← Motley Fool Hidden Gems Investing
Motley Fool Hidden Gems Investing
2 Go-To Market Indicators, 6 Stock Ideas for the Next 5 Years
00:24:41
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- [00:05]
A
Transmedics has built up their organ care system. They have one of the great CEOs in the U.S. it's been a wonderful stock for us. I think our cost basis on some of our shares are down around 15 to 20 and the stock is at about 145 today. But I think it's got another 3x over the next six to seven years for Transmedic shareholders as it continues to expand.
- [00:29]
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That was Motley fool co founder and CEO Tom Gardner talking about Transmedics, one of his favorite stocks for the next five years. I'm Motley fool producer Matt Grier now. Motley Fool Chief Investment Officer Andy Cross recently sat down with Tom for our Stock Advisor podcast. They talked about the current stock market. Tom shared two of his go to market indicators and six of his favorite stock ideas. Andy kicked things off by asking Tom about AI.
- [00:58]
C
How do you think about trying to determine those AI contenders from the AI pretenders when you're looking at it as an analyst and as an investor in companies you might be studying and thinking about investing in?
- [01:11]
A
Well, one of the things to look at is cultural change and to just read about the companies. Again, depends how many companies you have in your portfolio, whether you think you'd have pattern recognition on understanding the decisions they're making. But you basically want dramatic action culturally at companies now because the winners are going to be AI native companies. Like the winners were going to be and did become Internet native companies. You know, it wasn't like Google was actually a physical bookstore. Google wasn't a bunch of physical space universities and it was going to try and create online learning. It was just, we're just using the Internet for our whole business. We wouldn't even think twice. This is what people are not quite understanding. But of course, I don't want to say that too much because it's becoming more and more real and we're seeing transformations in company cultures. But I don't think what people fully realize is that companies with 2800 employees may be able to be replaced by companies with 108 employees in order for a existing technology business to get there. I mean, how do you get from having 2800 employees, let's just say down to 400 employees who are all AI native, all advanced AI coders, totally bought in, not even questioning, not even like, oh, I use AI and it came back and it gave me the wrong computation, gave me the wrong answers, like, okay, good. You're supposed to go back and keep working so that it gets it right for you. You're Using a tool, you're trying to shape that tool to work for you. You don't just give up after you put a one line prompt in. It doesn't give you the right response. So I think what we want to see in companies is that they are bringing in teams of people who have expertise with advanced new technologies and that they're letting them lead. And that's so hard to do. We got such great advice from outside tech advisors at the Motley fool who essentially said, you know, when you hit a big transformation like this, just go back and read Only the Paranoid survived by Andy Grove. The leaders of today at they're not likely to be the leaders of tomorrow unless they go to sleep and wake up the next day and they're like, I am all in on this. I'm only going to work through this. I'm not going to try and incrementalize my way forward. I'm all in, fully on it. It just becomes too difficult to stage your transition in a workplace when there are newcomers into the market that are only using those tools. We saw it at Time magazine, We saw it at BusinessWeek magazine. We were interacting with so many magazine newspaper companies in the 1990s, and I had a lot of respect for them. After all, they were the big brands of the last 15 years. They were. They had huge balance sheets. Like, we were flattered that they were talking to the little old Motley Fool. But now they're all gone. Like, they're literally. They were. Their commercial value collapsed. Some of them were bought for a dollar a share or their stock went down 95%. So when you say which ones are going to be real, which ones aren't, I think you have to get proof that they are AI native. And the clearest way will be that they're born in this era and come public with that. But anyone who's in denial or any cultural challenge, it has been interesting to follow Duolingo because some of the leaders in Duolingo said something, you know, a year ago about how we're going to use AI. And there was a cultural issue about that. Like, what do you mean we're going to. We're not going to use AI? But the problem is, I think those points that were made, if you go back and look at them, they were accurate. And the question is, can these companies act with respect for all the people that work there, but with a deep understanding that if we don't change, like right now, we're going to lose relevance and we'll despair? There won't be any jobs left. So it's hard to face this and we've actually never faced anything quite like this. We can save the Internet. It's an obvious illustration, but this technology is moving a lot faster and the implications are more profound, scarier and more exciting than the Internet. So I think you just need to know, you need to be looking for companies that are fully all in. They're not in transition mode. They're creating everything through AI in their workplace.
- [04:48]
C
Yeah. And having founders like Toby who own meaningful stakes and are all in like that and very vocal about it is a good indication of that. Exactly, Tom.
- [04:56]
A
That's such a great point, Andy, because I can't remember which founder CEO said, I feel sorry for all CEOs in the public markets that aren't a founder because they have to work slowly through a procedure with their board. As the founder, spiritual leader and largest individual stakeholder, I can walk into the board and say, I have to make this change now and it has to go quickly. I'm going to make the case. But we're not going through a bunch of bureaucratic checks, checklists here. We have to move, yeah, a lot.
- [05:21]
C
Of sweat equity, real equity and sweat equity into those kinds of decisions.
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D
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- [06:08]
C
You remain cautious and moderate with your investing stance, but the AI powered indicator that you use in Hidden Gems actually turned more positive about the markets.
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A
Why?
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C
And has it impacted your thinking? Maybe define what that tool is and how it's impacted your thinking.
- [06:25]
A
Yeah, so I use two market indicators primarily to guide my thinking and I really am using market indicators to tilt, not to go all in, you know, or exit entirely the market. I just don't think that way. I think the history of people who made extreme calls, of course they're gonna get some Right. But in general, they actually, at best they're net neutral and they probably cause a lot of tax implications for people. I think what we should be teaching investors worldwide is to be more incremental and to recognize that the equity markets go up over time. There can be some bad stretches we could take, some extreme cases like Japan since 1989. So I don't want to generalize too much or oversimplify this, but I think in a market that's dynamic like the US Market has good regulatory standards and there isn't a lot of inside baseball dealings between boards and executives all protecting each other. So we have a really competitive market in the US and so I think I would look at the market and say, of course they're going to be 40% declines at certain points along the way. So I would definitely want to work back from a 40% decline with my investment portfolio and ask, you know, what will that mean for me in my life? If I have a million dollars in this portfolio and it goes down 40%, I'm down at 600,000. Like that is a horrible experience to have most people the idea of losing $400,000 in your lifetime. But as you get older and move closer to retirement, you have more and more people who have a million dollar portfolio and also they're starting to run out of their income years. So those 40% declines can have a much more profound effect on their lifestyle and their quality of their life. Of course there was a great depression, but I think we have a lot more protections, a lot more solidity and dynamism to our market. That 40% is a good one to work off of. So then I tracking back from that, I use my two market indicators. The first is the potential growth indicator, the pgi. And the second, our Market View tool, which is AI powered. The first is just measuring the amount of cash that's flowing in and out of the market. It's basically saying if there's a lot of cash on the sidelines, that's a good time to invest because that cash will come back in. And if there's not that much cash on the sidelines, it's all in the market. Like you could even have great earnings reports and companies could be doing amazing, innovative things. But if there isn't more cash that can come into the market, you're not going to get a lot of upside. So that tool is essentially saying that the market is somewhat overvalued now and that we might want to expect something more like 8 1/2% or 9% a year instead of the sort of 10 to 11% a year that US equity markets have delivered over very long periods of time. So you're like, okay, good, I'm going to be cautious, I'm going to be moderate. But the Market View tool is using floods of data sources. And it's not just following cash in and out of the market. It's following cash flow projections across all US equities, multiples, historical multiples, interest rates, unemployment. It's bringing in a lot of data points. And our formula calculates and we can update that more frequently, but we update it once a month. And that is basically saying more like 10 and a half to 11% a year. And the reason that that tool is advancing that, I think my conclusion is that there are two reasons. One, margins are going to improve. If there are companies that have 2500 employees, and that can be done with 250, either a new company is going to come along and do that, or a large company is going to gradually or suddenly, depending on their cultural approach, reduce their workforce costs and be create a lot more, you know. Vinod Khosla of Khosla Ventures said recently that the marker for Silicon Valley Companies is $1 million in revenue per employee. $1 million in revenue per employee. That's what tech companies have been targeting as they've gotten funding and gone public. 1 million in revenue per employee. And he said with AI, the new target is 5 to 10 million in revenue per employee. And that either means that everyone who is in a workplace is going to become five to ten times more productive using the tools right away, or that company is going to reduce its employment by 80%. The answer is it'll be somewhere in the middle. And those puts and takes across who's willing to use the tools and become a 10x producer and who's not and therefore is going to get a performance exit or an exit offer and will exit that workplace. There's going to be operating and gross operating and net and cash flow margin improvements, and that those will translate to higher valuations. Companies will be a lot more profitable because of that. And the second factor is that the margin improvement will come in technology companies that are many of the leaders of the S&P 500. So you'll see continued outsized gains by large tech, which is already making up a bulk of total market cap in the US and those margin gains will translate to higher valuations and you'll end up with closer to 10 and a half percent per year. So anyway, predictions would be somewhere between 8.5% and 10.5%. And on the one hand that's not that big a deal. That's not a big gap. On the other hand it is, you know, it is about a 30% swing either way per year. And so if it's going to be closer to 8 and a half percent, we're going to see more volatility, we're going to see some bigger losers and we're going to not get as many big winners. And if it's closer to 11% a year, well, we're going to be in an exciting market where there are some big winners, particularly in new technologies. There will be a lot of IPOs as well. So I guess I'm somewhere in the middle overall. That might sound boring or wishy washy, but I'm still pretty firmly in the moderate camp, leaning more towards adding cautious investments alongside my moderate rex than aggressive investments alongside. But I still want to have a good mix of all.
- [11:36]
C
It's hard to believe that AI could be more dramatic with the markets than those Internet years were that you spoke about. You know, as you mentioned, the Nasdaq had fallen about 75% back then. The business world seemed to basically collapse. So do you think that could really happen with AI, or could it be even more dramatic than the Internet?
- [11:56]
A
Well, I would start by saying that the primary reason the NASDAQ fell 75% in 2001 was valuation. So I think we would want to look back throughout history at peak valuations for growth companies and run comparisons to see, you know, are we anywhere near there. I think the second biggest difference is the quality of the companies today versus 25 years ago. We actually haven't had a, a ton of IPOs. Right. Most of what's happening now are very large technology companies with their cash hoard, their access to AI talent and their massive amounts of data which consumers should have been paid for. There should be some compensation for the individual who has had all their data raked out of their lives into these large companies. But the advantages they have now without regulation on that front, no pushback in society yet, is they've just been able to multiply the value of that data and widen their lead over any competition. So when we look at the companies today, they're of a much higher quality. We don't have drcoop.com, you know, we have some companies that I think are a little bit ridiculous, like C3AI. We called that one out in our AI scoring and hidden gems early on to say, please don't buy the Stock. This is a company that used to be C3 IoT and before that C3 energy. They were just kind of dancing around to each new theme. And there's some questionable dynamics to certain companies out here, but I think the main reality here is that companies are profitable, they have strong balance sheets and there's a lot of enthusiasm for the technology. And although there are occasional studies that come out and say, oh, none of these projects are actually profitable, okay, sure, you know, neither were they early on in the Internet years, but these companies are profitable and they're deploying R and D against this. And every executive that I've spoken to about the utilization of AI inside their company are saying, we are excited now, we are hyping this. Not superficiality, but real substantive change is coming in how they create their product and how they market it and how they develop their workforce. So there's a lot of change happening right now and, and yet it's change that's happening inside of productive and cash flow producing companies. So I don't think that we're right here sitting at a big meltdown. Personally, I don't think so. I know Jeremy Grantham is out again with another call on the big meltdown. And you know what, sometimes he's right. I don't actually favor that he goes to extremes in his calls, in my opinion. I think, I think if he tapped a little bit more of a moderate view continually, he could teach a lot of people about thoughtful investments in the equity markets. But it's a little too much all in, all out for me, although I have a lot of admiration for him. But I would say that here are the things I would look for in and around collapses. So the first would be evaluation. I mentioned that, but I don't think it's going to be valuation off of unprofitable, Jerry built flimsy companies. We'll see when they come public. We have to watch that public markets. And remember, number two, that when SpaceX comes public at a, I don't know, $1.8 trillion valuation, I mean that's going to draw a lot of cash away from other stocks. So we'll start to see, you know, a little bit more dilution with the total number of companies and where that capital is going. So that will hurt valuations. But that would be the first thing. The second thing I would look for is actually the other side of it, the companies that are going to collapse because they didn't make the upgrades. And we're seeing that with some SaaS software companies now. And some questions about it. Obviously the extreme version of it is Chegg, which just collapsed in like three GPT upgrades. That stock had gone from $105 a share to one. And so, you know, certain categories you better not get left by investing is one of them. So I think we're going to see sections get hurt. The third thing I think that will hit is we'll have problems with consumer discretionary companies because of wage deflation. I think if you're a company and you have 2000 employees and you can do it with 250 employees, it means that there's, it's not just that people will lose their jobs. It's like there's not going to be a lot of pay hikes going on. There's a rewriting of employment right now and it's a huge transition. And I think it could be five years before we start resettling with new organizations. I think we're going to need tons of new companies to be created. A lot of entrepreneurship. I think we could run into real employment issues. I know I'm not alone in that, but that would mean people will not be spending as much. So we'll have a deflationary period as people are fearful and saving their money wherever they can. Okay. Third market collapse to me is cybersecurity. You know, you have foreign countries that don't like our stock market. They don't like how prosperous our stock market is and how much wealth it creates. In the US Obviously we can not go into a geopolitical debate, but we're not making a lot of friends right now out there. And I think that, that one of the major forms of warfare, of course the next rest of our lives is cyber. And therefore people who don't like the US wanting to hurt our financial system is a risk. Definitely. And then I think the final one is just watching industry by industry. Again, it's kind of like the earlier one, so I may be repeating myself, but it's who are the AI leaders? You really want to invest in the AI leader by industry? I mean, obviously there are many other factors than just that, but you want to start leaning that direction. Who is making the technological upgrades. They're uncomfortable to make because it replaces jobs, it changes workers workflows. I think Vinod Khosla, to quote him again, said something like, you know, 90% of AI projects internally that aren't working are being sabotaged internally because it's only natural. If you feel like that's going to take away your role, your income, you're going to half participate or maybe drag your feet or maybe even try and block it. So technological change like this is very uncomfortable, but we have to find the companies that are willing to make those difficult changes. And as you mentioned, one place to keep our eyes open to are founder run companies or companies where they have high inside ownership and they have enough success that they can have clear process for decision making to move quickly.
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E
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C
Tom, let's wrap up here and look at the next say five years. Because we're long term investors and we always focus on the next five years and beyond. How about one cautious, one moderate and one aggressive stock looking out?
- [19:09]
A
Well I felt like I was ready to do that and then before we went live with Sandy I decided I need to have two for each. Now that we can range across so many companies it's hard to limit the ones that I like. So here we go. On the cautious side, I'm going to call out Deere, which is automating the farm and I'm going to call out msci.
- [19:31]
C
Ah, blast from the past there.
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A
Yes, that's bounced around for us between like 5:40 and 600 and it has not been a good stock But I mean, their underlying financials of that business are outstanding. Their return on assets are like 35% plus. So just a very well managed, very light model that generates a lot of cash. So that's MSCI and DEERE.MSCI ticker and ticker symbol. Deer for Deere is de. My moderate stocks are Intel. You know, the US Government, national security is saying we want foundries. Intel has actually been making major investments in forward technologies because they kind of missed, you could almost say they were going to veer towards permanent disrepair and they made some modernizing investments and then they've gotten a lot of support. People think, you know, that's just support from one administration or the other. They got a lot of support from the Biden administration, a lot of support from the Trump administration. Of course they have the amazing CEO from Cadence Design Systems. So Intel. And then the second company, which also has an amazing founder and Martin Rosenblatt is United Therapeutics uthr. What I love about United Therapeutics is they were founded by a NASA scientist whose daughter had a rare pulmonary arterial hypertension, a very rare, often fatal lung disease. She left her employment at NASA to start the company to save her daughter and built up this incredible business with a market cap of $20 billion and is now partnering back with NASA to work at the International Space Station and see if it is possible to grow organs in anti gravity environment. Because organs are kind of like jelly and they would just collapse if you did it here on Earth. Maybe we'll be able to build organs and maybe we'll find a way to bring them back. That would be a competitor with one of my aggressive companies, Transmedics. United Therapeutics could ultimately. But that'll be 15 years from now. Transmedics is the first of the aggressive companies. Okay, before I go there, Intel's intc. United Therapeutics is uthr. Transmedics has the organ care system where, you know, the vast majority of organs donated do not get to a recipient because they're just put on ice and they don't get there quickly enough. But Transmedics has built up their organ care system. They have one of the great CEOs in the U.S. it's been a wonderful stock for us. I think our cost basis on some of our shares are down around 15 to 20 and the stock is at about 145 today. But I think it's got another 3x over the next six to seven years for Transmedic shareholders as it continues to expand. And then my other aggressive company is Aritzia, which is A Canadian company that is bringing boutiques into the US and doing so very profitably. ATZ AF is the ticker symbol for Aritzia and it's very well managed financially. It is a company that my sister told me that I should look at. Thankfully I did because we got our first shares in stock advisor around 67. It's now 87. It's about a $10 billion market cap. And they're bringing boutiques into the US and their growth rates are, are outstanding. Their financials are remarkable. They are vertically integrated with their own private label brands. They have been a success story in Canada and now they're making their way into the US with a lot of growth opportunities. And that's Aritzia. So my six stocks there are msci, Deere, Intel, United Therapeutics, Transmedics and Aritzia.
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C
Awesome. So not just three but six. Thanks for bringing two for each category. Tom. As and I think can you give.
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A
Us a stock or two you like? Andy, we obviously you're interviewing me here, but I'd like to hear two from you.
- [22:56]
C
Oh gosh. One, the moderate one, moderate to growth one is medpace medp which is a contract research organization tied very heavily to biotech funding which is starting to pick up. And so I think this year we'll see a little bit more pickup of that. Especially if interest rates start to moderate. We'll see more pickup and they, they just have a great leadership position. They're relatively smaller compared to maybe some of the other players out there. But their founder led financial model is excellent. They have deep connections with their clients. So metp I think in the stock has done very well for over the years when I think about medp.
- [23:27]
A
Great leadership team.
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C
Yeah, good leadership team. Owns some good stock, owns lots of stock and is pretty astute at buying back stock at the right time. So MedP, I'll put that one out there for you, Tom.
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A
Thank you very much sir. I, I will double down my research on that company.
- [23:39]
C
Well, thank you very much for taking the time to talk to us and, and share those six stocks. I really appreciate that. Tom. Great to have you here and appreciate you sharing so many deep insights into your process and into the markets in general. Thanks for being here with us.
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A
Full on.
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B
As always. People on the 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. All personal finance content follows Motley fool editorial standards and is not approved by Advertisers Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money Team, I'm Mac Greer. Thanks for listening and we will see you tomorrow.