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Some companies beat the market; some companies get in trouble with the law. So it’s important for us to come back every year and check the score for our five-stock samplers — warts and all.

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This video was recorded on Sept. 14, 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, sometimes silly. 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? Then one year later we reviewed the picks and then another year passes the two-year review. 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 is that? Well, first of all, three years have passed since I picked those five stocks, we really can be smarter about what’s happened and why, and what we can learn after three full years. That’s the smarter part.

But if I’ve done my job well, then we’ll also be happier and richer as well. 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 and you should too, if you own them. But if I kept reviewing all 30 of my samplers in years 4, 5, and 6, etc. We wouldn’t have time to do much else on this podcast. Well, 30 separate times I’ve picked five stocks, what I’ve also called my five-stock samplers. We’re going to review two of those samplers this week. Five stocks with a tailwind blow, and five stocks indistinguishable from magic. Review them we will with my two analysts, guest stars Sanmeet Deo and Rick Munarriz. Just how badly has the market treated me? We’ll find out only on this week’s Rule Breaker Investing.

Welcome back to Rule Breaker Investing. Thanks for joining us. Thank you for suffering Fools gladly. I hope that you’re always reminded as you hear that glass break once again, that that is the sound of rules being broken and that’s why this is Rule Breaker Investing, a Motley Fool podcast. The purpose of The Motley Fool is to make the world smarter, happier, and richer. I love our purpose statement. Every one of our 625 employees and more than that contractors tries to deliver that to you every day. It turns out we can’t always guarantee the last of those, the richer part. This market year has been a reminder that one year in every three, on average historically, the market loses value. We’ll just try to make you smarter, happier, and richer on this podcast in any given week. But for any market year that richer part, no guarantee. Last week I had my personal pleasure. It is a very personal, arguably self-indulgent pleasure of being able to air out my most recent list of pet peeves. I want to call out in particular the first two that I did because I’ve gotten some enjoyable Twitter feedback there. Some of you have said that you’ll never say last, but not least again, or at least if you say it or hear it, you’ll be reminded perhaps of my brief diatribe on last week’s podcast.

Then thank you, Desmond Walker @deedubya78 on Twitter or the gaps widening or narrowing @DavidGFool, this episode was dope. Thank you very much, Desmond and may your gaps always be narrowing. Because let’s face it, friends, even if gaps widen more than they narrow, I can’t imagine that ever happening. More than about a 2-1 ratio. That doesn’t make much sense to me. Thinking about headlines referring to widening gaps at a level of 16-1, those that narrow, well, Desmond, I got you. We got each other. Rarely do I mentioned this, but it’s worth pointing out from time to time if you haven’t already, I hope you’ll subscribe to Rule Breaker Investing this podcast on iTunes or Spotify or Google Play or wherever you find your podcasts. You can follow us on Twitter at @RBIPodcast. You can follow me on Twitter if you like, I’m @DavidGFool. Finally, I hope you’ll give us a review on whichever site you download podcasts from, throw me some stars, let us know how we’re doing. I read every comment. This is a Reviewapalooza episode, one of our longest running episodic series. It’s a pleasure to review in good times and bad stock picks that we’ve made years ago. I think it’s a unique aspect of the Motley Fool that as an online site. Now, entering our fourth decade, we started as a keyword on AOL.

I think it’s appropriate that we continue to be accountable and to remind you and learn together how things have done based on what we said. On this podcast for years, I said, these five stocks, I think whatever the theme is, these five stocks I hope, will beat the market. We’ve done a good job checking back one, two and three years later ever since. I always get the help of talented analysts around the Motley Fool, we’ve never had a shortage of them. I’m looking forward to being joined by Sanmeet Deo and Rick Munarriz a little bit later, but first before we start with the first of those two samplers to reflect on, and the first one we’re going to be doing is five stocks indistinguishable from magic, I want to restate why we do this. Why did we do these Reviewapalooza podcasts? I guess I have three things that come to mind as I answer that question. The first is, it’s important to review stuff. I think that’s true in life. It’s often we don’t give enough time to reflecting on whatever is just happened good or bad. Sometimes we rush to the next thing, but we would’ve been smarter as we rushed to that next thing, maybe we wouldn’t have rushed to that next thing if we’d first reflected for a little bit about why whatever just happened again for good and for ill.

I do think it’s important to review stuff and I’m speaking to myself as much as you today because I need to keep reminding myself of that as well. To review. Review is good and especially when we think about the financial markets, review is rare. I often say, it’s up to you and me to review why stocks have done what they’ve done because TV sure won’t. How many people go onto CNBC or are quoted in the Wall Street Journal saying this or that about a stock or the market overall. At least in my experience, CNBC and even the Wall Street Journal rarely go back and let you know later on whether that person was right or wrong. In fact, in many cases, they’re rushing to the next minute of programming to have that person back on to generate more. I always use this wording, “content.” Yet we don’t really know whether the person speaking right now, making their prediction is right. More than half the time, let’s say is worth listening to. Now, certainly good media vehicles. I do think that CNBC and the Wall Street Journal do a lot of good.

Typically will try to have good people on in the first place. But boy, is there a missing scorecard in the sky that’s never really keeping track as we do for sports. That’s never really keeping track of all of those prognostications made in financial media. So it’s important to review stuff TV sure won’t. One of the many reasons I love the Internet is because the Internet does have a memory. When something is said in a podcast, you can go back and listen to it. When a stock is picked at, you can come right to our scorecard and see how it’s done. Whether we’re talking about 12 months later or 12 years later, it’s important to review stuff. Reason number 2, why we do this. If you don’t score, you don’t learn. There’s an old business saw, and I can see both sides of this. There are really two schools, the ones that agree with this and the ones that don’t. I can easily join either one contextually, it makes sense to be in one group or the other at different points. Here’s the line. If you can’t measure it, you can’t manage it. A lot of wonderful leaders have had successful careers in business and in-life making sure that we’re measuring the things that we want to manage, feeling as if they can’t manage it effectively unless it’s being measured. Now, on the other hand, it’s also true that many of the most important things in life are not that measurable.

The notion that if you can’t measure it, you can’t manage it. If you’re not able to put a measure on things well, those are things like love or how you treated your kids yesterday, or how well a company’s culture influences its ability to innovate. A lot of things can’t really be measured that effectively, we struggle for better measures and the struggle is real and I think it’s great to find new measures. I love proxy measures are creative ways of measuring things. But it’s also certainly true out the other side of my mouth that it’s very hard to measure many of the most important things. But one thing is for sure if you’re not scoring, especially with investing, I don’t think you’re learning. That’s in part why we do what we do. Then the third reason why we do this is I think it’s really helpful to listeners. I hope to hear me screw up, for me to lose, for me to fail and talk about it on this podcast or as I did at FoolFest a couple of weeks ago. I think I’ve already delivered this line on my podcast as well, but I’ll say it once again. It was in some ways a perverse but important pleasure for me to stand in front of a room of a few 100 people and say, whoever’s down, however much you’re down, I’m down more.

I think that’s very important for me to be able to say and for a lot of people to hear because I think the assumption is that people who are in the professional world, professional stock-pickers, advisors, analysts, they must always get it right and it’s the rest of us, the so-called retail investor, to point to a past pet peeve podcasts. These so-called retail investor doesn’t get it right, but the truth is, the professionals get it wrong all the time, and I think part of being professional is owning that. Well, we’re about to get to our first sampler. I do want to mention after we do these two samplers, I’ll spend a little time at the end reflecting overall on how these 35 stock samplers, these 150 stock picks are doing and have done. That enterprise-level waterfront view if you will. But for now, let’s go right into one of the boats to strain this lane metaphor on the waterfront. Sit down in it, look around, and see where we are, and what we can learn from that sampler. Let’s start with five stocks indistinguishable from magic. Sanmeet Deo, great to have you back to Rule Breaker Investing.

Sanmeet Deo: Great to be here, David. Thanks for having me.

David Gardner: You’re welcome. I think each time I try to ask an icebreaker question just to get us into the frame of mind here. I don’t remember if we did it last time, but I know one thing, I came up with one this time and I shared it with you ahead of time. So you and I have both briefly had a chance to premeditated answers to this question. Sanmeet, if you could wake up tomorrow, having gained one skill, ability, or talent, what would it be and why? The only clarification I want to give here is you’re not allowed to give a superhero power or ability. This needs to be an achievable for most of us: skill ability, or talent. What would it be for you, sir?

Sanmeet Deo: Yeah, and I’m going to use a little bit of recency bias because over the past couple of years I started doing more formal martial arts training, and so if I could wake up tomorrow, I’d love to just be a black belt martial artist with all the skills and talents in kickboxing that I’m learning already. That would be a lot of fun. Then hopefully, with that comes the ability to have a body that is able to sustain injury and those things.

David Gardner: That sounds really good to me and Sanmeet, you and I, having worked together for a couple of years, still have never met in-person, I do look forward to that day as the world continues to try to get past the pandemic and understand what hybrid work means going forward, which I’m sure there’ll be a lot of clarification too as the months pass. But am I not right that part of your own business background is having started and run your own gym?

Sanmeet Deo: Yes, absolutely. We run a kickboxing gym but it was more fitness kickboxing, so it was primarily hit-style kickboxing to get in shape to get your cardio and all that. Not the traditional martial arts where you’d learn to spar or learn to train in martial arts competition typesetting too.

David Gardner: Yeah, and so you can now go after black belts this way, but not from the style of what you were doing your previous gym; am I right? It’s a martial art.

Sanmeet Deo: Yes. Currently, I am training my kids as well in martial arts, where you go up the belt rankings as you progress and as you get better. We’re also doing some competitions within the school across the tri-state area. Yeah, it’s a lot of fun.

David Gardner: Awesome. I guess trying to answer my own question, I would say if I could wake up tomorrow, having gained the ability to remember more than about the five percent of my reading that I actually remember, I would be a much happier and more impressive person. Maybe it’s with my passing years, although I remember back in my 20s, my memory wasn’t that good. I do feel like so much of what I read, I forget and that’s most frustrating. Well, Sanmeet, thank you. Let’s get into this now the theme, a phrase from Arthur C. Clarke. We’ve talked about it before in this podcast, of course, since this is the third time we’ve been talking about this group of stocks. The second review from Arthur C. Clarke’s great line, one of his three laws, by the way, and I had to check Wikipedia for this because I’ve never read Clarke’s essay, Hazards of Prophecy: The Failure of Imagination, which was first published in 1962. But one of his three laws, the last and best-known, any sufficiently advanced technology is indistinguishable from magic. I do hear that quoted quite a lot these days and maybe Sanmeet, it’s because we see more instances of really interesting technology pop-up, it seems with every passing year.

Sanmeet Deo: Yeah, absolutely. I mean if you look at the technologies that we have now versus 10-15 years ago, we would look like magic to us back then. For example, the eVTOL, which is the electric vertical takeoff and landing vehicles. I know if you’ve seen these almost dubbed flying cars back 10, 15 years ago, we just thought that’s magic and now they’re testing them and it’s possibly going to be here in a few years.

David Gardner: I keep waiting for the flying cars to show up. For the last 10 or 15 years, any YouTube video that had enough views that looked legit from a site that maybe I could tap into, I put myself in the waiting list for that. I’ve seen some amazing videos. I know this is going to happen one day, the so-called Jetson’s flying car and EV vertical takeoff I am in. Let me know, either Sanmeet listeners or companies themselves, once this thing hits the market because I’m a buyer. Let me share the two other laws from Arthur C. Clarke. I like these two. The first one, when a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong. That was Clarke’s first of his three laws. The second, the only way of discovering the limits of the possible is to venture a little way past them into the impossible. Now it’s time to go back in time. Can we have the way-back music, please Rick.

The year was 2020, the date was September 2nd, the market is up 9.8 percent from that day two years ago. Now with the market having dropped as much as it has in 2022, and as you and I record Tuesday afternoon last I saw the markets were down about four percent just today, 9.8 percent ahead of two years ago feels almost like a fantasy year, is that really true? Could that have been true? The market was up these two years, but that is true. The real question is, did these five stocks individually and as a basket, outperform that 9.8 percent? As is our tradition, Sanmeet, let’s start with the worst performer, and I’m very sorry to say Pegasystems, ticker symbol, PEGA. One of my five stocks indistinguishable from magic is now down, get this two years later, 71 percent, the market up about 10 percent, so that puts us about 80 percentage points in the hole here minus Alpha, the Alpha you and I don’t like. What has been happening with Pegasystems?

Sanmeet Deo: While a year ago when we talked about Pegasystems, it was a little challenging to find specific reasons or news for the performance of the stock over the course of the prior year, this year was much different. There really was one major story that severely impacted the stock and took it from last year where it was about $11 billion, market cap town was three billion market cap now.

David Gardner: Oh, what a year.

Sanmeet Deo: Tough year. Basically, what happened is, Appian, a competitor Company, received a verdict from a jury in the Circuit Court of Fairfax County, Virginia, awarding it 2.036 million in damages from Pegasystems for trade secret misappropriation. The jury also found that Pegasystem violated the Virginia Computer Crimes Act, and they also said that misappropriation of the trade secrets was also willful and malicious. Now, crazy story as I was digging into this, was it almost breeds like some true crime or documentary that’s going to be on Netflix, where it was said that there was a software developer who’s working under a government contract for Appian, who was recruited by Pegasystems to spy on the company and misappropriate information. It was also said that the CEO, Alan Trefler, created an alias to discretely obtain information from Appian.

David Gardner: Oh, my golly.

Sanmeet Deo: Crazy story there, and I have to imagine, I think it was the day that had happened, the stock took quite a beating. Just to put in perspective, Appian’s getting 2.036 billion in damages, at the time, Appian’s market cap was only about $1.8 billion. This takes a huge toll on the company Pegasystems, and almost makes us wonder if the magic that we’re talking about that the company has is withering away.

David Gardner: Well, indeed, and knowing that Appian is a stock owned by many Fool members, I guess I’m happy, I’m pretty sure a lot more fellow Fools own Appian than Pegasystems, so if one had to pay the other, I guess it went the right direction that said we wanted both companies to win, and I picked this one for my five-stock sampler, and that is extremely disappointing. I really have not been keeping up with Pegasystems, so that news jumps out at me too. It looks like it was one day in May that the stock dropped from about 70 to about 50. But that’s part of a big progression downward for Pegasystems. That is just one bad day for a stock that today is trading around 40 and it was about 120 last year. It does remind me that you helped me review this last year, I don’t do that with each Reviewapalooza. But it’s fun to have you back looking at the exact same set of five stocks again.

Sanmeet Deo: Absolutely. This is one of the things that listeners should understand to continue to monitor these companies for different news that comes out and see how they progress over time is very important to the investing process in itself.

David Gardner: Well said. We’re going to keep our eyes on Pegasystems. Hands-off the wheel here, I pick these stocks for two years ago, so all I can do is regret if the company acted illegally, all I can do is regret that. I remember Alan Trefler, who is the longtime CEO of Pegasystems, was a chess expert, a chess master back in the day. Somebody that we’ve had on Motley Fool Live before, I enjoyed my conversation with them, sounds as if he and his company are in trouble and it’s by their own actions. That is most regrettable, and it’s resulted in a minus 80 Alpha for this worst performer, and I think five stocks that were ahead of the market last year, but now spoiler alert are not. Well, from the worst performer, let’s go to the best performer. The good news is, three of these five stocks are beating the market over the last two years. The bad news is, none of them is doing so spectacularly, so when we start with a minus 80 for Pegasystems, the best I can muster thus far is Repligen, ticker symbol RGEN. Repligen’s up 42 percent market up 10, so we can give ourselves a plus 32 in the win column so far for Repligen. Sanmeet, can you remind us of what Repligen does, and then maybe explain roughly why it’s gone from 156-222 over the last two years.

Sanmeet Deo: This is one of the reasons I enjoy these baskets to see how you’ll have a mixture of stocks within the basket of some that do well, some do not, and also to come back on to review the same stocks and to get a better understanding of how they’re performing, so Repligen is a picks and shovels way to gain biotech exposure. They supply a lot of the things that are biotech and pharma company needs in order to do what they do. Example, filtration, chromatography, tools, and things they need to create the biologics and the medicines that people need. This story is fairly simple, they’re just consistently executing. They’ve grown and beat revenue and EPS consensus over the past couple of years consistently. It has strong gross margins approaching 60 percent, healthy operating margins hovering around 30 percent and it’s grown.

Their free cash flow per share over 30 percent in the past four years, while steadily improving their return on invested capital to over 14 percent in the most recent year. Now, some of the only concern that I can see right now; they did have a big COVID-related bump from revenues, and their most recent gross margins compress a little due to a lot of things that are affecting many companies; Inflation, supply chain issues, lockdowns in China. But it’s hard to overlook the impressive results that they’ve had. The fact that they’re providing necessary tools to an industry that’s expanding and growing and in constant need, so they’re just doing things right.

David Gardner: You mentioned EPS, their earnings per share, some positive reports as you were pointing to the stock bottomed in June, that’s when my portfolio bottomed anyway. Even after a really bad day today market is down around five percent now, I hope other Fools will join me in saying, I’m up from June though, which I certainly I’m, but Repligen’s up from June, up from 140-220. Still below where it was a year ago, but this is a company, I think, right technology, the right time as an enabler and a supplier to the biotech industry and a profitable one, of course, I continue to really like Repligen. I tend to like my winners more than my losers for very logical reasons, so ticker symbol RGEN, putting up some good numbers. Not to be forgotten, I want to mention SolarEdge Technologies, the ticker symbol as SEDG, because with rebel gin up 42 percent, it’s getting the headlines here is the top performer, SolarEdge though up 41 percent.

It’s been a pretty good year for this company in that it’s about where it was a year ago, which you can say for most Rule Breakers stocks over these last 12 months, so SolarEdge, beating the market by 32 percentage points-ish as well. Of course, the maker of inverters, part of the solar array, if you put an assembly on your roof, lots of solar panels, you’re probably going to want to have inverters which translate the sun’s current into electrical current your plug outlets and house can use, so SolarEdge, a stellar performer. Sanmeet, the other two are both in the semiconductor industry. We have here five quite different businesses really from different industries, although ASML, ticker symbol ASML, and Nvidia, ticker symbol NVDA probably are most similar to each other. Anything you’d like to say about either of those companies, Sanmeet?

Sanmeet Deo: Yeah. Both of them are great companies, Nvidia has been in the news a little bit more. In early August, they pre-announced lower revenue guidance and those big because they announced that they were going to achieve $6.7 billion of revenue, but this was substantially down from the 7.94-8.26 billion guidance they had given in the prior to coordinate eight-point billion consensus estimates what the market thought. Also drastically lower their gross margins to 46.1 percent versus the prior guidance of 67.1 percent. Now, this was primarily a result of the weakness in the gaming revenue segment, which was down almost 33 percent year over year, and it just reflects how Nvidia’s business can change very abruptly given the macroeconomic conditions that are in the market, and the end customers that they serve, and how demand can drive really quick. Now, while gaming was weak, data center and automotive segments held up well. Semiconductors are volatile business, it can shift very quickly, as we’ve seen here. Nvidia is still a very phenomenal business, a strong business, and it’s going to be challenged in the short run. But I’m pretty confident the long-run future of the company because of his demand being driven by things such as gaming, automotive, datacenter, AI, all the various things, all the magic that it actually is going to bring to our world in the future.

David Gardner: I feel the same way, and Nvidia, we have a long-running. I have a long-running love affair with Nvidia stock since I first picked it, I think in 2005, it’s a story I’ve talked about on this podcast before. The ups and downs that you had to go through over these 17 years to get from what is a tiny cost basis for Motley Fool Stock Advisor members. Today, the stock is at about 130, which is way ahead of where it was in 2005, but way down from where it was just nine months ago, the stock’s been cut in half, this volatility in a cyclical industry is not unusual. Sanmeet, I will just note for the record that, I don’t know, five years ago stock was at 50 today it’s 150, so tripled over five years. With this volatile market, it’s almost where you start counting from that has you, with the happier, sad narrative you’d like to tell, but for a great company like Nvidia, if you just look back over any meaningful period of time, you are very happy to be a long-term holder.

I suspect at present prices and you’re right, Sanmeet, the market never likes uncertainty, and when you come out with disappointing numbers or projections, your stock’s going to get whacked. Especially in this environment, I think it’s probably a pretty good buying opportunity, let’s check back in five years. Shall we. Sanmeet, it’s been great to cover five stocks indistinguishable from magic with you for a second year in a row and just a fully account for their performance. Again, we’re doing this live on Tuesday afternoon, September 13th, the numbers are always changing. A reminder, since I’m about to report slightly down numbers, this game is not over. We’re going to be checking back with this five, one year from this week when the final tail will be told that as of now, five stocks indistinguishable from magic with the market up 9.8 percent, these stocks average a gain of 4.7 percent, so we’re five percentage points behind the market after a gut-wrenching bad last 12 months. Let’s hope the magic reemerges and continues going forward. Sanmeet, thank you so much for joining me again on Rule Breaker Investing.

Sanmeet Deo: Thank you, David.

David Gardner: Well, from September 2020, let’s go back further in time. The date, September 4th, 2019, was five stocks with a tailwind blow. I picked that day since I do try to keep a calendar day of every day in my life thanks to having had, I don’t know, a lot of IMAX going back to 2008 or so. I can see that later that day after picking this five-stock sampler, I had a game night with friends and played Alhambra, Terraforming Mars, and Ra, all three of which I enjoy playing to this day. There’s a window into my world that day. But more importantly, five stocks with a tailwind blow and my friend Rick Munarriz is back to help us review these five stocks. Rick, welcome back to Rule Breaker Investing.

Rick Munarriz: Thank you. Great to be here, David, thanks.

David Gardner: Rick, you know my prompt, I gave it to you ahead of time. You’re an improv comedian so you probably could come up with this unaided anyway, but you’ve had a little bit of time, let’s call it two minutes to think about your answer to our icebreaker question this week. Rick, if you could wake up tomorrow having gained one skill, ability or talent, what would it be and why?

Rick Munarriz: I’m going to go with the ability to sing, which I know seems very petty. But I mean, when I was young, when I was even by my preteens I’d be writing songs. I’ll be able to play them because I took piano lessons as a kid and I was a musician growing up and was part of a band that got signed to major label. But nothing ever happened. I was one hit shy of a one-hit wonder. Paris By Air ended and began at that point.

David Gardner: Paris By Air, love it. I’ve always loved it when you retell the story Rick.

Rick Munarriz: Despite all that, I always had the music, but I had to be attached to a singer. I always thinking how easy it would be if I would be able to sing. I can just wake up. I could just therapeutically not just write songs, but actually, record them and say, hey, this is a decent demo. Also for improv too. I mean, there is musical improv, which is something that we do at the theater that I perform in Miami and I do musical improv, but I’m a very weak singer. I can rhyme well, so I make it up in ways. But like hip pop, I can rhyme my wraps well, but I obviously do not have a good wrap metric to myself, so I can do that. But if I knew how to sing, if I had this nice tonality to my voice, I don’t think my life would be different, but I think I’d be able to probably be more productive growing up when I was just writing poetry and putting it to music.

David Gardner: Yeah, you wouldn’t have to learn an instrument. I mean, you could just be the singer. That’s what I tried to do back in the day. It’s a lot easier not having to learn an instrument.

Rick Munarriz: You don’t get the callous fingers when you start learning to play guitar, you don’t have to worry about time as a drummer. Yeah, it’d be so much easier.

David Gardner: Well, in honor of your answer, I feel compelled I should reciprocate as well. I’m going to save for this one this time. I’m going to say, this is a humblebrag. This is very intentional on my part. I’m going to say I wish I could juggle four balls. Yes. I can juggle three. I’ve been able to juggle all my life, but never have I been well-trained or really had enough internal motivation to do four which is so much harder than three. I wish I could wake up tomorrow and just be juggling as much stuff as I wanted.

Rick Munarriz: I thought when you said humblebrag you said, I can juggle five, I can juggle an odd number of balls, four just throws me off, but yeah, that would be amazing.

David Gardner: My only humblebrag is I could do three because I taught myself out of the Juggling for Klutz’s book about 35, 37 years ago and I’ve always remembered ever since. It’s really easy to juggle three, if I can teach myself out of a book, I can teach anybody to do it, but four, that actually takes talent.

Rick Munarriz: I think I had that book but I could never do it past the hanker. The hanker just in slow motion, how you start that I could do easily like a referee an NFL official, I can throw the flags around in the right order but no balls, just yeah, I could never master that.

David Gardner: Let’s move from our nascent talents and singing and juggling back to the stock market and five stocks with a Tailwind Blow. I was reflecting, since we’re at the end of this one, I was reflecting back to the very beginning. Where did the phrase come from? It’s a phrase, a lot of us understand a tailwind blow that in sailing, that’s what you want. You’re going to win the race if you can catch a good tailwind blow. In technology terms, we often think of what are the big tailwinds, the inevitable technological forces that can propel things forward. I was talking with Sanmeet earlier, he was mentioning 2007, we couldn’t even really dream of some of the things we do in 2022. Fifteen years ago, Rick, the iPhone, of course, it was right around this month, this time of year 15 years ago, the iPhone was unveiled by Steve Jobs on stage. Think of all the tailwinds that have been created from apps. Well, it didn’t help Garmin presumably, or maybe the flashlight people as well.

But for a lot of us and a lot of companies, the iPhone has created a huge tailwind. But the real story of tailwind blow came from a listener writing in. His name, Paul. Paul wrote this little store and I want to share it since Rick we’re at the end of this three-year journey for these five stocks. Here’s how Paul wrote in to Rule Breaker Investing. He said, “My tailwind fetish came about over a 10-plus-year period where I was the president and CEO of a company whose revenues historically came predominantly from ad sponsored weekly Catholic church bulletins. Unless you’re familiar with them,” Paul wrote, “your first reaction is probably, ‘What?’ Yet rest assured, we are a real company with 4,000 print customers and between $50 and $100 million of revenue. Not huge, but not miniature. Over those 10 years, the church bulletin business experienced some very strong headwinds.

The priest scandal, decreasing allegiance of the next-generation to religious institutions. The great recession, and decreasing affinity of small businesses to church bulletin advertising. On top of the general decline of ads in print.” Paul continued, “Now taking off my humility cap for a second. Let me say we had an excellent management team. Clearly the tallest pigmy in our business. We outgrew all others over several decades. However, given the headwinds, about seven years ago, we started a fintech product to solicit and process church donations online. This business was a revelation to us as we pursued a business model that had,” and he used all caps for this word, “TAILWINDS. First, we leveraged our large customer network to sign-up churches. Then lo and behold, after the first year we signed the church, the revenues and margin grew annually as more church members participated online. After Year 1, we had virtually no sales costs and no incremental software costs.

Now in the bulletin business, we were clearly the best. We worked very hard to achieve a modest single-digit growth rate. But in the online transaction world, we were mediocre among tougher competition. Yet our existing customers grew 10 percent a year and we were adding new customers constantly. What I learned is that in terms of creating shareholder value, an excellent management team facing strong headwinds can easily be outperformed by a mediocre team with strong tailwinds.” Rick, taking that note from Paul [inaudible] and thinking about it, I thought, that’s a really good point. He made several good points there. But the primary one, the great line, an excellent management team facing strong headwinds can easily be outperformed by a mediocre team with strong tailwinds, puts us in mind some tailwind stocks.

Rick Munarriz: Yeah, definitely. Obviously, you want a tailwind and you want to avoid the headwinds. Definitely, that is an advantage. That’s like the home field advantage or AstroTurf if you know how to play on that turf versus the team coming in that does not know the rules of that field.

David Gardner: Let’s be clear. There’s no substitute for strong tailwinds and an excellent management team. That’s what I tried to find in the five companies that we are now reviewing. I would say Rick, in a couple of cases, I got it dramatically wrong. Let’s review these stocks now. Five stocks with a tailwind blow, these were repicked as I mentioned, September 4th, 2019. The game ended for these five on September 2nd, earlier this month. So about two weeks ago that Friday before Labor Day, we called an end to this contest. Five stocks with a tailwind blow. The stock market over these three years, get this Rick, the stock market was up 33.4 percent.

Now, many times in the past, we’ve said at The Motley Fool, the market annualizes average gains of around 10 percent a year or so. 33.4 feels like a three-year, normal annualized performance for the market. These five stocks were all over the map and ultimately to spoil the ending, it’s going to be a little sad. But let’s start first of all with the worst performer. So Rick, this is a company you and I know very well. This has been a Rule Breaker pick one that we’ve made, one that still exists. It’s a well-known brand. Boy, over these three years did this stock rock and roll, and then ultimately drop 61 percent over the three-year period. The ticker symbol is the same as the company name, R-O-K-U, Roku.

Rick Munarriz: Yeah, definitely. The weirdest thing about Roku, not the weirdest, but I guess the most painful part of this, is a year ago we were 2/3 of the way through the sampler and the stock was up 104 percent after two years. So not only did it give back the fact that it more than doubled, it gave all that back.

David Gardner: Unbelievable.

Rick Munarriz: It would go on to give it away another 61 percent on the way down. So clearly, a stock that definitely had two strong years and a horrendous past year. Like many growth stocks, but definitely this is out of the norm. Again, we all know Roku, I think it’s a smart TV operating system. Roku is the Japanese number for six, and because it’s Anthony Wood. It was the sixth company that he founded. Anthony Wood is the guy that created the DVR, the digital video recorder. Before TiVo did, he created a company ReplayTV. So he was always playing with time-shifting shows and time-shifting television the way we consume it. Here’s Roku a company where he’s been at for basically I think 15, 16 years at this point. Clearly knows this business, knows it well, but the stock had a terrible year. The good news is if you look at their numbers, if you look at like their top line numbers where they are now to where they were a year ago, business is actually not so bad. There’s 63.1 million active accounts. That’s up 14 percent.

David Gardner: That’s a lot.

Rick Munarriz: That’s a lot. More importantly, I think, especially for what people feared a year ago, streaming hours are 20.7 billion, those people, and that’s up 19 percent.

David Gardner: That’s a lot.

Rick Munarriz: Not only is it growing, people are streaming even more now, which was always a real concern with Roku. A year ago they’re saying, OK, the vaccine is out, people are going to go out and play. They’re not going to stream as much. No, we’re streaming as much now and more so than we were a year ago. But this is basically an advertising company at this point. Their platform, it’s free. Roku is a free product to sign up and create an account once you have access to it, either through a Roku stick that you buy or it comes free with a Smart TV that you pick up that has Roku. Average revenue per user is up 21 percent, so it’s $44.10 over the trailing 12 months. All of this sounds great and you think, why didn’t the stock double again? That’s where things turn rough for Roku. First of all, we had the supply chain constraints that I think a lot of companies were leaning on a couple of quarters ago.

For them, their hardware business, it was hard for them to get certain dongles and soundbars insert into their products, so that business took a hit. Even though that business isn’t very important these days, because again 38 percent of all Smart TVs as of two years ago came with Roku factory installed, so they didn’t necessarily need the dongle business and those little plug-ins that you plug into your TV. It definitely didn’t hurt their margins on that, but the revenue took a big hit and their margins took a hit. But also even on the platform revenue, which is now their bread and butter business accounting for the lion’s share of the revenue, it took a hit because for many reasons, one of them it’s investing in original content, which sounds great when you’re thinking it wants to take on Netflix or Prime or Apple TV+. But the problem is when you try to do as they are, in November, they have a movie coming out with the “Weird AI” Yankovic life story.

David Gardner: I saw that.

Rick Munarriz: With Daniel Radcliffe. Harry Potter is “Weird AI”, so this isn’t a low-budget movie.

David Gardner: It’s already getting good reviews, Rick.

Rick Munarriz: I have not seen the reviews. I’ve seen the trailer and I’m a big “Weird Al” fan, so I was going to see it even if it was terrible.

David Gardner: You’re in. 

Rick Munarriz: I used to listen to Dr. Demento as a kid, so I’m all in on this whole “Weird Al” thing. I’m definitely there for that. But the fact that they’re investing money in this, back then they bought like the Quibi library and they were able to use that. So they were able to get content on the cheap. Now they’re trying to spend a little more. So you’re seeing that their gross margins and their net margins are really taking a hit. The last two quarters, it’s had negative operating profit. So it’s a negative operating loss. It’s an operating loss basically. They went from slightly profitable to losing money, and I think that’s what concerns people. Clearly, I think the company, their platform is still growing in popularity, but their ability to just you say, when they grow this scale, everything is going to come so easy. It did not come easy for Roku and they’re losing money now, unfortunately.

David Gardner: Well said, and that’s a big reason why the stock, despite a lot of the growth numbers you shared, they’re not making money and you’re growing a business that isn’t making money and you’re scaling a business that isn’t making money. That can certainly send a shiver through the stock market and shake some shaky hands. I will point out about this stock, Rick, that five years ago, it was down somewhere around low 20s. This stock has tripled from five years ago. It’s at $68 a share as we speak. It’s tripled from five years ago. It is down from 480 last year to 68 now. That is a gigantic drop. I think what we’re seeing is the market always overshoots to the high and to the low. That’s always going to be true.

People get too excited when growth shows up, especially we would say recently during the pandemic. At the same time, we sometimes get too pessimistic as things come crashing down. We’ll keep our fingers crossed for Roku, but the reality is this contest ended two weeks ago. For this five-stock sampler, I will always have recorded a cost basis of $168.91 three years ago to 65.99 today, well actually two weeks ago. That makes the stock down 61 percent the market as we set up 33, so that is a gap of 94 points of Alpha, very hard to overcome. The best performer, Rick Munarriz, in this group of five, The Trade Desk, ticker symbol TTD. It was 24 three years ago, closed just over 60 a couple of weeks ago, up 155 percent, triple digits ahead of the market’s performance. Rick, what has been going right at The Trade Desk?

Rick Munarriz: Yeah. A lot’s been going right for The Trade Desk. Again, it actually was up even higher two years ago. It’s up 214 percent, it had more than tripled.

David Gardner: Ouch. Don’t remind me.

Rick Munarriz: Again, David. I think any of you tell anybody 155 percent over three years, who would not take that? So clearly, a great three-year run for The Trade Desk. It’s disappointing that it slipped a little last year, but not to the point as Roku, which is interesting. Because The Trade Desk and Roku, they are really connected TV advertising plays. Trade Desk, obviously a much different advertising play, but these are two companies that are basically ad companies right now. That’s the big driver. One went one way and the other went the wrong way. For The Trade Desk, they are the undisputed leader in programmatic advertising and they are demand side platform. What that basically means is that instead of the supply side that reaches out to the publishers, like reaches out to maybe put ads on The Motley Fool website, something like that, this is the other side. They reach out to the advertisers who want to get noticed, then they use algorithms to allocate their budgets.

David Gardner: Yeah.

Rick Munarriz: They do so well that the revenue grew 35 percent in its latest quarter. If you think, well, what does that mean? A 35, is that good or bad? That’s a little below where it’s been historically. But compared to its peers, a lot of advertising companies, even programmatic advertising companies, didn’t grow that quickly in the latest quarter. As CEO Jeff Green said in the call, basically they gained market share. They were able to outsized a significant amount of market share by growing 35 percent. The customers, they’re loyal. You think that they’re just going to be chasing around deals, especially with The Trade Desk as the top dog. You would think a lot of smaller dogs, a little smaller pups, would be very aggressive in trying to land new customers. But they’ve been able to keep at least 95 percent of their customers in place for the last eight years. Their guidance for the current quarter is $385 million, which translates to at least 28 percent year over year growth.

So slowing growth in this current quarter. But again, that’s not so bad when you think about the advertising market and the fact that a lot of people are concerned. If the economy keeps getting wobbly and things happen, advertising will take a hit. But The Trade Desk looks not only are they in a part of a growing pie, which is the algorithmic programmatic advertising market, but they’re doing so and they’re gaining market share. So even though is maybe a little more reluctant, if people have to save more money to pay for their food as we’ve seen with some earnings reports this summer that people are spending more money on the essentials and not so much on the stuff that you want to advertise to smoke out leads for, you do have a case where this company is doing so well that they should continue to do well, even though that is a concern with any advertising company, that if this dark cloud comes over us and advertisers really don’t have the money to spend or don’t feel that the people are going to buy what they’re trying to sell, it would hurt the advertising market as we’ve seen in previous market downturns. But until we get there, I think The Trade Desk is obviously earned his stripes as the number 1 name on this list.

David Gardner: Merely a coincidence, Rick, but both of these companies are trading right around the mid-60s as we speak. If you had to put money into only one of them, money that you’re going to need for retirement, which would you pick right now injecting dollars into over the next five years?

Rick Munarriz: I’m going to be a contrarian on this and you’ll never invite me back on your podcast.

David Gardner: You’re going to say Roku.

Rick Munarriz: I’m going to say Roku. I’m going to say Roku because as broken as it is on the bottom line, the platform’s still growing, and I love The Trade Desk. My heart goes pitter-patter for The Trade Desk. So it’s not anything against Trade Desk. But I think Roku is really depressed, the stock price is depressed, I think overdone. But again, if you told me which one do you think will beat the market, I think they both will at this point. Even with The Trade Desk up 155 percent over the next few years, I think it will. But I think Roku has a bigger shut to bounce back because the rival isn’t really there for Roku. All these other big tech companies that they have, these things, [Alphabet‘s] Google, Apple, Amazon, they all have devices that can plug into your TV and TV’s operating systems.

David Gardner: Yeah.

Rick Munarriz: Roku is still growing. They’ve been able to overcome that threat. They’ll overcome a little of supply chain hiccup and a little bit of margin crunch as they spend on content and deal with any other factors. I am a fan of Roku despite the big hit. I’m a fan of the first and the end of this sampler list.

David Gardner: Do you think Roku represents a potential buyout target if it got even cheaper? This is an oligopoly, the streaming wars. These guys are a major player, and if they’ve fallen on hard times, their stock gets really cheap. Someone’s going to jump in and snap them up.

Rick Munarriz: Yeah. I mean, you asked me a year ago, I’d say yeah, right, like who’d want to unload their Roku share? But I’m sure if a company came in with a decent premium, despite it being well below the price it was at its peak last year, I can’t think of a shareholder that wouldn’t just turn it in at that point. Yeah. It’s definitely a takeover target, but that’s not why I would buy Roku.

David Gardner: Sure.

Rick Munarriz: I think Roku could stand up on its own, but it has to be attractive for any other company that wants some skin in this game that is clearly a growing market, judging by Roku’s own growth, double-digit growth in accounts and in usage.

David Gardner: Well said, Rick, and thank you. Chock-full of information as you always are. It’s worth pointing out, of course, that nobody has to just buy one and not the other. Certainly a big Foolish investing point we’ve made over many years is that diversification is a good thing. That’s why these are five-stock samplers, not one-stock samplers, and nobody has to just buy one and not the other. However, now that we have three years of getting smarter to look back on, it’s very evident that The Trade Desk was one heck of a better pick than Roku despite the volatility and significant drops for both.

Well, Rick, we’re running out of time. So let me ask you, of the three other stocks, and I’ll name them right now alphabetically. They are NextEra Energy, ticker symbol NEE, Teladoc, ticker symbol TDOC, and I almost say that gagging based on its performance as well, and Waste Management, a stock with a tailwind blow, the creation of a lot more wastes that needs to be cleaned up in this world, ticker symbol WM. Which of those three would you like to pull out and say something interesting about?

Rick Munarriz: It’s going involve two but it’s related, so it’s just one point but it involves two stocks. Believe it or not, it’s not Teladoc. Which I know if you start talking about Teladoc, you’re not going to be able to shut me up for another hour. I want to talk about Waste Management and NextEra Energy. NextEra Energy, obviously I’m in Florida, so they are based here. FPL.

David Gardner: Florida Power and Light, is that your utility provider in around Miami?

Rick Munarriz: In Miami, yes, In some place I think it’s Duke. It’s weird. It’s clearly NextEra Energy is a very big Florida company doing great things with renewable energy and I think Waste Management, obviously we’re always going to have trash around. But my point about these two companies is at the two-year mark when I was listening to the two-year review that you did last year, they were the worst performers. They were Number 3, NextEra Energy was Number 4 and Waste Management was Number 5.

David Gardner: Wow.

Rick Munarriz: Waste Management was up 27 percent, so that was the worst 1, 2 years ago. If only we could have ended it there. The only reason I’m bringing this up is that they were 4th and 5th and the two of them leaped over, Teladoc and Roku. They went from 4th and 5th horses in this race to placing and showing at the finish line.

David Gardner: Incredible.

Rick Munarriz: Impressive run by two. Otherwise, sleepy company but Waste Management up over the past year and NextEra Energy, I think is practically unchanged, maybe marginally higher, but clearly did not suffer the way the other three stocks just over the past year. An interesting change at the finish line.

David Gardner: I really appreciate you going back and relistening to our review from last year and anybody can go back and hear the original from three years ago or the Reviewapaloozas 1, 2 years ago and now of course, three years later here we are and I love hearing that insight from you, Rick, I’d forgotten that. Just the full accounting Waste Management was up 39 percent, six percentage points ahead of the market. NextEra Energy, the number 2 performer as you mentioned the place horse up 52 percent over these three years versus the market’s 33. Teladoc, which had been rocking and rolling with Roku. They were multi-bagger winners within the three-year period, Teladoc basically gets cut in half, finishing down 49 percent way behind the market. Well, let’s get the final accounting before we prepare to send this five-stock sampler. We’re all five-stock samplers go one day to Foolhalla. The full accounting these five stocks as a group we’re up 27.3 percent over these three years.

Unfortunately, that is not higher than the 33.4 percent that the market showed over the same period. Asit Group five stocks with a tailwind blow, a beautiful theme and one that was worthier than the stocks I picked for it. I think, I hope it’s a lesson. Everybody hearing us this week will retain the power of tailwinds was not enough for this group to beat the market. Yet even now, since I’d like to keep these numbers live, I can see that they’re almost ahead of the market as a group just 12 days later. I’m not going to be the guy saying keep running the race even after all of the horses have finished and have gone to the Winners Circle. But I do keep these races going because I hope everybody listening knows from all of our five-stock samplers these are typically actively recommended stocks that we hope you’ll continue holding not for three years, but for three decades. The Trade Desk has gone higher over the last couple of weeks and it gives me a good sense of hope, but that’s all I can leave you, Rick and our listeners with this time, is just hope for the future because we’re now looking at the past. The past is complete. The Foolhalla music is beginning. Goodbye Five stocks with a Tailwind Blow. Thank you Rick Munarriz for the accounting.

Rick Munarriz: Thanks.

David Gardner: Well, thus much for another Reviewapalooza. Thank you so much again for joining us this week, joining with Sanmeet and Rick and me and 10 stocks, all of which have had quite different fortunes and interesting pasts, good and bad. Now the past is always but prologue, when we send stocks off to Foolhalla, that sampler is done but the companies sure aren’t. It will continue to be interesting to follow these companies going forward. The volatility of these few years is highly unusual. I know I have a lot of old hands listening to me right now. People who’ve invested longer than I have been around the Motley Fool for 20 plus years. I also have a lot of people relatively new to the market listening to me now and thinking about a stock like Roku, which has gone from 480 to 70 in the last year. Keep that thought in your mind. Hold those numbers in your mind. Four hundred eighty to seventy in the last year and yet take it all-in-all over the last five years, buying and holding Roku, you’ve actually tripled your money way ahead of the market averages.

Those kinds of juxtapositions are what we’re regularly seeing these days. Great long-term performance, horrific, short-term performance. I know how this movie ends. It’s going to end well, because the market goes up over time, but we’re really in rarefied air and unusual situation. Obviously, the market is not liking unexpectedly higher inflation reported this week, which is what’s tilted them down. Yet, I’m still looking well above my lows anyway of June, I hope you are too. The markets are always going to keep looking ahead and more than anything, we try to look ahead of the markets. You and I should be focused on a lifetime of investing, not a year or a quarter on three-years minimum as an investor, which is how I’ve set up my five-stock samplers. Not three months, which is a quarter, which is what most of Wall Street is looking at just the next quarter.

Therein lies our advantage and speaking of advantage, it’s disappointing, of course, to be talking about two samplers this week, both of which were waxing the market a year ago and both are losing one of them now permanently so since that five-stock sampler contest is over. But as I said at the start of the podcast, I do want to make sure I share with you the overall all-time totals for these 30 samplers and the average return of the 150 stocks and these samplers over the course of time, of them being samplers, 73.5 percent. The S&P 500 directly comparable up and down the 150 stocks, 34.8 percent. Take the losers with the winners. We’re talking a lot about losing here in 2022, but I want to make sure chin up that you dear Fool see what I see, which is that we are wildly ahead of the market with these 30 samplers. I trust five and 10 years from now as things have settled and begun to rise again, that this will look way better than that. I’m trying to make sure we take the long game view, but I hope it doesn’t sound like sour grapes.

Because, I fully acknowledge that these two samplers, I’ve been losers at least thus far. I’m looking forward to our next Reviewapalooza. That won’t be until early November. At least one of those is going to put up some pretty good numbers for a recent change. Well, next week on this podcast, regular listeners should already be rubbing their hands together in anticipation. It’s the Market Cap Game Show. The last time Brian Stoffel and Yasser El-Shimy tied each other. I thought more about the Market Cap Game Show, especially with the help of our listeners. Thank you, Sam Stevens. There has to be a better way than a game ending in a tie. Any Indianapolis Colts fans or Houston Texan fans can agree with me. Based on last weekend’s results, games shouldn’t end in ties and indeed they will not any longer. We’re rocking a new rule in next week’s Market Cap Game Show, a new rule, but the same fun and I will have both contestants back to join with me next week to join with me and you as we play the newest installment of The Market Cap Game Show. The market caps, they keep a changing Foolishness, capital F, does not have a great week. Fool on.