Rule Breaker Investing: 5 Low-Risk Stocks
In this episode of Rule Breaker Investing, Motley Fool co-founder David Gardnerlooks back at some of his past stock selections before laying out his case for five new ones. These are not stocks to buy for short-term gains; these are five companies Gardner plans to invest in for the next five years.
Before he gets into his stock picks, Gardner explains why he reads a lot of financial writing but does not follow many individual journalists.He also talks about how to keep score and why your track record matters.That accountability -- even if you're only accountable to yourself -- should lead to better performance as you see how your expectations for your investments stack up to reality and, hopefully, learn from any differences between the two.
A transcript follows this video.
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This podcast was recorded on Sept. 7, 2016
DAVID GARDNER: Welcome back to Rule Breaker Investing. A pleasure to have you with me this week. It's going to be a stock-picking podcast this week. I have five stocks in mind that we're going to look at going forward, but we're also going to do a retrospective, and this is exciting for me. I hope it will be fun for you.
About every nine or 10 podcasts over the last year, I picked five stocks. Packs of five stocks that I liked generally for three or five years. Sometimes for one year. Always a minimum of least one year. If you've been a regular listener, you know that's something that we do on this podcast.
Well, on September 2, 2015 I did that for the first time. And if our math is right, it's about 52 weeks after September 2015, and so I want to spend, for the first time in Rule Breaker Investing podcast history, a portion of the podcast looking backward and scoring what we did a year ago when I highlighted "5 Stocks for the Next 5 Years."
Before I get into that, I want to mention a conversation I had earlier today with David Kretzmann, one of our wonderful Motley Fools. If you're a Supernova member, or really if you've been around The Motley Fool in our community, you would know TMFPencils. David asked me, in a meeting we had earlier today at Fool HQ, "Hey, what financial bloggers do I read or who would I enjoy mentioning as somebody that I think you should follow?"
And I have to admit while there is certainly some good financial blogging going on out there in the world, this is not something I spend a lot of time following. In fact, reading our own discussion boards and regularly getting to hear from Fools all the time, just via our community, I don't really have that much more time to spend outside of that thinking about stocks and investing.
But as I thought about it more with David, I realized here's a key reason that I tend not to follow many bloggers, and it is that there are precious few. And I don't mean bloggers, here. I mean professional journalists. I mean television shows. I mean there's very little financial reporting that has anybody keeping score -- specifically, self-scoring what they're doing.
I would be far more compelled, and I would read and follow a lot more in the world of finance, if I was regularly hearing from people whose stats I knew. There is no great stat-keeping machine in the skies that's really doing that. Of course, we do know how mutual funds are doing, so certainly for vehicles like mutual funds, we do know their performance. But when we're talking about following people talking about stocks (and I even include a lot of our work at The Motley Fool), I'm always urging us to score ourselves.
The reason I think it's so important to score yourself is because you create a learning system when you do that. The act of scoring yourself will cause you (will force you numerically) to assess, later on, the results, the fruits borne by what you were thinking way back when.
Absent that, I think it's far too easy for most of us to remember the good things that we did and rather conveniently (I've certainly done this myself) forget about the wrong calls we made or our very worst stock picks. So we really don't learn very much if we're not regularly facing the mistakes that we've made and regularly realizing the good stuff that we did and trying to do more of that.
I've always loved the world of sports. I've talked about that a lot on Rule Breaker Investing, partly because sports is competitive and it's numerical. It's scored. Everyone will know the final score after the opening round of the NFL games this coming weekend, and I love that (I bet you do, too) about sports if you're a sports fan, and I always want finance to be more and more like that.
So this act, this week, of looking back one year ago at the "5 Stocks for the Next 5 Years" and seeing how they're doing is just a natural part of my process, and I hope you'll make it part of your process, too, as an investor.
In fact, one of the reasons I helped build Motley Fool CAPS 10 years ago is that I wanted each of us to have an open platform where we could score ourselves when we say, "I think this stock will do well," or "I think this stock will underperform the S&P 500." That platform is for you, right there.
And in fact, part of what I've done with each of these five-stock packs that I've been picking over the last year, every couple of months or so on Rule Breaker Investing, has been typing those into my CAPS page, as I've mentioned at the time, so I can look at my own CAPS page and see me being accountable for what I'm saying on this podcast.
Without further ado, then, let's take a quick look backward. In fact, maybe I could ask Rick Engdahl, my talented producer, to produce a new sound for "going back in time," because that's what we're doing right now. We're going back in time and looking at what we did September 2, 2015.
So five stocks to talk about. But before we talk about those stocks, we're going to talk about the market overall, because it's very important to me, as a stock picker, that I try to be beating the S&P 500 as much of the time as I possibly can.
After all, if you and I aren't beating the S&P 500, we probably should just be joining it by buying an S&P 500 index fund, which will always underperform the S&P 500, it must be noted, because even the cheapest Vanguard S&P 500 index fund still takes its cost out, meaning you will be given a lower-than-S&P 500 performance by the S&P 500 index fund.
But since that's such a good, ready answer for so many people, a lot of our work at The Motley Fool has been to beat that. And it's very compelling to me, when the rest of the world is just swimming along with the so-called "gentleman's C," to think that you and I can guide our portfolios in excess. Maybe get at least a B. Maybe even an A- or sometimes an A+. The value of doing that with your own money and your future can be extreme, relative to just mailing it in with the index fund.
So the first thing I want to say is the S&P 500 a year ago today -- to today -- has gone up 14.2%. That's the bogey. That's the goal. That's what we were trying to beat a year ago. Briefly I should reflect that it's been a good year for the stock market. I would take that. I hope you would, too, year in and year out.
Since the S&P 500 typically only gains around 10% a year annualized, a year in which we can look back and say, "Hey, last September it was 14% lower than it is today," means that's been a good year. So let's pinch ourselves and be glad about that because two years out of every three the market does go up, but one year out of every year the market loses value, so it's been a good year.
Let's talk about the five stocks for the next five years. I will remind you it's five stocks for the next five years, so we're just having fun on the one-year anniversary of this list, but we'll review this list in future years, as well, and I don't want to call premature wins or losses, here. We're just along the journey -- but it has been one solid year -- so let's take a look at these five.
I want to lead off with FireEye (NASDAQ: FEYE). Now if you are a Motley Fool Stock Advisor member, you might be cursing me as I talk about this particular company, because this has been one of my very worst performers in recent memory and yes, just a year ago, "5 Stocks for the Next 5 Years" included FireEye. The stock, at the time, was at $36.86. Today it tips the scales right about $15.50. So the stock is down 58% since I picked it on this show a year ago, and the stock market is up 14%, which means it's been a huge underperformer, about 73 percentage points below the market.
What's happened? Well, a lot of bad things for FireEye over the last year. This is a company that is an emergent leader in the cyber security space. I continue to recommend the stock today. I personally own shares of it, so yes, I've taken a bath so far. The CEO, Dave DeWalt, stepped down a few months ago in June, 2016, so we lost our CEO in the meantime.
Here's a headline you may not have heard recently -- how this or that large consumer products company got hacked and all of your credit card information was given away. We do, sadly, still hear those stories from time to time, but can you think of a really high-profile hack at any point in the last six months? Most of us probably can. I can. In fact, cyber security attacks and high-profile hacks have significantly reduced short-term demand for FireEye's products.
Now part of my thinking about this company and this industry is that cyber security, to me, is going to be the industry that never dies as long as our civilization continues. To me, this is always going to be a constant. Somebody trying to hack somebody else using computers. The internet is such a profound thing in our lives, today. It's so integral to the future of the world. That's why I really like cyber security.
FireEye has actually been a disappointing performer within that space, but it's a company that I continue to believe will be a winner. They are not profitable. They're still shooting for operating cash flow in 2017. We knew that going into the recommendation. Eyes wide open, sometimes I say yes.
I recommend companies that don't have profits yet when I can foresee them getting them later on. Sometimes those stocks do even better if they didn't have profits at the time because maybe people weren't buying the stock, and so the bandwagons can show up later on when the stock starts to earn money.
In this case, it hasn't worked out well. The company was laying off employees this year, so it's not been a great time. I don't feel great about FireEye, obviously. This is the big dog -- I'm foreshadowing where we're headed with this podcast -- this is the big dog of "5 Stocks for the Next 5 Years."
The next one is Middleby Corporation (NASDAQ: MIDD). MIDD is the ticker symbol. A year ago Middleby was at $109.34 as September 3rd's opening trade was printed. Today Middleby is right about at $127.50. The stock is up about 17%. Again, the stock market up 14%, so it's been a good performer.
You know, Middleby has the brilliant CEO Selim Bassoul. This is basically [a commercial oven and other kitchen accessories] company. However, Middleby did a really interesting thing as a growth-by-acquisition model, which has been true of this company for more than a decade. As it's gotten larger (and this is what happens when you grow by acquisition), you end up having to find bigger and bigger things to acquire to make a real difference in the growth of your business.
Middleby acquired Viking, which is the oven company. Long-time, higher-end ovens, especially in residential places. And Viking was a hard pill to swallow. It was in worse shape, Bassoul has said, than Middleby thought at the time that it acquired it, and as a consequence, the growing residential side of Middleby has not been growing very much. In fact, it's declined in its most recent quarter.
However, the stock still remains at or near all-time highs because of commercial ovens. Think of all those fast casual businesses. Think of all the pizza that people order. All of that is being served by Middleby and Middleby ovens. It's one of those quiet, boring stocks. Most people don't know the name of the company, but it's doing something very relevant and has done so very well. I'm happy to see Middleby for the next five years in its first year beating the market at this point.
Stock number three is Casey's General Stores (NASDAQ: CASY). The stock, a year ago, was at $104.50, and today it's right about $133.00 as I tape this podcast on the afternoon of Tuesday, September 6. That means that Casey's is up 27%. That's been an outstanding performance for a company that basically has a lot of convenience stores in the Middle West of the United States of America. A very regionally based company which has benefited, in particular, from continued low gas prices, because people refill their automobile at their local, friendly Casey's. Casey's is a very friendly and local brand for people in the Midwest.
But in addition to filling their gas, they go into Casey's and they buy stuff. And in particular, Casey's has a good pizza business. Some people swear by Casey's pizza. I have still not had one, myself, but I'm happy that a lot of people appreciate it and enjoy it because really, in some ways, we've talked about Casey's as a restaurant masquerading as a convenience store. This is a business that's done very well with the higher-margin groceries and prepared-food business that you find on the inside of the Casey's outlets.
The company has performed well. I like it a lot as it continues to expand outside of its region. It's starting to look more at the American South as opposed to mostly the Midwest. So Casey's up 27% with the stock market up 14% by comparison. It just about doubled the market, here. I'll take a 27% annual return every single year if I can get it. So thanks, Casey's. Keep up the good work.
Have you noticed these are getting better? Yup. I always like to go hard-easy [and] not easy-hard. In fact, that was a key phrase as we raised our kids, who are now not really kids anymore. Just that concept of get your homework done first and have all the fun afterward, because it's a lot more fun, fun when you don't have homework on your mind as you're trying to have fun. So hard-easy. I like to lead off with our biggest losers. Whatever is the hard thing to talk about, let's lead off with that. That's what I try to do on this podcast so things keep getting better.
Stock number four is Activision Blizzard (NASDAQ: ATVI), which I named a year ago this week. And wow, I have to tell you, I didn't expect Activision Blizzard to go up 52% in the meantime, but yes, $28.37 on September 3 of last year, and now right over $43.00 a share as I tape, so a gain just in excess of 50%.
Now, the big development for Activision Blizzard was that it acquired King Digital, which was the leader in mobile games. If you've ever seen or played Candy Crush Saga, then you know King Digital's big product. When Activision acquired King Digital, it acquired a very profitable company that had tens of millions of customers (gamers) worldwide.
So Activision was able to welcome that gaming community and own it, and start to sell some of its other products into that gaming community. And especially Candy Crush Saga tilts more female than a lot of the Call of Duty macho shooter games that Activision Blizzard has buttered its bread on, so it further diversified its customer base.
This is a company that over the last year has made, I think, all the right moves. I personally really enjoy the card game Hearthstone, which is certainly a Blizzard property. World of Warcraft, which has been so profitable for a long time. Has recently had yet another expansion introduced. Yes, there are fewer people playing World of Warcraft today than were a year or five years ago, and yes, the Warcraft movie was pretty mediocre for those who saw it.
Nevertheless, when you look across all of the Activision properties (all of the Blizzardgames properties and the King Digital properties, now, as well), this is a brilliantly managed company by CEO Bobby Kotick. I'm really happy to be a shareholder, and so are you, especially if you listened to this podcast about a year ago.
And the happiness continues, then, if you were listening to me 12 months ago, because stock number one, the best performer from that podcast a year ago is MercadoLibre (NASDAQ: MELI). MELI is the ticker symbol on the Nasdaq. MercadoLibre, that day, $111.72. Today it's $186, so the stock is up 67% over the last year, again, against the S&P 500's 14% gain.
MercadoLibre is the Latin American e-commerce leader. This is a company I've certainly talked about in a number of podcasts over our first year of Rule Breaker Investing together. It's a company that has not just the equivalent of Amazon's and eBay's business in Central and South America, but it also has the equivalent of PayPal. MercadoPago is a significant platform and business for online payments in Latin America. MercadoEnvios is its new shipping solutions company.
So if you are the CEO of MercadoLibre, I think you have two great advantages. The first one is that you are the out-and-out leader in commerce online for a significant part of the world. For a continent. Actually a little bit more than a continent. That's great news.
The second bit of good news for you is that you can follow what Jeff Bezos does, and you can adopt some of the best practices and learnings that the big dog in the rest of the world is practicing. You can improve your own business, in your area, by being a fast follower. I think that's part of what this company's been doing. Following along with online payments. Following along with its own shipping solutions. This is a wonderful model and wow, it's been a great year for MercadoLibre.
Those were the stocks from last year. That was my retrospective. And I want to average them all together now, because that's really what matters. We've had some big winners and one big loser over the last year in this group of five, but taken altogether, they're up 20.9%, and that's pretty good against the S&P 500's 14.2%.
My goal with this podcast and my goal with all of my work at The Motley Fool -- if you want to, and if you're willing to go for it -- is to help you beat the market. And I'm happy to say, at least in year one of this group of five stocks, we're doing so. We'll keep following going forward and now let me come back to the present day and let's talk about five more stocks going forward.
This week's list of five stocks is inspired by looking for companies with lower risk ratings. Now, you [may have listened] to our risk ratings series [in March] earlier this year, but if you're new to the podcast you can go back (I hope you will) and listen to our three-part series "Calculating Risk." About 20 minutes each, or so, talking about how we put risk ratings on stocks.
We actually put a number that estimates, to us, the risk of holding that company. The risk that you would lose a substantial portion of your capital if you're holding that company over the long term. That's how I define risk and how I think about it. And we talked at the end of that series about how there were some very low-key studies (that interested me, anyway) done by one of our community members, Tom Rooney (tprooney3) in the Fool community.
Tom studied the past performance of our scorecards, looking for companies and where their risk ratings were, and how those stocks did. He determined that over the first decade or so of doing this, the companies that had low risk ratings tended to have a higher-percentage chance of beating the market.
That interested me a lot, at the time, as I said on that podcast, because this is not designed to find winning companies. This is something designed to estimate the chances that you would actually lose a lot of money, but it might just be that this does help us find some winning stocks. So taking that inspiration, this week, I'm going to be finding companies that are either 4 or 5 on our risk rating scale.
In fact, these are the very lowest-risk companies in my Supernova Universe, the 200 or so that I've recommended that are an active part of my life in recommending to Motley Fool members worldwide, every week, as I've done for years, now. So with the Supernova Universe, I'm looking at the very safest companies. Most of these pay dividends, for example.
And because this is a shorter podcast -- where I've already spent probably more time than I meant to on the retrospective (but really I celebrate that, because I think it's great to spend more time looking backwards, often, then just gabbing a lot about what you see and what you think is going to happen going forward) -- I will go through this list fairly quickly. Not only that, but these are very well-known companies. Usually big, safe, and low-risk means you've heard of them, which I'm confident you have. I will go through alphabetically, because I'm not weighting any of these any more than any other.
Without further ado, then, let's get started with five stocks that I like over the next year as safer bets to beat the market.
The first one up is Apple (NASDAQ: AAPL). I bet you've heard of it. Didn't I tell you? Apple has been -- get this -- an underperforming stock over the last year, over the last two years, and over the last five years. Apple stock has actually underperformed the S&P 500.
Now I do believe this is one of the great companies of our time. This company has a huge amount of cash and it is extremely profitable. And while I do hear recent headlines about how the iPhone 7 -- these new product introductions -- aren't even cool anymore and they're selling fewer of these, those kinds of stories and what's up with the Apple Watch makes me a little bit bullish.
I'm looking backward and seeing underperformance. I'm seeing one of the best brands in the world. I'm seeing a company whose products I love. I know many of you do, too. What I love about them is that they simplify, they make technology work, and they make it simple to use.
That's a great place to be, going forward, in an increasingly complex world. So I very much favor Apple. Whether the stock will actually beat the market or not over the next year we shall see. We'll check in about a year from now and see how we're doing, but I like Apple with its 2.1% dividend yield. This is a company that could definitely increase its dividend if it ever wanted to or needed to. I like Apple.
Number two is Canadian National(NYSE: CNI). This is a railroad company. Kind of boring, but kind of timeless. A very relevant company. A company that is a cheap, effective way to transport stuff through Canada and some of North America. This is a company that is a long-term player. It's been around 100 years. The stock has been in Motley Fool Stock Advisor since 2008. It's about tripled. The market's doubled since then, so this has been a market beater for me.
This is a really interesting case of a company doing something timeless -- transport -- but getting hurt, in particular, by some of the products it transports losing relevance, like coal. I think a lot of us hope that coal will lose relevance (I certainly do) and it has. It's down about 31% in transports for Canadian National over the last year or so. That hurts the company's business.
Further, the company's management has fully changed over. The longtime CEO, for health reasons, retired this summer. And it wasn't expected at the time, but the chief operating officer and the chief financial officer decided to retire, as well, right along with him. So there's now a brand new management team at Canadian National, and yet they've been with the company for years, and that's the way I like my transitions to happen.
Again, a lot of the products that Canadian National transports are flat or down over the last year, but I'm just looking ahead over the next year. I'm looking at a very safe company, again, that pays about a 1.7% dividend yield, and I like railroads. I'm going to say Canadian Natty beats the market over the next year.
Number three is Disney (NYSE: DIS). Do I need to say anything more? It's Disney. Everyone knows Disney. I hope you own shares of Disney, by the way. If I'm inspiring you, this week, to buy shares of Disney, and you haven't, and you keep thinking you've missed it, or you meant to buy it before Marvel or before the last Star Wars (the biggest box office draw in United States history), I still don't think you've missed it.
In fact, I think we're at a really interesting point. I'm going to be quick on this, but Rogue One is a Star Wars movie that comes out later this year. A lot of people can't quite figure out how this movie is going to perform. It is entitled officially Rogue One: A Star Wars Story. I think I heard some stories about how they had to change it up, or they had to change up the script or things weren't going so well a few months ago for this movie.
And yet, it is Disney, the company that knows how to crank out $900+ million movies. It's already done that at least four times in 2016. It is Star Wars. And what I particularly like about this inflection point in Disney's business is it reminds me of Marvel, because the big promise of Marvel was that it wouldn't just be that first Spider-Man movie, but rather other characters could come to the screen and you'd enjoy their stories, too, and they could start linking them together.
Here we are, for the first time, going away from the canon of the first 10 Star Wars pictures. I was going to say [in] logical or chronological order, and it came out a little bit strange, but it still fits together, mostly looking backwards. But for the first time, we're kind of going off the reservation, here. We have a new character, and we're just having this "A Star Wars Story" told about this new character.
It kind of feels like a new superhero to me. I think Disney will succeed with this movie. I know it's going to make a lot of money at the box office. I hope it's a good movie. But I think it opens the possibility to more and more of this universe hitting television and movie screens, kind of like we've watched Marvel effloresce over the last 10 years. We'll see.
Company number four is Ecolab (NYSE: ECL). This is one of my most recent recommendations. It is in Motley Fool Stock Advisor. Ecolab is a worldwide player cleaning up workplaces. Restaurants. Hospitals. Oil and gas spills. When I was in Australia earlier this summer, I saw an Ecolab brand right near the restaurant where I was working because [Ecolab] uses gloves to keep their hands clean in Australia.
This is a company that was formed in 1923. Its name was Economics Laboratories, and at the time their first product was that if you were a hotel, you could clean your rugs right there in the hotel as opposed to having to pull them up, send them off to be cleaned, and have to shut down those rooms. That was the start of Economics Labs. Here we have now, decades later, Ecolab, a company that is worth over $30 billion today and a company that I really favor. I love companies that help clean up the world.
What has hurt this stock, somewhat, and why I like it right now for a bounceback is that it has been involved, through some acquisitions recently, in the oil and gas industry, doing things like helping fracking. I realize some people really don't like fracking. Some people don't want to support the idea that you would be cleaning up fracking. So the oil and gas aspect of Ecolab has held it down and hurt it, because that industry has been so under siege the last couple of years.
Of course, Ecolab does many things besides that. Bill Gates owns 11% of Ecolab through his investment vehicle. He's very worldly minded, and what the Gates Foundation has done is pretty remarkable over the last 10 or 15 years. I think it's interesting to know that Gates is in there with you if you buy some shares of Ecolab. I like Ecolab to beat the market over the next year.
And the last one in this Motley alphabetical list (and I realize it's not exactly alphabetical, although I'm now hitting something like a triple pun) because it's Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). And the reason I included it last is because its ticker symbol comes alphabetically last. It's still GOOG, but I'm increasingly trying not to say Google unless I'm talking about the search engine, because Alphabet is so many things besides just the very lucrative Google search business.
I think more and more about autonomous cars, and I think about YouTube, and I think about Alphabet's many different properties. Investigating how to make human life longer. A lot of different businesses. I love the diversity that I see in this company in terms of all the different places it's playing and, really, its [innovations].
Some of them won't work out and some of them haven't worked out, but I think when you buy stock in Alphabet, you truly are buying part of the future of the human race which I believe will be increasingly positive, and you're going to be a participant there. You're buying into a company that knows how to innovate, and that's the hardest thing to do in business.
So there you have it -- five stocks that I like over the next year. Now, of course, I like a lot of these for a lot more than that, but just in terms of keeping score, let's make this a one-year contest for this group, and we'll be revisiting, around this time next year, how these and my earlier ones did.
I hope you've enjoyed this episode of Rule Breaker Investing where we've picked some stocks and looked back at some old stock picks. Next week I have a special guest whom I'm going to interview, speaking of technology in the future. In the meantime, I hope your week is most Foolish. Fool on!
As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at RBI.Fool.com.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Gardner owns shares of Activision Blizzard, Alphabet (A shares), Apple, Canadian National Railway, FireEye, MercadoLibre, Middleby, and Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Apple, Canadian National Railway, Casey's General Stores, Ecolab, FireEye, MercadoLibre, Middleby, and Walt Disney. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.