Welcome to the seventh year of my New Year’s prognostications! Now that we’re officially into 2020, it’s time again for me to reveal my favorite growth stock (just one this time) that I expect to outperform the market. But before we look ahead, let’s look back. 2019 was an excellent year for growth investors, with the S&P 500 up more than 30% (including dividends) and the tech-heavy Nasdaq up nearly 34%. Despite continued trade tensions with China and fears over rising stock valuations, the strength of developing trends such as cloud computing and gene editing was more than enough to restore confidence in growth-style investing. Corporate earnings were healthy, and efficiency improvements helped boost earnings per share higher.As you’d expect in growth-style investing, there are some really big winners among my previous picks — and also some really big losers. Let’s start with the good news. Ubiquiti’s ( NYSE:UI) disruptive sales approach to offering best-in-class wireless connectivity products has proven extremely profitable, and the stock is up 546% since early 2015. MercadoLibre (NASDAQ:MELI) has become the one-stop-shop for e-commerce in Latin America, running an online marketplace that also offers shipping and digital payments, and its stock has risen 444% since 2014. Veeva Systems’ (NYSE:VEEV) cloud-based solution is improving the sales and research efficiency of drugmakers, and it’s up a healthy 433% since 2015. A $1,000 investment into each of those three companies when I recommended them (for a $3,000 total upfront investment) would today be worth more than $17,000. But it hasn’t all been rainbows and butterflies. Stratasys (NASDAQ:SSYS) vastly overestimated the demand for consumer 3D printing, and its stock has fallen 76% since 2015. And the trade war between the U.S. and China has led to inventory buildups for iRobot (NASDAQ:IRBT); its shares are down 37% since early 2018. Still, the consolidated performance of the picks makes a strong case for growth-style investing. Taken together, the average recommendation has provided an absolute return of 115%. On a year-by-year basis, 2014’s picks have provided an average absolute return of 165%, 2015’s have returned 301%, 2016’s have returned 99%, 2017’s have returned 48%, 2018’s have returned 11%, and 2019’s have returned 51%. That’s a lot of outperformance!
Within this growth-investing strategy is a key element that’s worth emphasizing. The outperformance of the winners more than makes up for the underperformance of the losers.
This is a dynamic we’ve become comfortable with. We know that, historically, only about 40% of the individual recommendations from our Motley Fool Rule Breakers service outperform the S&P. But when taken collectively, the portfolio of Rule Breakers picks from the past 15 years has an average absolute return of 174% — more than double the 83% return of the market over the same period (figures are as of Jan. 2).
That formula for wealth creation is only possible if you allow your winners to run (i.e., you don’t sell them), giving them time to compound their returns and overwhelm the losses from the laggards. But it also requires investors to identify the right companies at the right times, and to have a lot of patience.
|Company||Starting Price||Recent Price||Total Return|
|Stock picks for 2014||165% average|
|2015 stock picks||301% average|
|2016 stock picks||99% average|
|2017 stock picks||48% average|
|2018 stock picks||11% average|
|2019 stock picks||51% average|
|The Trade Desk||$117.92||$259.78||120%|