We don't believe in timing the market, but we do believe in taking advantage of a market drop to buy long-term positions in stellar companies. Today David highlights 5 under-the-radar, lower-risk companies with great prospects and discounted price tags.
Rule Breaker Investing
5 Stocks to Feed the Bear
It's the Rule Breaker Investing Podcast with Motley Fool Co-Founder, David Gardner. Welcome back to Rule Breaker Investing. I'm David Gardner. Wow, what a market it's been. We're going to talk about that coming up. We're going to talk about really my favorite market talk of all, which is not so much about the market itself. It's seemingly near-term random meandering, in this case, pretty downward last few weeks. But really, my favorite kind of market talk is about companies themselves and stocks that I would buy and stocks that I like right now, especially in the face of this bear market that we're living in right now. By the way, by my calculation, at least my kinds of companies, Rule Breakers, Supernova Stocks, Motley Fool Stock Advisor, I know I have a lot of members listening, so you know my stocks. I would say somewhere around August 15th, these stocks began to underperform. While there were some great standouts for 2015, performers like Amazon and Netflix, the really big well-known companies, the vast majority of stocks that I follow had pretty disappointing 2015, especially after August 15th. So here we are nearing February 15th, nearing Valentine's Day, and I'm already thinking that we're kind of six months into a bear market, just not a prediction and not something I spend a lot of time thinking about, but if that's helpful for anybody, a lot of the bad stuff has already happened. That's why this week, we're going to talk about good stuff. We're going to talk about five companies that I really favor right now. But before we get to that, I just want to mention a couple of the things we've done in recent weeks. I like to go back as I want to do and just refresh where we've been with Rule Breaker Investing. So, for example, three weeks ago, we talked about my favorite management traits, specifically using the acronym Yoda for youthful. I like youthful managers. I like managers who are owners. That's the O. I like managers who deliver. When they say it, they'll do it. And there's not a lot of excuses or surprises for the market. And then the A is ambitious. I like people who have global visions and who think big and then deliver on those things. You put those four attributes together, youthful, which is all relative, of course, owners, ownership mentality, delivering on ambition, and you have, to me, a good answer to one of my most requested mailbag questions, which is Dave, how do we actually assess management or what are you looking, what are we looking for as a Rule Breaker investors together? The week after that, two weeks ago, we did mailbag. And then last week, we went over the language of investing. And I had a lot of fun taking down some of the common, everyday, threadbare, trite cliche terms that are often misguided in their thinking. Words like correction, words like bubble or calling stocks names. So that's some of where we've been. And by the way, where we're going, next week, I'm going to cover dark clouds I can see through, one of my favorite metaphors for investors. And then the week after that, it's going to be mailbag. But this week, we've got five stocks I like a lot right now. And how did I come to my list? Well, the sum total of my work are all of my live, active stock picks in both Motleyful Stock Advisor and Motleyful Rule Breakers. And when you put that number together, you get just over 200 companies. So these are 200 companies that I actively favor and follow. Of course, looking at the long term. And when you put them all together, that's what I call the supernova universe. And if you're a supernova member, and darn it, I wish you were. If you're not, I hope you will join us at some point. We'll know that these are our supernova universe companies. And I'm hand picking five of them this week and just talking about them as prospects going forward stocks that I like. And how did I find these five? Well, I was specifically looking for two attributes. The first is companies with a very low risk rating. Now risk ratings are a unique Motleyful feature. Certainly you'll hear lots of others talk about the risk of holding a stock. They'll say that's a high risk stock or that's medium risk, whatever medium risk actually is. It remains somewhat aloof to me. But what we've done at the Fool is we've actually put a number on risk. We count a zero to 25 system. And by the way, I'm going to be covering this in March. So in a month or so, we'll go over this in greater depth. But what I was specifically looking for are very low risk companies. That's attribute number one. These are typically for those who know our risk rating system, lower the number, lower the risk. These are around five or six. Most of them as I'll be mentioning. But then the other thing I was looking for are companies that are smaller. Not great big companies like Apple, Amazon, Disney. By the way, all three of those companies are down 20% in the last three months. In excess of 20%. So if you're wondering how bad a thing's been, that's pretty bad for the market. If you're thinking, this is just going to continue, I doubt it. So these are not the apples, Amazon's, and Disney's because those are coming with very large market capitalizations, usually 12 figures, $100 billion plus. I'm looking at companies that are more in the $1 to $5 billion range. And why do I like these companies right now? These are the stocks that tend to bounce back stronger. Basically they snap back higher because they've taken a bigger hit than the big companies usually. They're more volatile. They're smaller. But since I'm really not even thinking about bounce backs, I'm thinking about three plus years. I like these stocks anyway. And so I think they have as lighter weight companies, they have an opportunity to go higher than some of those other companies I just mentioned. So those are the two attributes, again, lower risk companies that are smaller. And here come my five in no particular order. For each of these, I'll be mentioning a general investing principle that underlies this pick as well. But I'm going to talk about a few things I like about the company. And then I'll add one note of caution for each of these as well, just around things out. So first up, this week is Carter's. Now you may know Carter's. Maybe you know their Oshkosh bagash. I think I said that right, Brandon. I certainly see it in the stores. This is a company that's been around for decades. It is really a leader in something that's never going to change. That is cute clothes for babies, for little kids, for toddlers. So this is a branded long term leader in the space, but also a company that is experiencing rapid growth in e-commerce because you can go and buy clothes directly from them online. So they're participating there. They're not threatened by e-commerce. They are part of the revolution. They're also expanding internationally. So, you know, here decades after their founding, they're just starting to make real incursions into China. And you probably know China has babies. That happens in China. There are a lot of babies. In fact, it's nice to know that if you're a Chinese citizen today, you can actually have more than one child for the first time in quite a while, which is very promising. Anyway, so Carter's. This is the business, perhaps you're a customer, but a company with share buybacks, dividends, and just an impressive company overall. Let me mention this company has a risk rating of five. And this stock was recently when I did this podcast at about $86 a share. This is a company worth about $4.5 billion today. I want to mention for each of these, how I've done with the pick so far, you might be interested. So we first picked this in Motleyful's stock advisor in April of 2014. So here we are just about two years later, the stock's up 18%. Not bad. It hasn't lit the world on fire, but the S&P 500 by comparison is up 3%. So this company is beating the market by about 15% points so far, and I like it a lot for the long term. One note of caution for each of these for this one, the strong dollar, which is true today, the American dollar has appreciated dramatically against many worldwide currencies. The US economy kind of a safe haven and that hurts companies like, in this case, Carter's when they're trying to sell their produce abroad. So they're manufactured goods, in this case, they're apparel, they're threads, just have a higher price tag. If you're looking at them in China today, then they would have a few years ago. So that dampens some of their international growth possibilities in the near term, but this is a cautionary note that is not a long term cautionary note. It's just something about the here and now. And then my closing general investing principle that Carter's, I think, highlights for us as investors. I love businesses that deliver over decades, that please consumers particularly, companies that can create consumer brands over multiple generations. That's not easy to do. And further, this is a lesser known company. You probably were expecting me to lead off Rule Breaker Investing with my favorite tech stock, whatever that phrase means, by the way. But my favorite tech stock, no, actually I'm leading off with Carter's. And one thing I like about Carter's is it is lesser known. It's not something you'd expect maybe from Rule Breaker Investing or for your friend at the water cooler to be talking about, but these are the kinds of companies that really do return well for us as investors over long periods of time. Stock number two this week. Stock number two is IPG Photonics. IPG Photonics recently traded at about $83 a share. And it's worth about the same amount as Carter's, $4.4 billion in this case. It has a risk rating of six, low risk company. Now, IPG Photonics, legacy lasers are going out and fiber lasers are coming in. This is a trend that's been going on quite a while, fiber lasers. And by the way, I am not an engineer here, so I'm bringing out my best English major explanation for you. Fiber lasers are basically better technology that is more cost effective. So it's a nice disruptive combination of more affordable, cheaper prices and superior technology. And in fact, since the CEO founded this company in 1990, his name is Valentin Gipponsev. He's been a brilliant manager, one of the best unknown CEOs in America. So here he is 26 years later at the helm of this company that took the technology that he brought to our country from his native country of Russia and has created a great entrepreneurial enterprise based in Massachusetts today. But IPG Photonics, just to give you a little bit about where we picked this stock and how long we've been following it, I first picked it in April of 2007 at $20.53, so pretty happy that it's around 83 today, even if it's down from its recent highs. It's up about 250%. But importantly for this one, a year later in March of 2008, it had dropped from 20 to about 13, and we recommended it again, and I'm foreshadowing our general investing principle with this one, which I'll cover in a sec. But that position is up about five times in value since then. And of course, both are well ahead of the market. Now this technology is very relevant. It spans many different industries. We're talking about medical industry, telecom. If you are a movie theater owner and you want a more beautiful picture, you're probably looking at IPG's laser technology, lithium ion battery systems for electric cars. There's a lot of laser welding that's making those battery systems as lithium ion battery systems possible. So this is a company with lots, not just one customer, lots of different applications across multiple industries, which I like a lot. And finally, I already mentioned I like the CEO a lot. He's been around for a long time, owns some stock, and he's created a great company. A note of caution about IPG Photonics. You may have heard China is slowing down. China is a meaningful market for this company. So this company, like some others, gets dinged when we hear the slowdown in China affecting global business. That's something you have to know about IPG Photonics. That's stock number two. My general investing principle, buying good companies right into the teeth of bear markets is rewarding. And I hope that sounds good to you this particular week as we find ourselves in mid-February of 2016. A lot of us looking, I'm wearing a big red sweater today for those who might be watching the video of this podcast on Yahoo Finance. You'll see me in a great big red sweater because my stocks are well down over the last few months. I think my own portfolio, I'm down, I think more than 25% last I looked, which is not a very nice two months for anybody's portfolio. But I say that with a smile on my face because it's happened before, it'll happen again in future. And in particular, as I talk about these companies this week, I'm feeling really good about their prospects, three plus years going forward. And IPG is no exception, and I love being able to point back to 2008 where we watched our stock pick go from 20 to 13 and we said we're buying. And that position is really up over the last seven or eight years. So that's what I'm thinking about this stock in another seven to eight years, we'll see. Stock number three this week. Stock number three is L.E. May. L.E. May, the ticker symbol is E.L.L.I. It is on the NASDAQ, by the way, I haven't been giving ticker symbols, but you can look it up online. Use fool.com to find your ticker symbols. If you need these stock recently at $60 a share, this company is smaller than the first two I covered. It's about $1.8 billion. It's market cap. It's risk rating right in there at six. Again, each of these, five or six, these are very low, low risk investments. We define risk, by the way, as the chance that you will permanently lose a fair amount of your capital if you own the stock for the long term. That's what risk is to me. That's what we're trying to avoid. So we think that that's much less likely to happen in these companies I mentioned this week than some of the others, some of our biotechs or others, which are certainly higher risk, sometimes higher reward too. L.E. May is a software company. It processes mortgage applications. In fact, the company has about 25% of the market share of the US. This is a company that is using the software as a service model, connecting mortgage professionals with lenders and service providers. And this is a good example of a growth market that's very quiet. Very few people have heard of L.E. May, however, if you're in the mortgage industry, I'm pretty sure you have. You may well be using the company's platform. We first brought this doctor rule breakers in October of 2012. It's done quite well up 137% since then the S&P 500 up 41%. So this has been a quiet double and a strong performer, a company that has good growth and took a real hit recently when it was in fact February 5th, just days ago. It dropped 11% or so in one day, not on its news, but simply on the enterprise software industry selling off. You may have seen Tableau, which is certainly a leader in that industry, gave some pretty bearish projections about its business over the next year. So Tableau watched its market cap get shaved in half that day. And so a company like L.E. May sold off 11%, not on its news, but in sympathy with the rest of its so-called industry. But what I want to point out here, and here's our general investing principle, I really like the so-called picks and shovel companies when they are working in industries that I think are going to be around a long time. So you know the whole thing about picks and shovels, you probably do. The idea was the only people who made money during the gold rush back in 1849 weren't those that went out to California hoping to strike it rich, find it gold, but rather the companies that were selling them the picks and the shovels to go ahead and search for gold. And so that's the way I think of a company like L.E. May. This is not a play on the housing market per se. I'm not making any comments about the strength or not of mortgages right now or specifically mortgage lending. This is not something that I spend a lot of time at personally. I'm not an expert on housing or real estate. I like software companies. That's what L.E. May is. It's a software company that picks and shovel company, and usually the ones off the beaten path are good for long-term returns. Now a note of caution, this company is pretty opaque. Part of being a picks and shovel company is that you and I have a harder time figuring out how that business is doing. So when you own a stock like this and I have it in my portfolio, I'll usually be surprised that there's bad news. I feel like you and I can see when bad news is hitting Chipotle because it hits national headlines, but we have less of a shot at doing that for these more opaque business-to-business companies. So that's something you have to bear in mind as a note of caution around L.E. May. Are we through three already? All right. Stock number four. Stock number four this week is Planet Fitness. Planet Fitness is trading recently at about $14 a share. The market cap, kind of the same size as L.E. May. A smaller company, it's $1.4 billion. This is one of our most recent picks. So this is a pretty fresh pick coming from our Motley Fool Rule Breakers service. In fact, it was the end of January when we purchased it. I'm happy to say, yes, I can even say this. Not about many stocks, but it is up. It is up since we purchased it, recommending it. On January 27th, the market is down. Lots of our stocks are down. Planet Fitness, you may have seen their marketing no-lunks. I like this business. It is a membership subscription business, and it is hitting the mass market for people who want to work out. Not people who really work out, not those other people, but people, maybe more like me. I might include you with me here, but those of us who want a simpler, cheaper, lower key approach to staying fit. So Planet Fitness, for example, has a $10 initiation fee. Try that at your local gym. See what it takes to just get started for that membership. Usually you're paying more than $10. In fact, Planet Fitness throws in a t-shirt for you for your $10 initiation fee. And then speaking of cheaper fees, $10 a month. Check that out against any competition that you see in your local area, I submit. It is going to be much cheaper. But this is a company that is making money from those price points by being disruptive. No frills. Now it does mean you don't get a lot of stuff at Planet Fitness. You're not going to get daycare. There are no juice bars. There are no fitness glasses that I know of anyway at Planet Fitness. No racquetball courts or swimming pools. They're just keeping it simple with treadmills and workout gear and creating a well-lit friendly space that people can return to and not feel like they're having to impress others with the shape of their body or how strenuously they're working at "no lunks" as Planet Fitness says. Now this is a business that has more than 6 million members and my general investing principle that I want to highlight for this one, stock number four, is that I love subscription businesses. In fact, we have one at the Motley Fool. It's a model that I like a lot. If you do a good job by your customers, not only have they purchased from you, but they will then renew their subscription with you. If you do a good job for them, and if they don't, if you don't, if you make bad stock picks or you have broken treadmills, then people will not. They won't come back the next month or the next year. But it's a wonderful business model because it replaces its revenue in a much more reliable way than many other businesses that have to keep going out there and scrabbling around to get growth. So that's a happy dynamic we have here at the Motley Fool. And certainly Planet Fitness, a much larger company than the Motley Fool, is one example. But whether you're talking about Netflix or any number of these kinds of AOL back in the day, these kinds of regular subscription business models, I favor them greatly. They're usually very numerical, they're very predictable, and it really focuses the company that's doing it on making sure its customers are pleased that their satisfaction and they want to renew from one month or year to the next. So that's Planet Fitness. Now my one cautionary note about PLNT on the NASDAQ, this is a company, first of all, we don't know quite as well. The other companies I've talked about, we usually have multi-year associations. These are long-term investments and I'm letting you in on them and saying I like them today, I especially like them watching what the market is down to some of these. But we have less association with Planet Fitness. So I don't know it as well as some of the others that I'm talking about. And I'd like to mention in particular a cautionary note about its low fee business. So typically, I favor companies that are more the premium brand in their industry. Those are usually the companies that have pricing power that can raise prices. People don't really notice if Tiffany, if the diamond is a little bit more next year than it was this year, it's Tiffany. When Netflix raises prices, it is in the process of doing so modestly. I think it's an incredibly great deal when I'm paying Netflix for streaming monthly right now. But Netflix has that ability, I think, to raise prices over time. Planet Fitness has really predicated a lot of its business on the idea that it is the low-cost provider and low-cost player. That's not often as comfortable a place for me to feel confident with my investing. But that said, when you have a disrupter and somebody that has fun with their marketing, and I think really appeals to the broadest group, those of us who don't work out intensely every day but still think it's a good thing, of course, I favor this company. And finally this week, stock number five, stock number five is Mercado Libre. Mercado Libre has a risk rating of five right in line with the others. It is right in between the sizes of the four that we've already covered. It's about $3.5 billion today. Stock's at 87 as I do this podcast. And this is the Latin American e-commerce giant. This is a company that we followed for quite a long time. In fact, my first recommendation of it was in February 2009. So that is seven years ago this month. The stock was at $14.22 when we recommended it. Today it's 87, so that's not been a bad investment at all. But here's something that surprised me. I've re-recommended it twice in Motley Fool Rule Breakers since. And it's actually losing to the market from those positions starting in 2012, one of them. And then another in 2014, it's substantially down from where it was in 2014. So in fact, speaking of substantially down, this is a stock whose 52-week high is 153. And presently, as I mentioned, is trading around 87. So this is a company we like a lot for the long term. They have excellent management. I like their positioning as the leader in Latin America in e-commerce. It's a fully featured business. It can do the eBay-like part of e-commerce with auctions. And in fact, speaking of eBay, PayPal is such a big part of eBay's success. Mercado Libre has Mercado Pago, which is also a payment system that Mercado Libre runs. And it also fulfills like Amazon does. And so for many countries, South and Central America, it is the e-commerce leader. And of course, I like that area of the world. Really, I like almost all areas of the world, frankly, going forward multiple decades. I'm a real bull on global business. And I see Mercado Libre with its, I won't say, stranglehold, but I'll say dominant position over a meaningful portion of the globe that's still early on in its acceptance and adoption of capitalism. In fact, my cautionary note about Mercado Libre, I'll sound right now. Some of its businesses are run in Venezuela. Argentina, if you're somebody who pays attention to business, you recognize these as countries that don't really respect entrepreneurism and that tend to just sometimes just co-op businesses all together and say that's now owned by the government. Sorry, oil company, American oil company that had developed that field, right? These are countries that I would not want to do business in personally. And Mercado Libre is doing business in them. And I think over time, they will improve and Mercado Libre will be part of that story. But it is, in the near term, certainly a difficult business environment sometimes when you have to work in some of these countries, some large countries. Fortunately, others like Brazil and Peru and Colombia and other companies that are really awakening, I think, to more prosperity for their citizens and more respect for human nature and our way of life. Those are all part of Mercado Libre's story today. So we like this company a lot. And my general investing principle, as I close it up here this week for Mercado Libre, I like to look at replacement cost. Now that's kind of a, let me just quickly define my term. If you ask yourself, what would it cost you if you and I wanted to go into business today? And we snapped our figures and we're able to make Mercado Libre disappear. We snap our fingers. It's gone. How much would it cost you and I? How much money would we have to raise? How much effort would it take to replace what Mercado Libre is doing today? And usually, while there's no round number that I ever put to it, I just ask myself, what is really expensive and hard to replace? And I believe that Mercado Libre, what it has achieved is extremely expensive and hard to replace. So when I see the company worth only less than $4 billion today, and I ask myself, what's the value of being where it is, playing for the next few decades in terms of the profits that it has coming to it, I see a very high replacement cost. And so it's going to be hard for anybody else to come in and really compete in the same way that in our country and other countries too, Amazon.com is a pretty hard competitor for a lot. The replacement cost is very high for Amazon.com. So that's my general investing principle applied to Mercado Libre. Well, this has been one of our longer podcasts. I hope it's been one of our more enjoyable ones. It's a pleasure to go and share some original thoughts with you about five favored companies in our supernova universe. Of course, we have a lot more companies that I like. But this time I wanted to focus, as I mentioned, on companies that I think are a little smaller. Less people know that have all been dinged by our market sell-off. Again, I got my great big red sweater on, and so do they. And yet as I look for three plus years, which is what we do as investors, I like these companies. And I always like to back it up by typing this into motleyful caps. So I will reflect that I like these companies and go over to my caps page, caps.fool.com. I'm TMF's 50Pop, and you can see that I'll have a thumb up on these. In fact, I already have a thumb up on a couple of them, but any that I don't have a thumb up on, you will see me making myself accountable going forward to what I said this week. Scoring yourself is one of the most important things you and I can do, not just as investors, but in life. All right, as I mentioned, next week, we're going to go through dark clouds we can see through. One of my favorite metaphors, and I'll give some examples of that principle in play, serving you and me as investors, and then the week after it's mailbag. This has been Rule Breaker Investing. Thanks, as always, to my producer, Rick Engdahl, and most of all, to you. Thank you for suffering fools, gladly, full on. As always, people on this program may have interest in the stocks they talk about, and the Mollie 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]