“Two specific, wealth-building investments you can buy today to start rebuilding your own wealth”

by Travis Johnson, Stock Gumshoe | July 7, 2010 2:27 pm

That headline is a quote from the Motley Fool[1], in a recent teaser ad for their flagship Stock Advisor[2] newsletter, the one that pits brother/founders Dave and Tom Gardner[3] against each other. They run through their familiar spiel, that Wall Street ignores the little guy, mutual funds[4] managers underperform and get overpaid, and that brokers who help you trade in and out of your stocks all the time are doing you a disservice by overtrading (the Foolies tend to be “buy and hold” folks, at least compared to active traders).

So they say that they’ll calm you down, get you into the market and keep you there for the long haul. They trot out the familiar — and generally true — data, such as that missing just a dozen or so of the best days in the market can cut your returns dramatically … and more importantly, that the best days are often what folks miss, since they sell in a panic when the market is dropping and wait until those big moves higher before they’re comfortable investing in the market.

And on most of that stuff I tend to be on the same page as the Gardners, though I know many folks who are much more active traders than I and some of them are certainly successful … it’s just not my thing.

But of course, while we probably appreciate the educational stuff, the big picture commentary, or the calm counsel of the best investment newsletters, what inspires us to actually subscribe to them is that they have some hot stock idea that they won’t tell us about until we throw some cash their way. And the Fool is no different, so this new Stock Advisor ad contains a couple teaser stocks that the Gardners apparently think you can buy right now for great long-term appreciation. So what are they?

The clues, please!

“A top investor’s No. 1 stock for your money right now

“Would you invest a few dollars in a business that churns out $289 million in free cash flow annually… has $266 million in cash and investments, minimal debt… and not so much as a single inventory or accounts receivable cost?

“I sure would. But surely this must be a boring, cigar butt business, right? Wrong. What if I told you this company is just ramping up and is consistently growing its generous free cash flow… at nearly 20% per year? …

“Like Dell[5] in the 1990s, this company is the top-rated consumer brand and undisputed leader in its category — shipping a staggering 2 million units per day nationwide.

“Also like Dell in the 1990s, it offers a lower-cost, more dependable AND more convenient level of service than the tired old conventional retail model we lived with for years.

“What may surprise you is that this company might actually have an even bigger competitive advantage than Dell had in 1990. (I’m going to get a bit technical here so bear with me…)

“You see, for each dollar of fixed assets (essentially plants and equipment that’s extremely costly to carry), this business churns out more than $6 in revenues and over 71 cents in operating profits. That’s huge.

“By comparison, the company’s closest competitor generates less than $2 in revenues on every dollar of its own fixed, non-cash assets, and a measly nickel[6] in operating earnings….

“Best of all, this company I want you to invest in is only getting started…

“At last count, 10 million Americans… roughly 10% of all U.S. households… used this company’s revolutionary product.

“So you’re probably wondering… 10% penetration — is that a lot or is that a little? Good question. In fact, it’s both.

“According to my colleague, Motley Fool co-founder David Gardner[7], the unusual investor who told me about this company, this 10% penetration rate is high enough to prove the company’s revolutionary business model works.

“And at the same time it is small enough to leave the company… and you and me as early investors … years of upside headroom.”

OK … sound familiar? It’s really that 2 million units a day bit that might be the clue to tip you over the edge, but this is …

Netflix (NFLX)[8]

And it sounded familiar to me, so I looked back into the Gumshoe Archives … it’s getting a little dusty back there, but I found an ad for Stock Advisor with almost identical wording that they were sending out almost exactly three years ago, also comparing this to buying Dell in 1990. That older article of mine is here if you like[9] — don’t worry, I cleaned it up and dusted it off real nice for you.

Oh, and since that article I wrote for the earlier Fool teaser, it looks like the stock is up about 550%. Not bad … in fact, among the top performers of any stock I’ve ever written about. Which makes me cringe a little bit to note that, to me, Netflix looked a little pricey even back then in the Summer of 2007. So take it with a grain of salt that I look at NFLX today and think it looks really pricey. Sometimes growth stocks with great competitive advantages and high margin concepts are just never as cheap as you’d like.

Netflix has not exactly been flying under the radar for this huge run they’ve had — almost any investor has probably heard of them, and many of us are customers, so there’s no shortage of opinion out there on this stock. Morningstar[10], which is probably a bit fuddy duddy on this point like yours truly, seems to think it’s insanely expensive at the current $115 — they peg the shares with a fair value of $43 and wouldn’t have you buy it until it falls to $21.50. This is clearly a growth stock at this price, with investors counting on the years of rapid growth (25% earnings growth in the most recent quarter) to continue apace.

If you think that growth will continue you can certainly make an argument that the current price is fair, it’s trading at a Price/Earnings/Growth ratio of about 1.6, which isn’t cheap but also isn’t all that expensive, particularly for a high profile and relatively stable company. But if you believe that DVD rental by mail is going to fall by the wayside, or that they’ll have too much competition in the video streaming and online delivery business in the years to come and lose some of their margin power, then the PE ratio on the last 12 months of earnings is a little scary at about 50. Really, your decision about whether or not NFLX is a good buy right now is probably going to hinge more on whether or not you think, like the Fool folks, that they’re “just getting started” … if growth slows faster than investors expect, there’s every possibility that the stock could take a big hit.

And there was another stock teased in the ad, too — how about that one?

“Now let me give you a feel for the kind of opportunities Tom Gardner digs up — with a remarkable company he assures me is following in the footsteps of none other than Intel.

“Is this really the NEXT Intel?

“We’ve all heard the slogan ‘Intel Inside.’ But did you ever consider how it came about and just how revolutionary it was when you first heard it?

“It’s a microprocessor, for Pete’s sake… a tiny wafer we can’t even see, touch, or hear — yet so powerful we dig deep and pay up for one computer and turn up our nose at another.

“Before Intel, nobody dreamed a market leader like Dell would eagerly feature another company’s logo front and center on its top-of-the-line computers. But you see how it worked for them!

“‘Intel Inside’ conveyed ‘speed, quality, reliability, even prestige.’…

“The ‘new’ LOGO top manufacturers display proudly on their products, packaging, and marketing

“When Tom Gardner told me to buy this new ‘Brand-Inside-a-Brand’ stock in September 2006 it was trading for about half as much.

“But Tom says this stock has just begun its historic run. And he should know — he’s studied this phenomenon closely.

“He calls it ‘customer facing,’ meaning simply that, like Intel, this company’s NAME and LOGO are in the faces of consumers and factor directly into their decision to pay up for top-of-the-line products….

“This new “Brand-Inside-a-Brand’s” cutting-edge technology helps drive a multibillion-dollar industry — in this case, audio electronics and entertainment media.

“Serious consumers and professionals actively seek out this brand wherever and whenever they listen to music, buy expensive audiovisual equipment, or even go to the movies.

“Its name is synonymous with top-end, premium quality and performance. In fact, it’s not only the industry standard… it’s the GOLD standard.”

Well, dangit if this isn’t another one that the Fool has been all hot and bothered by for years … and has teased before. The “Brand Inside a Brand” ad rang a bell for me, though the bells seem to be getting fainter every day, I wrote about this company also in 2007, though it was a bit later in the year. This is …

Dolby Laboratories (DLB)

That older article I wrote is here[11], if you’d like a trip down memory lane. Dolby has been a grower, and priced as a grower, for a few years now, but nowhere near the heady heights that Netflix has reached — the shares are up 50% or so since that older Fool teaser ad introduced us to their “brand inside a brand” idea, and they’re trading at a trailing PE of just under 30 (with the expected growth, the PEG ratio is pretty close to NFLX, right around 1.5). Dolby has also been a Navellier pick in the past, for whatever that’s worth, to give you an idea of the kind of folks who particularly appreciate this kind of high margin, high growth stock — and like most Navellier favorites, they’ve also been beating earnings estimates quite nicely for at least the past four quarters.

So what do you think, are these kinds of “oldie but goodie” growth stocks appealing at prices that reflect that growth, or would you rather wait around and see them take a beating if the market crashes? Or are they just too big now for the high growth investor, are you looking for the “next big thing” that’s not already a multibillion dollar stock? Let us know with a comment below.

And if you’ve ever subscribed to the Fool’s Stock Advisor, please click here to review it[12] for your fellow investors (if you’re new to that letter, you can see the reader reviews that we’ve already collected here[13]). Thank you!

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