appeared yet and a lot of it will be blue ocean opportunities for the companies we’re invested in. It doesn’t feel great looking backward from May 2022, but let’s keep looking forward, which takes me to my third and final point, one of my favorite lines. I’ve tried to rock on this podcast and many other contexts over the year. Here it is. One more time, “I try to find excellence, buy excellence, and add to excellence overtime. I sell mediocrity.” That’s how I invest and that’s how I hope you will invest. If you stay focused on excellence, if you look at your companies and ensure they’re meeting real-world problems, they’re helping people forward, head-on, like champions. You’re going to do really well as an investor over the only term that counts.

Tesla, a world-class innovator and company. Wonderful Rule Breaker. Tesla went sideways for five long years from 2014-2019. It didn’t feel great to be an investor in Tesla somewhere in 2019. Looking back over five-years, you were where you started five-years, before five long years and the market over that period of time had been great. Netflix. Netflix lost two-thirds of its value during Qwikster, and by the way, it’s lost two-thirds of its value in the past six months too but Netflix is still the smartest company in its industry. It’s admittedly a smaller fish simply because the pond has gotten so big with so many streaming services these days but Reed Hastings is one of the great living CEOs. I feel very confident as I did back in 2011 when Qwikster was so painfully bad for shareholders over the course of one year. I feel very confident today even with the stock down so far. Amazon, as I’ve often talked about, went from 95 to 7 in 2001. That felt even worse than losing 75 percent of your value, Amazon loss closer to 90 percent over that year or so.

These things happen. It’s all part of investing. I hope what you will take away from this Reviewapalooza is not only that, if you didn’t buy those biotech stocks, you’re probably happy you didn’t, you could definitely take that one away, but you should also take away not to be too discouraged by near-term results which tend to focus the mind, especially when they’re down. The pain of loss being three times the joy of gain as behavioral scientists have taught us but just realize that the beauty of the stock market is that the joy of gain is infinite times the pain of loss. The most you can ever lose, what I did was bluebird Bio for this five-stock sampler was down more than 90 percent.

That’s about the most you can ever lose with a single-stock, but the most you can gain is infinite. Having bought, invested, and still be holding more than one stock, that is a 100-bagger or better for me today and I’m speaking to long time Motley Fool members who know which those stocks are and you might own one of them yourself. Once you’ve had that experience, it makes you a lot more patient but it also reminds you to conclude point number 3 of the importance of finding true excellence. Companies that innovate toward meeting real-world problems and improve the lives of so many of us as a consequence of their work day in and day out. Well, thank you for staying with me to the very end of this miserable Reviewapalooza. I hope some of that in the future will be better. Certainly the stock market will need to be better for me to post some better numbers. But in the meantime, you have a Fool to keep you merry instead of experience to make you sad. I’m looking forward to next week’s podcast, What Have You Learned From Me? Have a great week. Fool on!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Asit Sharma has positions in Fulgent Genetics, Inc., Invitae, Microsoft, and Teladoc Health. David Gardner has positions in Activision Blizzard, Amazon, Apple, Axon Enterprise, Editas Medicine, MercadoLibre, Netflix, Roku, and Tesla. Emily Flippen has positions in Airbnb, Inc., Axon Enterprise, MercadoLibre, Peloton Interactive, Roku, Sea Limited, and Teladoc Health. Rick Munarriz has positions in Amazon, Apple, Axon Enterprise, Netflix, Roku, Teladoc Health, and Tesla. The Motley Fool has positions in and recommends Activision Blizzard, AeroVironment, Airbnb, Inc., Amazon, Apple, Axon Enterprise, CRISPR Therapeutics, Editas Medicine, Fulgent Genetics, Inc., Invitae, MercadoLibre, Microsoft, Netflix, Peloton Interactive, Roku, Sea Limited, Teladoc Health, Tesla, and Vertex Pharmaceuticals. The Motley Fool recommends Amgen, Bluebird Bio, and Illumina and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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