Long-term investors are going to have winners and losers in their portfolio. But if they take the time to analyze their mistakes, they can learn how to better avoid costly missteps in the future.
In this week's episode of Industry Focus: Healthcare, Motley Fool analyst Kristine Harjes and contributor Todd Campbell go over some of their best- and worst-performing investments in the past few years, and what lessons they learned from each of them. Find out some of the most important things that long-term investors should know about balancing their portfolios, some useful advice for thinking about risk and diversification, when it's time to reevaluate your thesis, and more.
A full transcript follows the video.
This video was recorded on May 3, 2017.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. As it's Wednesday, we'll be driving to healthcare. Today's date is May 3, 2017. I'm Kristine Harjes, and I'm joined via phone by longtime fool.com contributor Todd Campbell. Todd, how are you?
Todd Campbell: Hi, Kristine! I was wondering whether or not we should film the show on our couches today, seeing as how we're going to be doing a little self-reflection.
Harjes: Aha. I was like, "Where is he going with this?" But yeah. Todd has been investing for a long time, and I'm only a couple years in, but we thought we would do some reflection today on some of our biggest winners and losers and mistakes we've made and lessons we've learned. So yeah, it might be time to break out those reclining couches.
Campbell: Absolutely, and settle in and get comfortable and get ready to point and laugh at our mistakes, and hopefully learn from some of the trials and tribulations that we've experienced.
Harjes: Yeah, that's the goal. Todd, since your wisdom comes from so much more experience than I have, I'm going to hand the mic to you to start with.
Campbell: I thought this would be important show to do for everyone, including myself. I've been investing since the early '90s, since I was in my 20s, and I can honestly say I think I've tried every investment approach over the years, and I have the scars and what's left of my gray hair to prove it. I think one of the things that's intriguing about having that body of experience to look back on is to be able to look back and say, what has works and what hasn't worked? Over time, nutshelling it, I'm going to illustrate my point later on, but I've discovered that you really do need to worry less about the quarter-to-quarter machinations of the financial performance or whatever happens to be driving the stock for the day or the week or the month, and you have to truly go out and say, what's the potential for this company to disrupt and significantly change the industry in which it participates in? And by doing that, you're making investing so much easier. You're saying, "I know I'm going to make a lot of mistakes, and I also know that by managing a diversified portfolio of stocks, the majority of my returns are going to come from the minority of my stocks, not the majority." So what I'm most concerned about is saying, what is the catalyst, the reason behind getting involved in the stock, and does that catalyst still ring true today for the long haul? And like I mentioned, I have a couple stocks I picked out, one winner and one loser that I thought might be fun to go through and talk about a little bit more.
Harjes: Right. You made a lot of really awesome points there, so I want to elaborate on a couple of them before we move on to some specific examples. The first one is what you were saying about the quarter-to-quarter anxiety. I think that's something that starts to dissolve the longer you've been doing this. I know for me, when I first started buying stocks, I was really concerned about what they did a week after when I first purchased them. The longer your time window is, the more you realize that they go up and they go down, and it's really about how much they go up eventually. On Industry Focus, we did a series of episodes a couple months ago where our Financials host, Gaby Lapera, picked out a basket of stocks, one from each sector, that were going to be her first stock purchases. And it was so funny. For the next week or so, she's watching her portfolio, and she's like, "Kristine, what I bought is down 1% today! Why did you guys pitch this to me?" And she was joking, of course, because she knows our Foolish philosophy of long-term. But still, it's really hard at first not to get wrapped up in these day-to-day or quarter-to-quarter fluctuations.
The other point that I wanted to emphasize because it was such a good one is that the majority of your returns will come from the small minority of the winners. If you think about the math behind it, it makes a lot of sense. Your stocks can only go down 100%. Of course, that's the worst-case scenario. You don't really want that to happen. But the ones that go up a lot, that you were really right about, they can go up way more than 100%, and hopefully, over enough time, they will double, triple, 10x. That's when you really start to get, overall, a winning portfolio.
With that introduction, Todd, I know you have some specific examples that you wanted to share. How about it?
Campbell: Yeah, there was a winner and there was a loser. I wanted to take some time over the course of the weekend and the past couple days and go back and look at my notes and evaluate why I bought these two stocks and check in with them, and see what has changed, if anything, catalyst-wise. Why did I buy them, and has anything changed that would make me not want to own them today? On the winning side of the column, I want to talk about Align Technology (ALGN +2.66%). Align Technology is a stock that I got invested in in 2014. Like many parents out there, I was drawn to this company because my teenage boy needed to get braces. As I was sitting in there and watching people pile in and pile out of the orthodontist's office, I started thinking to myself, what has really changed in the way of braces over the last 20 or 30 years, other than adding charms to your metal brackets that reflect your sports interests? What has really changed in this way?
Harjes: Wait, do they really have that now? I'm sorry to cut you off. Do they actually have that now?
Campbell: Yeah. My son, unfortunately, was not a candidate for Invisalign, which is Align Technology's product, because he had a more severe need of straightening than Invisalign can address. So he actually picked the Patriots' colors, because I know, God forbid, we're up here in New England, and that happens to be his team. Please forgive us, rest of the United States.
Harjes: You know half our listeners just stopped listening.
Campbell: Yeah, I know, shutting off left and right. But yeah, they actually do have that. If you think about the potential to disrupt that market, and to think about the millions and millions of adults and teenage kids who need braces or want braces, and fortunately can afford those braces. If you can come in with a product that saves some money, cuts the cost, and you can create a better, more desirable experience for the patient, that's a win-win in my book. That's the big reason that I went out and bought Invisalign, which is now up 170% for me. You talk about the minority of stocks outperforming the majority of underperformers, this was obviously a big winner, up 170% since May of 2014. I'd like to say that I knew I was going to get that kind of a return in a few short years, but that's not the case. My decision to buy them was simply, how much of the market have they penetrated now with Invisalign, and do I think consumers are going to want a clear aligner system rather than metal brackets? And what is the opportunity to expand that beyond the United States as a global platform?
Harjes: When you're looking at this company going forward -- you're still a shareholder, right?
Campbell: I am, and after doing my homework this past weekend, there's nothing that has changed as far as the reasons behind why I bought it and would want to own it. If you look at the most recent quarter, sales were up 30% year over year. If you look back at the Q1 2014, the quarter before I bought my shares, revenue growth was only up, "only," 18%. So, you have, as they're making more headway into treating more complicated cases, and as they're making more headway in rolling out this product, Invisalign, globally, in important markets like Asia, for example, where billions of people live and are getting wealthier and can afford products like this, I think there's a tremendous amount of opportunity. I think investors always benefit from going through and reading the earnings transcripts of companies. I recommend they do that for Align Technology, because they will learn some interesting things about the growth opportunities in places like South America, i.e. Brazil, and Asia, and what they're doing to try to better penetrate the teenage market. I think there's a lot of opportunity, still, from here. If you look at their annualized shipments for cases, it's running at about 800,000 cases. They estimate the total market opportunity would be 10 million cases. So you're really only talking about 8% penetrated across the entire market.
Harjes: That's incredible, yeah. Before we turn over to a potential loser you might want to talk about, what would you say is the biggest lesson you've learned from Align?
Campbell: Don't get worried about the quarter-to-quarter machinations. There have been competitors like 3M that are rolling out their own products. There have been patent disputes. There are a lot of reasons that, day to day, I could have looked at this and said, "Oh, boy, maybe the run is over and I should book this gain." Instead, I looked at it and said, "No, they're still the leader in this space, and they're 100% tied to this disruptive product." So as long as that remains to be the case, and revenue continues to grow the way it is, I think this is a stock that I can see holding on to for years and years.
Harjes: Very nice.
OK, Todd, turning over to an investment decision that maybe you can't brag about quite as much, but hopefully can still learn from?
Campbell: I think this is very important, Kristine. You have to be willing to look at your losers. You have to be willing to say, why is this stock down? Is there a reason, did something change dramatically that makes me no longer think the reason I bought it holds true anymore? And it's tough. It's probably the toughest thing to do sometimes.
Harjes: Oh, I would much rather just forget about them.
Campbell: Yeah, bury your head in the sand and say, "OK, I'm going to move on." My loser is Mylan (MYL +0.00%). Mylan, you may know, over the course of last year, has been the subject of a lot of negative press, first for their EpiPen product, which got called out for egregious -- I think that's fair for me to say personally, what I feel were egregious price hikes for the product that we're a big driver of revenue growth for this one product, EpiPen. Then, some concerns over the course of the past year over some collusion among some of these generic-drug makers on pricing of certain products, which, obviously, has not been proven, but there's still some rumors and things going down that have weighed down the share price. I stepped in and bought Mylan in two blocks -- one block of it in July of 2015, and I added to it last fall. But I'm still down, even after lowering my average cost, 23% on that investment. It's really due to the negative publicity that we've seen over the course of the last year.
Harjes: Were you even thinking about EpiPen when you first bought into this company? It's primarily a generic-drug maker.
Campbell: No. EpiPen was not the reason I bought this stock. And that's one of the reasons I added to this position last fall. This is why you take the long-term approach. You say, what was my reason for buying it? My reason for buying it, Kristine, was biosimilars, which you and I have talked about ad nauseam at various points over the course of the last year and a half.
Harjes: They're kind of a big deal in healthcare.
Campbell: Right. Kristine, want to give a quick and dirty on what a biosimilar is?
Harjes: Sure. Biosimilars are basically generic versions of really complex biologic drugs. If you want more than that, shoot me an email. We've talked about them, as Todd so appropriately put it, ad nauseam on this show. But we also have a really good article on fool.com that explains everything you need to know about them. If you want that, you can email me, [email protected]. But if you're just looking for the basics, just think of it as a complicated generic drug.
Campbell: Yeah. And the market opportunity, theoretically, is huge, because you have $100 billion in branded-drug sales in biologics that are losing patent protection over the course of the next five years or so. So you have a gold rush going on among different drug makers including Mylan to develop these alternative options, to these top-selling biologics. Perhaps there is no company that has made as big a push R&D-wise into developing biosimilars as Mylan. They have 16 different biosimilars in their R&D pipeline, and they have a couple that are closing in on potential commercialization here in North America. When I went out and bought shares of this, it wasn't with the view that EpiPen is a significant one of their sellers and contributes a lot of their profitability. It was, how will the market look for biologic drugs in 10 years, 20 years, 30 years? And are we on the cusp of something like we saw on the 1990s, when small-molecule generic drugs first started to gain a toe hold, and now they account for 90% of all prescriptions written?
Harjes: Right. So the opportunity is still clearly there for biosimilars. It sounds to me like you're holding on to Mylan. Are you bullish on it going forward?
Campbell: I am. If I'm still long it -- and I added to it a year ago, after determining that if the EpiPen issue didn't really affect my thinking for getting into it, yeah, nothing has changed to make me think they're going to fail in biosimilars, or they won't be a major player. This is a global company. You have 600 million people living in the world right now over age 65. By 2030, you're going to have a billion people over 65. There's a lot of demand coming down the line for pharmaceuticals. And Mylan, both through generics and hopefully through biosimilars, is one of the largest by volume producers of medicine that gets prescribed.
Harjes: Yeah. I think when you look at this company, it's a really good learning opportunity to see that when share prices dip for reasons outside of what your original thesis was, if that thesis remains intact, that could be a really good time to buy some more of them, if you're still confident in your thesis. This was something I had to learn pretty quickly with one of the first stocks I ever bought, which I've also talked about ad nauseam on the show, which is Portola Pharmaceuticals (PTLA +0.00%). That stock went up a lot, it went down a lot, it's pretty much recovered by now. But through the process, I did buy a little bit more when share prices started to dip for the first time. And the last time that I bought more shares of it was right before it received a rejection from the FDA. Not surprisingly, after the rejection, share prices dropped even more, and I got kind of nervous. I was still relatively new at this, I really liked the bull case for this company, and I still believed in the bull case, because even after that rejection, the drug wasn't done. It was, for simplicity's sake, mostly just a manufacturing issue, which seemed completely surmountable. I was happy looking at this now that I did decide to buy more as the share price was sinking, but I wish that I had bought even more when it actually did hit what ended up being the bottom. Of course, it's impossible to try to call a bottom when you're right in the thick of it. We're not trying to time the market, but I think it's an important lesson to learn that you have this thesis and you confidently support it, so act on it. If why you love this company remains intact and some external forces driving shares down, then go ahead and scoop up some discounted stock.
Campbell: And Kristine, Portola probably wasn't the only stock in your portfolio.
Harjes: No. Gosh, that would be terrifying, I would not sleep at night.
Campbell: Yeah. You have a lot more flexibility as an investor to add to stocks that you still believe in if you're running a diversified portfolio, and these stocks don't account for the majority of the moves. Stay diversified: 20 stocks, 30 stocks, 50 stocks, whatever is right for you. Maintain diversification. That will give you the opportunity to do as Kristine did.
Harjes: Absolutely. Todd, as we wrap up, any other lessons from the stories or other ones that you just have to share before we close off?
Campbell: Both of these companies are similar, Mylan and Align, in that they both have something disruptive going on. But there is a key difference between the two, and I underestimated that difference. They key difference is that 100% of the success or failure of Align is tied to its disruptive product. That's not the case with Mylan. Biosimilars is only an adjacent market for them, because they're already such a huge player. As a result, they were more at risk to something going wrong in another part of their business that would derail there otherwise potential growth in biosimilars. So I think that's something to keep in mind, too. You don't want to necessarily not buy a company that has a diversified revenue stream, but you have to recognize that, along the way, things can happen to those other parts or pieces of the business that may impact your share price.
Harjes: Right. It seems like there's different types of risk that you're getting at. There's the risk of, you are basically an all-your-eggs-in-one-basket kind of company, or you are a company that has 500 eggs and any one of them could crack.
Campbell: And, theoretically, the one who's most exposed is going to be the one who's the riskiest. But it's also, if you've done your homework and you truly believe in that, online retail, e-commerce, whatever it happens to be, if you truly believe in the long term tailwinds supporting that disruption, then it's the one that could generate you the greatest return.
Harjes: Yep, absolutely. As we finally conclude, remember that it's Puzzle Week on Industry Focus. As you heard from the other hosts so far this week, we love games at Fool HQ. Fun is one of our core values, as is competitive, so puzzles and challenges are a big part of how we team build and spark collaboration here at the Fool. We love them so much that we had our chief collaboration officer, his name is Todd Etter, make us a challenge for our listeners. So we wanted to let you in on the office fun that we have, give you a little taste of Todd's challenges, which are so wildly brilliant, and also really fun. Each day this week, the hosts are wrapping up the show with a clue, and the answer to that clue is a company name, and the company names from Monday to Friday will all fit into a final puzzle that will be revealed on the Friday Tech show. So if you want to solve the whole thing, you need to listen to every episode this week.
Campbell: I have to wait?
Harjes: [laughs] I know. Yes.
Campbell: Kristine, I thought you were going to tell us today.
Harjes: Oh, no. Hey, we're investing for the long haul, so we're also puzzling over the long run, too.
Campbell: All right, I'm getting my pencil and paper ready.
Harjes: Before I give you guys the clue, I'll just say what you get for jumping through all of our clue hoops, which is that the first 10 listeners to shoot us an email after Friday's show with the five company names and also the final answer will get Fool swag.
So, the healthcare clue. Pencils out: What two-word Fortune 500 healthcare company has a first word that could also be a type of number, a religious person, a flying creature, or a World Series champion?
Campbell: [laughs]
Harjes: Todd, do not say the answer if you know what it is.
Campbell: All right, no, you have to repeat that.
Harjes: I will repeat it. What two-word Fortune 500 healthcare company has a first word that could also be a type of number, a religious person, a flying creature, or a World Series champion?
Starting Friday, if you solve every clue, write in to [email protected] with the email subject line "Puzzle" and your answers. Also, make sure to tell us your T-shirt size. If you're stumped and want the reveal, on May 12th, we'll post them to the Motley Fool Podcasts Facebook group and the Industry Focus Twitter account. To enter this contest, there's no purchase necessary, and the contest is open to all legal residents of the United States and Canada -- excepting residents of the province of Quebec -- over the age of 18. Employees, affiliates, and contractors and their families of The Motley Fool LLC or any of their affiliates are not eligible. Void where prohibited by law. For a complete list of contest rules, visit puzzle.fool.com. There you have it.
As usual, people on the program may have interests in the stocks they talk about, and The Motley Fool may have recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!
