“The ‘unmistakable signal’ that could lead YOU to profits of 246%, 631%, even 1,425%

“Only one in a thousand investors has even heard of it. But it’s delivered them an average return of 140% for more than ten years running.

“And the signal just started flashing AGAIN — pointing them to a surging stock that could be their biggest winner yet.”

That’s how the latest teaser ad for the Motley Fool’s Stock Advisor newsletter gets us started — this time the teaser letter is actually signed by a subscriber to the newsletter, a guy named Danny Vena, but the basic idea of the “unmistakable signal” is one they’ve used in ads several times over the years.

Basically, what they’re saying is that every time David or Tom Gardner re-recommends a stock, it does much better than the market… so that re-recommendation itself is the “signal” that a pick is extraordinary.

And there are plenty of examples they provide to back this up — both the Gardner brothers have re-recommended several stocks over the years, and many of them have been their best picks, stocks like Marvel (now owned by Disney, DIS), Quality Systems (QSII), Priceline.com (PCLN), Intuitive Surgical (ISRG) and Whole Foods Markets (WFMI). Of course, they’ve also occasionally re-pounded the table on stinkers, like Netflix when it was well over $200 a share (they also picked it cheap and got in very early, to be fair — they teased it at $17 a share in 2007, so folks who bought then are probably still happy if they hold the shares at $63 … it’s just that they kept saying it was a good buy at $200+ before the 70% collapse that started about a year ago), so the “signal” may not be entirely infallible.

Here’s how the ad puts it:

“Nearly all of Stock Advisor‘s biggest winners share one defining and extremely telling characteristic…

“They’re all stocks that David Gardner has re-recommended. Allow me to explain…

“Every month David recommends one stock to his Motley Fool Stock Advisor members.

“And, occasionally, when he thinks a stock he’s already recommended once makes for an incredibly compelling investment opportunity — either because of a temporary pullback in share price, or a new growth catalyst, or simply because he thinks it’s the very best company you can possibly buy at that given moment — he will actually double down and re-recommend it…

“That’s why I wasn’t surprised to see that David Gardner’s latest Stock Advisor re-recommendation is already up 20.8%… even though the S&P 500 has delivered just 2.4% in this same short period.

“If you’re worried this means you’ve missed your chance again… you shouldn’t be. Because what really fuels this stock’s growth (other than its 1,000 disruptive technology patents — both current and pending) is its ongoing defiance of Wall Street’s expectations.

“Here’s what I mean by defiance… on July 19, equity analysts at J.P. Morgan downgraded their rating of this company. But from that moment, it’s actually gone up… in just a few weeks, it’s clobbered the return of the S&P by a factor of more than 8 times.”

And he does actually insert a small note of caution, though it ain’t exactly in the bold type — he says that the “unmistakable signal… only generates a positive return about three quarters of the time.” So there’s your note of sobriety. But then he steps it up a notch because this is a rapid re-recommendation:

“Less than two months ago — for only the 6th time ever in his legendary investing career — David Gardner gave one of the picks on his Stock Advisor list an even STRONGER vote of confidence….

“Here’s the key statistic I want you to focus on: 6 months.

“As David will tell you, 6 months is usually too short of a period to evaluate a stock’s performance and potential. For starters, it includes only one quarterly reporting period.

“That’s why (until now) David has recommended a new stock — and then re-recommended it less than six months later — just 5 times in his entire career as an investor. A career that includes literally hundreds of stock picks.

“And those 5 recommendations have generated an average return of 440%.”

We’re told that this is a big vote of confidence because Dave Gardner re-recommended the stock very quickly, after just four months and 26 days … and that …

“… he isn’t issuing this ‘ultimate vote of confidence’ because the stock has seen a temporary pullback in price that represents a short-term misvaluation. Quite to the contrary, it’s already up 94% on his first recommendation. And now he’s signaling us again… that based on his analysis of the company’s outstanding fundamentals and its unique position in the marketplace, it’s poised to make an even BIGGER move.”

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Got it? So we want to know what stock he’s re-recommending, yes? Well then, on to the clues!

“… the companies he favors most are what he calls ‘Rule Breakers’ — businesses that completely reinvent their industry, or overturn it and create entirely new industries….

“… if you’ve been keeping an eye on the science world lately — like the recent “TED 2012” conference — you know that there’s only one technology right now that has this kind of disruptive potential.

“Researchers in Austria just used it to create a fully detailed automobile the size of a grain of sand. It’s convinced NASA (left for dead by decades of budget cuts) to start making new plans for a mission to Mars. And everyone from gun manufacturers, to pharmaceutical developers, to gourmet chefs, is rethinking their long-term strategies because they’re starting to recognize that it could put them out of business altogether….

“As recent articles in Forbes and Bloomberg Businessweek reveal, the world’s two dominant aerospace manufacturers, Airbus and Boeing, have both already created enormous new production facilities to start using this technology to better their bottom line. And as we speak, American athletes like Michael Phelps, Ryan Lochte, and LeBron James are taking full advantage of it at the Olympics in London.”

Sound familiar? Yes, this stock is not just a re-recommendation … it’s also a re-tease, the Stock Advisor folks teased it many months ago, around the time they were first recommending it. But there are actually a few stocks in this category that have been promoted by the Fool, so let’s make sure we ID the right one for you. A few more clues:

“… company is the clear-cut market leader bringing this technology into homes and offices everywhere.

“It just:

• Reported an impressive 71% increase in its already-healthy profits.
• Accepted a nomination as a finalist for the coveted American Technology Award.
• Closed key partnership deals with Volkswagen and Heineken.
• Acquired six of its competitors over the past year.

And if you think you’ve “already missed the really big gains” because the stock has almost doubled this year, the ad compares getting in early to buying Intel “late,” 15 years after its IPO and after they’d already hit revenues of a billion dollars … folks who bought then and held until now (27 years) apparently would be enjoying almost 100-fold gains. And of course …

“David Gardner recently went on record and stated that he’s ‘convinced the success we’ve already seen is just the beginning.'”

So who is it? Well, the 71% increase in profits was actually for 2011 over 2010 (the last two quarters actually posted year over year declines in per-share profits), but the Thinkolator says this is still … 3D Systems (DDD)

Which we’ve written about quite a few times — to their credit, the Motley Fool was the first one of the big newsletter publishers to get on board this 3D printing trend and push it hard as an investing theme back in March, calling it the “end of ‘Made in China'”, but it’s also been teased by Nicholas Vardy and Michael Robinson in recent months. Heck, I even got on board back in June and profiled DDD and their main competitor, Stratasys (SSYS) for the Irregulars.

And yes, DDD has gone up quite nicely since the Foolies started recommending it early this year. If the teaser ad is accurate on the dates (they aren’t always), then Gardner picked this one four months and 26 days before August 14, so that would mean he recommended it on February 17th (which is indeed the “third Friday” of the month, the day the newsletter typically publishes). From the chart I would have guessed February 22, since that’s the day there was a huge spike in the trading volume (it traded 10X as many shares) and a jump in price by about 10%, but either way it means he picked the stock right around $20. Right now it’s just shy of $40, so a 94% gain sound about right. Stratasys, which was also teased in that same ad back in March, has done almost-but-not-quite as well, and the big software provider they gave away as a “free” pick at the time, Dassault Systems (DASTY), has handily beaten the S&P but has trailed far behind the two 3D “hardware” companies.

3D Systems was indeed downgraded by the JP Morgan analyst on July 19, from neutral to underweight (which is pretty much going from “hold” to “sell” if you choose to speak English instead of analystese) — they put their price target at $34.50, which is right around where the stock was trading at the time, so from there to the recent highs (the stock bumped above $41 briefly on Monday of this week, which is the all time high price) it did indeed jump up by about 20%. This has been a wild ride of a momentum stock this year, and as befits a David Gardner pick it’s trading at a steep premium to the market by most conventional metrics — the trailing PE is close to 70, forward PE around 30 (for what’s expected to be long-term growth in the 15% neighborhood, so a fairly pricey price/earnings/growth ratio of a bit over 2), and thanks to the lofty valuation and the double in share price this year there’s a very high short ratio — more than a quarter of the free trading float is sold short, which means some investors are placing a pretty hefty bet that the stock will fall. Though to be fair, short interest has been pretty high in 3D Systems all year, which means either there’s a lot of in-and-out trading going on among those shorts or there are some really long-suffering short holders on these shares, and the potential for a substantial short squeeze if the share price keeps climbing.

(If you don’t know what a “short squeeze” is, it’s when a heavily shorted stock rises enough that the short holders either choose to (sick of losing money) or are forced to (because of margin calls) “throw in the towel” and get out of their short position. A short position means you borrowed the stock in order to sell it, so covering a short means you have to buy the stock to repay that loan of shares … which means they have to buy the underlying stock in the open market to cover their position, and if there’s a heavy short position and a lot of shorts have to cover at once, it can drive up trading volume substantially and cause the share price to spike on what can sometimes be desperate buying).

But this is also very much a “story” stock — it is in an industry that shows a lot of signs of breaking out and reaching much more widespread usage, both by traditional and industrial users and by home users (though I think the potential of the home business, with devices like DDD’s Cube printer, is probably overly hyped by many investors), thanks both to rapidly improving technology that allows these printers to be used for “real” manufacturing as well as for models and prototypes and to dropping prices … but we’re still in the very early days, without a history of earnings growth to look back on for any of these companies. Stratasys and 3D Systems have been around for a while, and there have been several times when the promise of 3D printing seemed eagerly anticipated but it spent a couple decades being a “little deal” … important for prototype designers but not showing any chance of doubling or tripling the market overnight. So a big part of the concern about these stocks is a worry that the bump up they’ve seen in revenues and earnings over the last two years might not be sustainable.

I tend to agree with Gardner that we’re in the early days of much faster adoption of these technologies, and continuing refresh cycles in the hardware as the 3D printers become better and better, with increasing precision and speed and a constantly improving variety of materials and colors … but that doesn’t mean the stocks can’t fall if the horizon starts to look a bit less shiny, expectations are quite high for these stocks, and as we’ve seen from several newsletters pushing them pretty aggressively the level of attention is increasing even if Mom and Pop investors may not have yet heard of these companies, so an earnings “miss” or a downbeat forecast from either Stratasys or 3D Systems would very likely cause a substantial drop in the shares. These are both pretty big companies now, Stratasys acquired the last outstanding major competitor earlier this year, and 3D Systems has grown through many, many smaller acquisitions over the last few years, so DDD is a $2 billion company and SSYS will be comparably sized once their combination with Objet goes through (shareholders will vote on it next month), and they’re no longer “under the radar” and can be expected to move fairly violently if news shakes investor confidence in the growing earnings power of these companies.

You can easily see the possibility that we’re on the cusp of great things — 2010 and 2011 brought breakthroughs in terms of operating income for DDD (it rose to 15% of sales in 2011, up from 3% in 2009 and 12% in 2010) without huge new spending on R&D or rising general or administrative costs, and the temptation is strong to look at this as similar to the 1990s performance of the desktop printer companies — eventually they were able to drive down equipment costs so much that every office and home had a printer, which drove usage much higher, and their profit margins increased dramatically when the sale of supplies became the main part of their income statement. Like inkjet printers in the early days, 3D printers are largely hostage to the refillable “cartridges” (printing materials) sold by the manufacturer, so increasing printer use leads to higher sales of disposable materials, which leads to higher profit margins. Right now the revenue growth from printer sales is higher, but the actual revenue from printer sales is about the same as from print materials (both are smaller than the revenue from their largest division, services, which includes “printing as a service”), but the lion’s share of their actual profits (42% for the first half of this year) already comes from print materials. That’s promising, though it’s been and may continue to be a gradual process. You can get a good idea of how they see themselves and the promise of their business from their latest investor presentation, released about a week ago. (Their next quarterly report won’t be until October 23, by the way.)

The most likely “big picture” risks seem to be either that this technology reaches saturation much earlier than folks like David Gardner expect, which would mean too much expected growth is factored into the shares, or that price competition erodes profits. I don’t have any way of predicting the former, though since it’s still pretty early in what looks an awful lot like a transformative technology that’s getting a new head of steam, I’m not terribly worried … and I think the latter is not terribly likely given the fact that for commercial-scale products there is an emerging duopoly, which tends to keep price competition in check to at least some degree. There are a lot of other companies who make printers, which can also be made using a kit at home, and some of these other firms might come up with a “better mousetrap” … but none are nearly as big as DDD or SSYS, and the two companies have consistently bought out all their emerging competitors, so that seems likely to continue.

With the volatility in these stocks, it’s very hard to open a position at or near all-time highs — since we can feel in our bones that there’s bound to be a quarter when they do very badly and the stock gets crunched by 20%. Of course, if the shares have already climbed another 30% before that happens, we’re still better off buying today, so you can never tell. If you’re interested in these kinds of high-momentum, high-expectation growth stocks (I’m interested in both SSYS and DDD, but have not bought them personally yet), I find that it’s generally easiest on the nerves to buy them in small nibbles over time, keeping an eye open for dips in the price as long as you’re still confident about the long-term future growth.

So what do you think? We’ve been writing about 3D printing for quite a while now, and DDD seems to be narrowly edging out SSYS as the growth darling consensus pick among investing pundits so far … do you agree? Or would you rather jump aboard Stratasys, or move to a stabler part of the food chain and buy one of the software companies like Dassault? Let us know what you think with a comment below.