Triple-Threat Portfolio Booster Pack
And, thanks for signing on!
In our hunt for innovative companies with the potential for market-crushing returns in the years to come, your Motley Fool Canada team has selected three stocks that we believe can give your portfolio an instant shot in the arm.
These higher-risk/higher-reward stock recommendations have been carefully selected from several of our premium stock-picking services, and will give you immediate exposure to some of the most exciting industries on the rise.
To your wealth,
Your Motley Fool Canada Team
From Stock Advisor US, 2/7/2019
Building wealth with great companies requires a long-term commitment to them. My recommendation today will touch on both halves of that statement.
The great company I’m recommending today is Appian (NASDAQ: APPN). You probably don’t need me to tell you how important apps are to our connected world. But they don’t just appear out of thin air — they take hard work to conceive and program. And that’s left small and mid-sized businesses with a dilemma. They can either hire IT pros to create the software in-house — a big deal when resources are already limited — or accept off-the-shelf solutions that may not fit their specialized needs.
Appian provides the solution: an easy-to-use platform that simplifies app and software development. Appian’s low-code approach allows existing staff to get trained and create customized solutions — and through its new “Appian Guarantee,” Appian will train in-house employees in two weeks so they can deliver a functional app in eight weeks or less.
Now for the long-term commitment. You’re likely familiar with our rule that you should hold your stocks for at least three to five years. Now I’d like you to go one better: Avoid the temptation of stop-loss orders.
I first recommended Appian more than a year ago. I was excited about it then, and it’s more than matched my expectations — if you bought the day that recommendation came out, you’re up more than 50% now. But the ride hasn’t been entirely smooth, and if you set a stop-loss order along the way — an automatic rule with your broker to sell if the share price fell below a certain level — you might have had your shares yanked out from under you and missed out needlessly.
So today I’m going to write about a great investment you should consider and a counterproductive investing trick you should avoid. Let’s get started!
Apps for All
One of the reasons I love founder-led businesses is that they sometimes have more freedom to dare greatly. I see that with Appian and its co-founder and CEO, Matt Calkins. Appian doesn’t just want to make it easier for customers to make their own apps — Appian wants to cut the development time for new software in half every two years. That kind of ease would be incredible, and owning shares of the company that’s making it happen is tantalizing.
Appian has only begun to unearth the full extent of its addressable market. Calkins believes that there are tens or even hundreds of thousands of potential customers for its low-code platform, yet Appian’s client base currently numbers only in the hundreds.
To put it another way: With a market opportunity that Appian believes is worth more than $30 billion, the company’s revenue of just $217 million over the past four quarters is just the tiniest hint at its full potential.
While fourth-quarter results won’t be released for another couple weeks, what we do know tells us 2018 was a good year for Appian. Sales rose 23% in the third quarter, and subscription revenue — which tends to be more profitable — surged by 42%. Meanwhile, the company turned in a subscription revenue retention rate of 117%, which means existing customers spent 17% more for the third quarter than they did a year earlier. That’s a customarily strong figure for Appian, and it speaks to the value of its services — not to mention its ability to sell new ones.
I like what Calkins and his team have built at Appian, and I really like Calkins’ personal investment in Appian’s success — not just as a founder, but also as a 46% shareholder.
Don’t Stop Short
If all you knew of Appian’s history was its return better than 50% over the past 14 months, you’d expect investors to be pretty happy. So now let’s talk about the stock’s volatility.
Over the past 52 weeks, Appian’s shares have traded as high as $43.06 and as low as $22.99. Because its market capitalization is on the small side — around $2 billion today — it’s susceptible to big swings in short periods of time. That’s how it goes when companies report to us four times a year but the market is open for business every day.
This kind of volatility is why we encourage you to tune out the daily ups and downs. Investors who find it all too stressful might end up doing things they regret. One of those things is setting a stop-loss order.
It sounds so reasonable: A stop-loss order means you determine how low you’re willing to see a stock go before you sell it. For instance, with Appian around $32 now, you could set a stop-loss order at $29, which would limit your loss to about 10% if the stock goes down. And it’s automatic, which means that if Appian’s stock is dropping, you won’t need to watch and worry.
Yet there are enough double-edged swords here to fill a medieval armory. Let’s focus on the big one.
All it takes is the briefest blip for your sell to be triggered. Even if the price rebounds in a matter of seconds, it’s too late — you’re out. This was one cause of the “Flash Crash” in 2010, when the Dow Jones Industrial Average went from a modest dip to a thousand-point freefall before regaining almost all of its lost ground. Along the way, countless stop-loss orders executed — leaving bewildered investors on the sidelines even as many of the stocks they had just unwittingly sold returned to their previous levels.
The increasingly computer-driven nature of stock trading has only made the danger of stop-loss orders worse. Many brokers make stop-loss orders visible as part of their order books, and that offers traders a potential reward if they can push the price of a stock far enough down to trigger those orders.
Volatility is no joke, but long-term success means learning to cope with it. Stop-loss orders sound like they should help with that, but too often they hurt instead.
Risks and When We’d Sell
For those of you just joining us — and those of you who need a reminder — we only recommend selling a stock when we no longer see market-beating growth potential in it.
- Appian makes a big investment in pulling in a new customer, and the value of that customer only grows over time. But because Appian doesn’t give the same front-loaded boost from customer acquisition that many companies get, some investors who are more used to conventional business models could get confused when they see volatility in Appian’s top-line numbers. Don’t be worried if that plays out — but do know it could affect the stock price in the short term.
- It’s been a long time since the stock market has gone through an extended correction, and many of the companies in Appian’s industry haven’t yet been tested under bad market conditions. I’m confident that Appian has what it takes to succeed in a down cycle, but short-term traders won’t necessarily have the same resolve.
As a smaller player in the space, Appian doesn’t have the reputation of a giant like IBM (NYSE: IBM) or Salesforce.com (NYSE: CRM), both of which have plenty of capacity to try to build their own low-code software development platform solutions. We’re looking to Calkins for leadership here, and his departure would be a grave cause for concern.
The Foolish Bottom Line
Appian is a great example of a strong company with a promising business model that has what it takes to stand the test of time. Be ready for market volatility to continue, and don’t let stop-loss orders or other misguided attempts to reduce risk end up biting you. We’re recommending Appian for the long run, and we think it has the potential to be a multibagger for those who stay the course.
Dan Caplinger contributed to this report.
From Age of Miracles, 1/29/2019
Of all the exciting clinical developments we’re discussing in this report, the one you’re most likely to have seen in the news is the gene-editing tool known as CRISPR. And it seems nobody is neutral about it. Supporters rave about its potential to erase debilitating genetic disorders with unprecedented ease; doubters note that these treatment decisions could affect countless generations to come and ask if we’re really ready to wield this kind of power.
Both sides have more to say. For right now, we’ll leave it at this: The technology is real, scientists are working hard to unlock its potential, and one day it could change the practice of healthcare as we know it.
If you’re looking to get in early on the CRISPR action, your best option is Editas Medicine (NASDAQ: EDIT), which was founded by the same researchers who pioneered the technology. Editas has exclusive access to some of the most important patents in the space, and it is now heading into its first human trials. The stock has been incredibly volatile since the company went public in 2016, with shares up 180% at one point and now actually trailing the S&P 500 over that timeframe (although still in positive territory). Consider all that as mere background noise: Editas is a risky investment for a number of reasons we’ll discuss, but if CRISPR lives up to even a fraction of the hype, the stock should make gains that make past volatility look like nothing.
A Molecular-Level Find-and-Replace
Editas’s mission is to address the root cause of diseases caused by mutations in our DNA. To that end, the company is working on cures for cancer, as well as for diseases of the eye, blood, muscle, lung, and liver by harnessing a natural immune defense called CRISPR.
CRISPR works like a find-and-replace function to recognize specific DNA sequences, cut them out, and potentially replace them with different sequences. Microorganisms have been using this process for millions of years to fight off attacks from viruses they’ve encountered before, but it wasn’t until the past few decades that scientists began experimenting with ways to harness CRISPR for their own uses.
Today, CRISPR has generated widespread excitement about its ability to one day give scientists a pair of molecular-scale scissors. Because the technology can produce “off-the-shelf” treatments (rather than costly personalized ones), these therapies could one day be used around the world for diseases that affect millions of people.
But Editas makes it very clear that the technology is still in very early stages. Poke around the company’s website for a few minutes and you’ll realize they don’t provide many details other than this table describing the pipeline.
Rather than expand on the programs listed, the website encourages visitors to “learn more about genome editing, CRISPR, and our areas of focus that might be useful.” It’s a not-so-subtle acknowledgement that this stock is a bet on CRISPR technology rather than any one particular program.
Reaching Into Deep Pockets
Editas’s pipeline is so early-stage that it is just now commencing its first human trials. But that hasn’t stopped some major drugmakers from taking an interest.
In 2017, Editas announced a collaboration with the massive drugmaker Allergan (NYSE: AGN) on eye diseases. The partnership gives Allergan exclusive access to and the option to license up to five of Editas’ programs in eye disease. This collaboration gave Editas a cash infusion of $90 million, with potential milestone payments and royalties to come that could be worth up to $1 billion.
The Editas program I’m most excited about falls under the Allergan collaboration. Leber Congenital Amaurosis type 10, or LCA-10, is a genetic disease that leads to progressive blindness in childhood. This indication makes for a great early project for two reasons. LCA10 is the most common form of congenital blindness, making it a large and unmet need. Plus, curing the disease only requires deleting faulty DNA, without needing to replace it. EDIT-101 is now ramping up for a phase 1/phase 2 trial, with patient screening beginning mid-year. That makes it one of the very first CRISPR programs to enter the clinic.
But the company is already looking beyond this, with the next clinical programs under the Allergan partnership likely to be in Usher Syndrome type 2A (a progressive form of vision loss resulting from a mutation in the USH2A gene) and in recurrent ocular herpes simplex virus type 1 (which, like it sounds, is not a genetic disorder but rather is caused by the herpes simplex virus, demonstrating another potential application of CRISPR).
Editas is also working with the Juno Therapeutics unit of Celgene (NASDAQ: CELG). In 2015, the two companies agreed to investigate combining Editas’ genome editing technology with Juno’s T-cell therapies, including its revolutionary CAR-T drugs. The terms of the agreement landed Editas a $25 million up-front payment, with more to come in the way of research, regulatory, and commercial milestones, plus royalties on any approved products. An expansion of this partnership last spring provided Editas with an additional $10 million up-front payment as well as potential additional milestones and royalties around a fourth target.
The milestone payments alone could be worth over $700 million, giving Editas another nice stream of cash to keep operations running well before it ever hits the market with an approved product. The lead program in this collaboration targets human papillomavirus-associated solid tumors.
A Broad Background
Editas is not the only CRISPR company out there, but what differentiates it from its competitors is its unique relationship with the Broad Institute, a research center affiliated with MIT and Harvard best known for its pioneering work on CRISPR-Cas-9 (this is the full name of the gene-editing process we’ve been talking about so far; Cas9 is the protein that powers it in nature, although the company is also developing an alternative mechanism called Cpf1).
One of the Broad Institute’s core researchers, Feng Zhang, founded Editas in 2013, along with fellow Broad colleagues George Church and David Liu and UC-Berkeley researcher Jennifer Doudna. Some of the company’s original funding came from Third Rock Ventures, which has close ties with Broad’s director, Eric Lander.
Editas’ close relationship with the Broad Institute lends it a competitive edge: Although the Broad Institute made its CRISPR-Cas 9 patents available to all research institutions, Editas was granted proprietary rights to all commercial applications. If a competitor wants to develop a human therapeutic using CRISPR-Cas 9, Editas will likely be able to exert some control — a potentially significant advantage.
Since the company’s founding, Editas’s competitors have questioned the validity of the Broad Institute’s patents, but the situation has now been largely cleared up—at least in the U.S.
UC-Berkeley filed a CRISPR-Cas9 patent application in May 2012, months before Broad filed its patent for use of CRISPR-Cas9 in humans. However, Broad paid a small fee for accelerated review, and it was awarded its patents first, in April 2014.
Berkeley claimed that its patents would cover the use of CRISPR-Cas9 in all cells, including human ones, and in January 2016, it initiated an interference proceeding. But this fight is now effectively over in the U.S. In September 2018, the U.S. Court of Appeals for the Federal Circuit affirmed the decision of the patent board, giving Editas broad latitude in pursuing CRISPR-Cas9 commercially. The fight is still ongoing in Europe, but in the U.S. it is very unlikely that this decision will either be reheard by the Court of Appeals or successfully make its way to the Superme Court.
It’s still not clear exactly what this means for Editas’s existing competitors CRISPR Therapeutics (Nasdaq:CRSP), Intellia Therapeutics (Nasdaq: NTLA), and Caribou Biosciences, which still hold some patents and are waiting on others. But it gives Editas clear freedom to operate and likely puts some limits on most would-be newcomers.
A Rocky Year
Still, not everything has been smooth sailing for Editas. CRISPR as a tool for human therapeutics has been called into question over the past year on a number of grounds, from the potential immunogenicity of the Cas9 mechanism to the possibility for off-target edits to the potential role of CRISPR in favoring cancerous cells when used ex vivo in certain circumstances.
Editas has remained sanguine about these issues. In discussing these obstacles, outgoing CEO Katrine Bosley noted to an investor conference last September, “We’ve never been surprised by any of these.” The company has very deliberately chosen a careful first application of CRISPR in EDIT-101, electing to use a delete-only mechanism within the eye — which is, biologically speaking, a fairly closed system.
Nevertheless, that’s no guarantee that these or other technical problems won’t limit the applications of CRISPR or even make it unfeasible altogether.
On top of these worries, there has been significant management turnover at Editas. In December, CFO Andrew Hack announced he would be leaving the company to join Bain Capital. A few weeks later, Katrin Bosley announced she, too, would be leaving the company — for undisclosed “personal” reasons — as of the same date. Given investors’ nervous mood, this put a big ding in the stock price. Yet with the company only now launching into the clinic — and no clear sign of any fundamental problems at the company — we don’t think the risk profile of an already speculative investment is significantly raised.
Foolish Bottom Line
It’s tough to measure Editas using any traditional valuation metrics. The company has never been profitable, and it’s not expected to reach positive EPS any time soon. Investors should be comfortable with the fact that this company will continue to bleed money for years before it has a product on the market. Fortunately, Editas has over $337 million in cash on its balance sheet, no long-term debt, and two well-financed partners in Celgene and Allergan. Though there are other companies working in the CRISPR space, Editas has the clearest freedom to operate.
At a valuation of under $1 billion, Editas has a long way to run if CRISPR lives up to even a little of its promise. I wouldn’t bet the ranch on this stock, but if all goes well, even a small bet could pay off fantastically. If you’re optimistic about what MIT Technology Review calls “the biggest biotech discovery of the century,” there just may be a place for Editas in the most speculative part of your portfolio.
From The Partnership Portfolio, 11/29/2018
Most doctors are painfully aware how much healthcare costs can affect their patients’ lives. A surprise medical bill can be financially devastating — indeed, medical expenses are the biggest cause of personal bankruptcy in the United States.
Stephen Neeleman, a practicing surgeon in Utah, saw this problem firsthand and set out to do something about it. He went to Washington in the early 2000s and lobbied for the creation of a new type of account that would make it easier for patients to save for medical bills. Neeleman’s efforts were successful, as Congress authorized Health Savings Accounts in 2003. He founded HealthEquity to get the word out about HSAs, and the company became the first legal trustee of the accounts in 2006. Its mission was huge: to make it easy for employers, health plans, and employers alike to get the most out of their healthcare spending.
HealthEquity (NASDAQ: HQY) has grown like a weed since its humble beginnings and now services more than 3.6 million accounts that hold more than $7 billion in assets. It has relationship agreements with thousands of employers and hundreds of health plans, including Blue Cross Blue Shield and Health Plan Alliance.
Our Partner: Stephen Neeleman
Neeleman is part of a family that knows something about entrepreneurship: His brother David is the founder of JetBlue Airlines (NASDAQ: JBLU). Stephen Neeleman was one of the first employees at JetBlue, and his wife, Christine, was JetBlue’s first at-home customer service agent.
Neeleman’s experience at JetBlue showed him that starting a company was a great way to solve a real-world problem. It also showed the importance of hiring great people and fostering a culture based on delighting customers. As HealthEquity CEO Jon Kessler put it, “Steve observed that if medicine treated patients the way that airlines treated customers, they would be very angry and go to another airline. … Steve was determined to create a business that has a different culture in terms of customers, but also in terms of the team.”
Since Neeleman is a big fan of Seth Godin, he took a cue from the book The Purple Cow and called HealthEquity’s internal culture “DEEP Purple,” which stands for “driving excellence, ethics, and process.” That might sound like corporate nonsense, but the company gets rave reviews from both employees and customers.
Neeleman is certainly the spark behind HealthEquity’s success, but as a practicing surgeon, he lacked the time to give the company the attention it needed. He found the right person to spearhead HealthEquity’s growth when he hired Kessler, an accomplished entrepreneur, as CEO. Kessler was the founder of a fast-growing business called WageWorks (NYSE: WAGE)before he retired in 2007. Neeleman convinced Kessler to join HealthEquity in 2009, a move that’s benefited the company as well as Kessler himself, who now owns more than $30 million in HealthEquity’s stock. Neeleman maintains a 2% stake, which is worth roughly $60 million. The duo boasts more than 25 years of leadership experience at the company.
The Business: HealthEquity
HealthEquity’s growth has been amazing — the stock is up more than 350% since its 2014 IPO — but there’s plenty of reason to believe there is still room to run. Management estimates that the market for HSAs will grow to 29 million accounts and $75 billion in assets by 2020, and eventually to reach 50 million and $600 billion or more. Those numbers are enormous when compared to HealthEquity’s current position, with 3.6 million accounts and $7 billion in custodial assets.
So how does HealthEquity stand apart in a crowded market? The secret sauce is the company’s customer-centric culture. HealthEquity outcompetes its rivals — mostly banks — by offering a superior customer experience based on service and education. The company operates a high-touch model and provides its users with tools that make it easy for them to save more and get the most out of every dollar. That’s helped the company’s market share grow from 4% in 2011 to 15% today.
This high-touch model makes a strong culture critical, and that’s where HealthEquity shines. The company gets a strong 4.2 stars out of 5 on Glassdoor, and 88% of employees would recommend it to a friend. These numbers explain why the company’s customer retention rate is a stellar 97%.
How HealthEquity Will Win
HealthEquity was the first HSA trustee approved by the U.S. government, and it has worked with employers and health plans for more than a decade to sign up customers in droves. HealthEquity monetizes its growing customer base by charging subscription fees, custodial fees, interchange fees, and investment fees.
This recurring revenue business model and swelling asset base has resulted in mouthwatering financials. The company’s net profit margin has increased to more than 23%, and the business pumps out free cash flow. The balance sheet has more than $300 million in cash and is free of debt.
The first key to achieving outsized returns is organic growth within its core market opportunity. The demand for HSAs is likely to continue to soar, and HealthEquity has a long history of using its consumer-facing products to win new business and convince existing clients to save more. Second will be improved margins. The company’s margins have been increasing for many years and should continue to grow as the business scales and HealthEquity rolls out new products. Finally, new products should help. The company is just starting to offer its HSA holders investment options, but it could become a big player in the 401(k) market down the road.