Chris Hill: Hey, everyone! Thanks for joining
us! I’m Chris Hill, here with Chief Investment Officer Andy Cross. Welcome to Fool Global
Headquarters here in Alexandria, Virginia. We’re going to be taking your questions.
Go ahead and type those into the chat box. First, we need to talk about monster growth
stocks. Last time we were in the studio, we were talking about dividend-paying stocks.
A lot of benefits to dividend payers, including the stability. A lot of big companies,
stable businesses that aren’t really going anywhere. Today, we’re talking about monster growth
stocks. A little bit more risk involved, but also the rewards when the growth
stocks pay off are really incredible. Andy Cross: Chris, that’s right. When you
think about the areas of the market over the last 10, 20, 30 years, it’s really pivoted
to these big growers, both earnings and sales, companies that can grow and compound over
time, that eventually reflects in the stock price. That part of the market, especially as
technology has become more and more prevalent, has really started to be the place where investors
are going for the return. We started to see the shift away from dividends, more towards
companies that can really grow sales and earnings at very high rates for very
long periods of time. Hill: You and I were talking before we
started taping — a lot of times, it breaks down into those two basic categories. You’ve got the
companies that are turning a profit, and they are compounding those profits. You’ve got
the companies that maybe aren’t profitable yet, but they’re growing that top
line revenue in an incredible way. Let’s start with the earnings compounding.
Particularly for people who are new to investing or they’re just starting out, they’re may
be a little bit more comfortable with companies that are profitable right out of the gate.
Cross: Yeah, that’s right, Chris. When you think about the theory of investing,
it’s that a company generates profits, and over time, those profits
accrue back to the shareholders, and the shareholders win
by the stock outperforming and performing well, based on how fast and
how long those companies can grow the earnings. I consider these excellent, these earnings
compounders. Companies such as Starbucks, Visa, Home Depot, Ulta Beauty,
Booking Holdings — the owner/ operator of Priceline. These are companies that, just looking over
the last 10 years, Chris, have grown earnings north of 20%, 25%, 30% per year. If you look
at the stock performance, it often tracks that earnings growth. These are well established
companies that really, over time, can grow earnings at very high rates and
they can reinvest that capital back. The sales growth may not be nearly as high,
but because of the way the business models work and the markets they’re serving, they can
grow those earnings for very long periods of time. I call those earnings compounders.
Hill: Let’s take a couple of those businesses and dig into them a little more. You think
about, whether it’s a company like Visa or Booking Holdings, better known as Priceline,
not only are they compounding machines, but they’re also in industries and taking advantage
of trends that have a long runway in front of them. In the case of Visa, it’s more and
more people not using cash, going digital. In the case of Booking Holdings, that was
a company that got out early in the trend of online travel booking, and really expanding
not just here in the U.S., but around the world. Cross: When you think about a company like Home Depot, which has benefited so much from
the growth in housing, even through the financial crisis — and that crisis was driven by a bubble
in the housing market. Companies that can really benefit from those growth trends,
they can grow sales — and all these companies do grow sales, but really, what I think investors
have been rewarding them for over time is the growth in the earnings. Those earnings
that they can redeploy, invest back into the business, to continue to grow the business
at higher and higher rates, and they can expand their margins over time. Not many companies
can expand margins for five, 10, 15, 20 years over time. So, when you think
about the ability for these companies to be more profitable over time,
that ultimately is going to end up showing the earnings growth, and investors are going
to reward that. The companies I mentioned, they’ve been able to do it for sometimes 10,
20 years at a clip. Those kinds of companies can ultimately lead to an
investor having a very nice portfolio. Hill: The other type of growth stock that
we were talking about earlier was the ones who are growing sales. They’re growing that
top line revenue. They’re not profitable yet, but they see a pathway towards that profitability.
Again, for a lot of investors, it’s a little unsettling to be like, “OK, they’re not actually
making money. I’m taking a leap of faith that at some point, they’re going
to be able to turn that on.” Cross: The market, I think, rewards those
sales growers. These are the companies that, when people think traditional high-growth
stories, these are the ones I’m talking about. The Shopifys of the world, the Oktas,
Appian — those are all recommendations here at The Motley Fool — Twilio, Ellie Mae, although
Ellie Mae is profitable; Splunk, MercadoLibre. These are businesses that can grow 25%,
30% at a clip. Very high level. They may not be making money now, but based on experience
and the leadership teams, investors have the patience to be like, “OK, it’s OK. I eventually
will see those profits accrue to me and accrue to the business. I’m going to benefit that way.”
In the meantime, they’re going to continue to grow sales at very high levels and the
stock gets continually rewarded for that performance. Then you see this performance like we’ve seen
for so many businesses over the last five years, especially those based on technology.
Hill: Another thing you mentioned to me before we started taping was the companies that are
essentially hybrids of the two we just talked about. Maybe the most obvious example is Amazon,
which was not profitable for so many years. A lot of people on Wall Street saying, “When are
these guys ever going to make any money?” Now they’re doing that in a pretty solid way.
They’re not the only ones who are those hybrids of earnings compounders and
being able to grow that top line. Cross: Chris, these are what I call the
hybrid heroes. These are the kinds of businesses that can really make your portfolio. A company
like Salesforce, Amazon, Netflix, a company I follow, EPAM Systems. Facebook was actually
one of these right out of the gate when it came public. It was very profitable. Apple,
the same way. Grows sales at 20% a year for 10 years, and earnings at 27%.
When you think about it in context, Chris, the average company in the S&P 500 probably
can grow sales at maybe 5% to 10% over time. Profits at about the same level because they
can’t expand margins. But these businesses, like Salesforce, you just look at what it’s
done growing sales 29% a year for 10 years, and earnings more than 30%. And that obviously
has been rewarded in the market by patient investors, like those, hopefully, watching the show,
and who have listened to our advice here. These are the kinds of businesses,
they’re attacking markets; they have leadership teams that are principled, aggressive; they’re delighting
customers; and they can grow these sales and turn that right into profits over time.
And that ultimately helps shareholders. Hill: I’m glad you mentioned the management.
That’s something that we always love to see here at The Motley Fool, is great management,
management that has a stake in what they’re actually doing at the business. Ideally,
it’s a founder-led company, but not all of these companies that we’ve talked about are necessarily
founder-led. That doesn’t mean they don’t have great growth potential.
What are some of the other factors investors, viewers, should be watching for
when they’re looking for growth stocks? Cross: Chris, you teed off our conversation
talking about the market opportunity. One thing that we look for, and I think many of
us at The Motley Fool understand, is trying to find companies that are serving a market
that is really growing, that will continue to grow for many years, is going to be changing,
and that a company can operate in the growth market, deliver the kind of services that
are going to be able to take market share in a growing market. If you have that combination
of a market that’s expanding and a company that can take more and more market share,
often from legacy performers and maybe a little bit more of the staid companies that aren’t
acting as aggressively, that’s probably the biggest factor I look for. I look
for these market opportunities. And then, like you said, you want the founders
who have a lot of ownership in the business, ideally. That’s been great. We mentioned some
of those earlier on. And the financial performance can’t be overlooked. Unique companies that
can deliver the solutions, and into a financial model that ultimately is going to continue to support
the sales growth and the financial performance. One thing David Gardner looks for when he talks about his six signs of a Rule Breaker,
one of the very first ones he looks for is this idea of a top dog and a first mover.
So, someone who’s really going after a market and basically inventing the market. Salesforce
basically invented the market for customer relationship management software and cloud-based
solutions. We can see where that market is today. If you can find teams and businesses
that are operating these big market opportunities, they do have these first-mover characteristics
and they have both a management team that can deliver the solutions that customers
want and the financial model that can back it. That right there is the secret sauce
for finding great growth companies. Hill: You mentioned the financial performance
of the company. That ties into another thing that David Gardner says he likes to look for,
which is the stock appreciation. A lot of times, investors look at a growth stock that’s
had a great six months, 12 months, that sort of thing, and it’s easy to think,
particularly with a lot of financial media saying, “Boy, that thing’s had a great run.” So, naturally,
we think, “OK, I don’t want to jump in now. I want to wait for it to dip.” But actually,
share price appreciation in the past is something he likes to look for.
Cross: Statistically, studies have shown in the short term, it’s actually a good way
to be able to invest and find some of these great growth companies. In our perspective,
the twist we add to it is, as long-term shareholders, so many of the media that you talked about,
Chris, calling a company totally overvalued, or a company that has gotten ahead of itself,
or, “Oh, I missed it! It’s up 35%, maybe a double, and I missed that opportunity.” Well,
those are companies that tend to have been performing well, as I just talked about,
the financial performance. If they’re performing well, that’s often — not always, but often
— a good indicator that they’re doing something right, they have good management teams that
will be able to continue that success in the future. Don’t be scared by
past appreciation in the stock. What really matters is where the business
is going from here on forward and the kinds of market opportunities and solutions they’re
delivering for their customers. If that continues to have success, the stock price
often will track that success as well. You look at a stock like Salesforce,
I mentioned earlier. That stock really has never, ever looked cheap on traditional metrics.
I’m sure if you go back over the last 10 years, there were plenty of times that was called
overvalued and that the stock got ahead of itself. And yet, that stock is up almost
19X in value over the last 10 years. Hill: We’re going to be taking your questions
in just a moment. Keep those coming. I know a lot of good questions
are already in the queue. One thing I wanted to touch on before we get
to the Q&A from the audience. Some of the names that we’ve been talking about here are
names that everybody is familiar with, even if you’re not an investor. Netflix, Amazon,
Starbucks, Facebook, Apple. These are all very strong consumer brands. Some of the other
names, not really consumer brands. Salesforce, Twilio. It does seem, however, that the one
thing that those have in common is, they all have customers. Some of them are
everyday folks like you and me, but some of them, you have to look for. But it seems like what ties
them together when it comes to growth stock potential is, the customers who are buying the goods
and services are happy with what they’re getting. Cross: Yeah, absolutely,
Chris. When you think about trying to understand what may make one
business better, different than another business, one thing we do like to look at is consumer
appeal, and whether that consumer is like a you and me consumer, shopping online,
or it’s maybe a B2B business, business-to-business provider more like a Salesforce or a Twilio.
Finding companies that continue to add to their client base — Okta is one, it does customer
identity management and security solutions. Including The Motley Fool, it helps thousands
of customers manage their employee logins. That is a business that continues
to add more and more people and add solutions and grow at scale in ways that I think,
even though they’re not profitable, over time will really benefit because they continue to deliver
solutions that their customers want to have. You really have to do that. Everybody says
they can do that. But, again, and I’m talking over 10, 20-year periods. Find the businesses
and the management teams that can do that time and time again, learn from their mistakes.
Look at the mistake Netflix made with Qwikster. They don’t always get it right. And sometimes
that’s a great time to be thinking about buying the stock. But they do it more right than
wrong, and they do it for long periods of time. That’s where the founder ownership,
Chris, is so important. You have founders who own parts of that business or a large
part of that business. They have the patience and the investing base who has faith in
those founders to be able to get it right. Hill: Alright, we’ve held off long enough
in terms of taking questions from the audience. Let’s start with this. A couple of people
asking about, what are your thoughts on the upcoming class of IPOs in 2019? Next month,
we’re probably going to have Lyft and Uber going public. Airbnb expected to go public
later this year. Any of those get you more excited than the others?
Cross: I think Slack is also slated to be in there. They’ll be in that class at
some point. I think that’s exciting. All those businesses, they’re very popular and they’re
large businesses. One thing, historically, when we look at our results here at
The Motley Fool, trying to find these businesses that are a little bit on the smaller side —
not the big, large, billion-dollar-plus so-called unicorns that have come public,
but maybe a little bit smaller. So many — Uber, the valuation at $60 billion or so; Lyft is
somewhere around $20 billion or $30 billion. These are very large companies. They have
the potential to grow at very high rates. But generally, when I think about growth companies,
I try to find a little bit more on the smaller side. Those companies are all going to come
out very big and large, high valuations and large sizes. They could be wonderful investments.
We’ll have to see how the financials play out. But they clearly are going after markets
that are changing and evolving and growing. That’s a good place to start thinking about
your research when you’re trying to find growth companies that over time should
be able to deliver for your portfolio. Hill: Jackie asked, “What do you think about
Nike?” A few weeks ago, we were here in the studio doing a live Q&A, and one of the things
we talked about, it was right in the wake of Zion Williamson blowing out his Nike sneakers.
Shares fell a little bit. They got some bad press. Where do you think that company is?
Cross: I think Nike’s in a great spot from a consumer appeal side, from a global brand side.
I don’t think the stock is that expensive. It doesn’t grow as fast as the companies that
we talked about earlier on the top line, but it’s exceptionally profitable, a very solid
management team. So when I think about that global appeal… Nike probably will not be
as volatile as some of these technology stocks we’ve been talking about, yet they’re utilizing
technology more and more. They continue to grow around the globe. And their competitors
have had some stumbles. The likes of Under Armour, Adidas here in the United States is
getting a little bit more traction now. But I think Nike’s in a pretty good spot to
do pretty well for the next five years. Hill: Richard asks, “With these monster growth
stocks, how does one know when to sell?” Great question!
Cross: That’s a great question! Hill: It’s different for everyone because
everyone’s got a different financial situation. Obviously, one reason to sell any stock is
if you need the money for something else. Cross: That’s right. This could be a whole
podcast for us, talking about selling. In fact, we probably already have done that.
I think the first rule is, think about not selling. If you need the money, like you said,
those are some reasons to sell. I would start with your worst performers and your lowest-conviction
stocks rather than the ones that are winning. But certainly, some of these stocks, as they
appreciate, you may wonder about when to sell, or what are my selling principles.
I think generally, I would urge you to try to sell as little as possible, try to transact
as little as possible. If you do need to sell, I would start with the ones that are underperforming
— this is what I’m doing — in your portfolio, and maybe a smaller part of your portfolio,
to raise capital you can think about deploying more in your winners rather than your losers.
Hill: A couple of people asking about the so-called FAANG stocks — Facebook, Apple,
Amazon, Netflix, Google. Di asks, “Which FAANG stock is the best buy right now?” Jim asked, “Which FAANG
stock would you shy away from right now?” Cross: Oh, gosh, two great questions! I own Facebook. I own Netflix. I think they’re both
good buys here. Facebook’s struggled, obviously. But if you look at their past quarter,
and I applaud Mark Zuckerberg for the direction that he is now thinking more towards private
interactions as opposed to public ones. I know you and Jason and I have had conversations
about that on some of the podcasts. I think our Alphabet, the investments they’re making
today, obviously, they got some bad news from the EU. I don’t think that was a huge surprise.
I like the optionality they have to invest. The one to avoid, I think it’ll be a fine
company, it just won’t grow nearly as much, although I’m very excited to see what they announce
next week, is Apple with the streaming service. That’s going to be a really new development
for them. They’re pushing more and more into that. These are businesses that can innovate
at very high levels, and their balance sheets or things of beauty. They’re just so large,
Chris, that these are companies that just are not going to generate nearly the kinds
of returns that they have in the past. Hill: I want to go back to a word you just
used because I think it’s particularly relevant to these companies. It’s optionality. By virtue
of the amount of cash on the balance sheet that Apple has, for the past decade,
people have looked at Apple and said, “Well, they could… ” They could go into this space,
they could go into that space. And technically that’s true, again,
simply by virtue of the cash. On the flip side, I look at companies like
Alphabet and Amazon, they’ve demonstrated their willingness to explore optionality.
Sometimes it doesn’t really pay off. We saw the restructuring of Google into
Alphabet a couple of years ago, and part of that was to give Wall Street and everyday investors
a little bit more transparency into their so-called Moonshot division. But it really
does seem like Alphabet and Amazon, they’ve explored optionality in a way that Apple
— this is not a knock on Apple, but Apple hasn’t really explored it in the same way.
Cross: You’re right, Chris. I think the way Steve Jobs built that company was really from
the inside. He was so principled and dedicated, sometimes tough to work with, and such a perfectionist
on the product development inside the family of Apple that they’ve really chosen to invest
their capital that way. They earn $60 billion a year, Chris. They have $85 billion of cash
on the balance sheet and they have exceptional returns on capital. They generate so much
money that they just can’t invest it fast enough, which is why they’ve
been buying back a lot of stock. Now, they’re putting a lot of money,
apparently, into this different streaming service, which is much different than selling iPhones,
which makes up 70% of the revenue. It is a change for them, and the first big one, I think,
since we’ve seen the iPod launched in the early 2000s. It will be very interesting
to see. But historically, you’re right. They have not been an acquisitive company,
where the other ones, Facebook and Google — Netflix has not been an acquisitive company,
they’ve just been able to grow because they’ve had this huge market opportunity.
So, Apple, I see this one really with slowing growth rates from the iPhone. We’re at a little
inflection point with Apple. That’s also why the stock, from a valuation perspective,
doesn’t sell nearly as expensively as the other ones. Hill: Usha asks, “Is it too late
to enter into The Trade Desk?” Cross: No. I don’t think so. This is a company
that really specializes in, one of the leaders in programmatic digital advertising, helping
clients place ads all over the web, and moving more and more off the web into TV. It’s done
exceptionally well and is continuing to grow at very high levels. Led by Jeff Green,
who was the founder and owns 11% of the stock. I don’t think it is too late to get into
The Trade Desk. Now, the company is not as small as it was when we first found it, but the
market opportunity they have and that changing market, I think it’s not too late.
However, with all these growth companies, Chris, one thing I do want to emphasize is
that we have to understand that these will come with some volatility. When they tend
to miss earnings, maybe, whether it’s theirs or the analysts’, the stocks will sell off
very aggressively at times. You just have to be able to withstand that in your portfolio
and not get scared away from owning these businesses. Lastly, when you do
buy them, make sure you really are buying them with a five, 10, 20-year
time horizon. I’m not kidding, think about this as a 20-year hold or 15-year hold,
because that’s the way you’re going to be able to sustain the volatility that will come with
owning some of these growth stocks. Hill: A few people asking about Tesla. A few
more people asking about Square. Let’s start with Tesla. Where is Tesla
right now, as yousee it? Cross: Oh, gosh! I don’t own the stock.
I know it has a lot of mixed opinions here inside the company. I think when you look at what
Elon Musk is doing, I’m impressed with him just from the mission that he is taking on.
The business as it tries to continue to generate — it’s actually been a very high-growing
sales company, but not profitable. This is one of those sales superstars over the
last five, 10 years. Now, they’re starting to get a little bit more profitability.
I think if you want to be an owner of Tesla, by all means, you could buy the stock.
That’s one that is definitely going to be more volatile, and it’ll be more volatile with every
communication Elon Musk makes. Hill: To the point you were making earlier
about management, there are some businesses out there, some that we like a whole lot,
that are even more of an investment in the leader of the company than they are in the
business. If you’re investing in Tesla, you’re all in on Elon Musk.
Cross: I think you have to be. You cannot, in this case more so than maybe almost
anywhere else, very hard to separate — even though, they did separate the CEO and the
chairman positions for him. Very hard to separate Elon Musk from Tesla.
As far as Square goes, I think the world of Jack Dorsey and what he’s trying to build
over there. Payments is a spot that’s getting a lot of attention and more and more competition,
and they have been able to really build a sustainable advantage, I think, that continues
to grow over time, even though there’s a lot of money going into the fintech space that’s
attacking and challenging them when it comes to payments. What they’re
building is pretty exceptional. Hill: As we talked about earlier with Visa,
Square is playing in that war on cash space. From everything I’ve read, in terms of customers,
the small merchants, the small businesses across America that use
Square really seem to like it. Cross: I think so. I’m using it more and more
as I shop. Heck, a dog groomer came to our house to groom our dog, and I think I used
Square when I paid for her. Square is a business that, they can grow these gross payment volumes
25%, 30% per year, and the profitability curve is just really starting to show up. This is
a business that I could very much see over the next five, 10 years, this one
moving into the hybrid hero level. Hill: Edward asks, “For small companies that
are not yet profitable, what can people look at to value the business?”
Cross: Sales growth. For these companies, when you think about Oktas and Appians, ultimately,
it’ll come down to sales growth for them. With sales growth, especially if you’re in
the technology space, you get a lot of the scale, and the profitability will come down
the line. Companies now have, from technology, the ability to be more profitable sooner than
maybe historically. And they have different ways to be able to manage
that profitability. It comes down to sales growth. I think it comes down also, one thing I watch
more and more is customer acquisitions. If the company does report customer acquisitions,
the number of customers they have, making sure they can continue to add to their
customer base because it will show that they’re in a market that, A, is growing, hopefully;
and B, that they’re actually growing with that market, or ideally taking market share.
Hill: We’re going to have to wrap up in just a moment. But first, I know next week,
you’re going on a well-deserved vacation. Kudos to you, have a great time!
Cross: Thank you! Hill: The market still proceeds,
even though you’re not going to be around. Cross: That’s right.
Hill: So let’s get to a couple of stocks that are reporting earnings next week.
We’re going to start with Ollie’s Bargain Outlet. Fourth quarter report is going to come out
next Tuesday. Think whatever you want about how they will maintain… what are they? Cross: Semi-lovely. Hill: The semi-lovely locations that they
operate. Stock’s up 35% over the past year. Cross: It’s actually pulled back a little
bit. Had a great run, I think as of last fall it was up 70% or 80% for the year. This is
a company that operates about 300 of these semi-lovely stores that sell excess inventory
and close-out inventory. It’s been able to grow. It’s been one of these profitable and
sales growing companies, a small company that’s able to continue to have a niche that they
have been able to excel at. Almost all their stores are on the Eastern Coast area.
Sales estimates for the quarter coming up 12%. That was a deceleration over a year ago.
But earnings per share estimates up about 37%. Things that I’ll pay attention to is, again,
this is going to the store to buy your stuff. This is not an online purchase. But they
did introduce a new app. They want to see how their most loyal customers,
Ollie’s Army, almost nine million consumers that have joined Ollie’s Army, and how the app integrates
with their buying habits. Will they expand? They say their market opportunity is maybe
900 locations. That’s up from 300. I want to see if they’re going to expand that to other
spots they think they can grow the Ollie’s company. Hill: OK, from bargain
outlets to global consulting, very different businesses. Accenture
reporting second quarter results on Thursday. This is a stock that’s basically flat over the
past year, although long-term, Accenture’s been a good stock to own.
Cross: It’s a really great businesses. $100 billion company. They specialize in technology
and strategic digital consulting for some of the largest companies in the world.
They help with things like the internet of things or digital security. They talk a lot about
making these investments in the new businesses, and that’s cloud and security and digital.
That now represents about 60% of their sales. I want to see if they’re going to expand that.
That’s up, it continues to grow. I want to see how far they can expand that. This is
a business that has more than $4 billion on the balance sheet with very little debt.
They just announced an acquisition recently, Digital Storm, this week or maybe last week.
They generate maybe $4 billion in earnings a year. They buy back maybe $2.5 billion worth
of stock. For Accenture, I want to see how they continue to deploy that
cash to be able to grow that business. Hill: Have a great vacation next week! Cross: Thank you! Hill: Andy Cross, thanks so much for
being here! Thank you so much for watching! Please click the subscribe button down below
so you don’t miss any of our live Q&As that we do here from Fool Global Headquarters.
I’m Chris Hill. Thanks so much for watching! We’ll see you next time!