Taking Stock of the Very First Rule Breakers 5-Stock Sampler

Every 10 weeks or so, for the past three years, Rule Breaker Investing podcast host and Motley Fool co-founder David Gardner has been picking sets of five stocks he recommends and sharing them with his listeners. There's always a time frame and usually a clever theme -- World Cup, for example, or "having your cake and eating it too" -- but while those things might change, one point stays absolutely constant. When the anniversary of each sampler rolls around, he tallies up the share prices, talks a bit about what's moved them, and scores the mini-portfolio against the S&P 500. Because win or lose, Fools keep honest score.

As this episode drops, we are three years into that very first sampler, which he dubbed simply "Five Stocks for the Next Five Years." The picks were Activision Blizzard (NASDAQ: ATVI), Casey's General Stores (NASDAQ: CASY), FireEye (NASDAQ: FEYE), MercadoLibre (NASDAQ: MELI), and Middleby (NASDAQ: MIDD) -- and we'll tell you up front that at this stage, David's far from batting a thousand on the set.

A full transcript follows the video.

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This video was recorded on Aug. 30, 2018.

David Gardner: I'm delighted to be presenting for you a review of that very first five-stock sampler. It was called, Five Stocks for the Next Five Years. So here we are, three years later. The game is not over yet, but we're definitely going to check in as I do on an annual basis with each of these and see how those five have done before going to our new-themed five-stock sampler later in the podcast.

All right, so what five stocks did we talk about three years ago this week?

Well, I'll present them alphabetically as I did on that first podcast, Five Stocks for the Next Five Years. And the very first one, alphabetically, the company name is Activision Blizzard. It is the very successful interactive entertainment company run by CEO Bobby Kotick. It's been one of our favorite long-running stocks in Motley Fool Stock Advisor.

In fact, when I was talking about it three years ago on the podcast, I was talking about the prospect of a movie that would be made based on World of Warcraft. And at the time I was saying that's a couple of years hence, and in the meantime that movie has come out. It didn't do particularly well. I still haven't seen it. I wasn't motivated, even though I'm a former World of Warcraft player myself.

I'm really happy to know, by the way, World of Warcraft keeps showing its staying power. A lot of times people think, "Well, finally that whole massively multiplayer online role-playing game clearly will end at some point," and yet, here this month the latest expansion for World of Warcraft has just launched and it's doing great guns for the business. So even though the movie didn't do too well, in the meantime [Warcraft, I think it was called], the business is doing quite well, thank you very much.

So how has [ATVI], Activision Blizzard, done? Well, three years ago we picked it at $28.37 at the end of that podcast, market close, September 2nd. Today it is at $73.96 this year; so from $28.00 to basically $74.00. As you can imagine, it's been a wonderful three years for Activision Blizzard shareholders. We have many in The Motley Fool community. I hope you're one of them.

The stock's up 160.7%. The S&P 500 -- the bogey we are competing against throughout this review -- is up 49.1% over these three years. An outstanding three-year performance for the market overall, but that means 160.7 minus 49.1; my schoolboy math and the spreadsheet I'm looking at tell me that's a difference of 111.6 points. We'll round to 112 points ahead of the market with that first pick.

Now, remember. Every one of my five-stock samplers has this positive -- that we are going to try to beat -- we think we can beat the stock market average with this group of five stocks. We'll have some winners, we'll have some losers, but take it as a little five-stock group which, by the way, is much smaller than I hope your portfolio is. I hope your portfolio is at least three times that size. I love to think that all my fellow Fools are diversified and have at least 15 stocks in your portfolio. You may well have funds and you might have a house or real estate outside of that, but when we just talk about the stock portion of your nest egg, I hope you have or are working toward having 15 or so stocks.

That's why when I say five-stock samplers, this is all a little bit of a game. I mean, I sure hope we're going to beat the market each time, but this isn't really a full portfolio. I'm giving you my best shot, though, so we're off to a great start with that first stock. And yet, things are about to get a little bit worse, so let's go to stock No. 2.

Stock No. 2 that I pitched you three years ago, this week, was Casey's General Stores, an extreme contrast with Activision Blizzard's business. If you live in the Middle West in the United States of America, you probably know Casey's General Stores. Or if you're passing through, you might have filled up your gas tank there.

When I was talking about this stock three years ago, a Stock Advisor pick at the time and still is, I was talking about how this is also the fifth-largest pizza company in the United States of America. That's right! Casey's General Stores -- for those in the Middle West -- a lot of you love the pizza and Casey's sells a heck of a lot of pizza and gasoline. It's kind of a convenience store business, but friendly and kind of more rural.

You're really happy to come across one because there aren't that many as you're driving through, let's say, Iowa. You love your Casey's. A lot of people love Casey's, but unfortunately the market hasn't loved this stock very much. Three years ago this week, Casey's was at $104.80 a share. Today it's at $112.76 a share. So, I mean, it hasn't been horrible. The stock is up 8%. The problem is the stock market is up 49% over the same time, so Casey's General Stores has been a serious laggard.

That first year -- from 2015 to 2016 -- Casey's was on fire and was off to a great start, but things kind of slowed down. In a lot of ways, fast casual dining hasn't been a great place, and to the extent that Casey's General Stores with its pizza business plays into this a little bit, companies like Chipotle have faltered in recent years. Well, that isn't the whole story for Casey's. It's part of the story.

I will say this going forward. Just like Activision Blizzard, I like this stock today. I would buy it right here going forward. Let's hope it will beat the market in the next couple of years before this particular five-stock sampler game ends -- Five Stocks for the Next Five Years -- so this will end in September 2020. Let's hope that Casey's performs a little bit better.

So doing the math, then, the first one was a +112. This one's a -42, so we're up 70% as we get to Stock No. 3 where things are about to get much, much worse.

So, yup, I was taking a shine three years ago this week to FireEye, the cybersecurity company. The ticker symbol is [FEYE]. I recommended it in Motley Fool Stock Advisor and then, in fact, it had a good month or two, and as I am wont to do I then re-recommended it because I like to add to my winners and I felt really good about this business, as I still do today, because I think that cybersecurity is going to be around for the rest of our collective lifetime.

As long as there is an internet and the technology that we have today, somebody's going to be trying to mess with people. And as I said three years ago, I think the good guys are always going to outnumber the bad guys, but bad-guy hackers [a lot of hackers are really good guys], but some bad-guy hackers are always going to be trying to steal things, or jam a site so people can't use it, or who knows one day? Take control of your self-driving car. There are all of those security concerns. There always will be as dependent as we are on technology, and so FireEye for me was a smaller-cap company and one I liked at the time.

The stock was at $37.47. Today FireEye is at $16.38 -- from $37.00 down to $16.00 -- which really hurts. So doing the math, this stock is down 56% over these three years. Five Stocks for the Next Years. Not this one. This was a horrible pick on my part. The stock market, of course, is up 49%. So doing the math, that's a -105% in the loss column. So we were up +70 going into Stock No. 3. We just gave all of that back and more. We are in the hole 35% behind the market looking at these three stocks together. I've got a little bit of good news for you. These weren't the only three. There are two others we'll be talking about, but FireEye, alphabetically, has put us deeply in the hole.

You know, the company wasn't profitable back when I recommended it. It's had a management change. It's had some problems. Some of its technology is not necessarily keeping up with state of the art. It is not the world-class leader in cybersecurity. Companies like Palo Alto Networks are bigger, more successful companies. That's a Rule Breakers pick.

In retrospect, I sure wish I'd picked Palo Alto for the next five years when I did that three years ago. But, again, I think cybersecurity is going to be around forever. I think that FireEye is going to come back. It has bounced from its lows, here, at $16.00 so I wouldn't be surprised if we end up, two years from now, saying, "This stock's done quite well." In the meantime, we'll see.

Speaking of quite well in the meantime, in the interest of never thinking that if you believe in a trend you should just buy one company within it, frustrated by the performance of FireEye that I've generated for my fellow Fools in Motley Fool Stock Advisor, in the last few years I was casting about for more cybersecurity companies to invest in. I already mentioned we have Palo Alto Networks in Rule Breakers.

But I added Fortinet to Motley Fool Stock Advisor in April of 2017. So about a year and a half ago really happy to say that if you'd bought some FireEye and you were taking it on the chin, well maybe you decided to add some Fortinet too, and Fortinet's up from basically $40.00 to $82.00 since April of 2017. So I may have picked the wrong horse, initially, but staying in the race and seeing other horses, we've saddled up. We have some bets on some of the other jockeys out there, too. So Fortinet is another of those companies that I think are worth looking at. So let's keep moving to Stock No. 4.

Well, Stock No. 3 may have given it all back, but guess what? Stock No. 4 is about to gain it all back and then some, because Stock No. 4, picked three years ago this week on this podcast, was MercadoLibre.

MercadoLibre, the dominant e-commerce platform in Latin America. The stock three years ago was at $109.00 a share [$109.94, basically $110.00]. Today it's at $340.65 as I do this podcast. By the way, I should mention that I'm going out of the country. I've been out of the country in the past week, so this podcast you're hearing today was, in fact, taped on Thursday, August 30th. So some of these numbers will look a little off by the time you hear the podcast, but we'll assume they all kind of average out.

So MercadoLibre has gone from $110.00 to basically $340.00 in the three years since we picked it on this podcast. That's a gain of 210%. The stock market up 49% over the same time and so yup, that's a +161% in the win column. Netting that out we're now back up 126% for this four-stock sampler before we get to Stock No. 5.

I just want to say about MercadoLibre that it is in such a powerful position. Even though it's in a volatile area of the world with some very poorly performing economies, this is a company that functions like Amazon. That is it does deliveries of its stuff and other people's stuff. It also is eBay, so you can sell stuff over its platform. And it's also like PayPal with MercadoPago. So it's really got it all going on. Firing on all cylinders. And yes, this is a stock I like just as much today as I did when I first picked it in 2009. I really like MercadoLibre and hint, hint, we might be talking about it a little bit more, a little bit later in this podcast.

Finally, concluding our review with Stock No. 5. Stock No. 5 has been unfortunately an underperformer. It's a very fine company, Middleby Corporation, and its ticker symbol is [MIDD]. And the stock is up 11% since I picked it three years ago. It's gone from $107.00 to $119.00 basically. The problem is, as you already know, the stock market's gone up 49% over that time, so Middleby is an underperformer by 38%.

And in the same way that fast casual hasn't really been performing very well, this is a company that really feeds that with its commercial oven business. Middleby is really powering the kitchens of so many different eateries -- not just fast casual -- but some more serious restaurants. Hotel restaurants and [the like]. This is a leading company in its space. Three years ago I was saying about this stock that it has one of the best CEOs in America in Selim Bassoul.

I'm really happy to say in the meantime [in the past year] I've had Selim on this podcast. I hope that you enjoyed Selim Bassoul on this podcast a few months ago. In fact, if you didn't I'm just going to flag the May 9th episode of Rule Breaker Investing where you can hear me interview Selim and give his perspective on the world and his amazing personal story, as well.

So unfortunately Middleby's stock over the last three years has not been an amazing story. It's been an underperformer. It is up, and I do hope and want more things and will expect more things from him these next couple of years. And this is definitely another one of those companies, really like all of these five, that I'd be very comfortable buying today to beat the market going forward.

So Middleby underperforming by 38%, and that brings us to a final total for this review. When you sum it all up, we're ahead of the market by 88% with these five stocks. So Five Stocks for the Next Five Years, and one of them a real dog. FireEye down more than 50%. But good news -- all the rest were up -- and a couple of them were up substantially. Activision Blizzard up 161% and MercadoLibre up 210%. So an outstanding performance. The market, again, up 49% over the last three years. This group of stocks basically up, on average, 67%. And so that was a great start.

Now looking back at our very first five-stock sampler, we do have a good record. I know my longtime listeners will recognize that we've been on fire, in general, with these five-stock samplers with at least one recent notable loss; although none of these games is over yet.

Actually, of the 15 stock samplers that I've presented on this podcast, only one of them has ended so far. It was a one-year call that I made with safety stocks, and that was a winner, but none of the others has officially closed out yet, including this one, so we're not going to pound our chest too hard here, even though these stocks are 18% ahead of the market because we have two years to go and we're all in it for the long term, as you well know.

So again, to conclude, Activision Blizzard, Casey's General Stores, FireEye, MercadoLibre, and the Middleby Corporation. Five Stocks for the Next Five Years due ultimately September 2nd-ish, 2020.

David Gardner owns shares of Activision Blizzard, FireEye, MercadoLibre, and Middleby. The Motley Fool owns shares of and recommends Activision Blizzard, Casey's General Stores, MercadoLibre, and Middleby. The Motley Fool recommends FireEye. The Motley Fool has a disclosure policy.