Motley Fool Hidden Gems Investing - 3 Broken Breakers Worth Buying

Starting point is 00:00:00 When are broken breakers worth buying? We break it down. You're listening to Motley Fool Money. Welcome, Fools. I'm your host, Tim Byers. And with me, our longtime Rule Breakers teammates and old friends, Rick Benares and Carl Thiel. It's a Gen X Power Half Hour. Today, we're talking about our favorite broken breakers, innovators that have yet to convince the market of their long-term potential. Carl, Rick, we've got a lot to talk about, but first, Carl, since we've got you here, I'd love to take just a couple of minutes to talk about the federal layoffs and any potential consequences you see for the biotech industry and for those who haven't been following along, this relates to federal cuts having to do with CDC and related

Starting point is 00:01:01 health and human services agencies. Carl, what do you see in here and what should we pay attention to as biotech investors? We're seeing things that have been affected both by budget cuts and then also by the government shutdown. I don't want to underplay any of this because every agency that gets cut can have a big impact. But I would say the most important ones near term for investors is FDA. And the good news there is that FDA is largely funded by user fees, so drug companies literally pay for their own reviews, which does mitigate the impact somewhat. And the agency has said something like 86% of employees are still active, and that keeps them active even through the government shutdown. The bad news in that regard is that there are

Starting point is 00:01:53 certain things that they cannot do during the government shutdown. And one of them is accept new NDAs or BLAs. You cannot accept any new drug application that requires a user fee payment because literally there's nobody to operate the till. So if you're trying to submit a new drug, you can't do it during the shutdown. And this is one of those things that if the shutdown is a few weeks, hopefully that doesn't impact things too much. Obviously, the longer that drags out, the more serious that gets. So companies that already have pending applications for the most part should be okay. Companies that are looking at making new submissions a little further out, hopefully we'll be back in business by then, but there is a little awkward period right now.

Starting point is 00:02:40 I will say there's some mitigation to that as well. If you're a company that's trying to submit a new drug application that is for something already approved, to pick a random example, Ionis has said this year that they're going to submit an approval for a drug called Tringulza, which is for high triglycerides. It's already approved for a rare disease. Because this is therefore a supplemental application, it doesn't require a user fee, and they should be able to submit that on the normal schedule, right? So that's the sort of good news and bad news on that. And then, you know, I think the other biggest impact for the industry has been all the NIH budget cuts and grant issues. And again, that's sort of a good news, bad news story. I mean,

Starting point is 00:03:26 the impact on it is really at the top of the funnel for research, which is that a tremendous number of ideas come from NIH research. And just to pick an example, you can come up with these stupid sounding studies that NIH is doing. It's like, why are we paying taxpayer money so somebody can study the diet habits of the Gila monster in the Southwest or something? But that's in fact where GLP-1 drugs come from, is that kind of early, early research. And so you're hurting the top of the funnel when you do that the good news such as it is is that um the current budget which is not being passed because of the shutdown but the current budget calls for basically both the house and senate versions call for restoration of most of nih funding this is one area in which

Starting point is 00:04:17 house and senate republicans for the for the most part kind of push back against uh uh the white house and they want to restore most of that funding. So hopefully, the impact will ultimately be less than it could have been. But it's still extremely disruptive, and it's going to work through the funnel for years. Okay. So just a quick follow-up on this, and then we'll move on. I think what I'm hearing from you is that there are some short-term disruptions here, but we like early-stage biotechs in Rule Breakers. You're the one that brings us most of these. This does not sound like something that over the long term should dissuade us from getting interested in emergent science in biotech. There's going to be

Starting point is 00:05:07 maybe some short-term disruptions. There'll be possibly some approval delays. But over the long term, we still should like emergent science biotechs because those are still necessary and will come to market. Yeah, I think that's right. And I, you know, I, and I do think there is an expectation that some of the sort of most radical moves made by the administration will be mitigated or reversed at some point. Got it. Okay. We'll, we'll keep our eyes on this Fools, let us know what you think and what emerging biotechs you're investing in. Up next, three broken breakers we still believe in. You've got to try breakfast at A&W.

Starting point is 00:05:57 You've got to try breakfast at A&W. And what better way than with a delicious Pret organic coffee? Starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. All right, welcome back to Motley Fool Money. We like dark clouds we can see through. And if you don't know what that principle means,

Starting point is 00:06:29 I'd like to introduce you to David Gardner's new book on Rule Breaker Investing. Dark clouds we can see through means, and it's a long-held principle of David's in Rule Breakers. We aren't trying to buy the low, but we love it when a company that we really believe in that has significant Rule Breaker traits gets punished for reasons that maybe are temporary or maybe are unfair. And so, We like these companies as rule breakers that may have taken a backward step for reasons that are partially their own fault, but maybe not completely. There are dark clouds. We can see through them, and we're willing to stick it out and wait till the sunny skies return.

Starting point is 00:07:18 We're going to talk about three of them. Rick, I'm going to start with you. We're going to start with the Trade Desk because, boy, has it been, I mean, is it just raining on their boardroom? What's going on here? Yeah, yeah. It's raining in their boardroom, and apparently, it's like an open roof. It's a convertible boardroom because they're getting soaked. But yeah. So, the Trade Desk, it's a 15-bagger since becoming a Rule Breaker recommendation eight and a half years ago when Carl Thiel and I coincidentally just approached David Gardner at the same month and said, hey, we like this stock. Carl and I rarely have the same stock on our minds, but we did that time. But it used to be a shinier star on our scorecard.

Starting point is 00:07:57 The leader in programmatic advertising has fallen 63% since peaking 10 months ago. Obviously, that's more than rain. That's a deluge. The first hit came a few weeks after its all-time high, when after 33 quarters of breezing through guidance, it proved mortal. Two quarters later, it's its most recent quarter, it missed on the bottom line, and revenue failed to top 20% for the first time as a public company outside of the second quarter 2020, when advertisers sort of took a mulligan. They took a quarter off early in the pandemic that time. But there are fears there. There are fears that it's AI deployment having gone exactly as planned. There's fears of a competitive market, specifically in connected TV, which is always

Starting point is 00:08:34 seen as this big growth for them. Amazon is emerging as a force. The open internet. But here's the thing. The open internet, it's a $935 billion market opportunity for digital advertising. It's never going to be a one-eats-all market. Connected TV is still powerful. Advertisers are willing to pay twice as much to reach a connected TV viewer where campaigns can be personalized and targeted than traditional advertising. The trade desk was once priced for perfection. Now, it's only priced for imperfection, but it's also priced for infection.

Starting point is 00:09:05 A lot of people just are doubting the trade desk. That's a good place to go and be a contrarian, and I see that now. You can pick up the trade desk for less than 25 times forward earnings. I'll say this again. You can pick up the trade desk for less than 25 times forward earnings, which may be a high multiple in most cases. But if you know the trade desk, you know that it never trades as cheap. And yes, revenue growth is slowing. And analysts see it slowing. It's guidance calls it to continue to go in the high teens in the current quarter. It'll analysts continue to see in the high teens next year. There's still a lot of things happening here

Starting point is 00:09:35 with the trade desk. But I think it's a steady growing company, still gaining market share, because there's no way the advertising market is growing at a double-digit pace. And I think right now that it's priced actually reasonably, despite warts and all, I believe it is a broken breaker that is mending itself. And to be honest, I don't think it was ever truly broken. I think it was just, you know, too much optimism. So cracks in the price, but not cracks in the business. Fair enough.

Starting point is 00:10:01 I mean, look, I think connected TV has changed everything and logged in experiences for all entertainment is a big boon for companies like the Trade Desk. But let's go back. Let's go back to healthcare. And, you know, I mean, Carl, Bristol-Myers Squibb. Bristol-Myers Squibb is one of these companies, by the way, that does not seem like it's been around. I think people would be shocked about how long it has been around. Tell me what you think here. Why is this one a broken breaker? It's pretty clearly broken. Uh, I mean, you could, you could argue that it's not a breaker. And I would say that, that that's, uh, you know, fair enough. I mean, this is a drug company, uh, that's well over a hundred years old. It, uh, came to us on our scorecard through

Starting point is 00:10:57 Celgene, uh, so, you know, Bristol acquired Celgene and swallowed a breaker. Exactly. It swallowed a breaker and, and has, you know, continued to struggle since. And I would say that it is a, a, a, a broken breaker that I've come to believe in again. And that is basically a valuation argument. So this is, this is, you know, not usually where we're coming from for rule breakers, but I think it's, it's a reasonably compelling case in which, you know, you have a company that's guided for earnings per share in the $6.50 range there, a little bit to either side of that. Revenue is going to be around $47 billion this year. That gives them a PE multiple of less than 7. I think that number alone tells you that there's some trouble at

Starting point is 00:11:49 this company. But I think that trouble is pretty well recognized at this point. They have one of the worst patent cliffs in the industry. And a patent cliff is when a drug that you've been selling for very high margin, lots and lots of money, suddenly goes off patent, generic competition comes in, and your market share tanks, and pricing pressure goes way up. That's going to happen with Eliquis. That's going to happen in the sort of 2028 range with Opdivo. It's a challenge. And so, this is a company where you're going to see both profits and revenue drop for a period of years. But I think that is more than priced in at this point. And the company is paying a dividend in the sort of 5.6% yield range. And it's a dividend that I think you can count on. I mean, they have

Starting point is 00:12:41 93-year history of paying a dividend, 93 consecutive years. There's no reason they're going to stop doing that. They're not in danger of dropping out of profitability. In fact, their portfolio of new drugs is growing quite nicely and being offset by legacy drugs that are seeing declines. So, I think it's a pretty surefire way to collect a very nice yield. And then I think eventually start to see some price appreciation as that very, very pessimistic multiple just kind of even comes back a little bit. Is it possible that that multiple expands once we start to see – because if I heard you correctly, and I think I did, the idea is that they – I mean, look, they're facing a giant patent cliff, but it's not like they've stopped innovating and they are building a backlog of drugs. And so, this is the old dog that's cooking up new drugs.

Starting point is 00:13:42 Sorry, I made it sound way too much like Walter White there. I didn't mean to do that. But you know what I mean? There's a big backlog here. And if that backlog starts to show promise, that multiple could expand quite quickly. Yeah. And I think even just any sign that they're going to be able to return to growth will do that. And they've made some interesting... I mean, they have some fast-growing newer drugs that are relatively new introductions. And they made some interesting acquisitions around radiopharma, for instance, and some next-gen oncology drugs. So yeah, I think this is a point in which there are lots of reasons to be negative, but you're sort of at, I don't want to say we're necessarily at

Starting point is 00:14:25 peak negativity, but I would say that there's definitely a very dark cloud hanging over the company, and any sign that that's lightening up could help with the actual stock price, even while you're just collecting the dividend. All right, so not just dark clouds, storm clouds. Fair enough. I'm going to take Progeny, and Progeny, ticker PGNY. I've talked about this before. I own it. Ever since our Fool 24 interview with CEO Pete Inefsky, I've been interested in this company. And part of the reason is that it has gotten so destroyed. On the Rule Breaker scorecard, down 41% as of our taping, down 99% versus the market. It is broken in terms of the price here since the IPO. But that does not mean that these are unnecessary services. In fact,

Starting point is 00:15:17 I think they are growing in importance. And so they're not getting enough credit because I think the healthcare market is, and Carl, I'll be curious if you have a thought about this, but this is my view of it. Because the healthcare market is so Byzantine, there's so much debate about it. There's so much worry about prices. This kind of business and product, which is essentially aimed at those who self-insure, which is not a lot of companies. It's a growing number of companies that do self-insure. They manage a bucket of money. They use an insurer on the front end, and then they pay benefits on the back end, and they get discounted versions. Then they build to menu. The Motley Fool is like this. As full-time employees, this is what we have.

Starting point is 00:16:08 We are a self-insured company, and we have good benefits, and the company works within a structure in order to do this. It's been very successful at it for a lot of years, and we offer progeny as a benefit. And you know what? I mean, I think we are going to see a lot more of this. Now, revenue was only up 9.5% in the most recent quarter, but I will say this. Gross profit increased 16%. So there's more efficiency here. It's a profitable company generating cash flow. And this is what I like the most, that despite all of this uncertainty around healthcare, the client base, so again, self-insured companies expanded to 542 in the most recent quarter. And that was just about 6.75 million members. So these are covered individuals under progeny.

Starting point is 00:17:00 That's up year over year from 473 clients, which again, self-insured companies, that's a lot. That's fairly big growth. The number of covered people underneath that was, again, grew to 6.75 million, up from 6.47 million. There's clearly a whole bunch of companies that are interested in progeny services because they do have some better indicators and results for helping those who are having trouble building a family starting a family they have you know they're well known their principal product is for infertility and they tend to help those couples who are trying to have the you know trying to have a child they tend to show clinically better results and that does show up they get chosen more often and so um this is another piece of this they do have

Starting point is 00:17:54 other things they're doing. One of them is they've introduced menopause support, and there's strong initial reception for this. 20% of existing clients and 40% of new clients are considering taking up progeny on that menopause support. And this is not the only extra service that they're working on. Last point on this, so Inefsky and a lot of his leadership team, back when the stock was a little lower than it is today, it was still in the teens, but they were active buyers on the open market. They're not selling shares. They've been, if anything, accumulators of shares. And that's another thing I like about this. But I don't know, Carl, I'll ask you to tell me I'm wrong if you think I'm wrong.

Starting point is 00:18:37 Is just the generalized confusion and concern about the healthcare market something that is a dark cloud that weighs over a service like Progeny, especially since it's for those companies that are self-insured well you know let me i'll put it back to you just a little bit which is beyond that concern which you know hard to say how people are regarding it do you do you think there's a concern just that you know the client base is as you say you know mostly uh self-insured companies that there's just a sort of simple cyclical economic concern around around layoffs and and sort of economic contraction around some of those companies you know that might be that might be something that's holding the company down and also something that you presume

Starting point is 00:19:24 we get past. Yeah, it could be. The other piece of it, though, is that as they introduce more services and the existing clients use progeny for more things, you would think that offsets. Rick, do you have a thing you want to add here? Oh, yeah. When you mentioned the buybacks, so yeah, they've retired of almost 10% of their shares over the last year and a half. It was mostly done last year, but it's still in there. But to me, I see the point here again, and I'm disconnecting the dots here, which I think is what we do as rule breakers, but couples are settling down later in life than they used to. And this means fertility treatment, surrogacy, adoption, all these things that progeny helps out are going to become more popular. They're going to want that

Starting point is 00:20:02 when it comes to coverage. And that's going to be great for progeny, I would think. Yeah, I think that's right. So let us know what you think. What's your favorite broken breaker? Give us a comment wherever you consume your podcast. Just leave us a comment and let us know. uh we'd love to hear it up next we play the yes and game again stay tuned you're listening to motley fool money you gotta try breakfast and what better way than with a delicious pret organic coffee starting with just one dollar all day every day now until december 31st you gotta try breakfast at a and w at participating a and w locations in ontario all right it's time for yes and which is our improv style game that

Starting point is 00:21:01 rick brought to us a while back where if you if you like this game write me a note t buyers at fool.com let us know because we'll keep bringing this bag if you want something else i'm going to keep playing faker breakers, faker breaker, and we're going to keep doing yes and. So as a reminder, the yes and game is pretty simple. We start with a bullish statement about a stock followed by another, and then followed by a concern. We go around the horn with three stocks taken from our rule breakers database. And we make a, we just make a statement about stock and then it's yes and yes, and yes, but we'd raise a concern and then we end the scene. We're going to do this for three stocks. So when you are ready, Carl, we're going to start with you and your, uh, your

Starting point is 00:21:51 pick, which is Arginix. All right. So I'll test my ability to make compound sentences. Arginix based in the Netherlands is a very successful biopharma company sells a drug called ViveGuard, mostly for Myasthenia gravis. Sales jumped 97% to $949 million in the second quarter. That's nearly a $4 billion run rate and still growing. Yes. And as strong as stateside sales have been, it's growing even faster outside of the U.S. market. Yes. And it appears that ViveGuard is positioning to capture, do I have this right, Carl, 50% market share in CIDP. That is an extraordinary number. You are right. Yes, but any market this good attracts a lot of competitors,

Starting point is 00:22:46 and there are some very serious ones that could be better than Vivecart. Yes, but U.S. accounts for more than 80% of current product sales of the Netherlands-based company. That's a lot in the recipe of a foreign company relying largely on the U.S. market for sales. Yes, but it does look like in Q1, there was a bit of seasonal insurance re-verification delays and increased Medicare Part D utilization leading to higher discounts, missing investor expectations. So the regulators aren't always friendly with this one. And seen. Excellent. Carl, you did it. There's your first. There's your first. Now we're going to go to the expert here. Rick, Celsius, let's do it. Yeah. Celsius is a disruptive leader in

Starting point is 00:23:37 the growing functional beverage market. Yes, and I see this every day, Rick. Every time I get on a bus or a train to commute into the office, I see at least one Celsius drink, not only on the way, but in the office where I end up going to work. Celsius, no matter what we say about its growth rates, it is everywhere. Yes. And it widened its footprint by acquiring Alani New and managing the Rockstar beverage and deepened its stake with Pepsi. Yes. And that PepsiCo deal, PepsiCo increased its stake in Celsius from 8% to 11%, getting a great distribution partner even deeper in exchange for Celsius taking over that rockstar brand. Yes, and the company's international division grew by 37% to 18.6 million. That's including expansion in Canada, UK, Ireland,

Starting point is 00:24:35 Australia, New Zealand, and France. So, a successful global market penetration is happening. Yes, but Celsius risks cannibalizing its brands with this much larger portfolio of beverages. Yes, but after three years of revenue more than doubling, investors saw how fickle the energy drink market can be for Celsius last year. Yes, but U.S. revenue did plunge 33% year-over-year to $247 million. So, good foreign revenue, not as great on domestic shores. And seen. All right, let's talk Salesforce. Salesforce has closed over 12,500 agent force deals since launch, and more than 6,000 of those are being paid deals. Salesforce is really ramping up its AI. Yes, and in their Q2 for fiscal 2026,

Starting point is 00:25:34 they raised their full-year revenue guidance to over $41 billion and are looking at improvements in operating margins and solid cash flow growth. Yes, and Salesforce.com has a strong track record of making shrewd acquisitions that can amplify through its own ecosystem. Yes, but Salesforce is now trading for a premium that is going to be hard to justify as the AI hype starts to die down, even with all that free cash flow. Yes, but they confirmed 4,000 job cuts in 2025 and some hiring pauses showing some struggles underneath the hood. Yes, but after decades, and I mean two, three decades of annual double-digit growth sales consistently, revenue rose at a single-digit clip in fiscal 2025. And scene. All right,

Starting point is 00:26:31 fools, that's Yes And. Let us know what you think about the Yes And game. Let us know what you think about our broken breakers and which broken breakers make the most sense for you, do check out when you want to hear more, if you want to hear more about dark clouds you can see through and all of the various Rule Breaker trades, please check out David Gardner's new book, Rule Breaker Investing. For those who want to learn the long-term benefits of compounding in high-growth, high-quality companies. It's a great place to start. Thanks to Rick and Carl for joining me today. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based

Starting point is 00:27:18 solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for information purposes only. To see our full advertising disclosure, please check out our show notes. Please also tune in tomorrow when Emily will have a bit more

Starting point is 00:27:40 Rule Breakery content for you. For Rick Minares, Carl Thiel, our engineer is Dan Boyd, and our producer is Anand Chakrabarlu. I'm Tim Byers. Fools, see you again soon Go on everyone

Motley Fool Hidden Gems Investing - 3 Broken Breakers Worth Buying

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