How 2U Earned Its Spot in the 5-Stock Sampler for a Troubled Market

The stock market is heading lower -- indeed, all the gains the major indexes made in 2018 have evaporated. So this might not feel like an opportune moment to advocate for stock purchases. Even so, about every 10 weeks, Rule Breaker Investing podcast host and Motley Fool co-founder David Gardner picks a set of five stocks to recommend, and shares them with anyone who wants to listen. Well, it's that time again, and he has more than enough companies to choose from. To narrow his options, he set four rules for this sampler:

1. The stock had to have been a big-time winner for the Rule Breaker portfolio over the long term.
2. It had to have hit a new high in September.
3. It had to have fallen at least 20% from that high in the weeks since.
4. The company name had to start with the letter T.

First up on Gardner's list is 2U (NASDAQ: TWOU), a tech company that partners with top higher education institutions to help them offer online degree programs. In this segment, he explains a couple of reasons why he'd buy it again today.

A full transcript follows the video.

10 stocks we like better than 2UWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and 2U wasn't one of them! That's right -- they think these 10 stocks are even better buys.

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*Stock Advisor returns as of November 14, 2018

This video was recorded on Nov. 14, 2018.

David Gardner: We're going to go alphabetical by company name. The first one up is 2U, ticker TWOU. Arguably, because this company name literally starts with the number two and the full name of the company is just 2U, you could argue this is not a T stock. But it is a T stock. It is 2U. Let's briefly review where it's been. This stock made a high of $90 a share on September 4th. Today, it's around $53 as we tape this podcast on the afternoon of Tuesday, November 13th. $90 to $53 in a couple of months. Yep, that's down 41%. In fact, of all five of my near-term losers here that we're going over this week, this has been the worst, down more than 40%.

Now, why has it been a big-time winner? I first picked it two years ago, in July of 2016. It's up over 50% since then. Then, three months later, I decided I really liked this company. I like to add to my winners, so I recommend it again for Rule Breakers. That one's also up over 50%. I'll take that two-year return for any company almost any day of the week. It's a double wreck and a double winner.

For each of these, maybe I'll just mention two things that I like about the stock and that I think about when I think about the company. The first thing I want to mention about 2U is, this company is built on a big idea: that it could bring distance learning into some of our best universities, most often at the graduate level, but undergraduate courses, too. 2U partners, usually with 10-year agreements, with some of the better-known universities in the world; universities like UCal Berkeley, or Georgetown University here in Washington, D.C., or my alma mater, the University of North Carolina Chapel Hill, the business school. These are the kinds of companies that 2U partners with.

They're bringing students that these universities would never otherwise have had through the internet, they're bringing them distance learning, and they're splitting the tuition that these universities are getting paid that they would never have had otherwise. It's a true win-win. There are at least three winners in there. A fourth one has been shareholders, because people who have owned 2U are pretty happy with their shares. As I say, the No.1 thing I like about it is: it's a big idea, but the market cap is only $3 billion. This is a company that has excellent existing relationships, continues to add more learning to its platform, and yet it's capitalized at just $3 billion. That feels like a small-cap company with at least a mid-cap idea and execution. That's thing No. 1 like about it.

Thing No. 2: 2U has been the victim of a short attack this year. You may know about short attacks. If you're a Rule Breaker investor of any real vintage, you've probably come across this before. Somebody will decide that this stock is overpriced, or something's horribly wrong with the company. And often, this person will put a 20-page screed on the internet about all the dirty linen and dirty dishes that the company that's being short attacked ever could have been connected to. And they'll say the stock's overpriced. These days, because there's a lot of viral passing around on the internet, people will hear about it, and often, these stocks will decline. It's usually pretty short-term. They're called short attacks because you can see it coming. Once it starts, you can see it playing out in the weeks ahead. Usually, the stocks drop. But then, because we just keep holding our companies, if the company is doing a good thing in the world and doing well, in my experience, it comes back, so the short attack creates temporary downdrafts in some really excellent companies.

Other examples from our Rule Breakers service in recent years: Shopify was absolutely short attacked for a while there. Ubiquiti Networks, another excellent company. I think Take-Two Interactive got nailed at one point. Definitely Green Mountain when it was Keurig. It used to be a Rule Breaker. It had a short attack, too. Tesla has been short attacked a number of times. This is pattern recognition that we've gotten used to at Motley Fool Rule Breakers, so when I see it happen to a good company, I think, "That's too bad for the near-term share price, but it does create an excellent discount for the rest of us who are going to be around for the long-term and believe in the company." That's thing No. 2 I like about 2U. And that's stock No. 1.

David Gardner owns shares of TSLA. The Motley Fool owns shares of and recommends 2U, SHOP, TTWO, TSLA, and UBNT. The Motley Fool has a disclosure policy.