Investing is about looking forward, not back, but we can always learn by examining our winners. Last year’s top 3 stocks in the S&P 500 were Netflix, Amazon, and Activision Blizzard. Today we explore what they have in common, and what they teach us about finding tomorrow’s winners. Also, we want to know your FANG score! Add it up on today’s RBI Podcast.
Rule Breaker Investing
What The Top 3 Stocks of 2015 Have In Common
It's the Rule Breaker Investing Podcast with Motley Fool Co-Founder, David Gardner. Welcome back to Rule Breaker Investing. I'm David Gardner. So pleased to have you joining with me this week. Thanks a lot for lending us your attention for 20 minutes or so. That's my goal each week, about 20 minutes of some foolish thought about investing, and particularly the Rule Breaker style of investing, which has been illustrated many times on this podcast since we debuted back in, oh, it was July of 2015. So we're not even to our first year anniversary, but for anybody who's new, and we have a lot of new listeners this week, I'll mention why in a sec, for anybody who's new, you can go back to the first several podcasts, shorter form, 10 minutes or so, laying out our approach and strategy. The six traits we're looking for in companies as we pick Rule Breakers. We invest in many companies besides the pure Rule Breakers, in fact, a lot of what I talk about and many of the companies that I've talked about over the course of the last 37, 840 podcasts or so, there's a motley array of companies. So by no means is the Rule Breaker approach the only approach to take to investing, nor is it the only approach I use, and I hope you use to investing, but it's a compelling way to think about the markets, and I hope it's been helpful for you. Now why are there some new listeners this week? Well, I had an opportunity to go on a wonderful talk radio show last week. A very popular one, and I know a lot of you might be listening to this one for the first time because it was on WFAN and Mike Francesa, the longtime sports talk radio show host in New York City. I had a really fun half hour last week with Mike talking about sports and investing. And I trust we have some new New York City listeners after that conversation with Mike. You know, Mike showed off what a passionate and I think powerful investor he's been. We talked about a little bit on air, but even more off the air, those moments you don't get to hear. I can tell you, I really enjoyed hearing from Mike about his years of investing. He probably has a little bit more of a trader mentality. He has some fun money that he runs kind of on the side, but he's definitely an investor. Somebody by definition who thinks and acts for the long term with a lot of his money, and he has some of it with hedge fund managers of repute. He does some himself. He's a Motley Fool one member. This is a guy that I really enjoyed spending time with. And I think it's particularly apt and was completely coincidental that the last couple of weeks on this podcast, I covered sports and investing more specifically how sports talk radio makes us better investors. And truly when I first heralded that series about a month ago, I had no idea that I was going to be on Mike's show. So that was a really fun dovetailing of this podcast and that interview, but the interests and the overlap between sports and investing, again, if you are a new listener, you might enjoy the last couple of weeks because I think there are a lot of important overlaps between investing and sports, everything from you're playing it to win, everything can be scored. And there are a lot of conventional wisdom in both subjects that mislead many others. And we covered all that. I'm not going to go back over it, but I'll flag it for you. If you didn't get to hear that, you know, it was a pleasurable day overall in Manhattan. I was there with Allison Southwick. So if you are a Motleyful answers listener, you'll know how charming and fun Alison is to work with. And in addition to her great work on Motleyful answers, the podcast, she also oversees a lot of media and PR here at the Fool. So she was with me and we had a lot of fun that day. And I also want to throw a shout out to Consuelo Mack, who is the host of a show called Wealthtrack, which is on PBS. And I had a really fun half an hour or so taping with her for her upcoming show. It'll be me and Consuelo on the 29th. I think that's the Friday after this one. So that weekend, if you have PBS, I know you do. If you have this show in your area, you'll be able to watch an extended conversation about stocks and investing in rule breaker investing on that PBS show. Now, you get to hear me arguably too much because you're, I hope, a weekly podcast listener. But in particular, if you have friends or family who want to know what this whole thing is, maybe they would enjoy that television show because that's a good introduction to how we think about investing. And I'd like to mention a new Motleyful experience, by the way, just in passing here, we just updated our Motleyful app for 2016. If you had our app, which still was getting like four and a half stars a few years ago from some years back, which was mainly just kind of a news reader of our site, I'm happy to say we've got a brand new spiffed up experience here in 2016. It includes, and this is why I'm mentioning in here, access to this podcast and all of our podcasts. So a convenient way to find your Motleyful podcast as well as Motleyful information. If you're not a member yet, we do have good free content on that app. So you're going to enjoy the app. If you are a Motleyful member, you'll enjoy it even more because we now include access to your services and the content of stock advisor or rule breakers or Motleyful One or whatever color is your Motleyful parachute, you're going to find that information in the app as well. And you can find that at app.fool.com. So what are we going to do this week? Well this week, we're going to talk about some of the top performers on the S&P 500 last year. So 2015 calendar year, which did the best on the S&P 500. And I'm going to give you right away the punch line. I'm going to give you the top performers, the gold, silver and bronze award winners for last year's performance. And they are number one, the top performer on the S&P 500 again, 500 of the largest companies in America, a list managed by the publishing company, Standard and Pores, the S&P 500. The number one performer was Netflix. Netflix was up 139.2% last year, leading all of those big companies in stock performance. Number two last year was Amazon, Amazon was up 122% CEO Jeff Bezos. Once again, driving huge value creation. And the number three performer last year was Activision Blizzard. That's the pure play online gaming stock, the video game company up 95.7%. Now why am I talking about these? Well, on a quick side note, these are three of our biggest stocks. These are three recommendations from my Motley Fool Stock Advisor service. We've had them for years. So I'm partly just briefly bragging that we had in that one service numbers one, two and three. I was doing the math. We have 26 stocks in stock advisor on my side. My brother has the other half of that service on my side of the scorecard. We have 26 of the 500 S&P 500 stock. So we have a small minority. And so it is, I think, more than just luck that we would have numbers one, two and three. That said, I want to mention right away, there is a lot of luck in any one year of the market. You can look really silly good or silly bad and not deserve it in either case. So it isn't so much my point to point out that we've had those three, but to actually look for some similarities among those three. If you've ever played a game where you sit there with others and try to dream up as many things as you can in 60 seconds or so, that's kind of what this podcast is. I'll spend a little bit more than 60 seconds, but I'm just going to try to dream up and come up with as many similarities among those three so that we can extract from those similarities, some core traits or lessons that we want to learn as investors from what worked last year. I do want to mention before we start our list that it was just one year. It was last year. In fact, it's a little bittersweet because I'm taping this podcast on the 19th, Tuesday, April 19th and Netflix is down about 11 or 12% today and just one day. So one of my favorite stocks, one of our biggest holdings at the Motley Fool had earnings that looked good, but didn't quite please the market enough for at least one day. So it's a little bit bittersweet for me to talk about Netflix, ironically, on this particular day, but I'm not shy about that. So with that said, here are some traits that I can see that run through these three companies. And by the way, I'd love to hear from you. So on Twitter this week, if you like, at RBI podcast, let me know any additional similarities. Maybe some nuances, some subtleties that I'm bluntly going to miss that you see that can help us as investors some traits that these companies share. So the first one I want to mention as I start my list is entertainment. Every one of these is in the entertainment business. Certainly Netflix is really in command, I think worldwide. It's by no means a dominant market share. We're talking about a very spread out market, but there's no clearer worldwide leader when it comes to movies and television shows than Netflix and where it is today. Similarly, Activision blizzard with its properties, World of Warcraft. By the way, Warcraft is going to be a movie this summer in the theaters. It'll be interesting to see how that does, Call of Duty, Hearthstone more recently, lots of different entertainment properties. And then of course, Amazon.com not only sells all of these products, but also contributes its own with Amazon video, which you can use if you are an Amazon Prime member and Amazon is investing a lot these days as is Netflix in the core creation of new entertainment. So the first thing that we see that I see as I think about these three companies is they're in what I consider to be an outstanding, timeless industry entertainment. The second similarity shared by all of these three is that they are content producers. They're not just in the entertainment business. They are actively creating content, whether it's Netflix, having funded everything from big shows like House of Cards are much smaller, sometimes just one off comedies with popular comics, but Netflix is clearly producing content. It wasn't always that way. It's only relatively recently that Netflix has even entered that market. Similarly, we know Amazon is doing the same thing. And then Activision blizzard all the time is creating new video games. So number two, within a great industry, they are producers. They are content owners. The work that these companies are doing is building up an archived library of properties. A third similarity shared by all three of these is that they are branded properties. You recognize names like House of Cards for Netflix or Call of Duty when it comes to video games for Activision Blizzard. And so this is a really important thing. It's not just that you own content, it's that it's branded content that can work across trans media. You know, one of the big trends that we've seen in the last 15 or 20 years, think of Marvel with its superheroes. Think of the Lord of the Rings is we've seen properties that started in one medium, comic books, all of a sudden go into other media, trans media, across media, everything from movies to lunchboxes and lots of stuff in between. And that's the power of having branded properties, which is what all three of these companies, frankly, have and are continuing to develop. So that's an important third similarity. Here's a fourth one. All three of these companies are making lots of bets. So it's not just about a single big biotech drug and that biotech stock hanging on whether it gets FDA approval or not, these are not binary outcome companies. These are companies that are experienced taking risks, but they're doing it across a wide array of possibilities, and yes, some of Amazon's risks haven't worked out so well. For example, the Amazon phone, was it the fire phone? I've almost already forgotten about it, but that didn't do so well. And certainly there are some clunkers out there. Ironically, for Netflix, the ridiculous six, which has gotten ridiculously bad ratings is also the number one most watched movie in the history of Netflix. So things arguably, I don't know if we say that worked or did not. I guess we'd say it worked overall, but but every one of these companies has had failures, will have failures in future, but the beauty of it is you're invested in companies that when they fail, they can rebound from that. They're not betting at all on black. Similarity number five, not only do these companies operate in the entertainment business as content producers of branded properties that make lots of bets, but I want to take that one notch further. I'm going to say that these companies do a darn good job with that. In other words, they bring joy to the lives of many. Whether you are a world of warcraft, longtime player, or somebody who just enjoys being able to watch 24, all nine seasons or whatever it is, binging on whatever you've watched in the last week or so, these companies I think are certainly enhancing my life. I hope at least one of them is enhancing your life. And we love these businesses and this runs up and down stocks that I pick and rule breakers in stock advisor, but especially the best ones. After all, here we are this week talking about the top three performers on the S&P 500 last year and all of them do a really nice job bringing joy to the lives of many. And I think that's important to point out sometimes investing doesn't need to be that much more complicated than asking yourself, who's bringing value to the world out there? Who is adding value to your life? And then beyond the sample size of one that each of us represents, who is bringing joy to the lives of many. It's a fairly simple filter. It doesn't take a CFA or training and accounting or your ability to read financial statements. I do think that those things are valuable as well, but you can increase your own odds an awful lot by focusing on where real value is being added in the world. Okay. I'm going to start losing my math here. I think that was five. So next we're going to go with six. My list is going to start running out, by the way, this will be one of our shorter podcasts this week, but number six, all three of these companies are some combination of software companies or operate in the cloud. And that is itself a really important realization because companies that are more software oriented or more cloud oriented, basically are lighter business models. And we favor these a lot as well in the services that I pick stocks for and with my analysts. We like companies that don't have to invest a huge amount in heavy industry. They don't have to pay for everything that an airplane entails in order to get a plane flying up and making profits for the business. Heavier industries like, well, airplanes, cars, et cetera, where there is a huge amount of cost in order to get even a single product out there that somebody would buy. While there can be some very powerful models there and Southwest Airlines has been a great long-term stock performer, the reality is that these lighter business models think about Amazon and what it's doing with the cloud. I mean, it is actually enabling a lot of Netflix to happen through Amazon Web services, but Amazon is not only a cloud user, but it's also a cloud purveyor. It sells cloud services to so many companies. I think probably the Motley Fool included all benefiting from its servers running your website. That's kind of the cloud business, but you can also see that software business clearly running through its video games, Activision Blizzard has many people who are kind of subscribed who are regularly using its product. And I'm going to bleed this over right into number seven. So from software and cloud, number seven is that all three of these companies have subscription businesses. Maybe my favorite business model, you and I as consumers put up the cash upfront. We buy ahead of time that service, Netflix for the month ahead or World of Warcraft for the year ahead, whatever it is, we are paying upfront and creating recurring relationships with the companies we're doing business with. Yes, a lot of companies, the Motley Fool included auto-rebill you from one month or year to the next. And while anybody can cancel at any time, and that's true of most good businesses in this space, the reality is that most of us, unless we're highly displeased by the service, we will continue with that service and make it a regular recurring part of our life. And you can clearly see it in Netflix and Amazon and Activision Blizzard. So appreciate that about these businesses as well, which takes me finally to numbers eight and nine. And both of these aren't so much about the companies, but about how the Motley Fool has covered them and how we've treated them over the years. Number eight, all three of them are multiple recommendations in Motley Fool's stock advisor. So it's not just that we picked the stock once back in 2002 and have held ever since. It is, in fact, that we did pick Amazon in 2002 for stock advisor or Netflix in 2004, but it's that we've continued adding to that stock over the course of time. Netflix has been recommended for additional time since we first picked at Activision Blizzard. I first picked in August of 2002. Similarly, I've added to it three separate times since. And finally, Amazon.com is probably the single stock that I've held the longest predating stock advisor to when we had it. For those who remember the Motley Fool back in the AOL days, when we first launched our service, we had it in our original portfolio, which we called the Fool portfolio at the time, and then later rebranded to the Rule Breaker portfolio. This is all before Motley Fool's stock advisor. We bought Amazon in 1997, but we've added several times since. And so that's really important. It's important for us as investors, I think, to find what's working and add to that over time. Too many of us think about just adding to something that's down or trying to get back to even with a loser by lowering our cost basis. And we've talked about this on this podcast that can work in some situations and brave people do that all the time. But in my experience, you're better off, more often than not, if you have new money, putting it towards something that's working towards something that's winning. And so with Motley Fool's stock advisor and these three stocks, how we've treated them is that we have added to them consistently over the course of time. That doesn't even include the many times they've been named as Best Buys Now, which is a key feature of all Motley Fool services, but they've been frequent recurring companies there. And number nine, similarly, and this is important, everyone has to remember this, especially on a day today when I tape this, that Netflix has dropped more than 10% in a single day. All three of these companies, you had to hold well up and down over the course of time to really make the profits that you enjoyed in 2015. Yeah, Netflix, the big quickster fiasco after 2010 is a great example of that. Netflix has been a very difficult stock to have held for a long time as has Amazon.com. When we first bought it, our cost basis was $3.21 in 1997. It went to 95 over the course of the next four years. It then dropped from 95 to 7, and we continue to hold. And these days, I'm happy to say it's much closer to, well, it's over 600. So we've been well rewarded, but along the way, there have been many, and will be many drops for these kinds of companies, more volatile stocks. And I said there were going to be nine similarities, but I found a tenth. I'm just going to mention it as well, and that is, and maybe it's already become clear, we've held each of these for a long time. Which causes me to close out this week's podcast with a brief meditation on Fang. Do you know Fang? Well, Fang can mean many things. For example, Fang was a pet of Hagrid in the Harry Potter series. I didn't remember that. Fang is the Arizona Rattlers mascot. It's a man on a motorcycle. Fang is just the snakes poison injecting tooth. I think we all know that version. Hope to never get too close to it. It's a town in Thailand. The list goes on. For a lot of investors, they think of the acronym, Fang, for big time stocks in recent years, Facebook, Amazon, Netflix, and Google. And these companies are regularly referred to as kind of a four horseman by some people or a group of stocks, kind of must have stocks that you've had to have and having them start with those four letters and being able to arrange them in that way gives them a little cache when you're able to talk about Fang. It's not an acronym that I use very often. And in fact, my closing meditation is be aware of this kind of thinking. Often what happens is after stocks have made a big run, someone invents a catchy phrase or in this case acronym and while I love each of those companies and we've held those companies for many years, I encourage you to generally eschew these kinds of terms, this cache, because what they're representing for you is stocks that have already probably moved significantly within the last year or two. It isn't to say that they're not going to have a great next year or two and for each of those, I think they'll have a great next five years or so, but don't get caught up or swept up in the acronym-izing of small baskets of superhero stocks. At the very same time that I ask you to watch out for those, I'll also ask you your Fang score. And we'll close with that this week. What is your Fang score? Your Fang score is simply if you add up the number of years that you've held each of those four companies. If you own any Facebook, Amazon, Netflix or Google, which is today, Alphabet, so the acronym is starting to break down. I think I have those four right. I might even not have those four right. It might be a different G, but I think it's Google. Anyway, what is your Fang score? You take the number of years you've held any of those stocks and you simply sum it up. And I submit to you that most of the people who use Fang or talk about Fang don't have a very big Fang score. And I think it's because people tend to chase whatever the latest winner was. It happens in the mutual fund industry all the time. It's called window dressing. When fund managers in the last day of a quarter or last week of a year add certain stocks to their fund so they can show that name and say, yes, we have that stock in our fund too. Very superficial window dressing. So I think a lot of the Fang talkers and Fang scores don't have the number that I hope you have. I'll give you my Fang score. It's just the stock advisor and Rule Breakers Fang score and it's 34. So 34, if you add up those four stocks, anything over 10, give yourself a golden star. Anything below 10, I still think you've found a good thing. But if your Fang score is more like one or two, you're either somebody who's just brand new to the Motley Fool, which I hope is the case and I hope you own those companies for the long term, or you might be somebody tending to chase last year's big winner. Still enough there about Fang, but three companies, a couple of which are part of Fang, were our focus this week. And I'm really happy to say that this podcast kind of pairs up with my July 29, 2015 podcast and anybody wants to go back and listen to that. We talked about the five biggest stock winners over the last 10 years. And if you listen in, you can listen in for how many the Motley Fool had. Next week it's going to be mailbag. So as always I look forward to your questions it might be this week about sports and investing perhaps or the S&P 500 or anything goes as always on the Rule Breaker Investing Mailbag. Just email us at RBI at fool.com or if you want to put it out there on Twitter, we read that too at RBI podcast. Oh, and it now occurs to me there might be a third place you can place your mailbag question, although it's probably best place in the first two, but we've just opened a Motley Fool Podcasts group on Facebook. So it's a wonderful way to connect with other listeners. This is a closed group, a private group. So you're in the in crowd right now. If you're hearing me, if you apply to the group, you have to apply to be accepted, but I pretty much guarantee you will give everybody listening card belongs. So love to have you join us there on that group if you're a big Facebook user speaking of Fang. And I should mention Rule Breaker Investing has now heard on Spotify and Google Play. It's been a big week for all Motley Fool Podcasts, as we now have debuted both on Spotify and on Google Play. If those are regular experiences for you where you'd like to find us, maybe you've just been listening to a podcast on our website and didn't realize that we're on Spotify where we are now. That's all she wrote for this week. Talk to you next week. 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 [MUSIC] [BLANK_AUDIO]