5 Supernova Stocks That Have Flown Under the Radar: Ultimate Software Group

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Last week on the Rule Breaker Investing podcast, Motley Fool co-founder David Gardner reviewed the performance of two sets of his buy-and-hold stock picks: one set with a five-year horizon, and one that he recommended we hold for a year. This week, he offers up a new handful of recommendations, and the theme that came to his mind was Motley Fool Explorer, which is one of the premium services that competitively cherry-picks stocks from the Supernova universe.

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So David is offering five hidden gems from the 210 Foolish holdings -- long-term market beaters that have never been part of a Real Money mission that have market caps below $10 billion and brand names most people won't recognize. And he thinks you should hold them for the next three years or more. First up, Ultimate Software Group (NASDAQ: ULTI), a cloud-based human capital management service provider.

A full transcript follows the video.

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This video was recorded on Sept. 13, 2017.

David Gardner: "Hidden Gem" No. 1: The first company is Ultimate Software Group. The ticker symbol is ULTI. The company's market capitalization is $6 billion and the risk rating of this stock -- I believe this is the lowest of the five I'm presenting this week -- is eight.

Now risk ratings -- I'm not going to digress too much from the main focus. I can sometimes get off track when I get excited talking about things that I love. I love risk ratings. I love what we've created at The Motley Fool. For Rule Breakers and Stock Advisor we put a number from 0 to 25 on every stock estimating what we perceive to be the risk of holding that stock, and the higher the number, the higher the risk. Pretty intuitive. So if it's a big number, big risk. Lower number, low risk. This is an eight. Ultimate Software Group is an eight.

By the way, I've done a full series on risk ratings. Just page back a few pages on iTunes or Spotify, or however you listen to this podcast -- podcasts.fool.com -- and you'll see my series on risk ratings where I go through the whole system over the course of three episodes. I highly recommend them. Anyway, a risk rating of eight.

So what does Ultimate Software Group do? Well, the buzzwords here, and these are buzzwords, are cloud-based. That's a good buzzword. I think you know what that is. That means that all of the data is being stored somewhere up in the sky. Well, that's what we tend to think when we actually hear the word cloud, but it turns out it's very much more terrestrial than that. But the point is the data is protected because it's not in any one central place. It's in the cloud.

And the data that this company helps companies manage is their human capital management. So that's HCM, another buzzword for you. This company basically enables companies to keep track of all the HR-related tasks traditionally that they've done but in a more efficient, sometimes automated way using the cloud.

Ultimate Software Group's tag line... I'm going to try to provide this for each of these five companies because I love looking at corporate tag lines and brands. They're trying to tell you something about themselves. You can decide whether you agree or not, but at least they're putting out there what they think they're about. This company's tag line is "People First." And as you'll hear about shortly, I think that they're living up to that.

Anyway, a little history for this stock. I picked it in Motley Fool Rule Breakers on May 23, 2012. Here we are, now, five years later. I picked it that day at $81.16. Today it's at $190.87. A wonderful performer. It's up 135% over these five years with the market having done pretty awesome, too, at 112%. So this stock is 23% ahead of the market, which is maybe fewer than you would have thought given that it's more than two-bagged over the last five years, but it's been a strong stock market, overall.

So for each of my five companies, I'm just going to mention briefly a few traits that I like or appreciate about this company and why I like it as a stock. For Ultimate Software, I really like the recurring revenue business here. This is basically a subscription business. Companies pay them on a recurring basis to keep track of its data and to use the UltiPro platform which is what Ultimate Software calls its platform.

So recurring revenue. Very high renewals. Companies like it just like you. Do you like your Netflix? I do. Do you think hard about having that $7-$10 charge roll over from one month to the next? No, you don't. You're probably happy for just to keep rolling. And that's the way it works, often, for good subscription services. We try to provide some of those at The Motley Fool, as well, so I know this business model pretty well. I like the recurring revenue with high renewals. They have very high renewal rates among their customers from one year to the next.

A second thing that I appreciate about Ultimate Software is people love to work at this company. Their tag line "People First" is true of their employees, I think, based on the rave reviews they get on Glassdoor. This is a consciously capitalistic enterprise. They're thinking about all their stakeholders, trying to create wins, and indeed, clearly are creating wins, because the third and final trait I'll mention is just the growth that this company has exhibited. Earlier this year Forbes put them on the Fast Tech 25 list. That's the 25 fastest-growing public tech companies for 2017.

There are two measures that Forbes looks at. The first is the past three years of sales growth. It's very strong. But also the three-to-five forward years of projected earnings. So Ultimate Software is the type of company that makes that group. We're very happy to have more than a double for this stock so far in Rule Breakers. I like it today, which is why I'm presenting it to you. Right now, going forward, Ultimate Software.

David Gardner owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Ultimate Software Group. The Motley Fool has a disclosure policy.