Motley Fool’s “Small company with a $147 billion opportunity” De-teased

What's David Gardner's company that's "pushing the cancer industry into the future?"

By Travis Johnson, Stock Gumshoe, March 18, 2019

This weekend I started seeing new questions about a Motley Fool pitch, and it turns out to be a new one that I haven’t covered before.

The ad is for Motley Fool Rule Breakers, the growth-stock service helmed by David Gardner, and it’s apparently for a stock that he has recommended twice recently. Here’s a little taste of the email pitch:

“… let me tell you a little bit about why I was so excited about this stock, even before it returned 51% for members who bought on David’s recommendation in February.

“As a matter of fact, this is the second time David has recommended this company in less than a year! (It’s actually up 99% since that first recommendation.) And that just doesn’t happen very often.

“But it gets better. This is the second time he’s recommended the company… in the last 4 months.

“And when David Gardner gets THAT excited about a company, it pays off to listen.”

This is an investing style that’s not often very comfortable to me — and I suppose that’s part of why it works sometimes. David Gardner teaches growth investors to buy rising stocks, to buy more after they’ve risen, and to only pick stocks that conventional Wall Street analysts think are overvalued (among other “rule breaker” rules). The ad claims great success with similar re-recommendations in the past (including Zillow, Shopify and Intuitive Surgical, all recommended and then re-recommended within a few months after they had risen sharply, with huge gains after that.

I’m sure it doesn’t work every time, but the occasional 500-1,000%+ returns do help to make up for the good number of stocks that do poorly (both Rule Breakers and Stock Advisor, the somewhat lower-octane “flagship” letter for the Fool, typically have at least dozens and sometimes hundreds of stocks in their “active recommendations” portfolios even with regular re-recommendations, mostly because they rarely sell).

But anyway, what is this stock that Gardner is touting today? More from the ad:

“… on a recent Thursday, David released his “double up” rec.

“Can I be sure you’ll also see 80x returns on this company? Of course not! But I can tell you what excites me so much about this “double up” company.

“While it’s already up 99% since David first recommended it in Rule Breakers back in November, I think that’s only the beginning for this remarkable company.”

And then we get some clues that I can feed into the Thinkolator…

“This small healthcare company is revolutionizing cancer detection, diagnosis, and treatment technologies.

“And in doing so, they’re pushing a $147 billion cancer industry into the future….

“A small percentage of the 1.7 million new cancer cases in the U.S. last year experienced a faster, smoother, safer diagnosis, thanks to this company. Cancer patients with Blue Cross Blue Shield, Cigna, or Medicare can all take advantage of this company’s innovative new technology.”

So… hoodat? Thinkolator sez this is Guardant Health (GH), which went public just about six months ago and has really been tearing up the market in just the past six weeks or so, rising from the high $30s at the end of last year to top out right around $100 a few days ago before dipping back slightly to around $93 now.

But really, any specific price is hard to justify — it trades at 60X expected 2019 sales, with analysts penciling in roughly 50% annual revenue growth for a few years but no profits until at least 2022 as their operating expenses easily keep up with revenues (though the actual cost of testing doesn’t appear onerous, so they do at least have decent unit-level economics of 50%+ — worth noting, since scaling a business is much easier if the unit economics make sense). Would 40X sales make more sense? 20X? 100X? That’s a philosophical and future-telling question, not really an analytical one — you have to believe in their future and place decent odds on them growing and protecting a massive market share in cancer biopsies and testing to think 40X sales is reasonable, but you really need a similar belief to make 20X sales a rational number too.

This is a story stock that depends on the idea that it will dramatically boost usage of its liquid biopsy tests in various cancers, taking share from traditional biopsies as their genetically sequenced blood testing connects to their proprietary data sets and analytics system to help identify specific cancer types that respond to different treatments.

Will they? I have no idea. I had not looked at the company before this morning — it’s clearly a very attractive stock for the momentum-trading crowd, but that’s about all I know about them so far. You can see a little fan letter to them from Investors Business Daily here, and a free article from the Motley Fool summing up their quarter (reported last week) here (they also posted a transcript of the conference call here, if you want to see management’s own interpretation of where they are and where they’re going).

Guardant Health went public in early October, so the lockup period expires on April 2… which might provide a big of a dip if you’re interested in trying to build a position (that’s the day when insiders will be allowed to sell shares, something that is prohibited for usually six months after an IPO). It’s hard to know exactly what will happen, though, since the stock is so wildly story-driven.

Their big potential outside of their Guardant360 lung cancer screening blood test, which is performing well and getting increased insurance coverage, is the possibility that their blood tests could be used by much larger populations as a screening tool both for cancer recurrence and for early detection of cancer in people who have no cancer symptoms — that’s a new tool that is just beginning to be tested, they call this research LUNAR 1 and LUNAR 2, but they said last week that they’ll have some pilot data to release at the AACR meeting in a couple weeks, so that could generate some interest as well.

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And beyond that, you’re on your own, I’m afraid. Diagnostic companies have posted incredible gains in the past, but they’ve also been touted to the stars and collapsed sometimes due to either failure to broaden their customer base or new competition or failure to satisfy insurance companies about the cost-effectiveness of new testing tools. I’m not able to guess at the odds for this one, but it’s certainly been an exciting growth stock so far in its young life as a public company.

Have a thought on Guardant Health to share? See great times continuing to roll? Worried about the valuation or the competition? Let us know with a comment below… thanks for reading!

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