David Gardner’s Next “Spiffy-Pop” Investment?

by Travis Johnson, Stock Gumshoe | April 27, 2011 11:55 am

Have you seen the newest ad from the Motley Fool[1]? It’s similar in many ways to lots of their other teaser ads — it’s loooooong, it includes lots of quotes from outside sources to buttress their claim that they are the one publisher looking out for the small investor, and it teases an investment idea that one of the Fool brothers (Dave Gardner, in this case, the “growth” brother — his brother Tom is the “value” guy) thinks could be the next hot investment in a string of impressive picks they’ve made.

But the ad also embraces the Fool’s … well, foolishness — being a little silly and offbeat is a big part of their brand, thus the jester hats, and David Gardner[2] in particular has long been fond of coining new terms and jumping on hot investment phrases that capture the “rule breaking” strategies he espouses. In this case, the term is “Spiffy Pop.”

You’ll see the “Spiffy Pop” phrase used in free Motley Fool articles from time to time, but this ad explains that it’s a term that describes a stock that they’ve recommended which, presumably years later, increases in value in one day by more than the initial price you paid for the stock. Dave Gardner, as I said, is a growth guy, and he, like most of the Fool newsletter folks, is patient — no stop losses here, he jumps on to big growth stories that he thinks are changing the world in some way and holds on. So he’s certainly recommended some “spiffy pops” in the past — including Netflix (NFLX)[3], which I think both brothers may have recommended at one time or another (and which has also been one of the best teaser picks I’ve ever written about — though after the 2009-2010 market recovery there’s now a pretty long list of 100%+ gainers from the Fool teaser crop), and Priceline (PCLN).

Now, to be fair I should tell you right up front that although I do invest in some growth stocks, and have owned Dave Gardner favorites like Intuitive Surgical (ISRG)[4] and Baidu (BIDU)[5] in the past, I’ve in general been way too cautious about nosebleed growth stocks that turn into momentum darlings and tend to appeal to Gardner and to folks like Louis Navellier[6] — I thought Amazon (AMZN)[7] was expensive at $50 and destined for lower margins, I was never comfortable with Netflix’s valuation even though it’s gone up more than 1,000%, and, well, lots of other mistakes along those lines, including selling both ISRG and BIDU far too early.

And of course, not all of Dave Gardner’s picks come anywhere near “Spiffy Pop” status — and in fact, his strategy almost by definition means that you need a pretty diversified portfolio (as he’d no doubt also tell you), because to nurture a stock that becomes a “Spiffy Pop” for you (or, their other favorite phrase borrowed from Peter Lynch[8], a “10-bagger”), you usually have to also accept a fairly large number of ugly ducklings that grow up into, well, ugly ducks … or end up hanging by their feet in a Chinatown storefront.

So that’s my caveat — I apparently stink at picking large growth stocks, particularly the ones that look really expensive on current valuations and that tend to be Dave Gardner’s favorites … in fact, one of his rules is that the conventional Wall Streeters have to be telling everyone that a stock is way overvalued before it can be a “rule breaker.” So I’m probably too conventional to embrace this strategy wholeheartedly.

But sometimes one comes through that I really do like … and sometimes he sure does pick ’em — so let’s see which stock he’s teasing as one of his next potential “spiffy pop” performers, shall we?

They’re a little bit light on the clues, to be sure … I like to think they must hear the encroaching drumbeat of the Gumshoe Nation on their heels, but they do provide just enough for the mighty Thinkolotor to work on. Here’s the meat of it:

“So let me give you one of David Gardner’s favorite picks you can invest in today…

“Like Netflix, Gardner is convinced he’s found another remarkable U.S. company at the very FOREFRONT of a radical shift in consumer tastes, leading a generational shift in an important and growing market segment.

“Also like Netflix, the company’s stock has been a strong performer — earning investors a solid double in 2010 and more than 395% in pure profit since March 2009.”

The Fool also provides a chart in the ad, so I can also tell you that the stock price is somewhere near $90 right now, and that the chart pattern will help me confirm the exact pick once I’ve narrowed it down some more.

Some more of the tease:

“… when it comes to satisfying this radical new consumer taste, this company is — like Netflix and every life-altering investment just mentioned — both the “top dog” and “first mover” on the scene.

“In other words, it’s just the kind of rare anomaly David Gardner has made a career of uncovering ahead of Wall Street… an opportunity that, like Netflix and Amazon and Starbucks before, looks poised to double and triple in value — and more.

“Yes, precisely the kind of opportunity that can realistically earn you back your entire investment in a single day.”

And then we get some clues that actually include a couple numbers — helpful for confirming and double checking:

“Over the past 12 months, this comparatively small and underfollowed U.S. operation churned out $54 million in free cash flow on sales of $464 million — and, like Netflix, is gobbling up market share from much larger, less nimble rivals.

“Earnings are growing at an impressive 26% per year for five years running, putting the company dead-center in David Gardner’s ‘Spiffy-Pop’ sweet spot. Especially impressive, given that, as Gardner points out, ‘the company is still early in its bid for national dominance.'”

And one more bit of clueishness here:

“And unlike its bloated, out-of-step competitors, the balance sheet is strong with $49 million in cash and ZERO debt — again, remarkable given that the company is an up-and-coming player in a capital-intensive industry (again, think nimble Neflix vs. doddering Blockbuster).

“Management, meanwhile — perhaps Gardner’s single most critical criteria for assessing a company’s long-term viability and “Spiffy-Pop” potential — is rock-solid and shareholder friendly. Which shouldn’t surprise you given that the founder still holds more than $400 million in stock.”

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OK, so I guess there were more clues than I thought — anyone want to hazard a guess before I turn on the Thinkolator and stage our big “reveal?” No? OK, this stock is …

Boston Beer (SAM)[9]

You’ve heard of it? Yep, me too. Drank some Boston Lager just the other day, in fact. Boston Beer is the first widely successful “microbrewer” by most folks’ reckoning (there are other claimants to the throne, of course), and their Sam Adams brand has become a strong national player in the premium beer market. It’s still quite small compared to the “macrobrew” companies, with a market cap of just over a billion dollars (about 1% of the size of Anheuser Busch-InBev), and they do match the clues perfectly: revenue just a couple bucks shy of $464 million in 2010, a huge run in the stock from the March 2009 bottom.

And yes, the founder, Jim Koch, does still own a huge chunk of the company — and, like some other firms, he holds his ownership in a different class of “super stock” that has much stronger voting rights (he owns pretty much all 4.2 million of the authorized Class B shares, it’s convertible into common stock if he wants to do that but it’s not publicly traded — in effect, this means he can control the Board of Directors, of which he’s also Chairman).

SAM has had such a run from the bottom — and, indeed, from where they were before the market crashed in 2008 (around $50), that it’s not surprising that the shares look expensive. Right now it trades at about 25X last year’s earnings and does not pay a dividend, and the stock did take a small tumble when the earnings were last released in March because they’re investing in a “fresher beer” program and upping marketing costs in the face of continuing strong competition in the premium and microbrew space, and there was also some chatter about concern over commodity costs, though the commodity cost that really seems to have potential to bite into their margins is energy (both for brewing and, far more importantly, for distribution).

Still, analysts see them earning almost $4 per share this year ($3.80 is the current consensus), which is still decent growth of 13% or so even if it’s not the more spectacular growth that SAM had in 2010 — and they see that earnings growth rate staying at least in the teens in future years as well, so perhaps it’s reasonable to pay a bit more than 20X the current year’s profit for the stock, though it doesn’t stand out as a rock-solid bargain unless you believe that Dave Gardner is right about their ability to maintain their niche (and therefore their profit margins) and take more of the market away from the bigger brewers without losing a commensurate share to smaller, growing craft brewers — there are, after all, plenty of folks with the ambition to be the next Boston Beer, a list that probably starts with the oft-teased Craft Brewers Alliance (HOOK), a far tinier microbrew company that makes SAM look positively cheap by comparison.

And, to be fair, there’s an unusually strong effort to include disclaimers in the letter — like these:

“there are no guarantees when it comes to his style of high-growth investing. It will take courage, conviction, and patience to follow Gardner’s lead, if you choose to do so.

“… it’s not possible to predict which companies in your portfolio will go on to be massive winners. The system he has developed — over 10 years of trial and error and remarkable success — is designed to tilt the odds in your favor.

“… Gardner further insisted that I highlight not one top idea, but three top candidates he believes you should get into your portfolio as soon as possible.”

Of course, the clues are also limited about the other two, but I think one is also a pick that I profiled a couple years ago for the Irregulars — I’ll get into those tomorrow if folks are interested.

So are you a SAM fan, either of the beer or the stock, or does it look to pricey (if the latter, welcome to the consensus of the stodgy — I’ll save a stool for you!) Let us know your thoughts with a comment below.

And, as always, we thirst for knowledge — if you’ve tried the Fool’s Stock Advisor[10] newsletter and have an opinion about it, please share that with a quick note at Stock Gumshoe Reviews by clicking here. Thanks!

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