Thunderdome of Stocks

We're pitting the most recent graduates of The Motley Fool's Investor Development Program against one another in a stock-pitching battle. Four stocks enter. You vote for the winner.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Oct. 22, 2019.

Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool. Hey, Bro!

Robert Brokamp: Well, hello, Alison!

Southwick: In this week's episode we're joined by the latest crop of Motley Fool analysts -- our most recent graduates of the Investor Development Program. They're going to share their Foolish investing principles and pitch us some stocks. All that and more on this week's episode of Motley Fool Answers


Southwick: So, Bro, what's up?

Brokamp: Absolutely nothing, thank you very much! [Laughs] 

Southwick: Hey! Let's move on with the show, then!

Brokamp: Oh! [Laughs] 

Southwick: Somebody didn't do his homework. 

Brokamp: [Laughs] Oh, boy!

Southwick: That's OK. You work hard...

Brokamp: Thanks! Thanks, everybody!

Southwick: ... and that's what's up!

Brokamp: And that's what's up!

Southwick: So, Bro, we have a number of very special guests in the studio today. You are giving me the cheesiest of cheesy smiles right now...

Brokamp: Just to distract you. 

Southwick: ... just because you're so excited that we have the not-so-recent graduates, but most recent graduates of our IDP... I guess it's wait...

Brokamp: Program.

Southwick: I was going to say IDP Program, but isn't it Investor Development Program program?

Brokamp: Yes.

Southwick: Is what I would have ended up accidentally saying.

Brokamp: Or IDP. 

Southwick: Or IDP. Ugh. Anyway. We have a thing. It's called the Investor Development Program where we bring on... Well, actually, I'll ask you guys what it was, but first let's go around the table. We have Tom King, Auri Hughes, TJ Piggott... Did I say that right?

TJ Piggott: You got it. 

Southwick: It's not like Peugeot or Pujais? 

Piggott: No, I'm not French. And a lot of people think that, so...

Southwick: And Maria Gallagher. And so, welcome you guys! Thanks for coming in!

Graduates: Thanks for having us!

Southwick: All right! That sounded good!

Brokamp: It's a record. The most people we've had on Answers. Let's see how this goes. 

Southwick: Is it?

Brokamp: At one time? Sure!

Southwick: I don't know. I feel like when we did the Pumpkin Spice challenge, we had a lot of people in here.

Brokamp: Perhaps. 

Southwick: And that was hard-hitting investing stuff, so let's see if we can live up to that. Let's start with you, Tom. Where are you from and how did you find out about The Motley Fool?

Tom King: I'm from South Africa. I came here in July 2018. The Motley Fool was hiring and that's how I found out about it.

Brokamp: Were you reading about The Motley Fool in South Africa?

King: I had heard of The Motley Fool, but I didn't know it well. 

Southwick: What is your background? What did you want to be when you grew up?

King: I was an environmental scientist in South Africa. I wasn't an analyst.

Southwick: And then you were like, "I'm just going to move to America and I'm going to become a stock analyst?"

King: Yes. I wrote some exams before I made that move, which was probably wise. After I finished the exams, I was like, "Now I think I'm ready to go," and then I just came.

Brokamp: Just to be clear, "wrote some exams" is the way you all say, "you took your exams and passed them," right?

King: Yes. 

Brokamp: OK, got it. You were not a test creator. 

King: Yes. 

Southwick: All right, let's go next to Auri Hughes. Auri, where are you from and how did you find out about The Motley Fool?

Auri Hughes: I'm from Northern Virginia. I found out about The Motley Fool in college. I used to read the articles. Then within the last couple of years I really wanted to transition into stock research. I was sitting in the market and looking for a job. I came across The Motley Fool and applied and here I am. 

Southwick: And then TJ, how about you?

Piggott: I've been at The Fool, now, for almost five years. I found you guys because I was looking to transition from doing financial planning to more of the investment analysis. Before I came upstairs I was managing the trade desk for Motley Fool Wealth Management.

Southwick: And Maria?

Maria Gallagher: I found out about The Motley Fool when I was applying for jobs in my senior year of college. I started, here, as an intern last summer. Then I worked in the Asset Management Department doing marketing and shareholder experience for six or eight months. I then came up here for IDP. 

Southwick: I'm not sure who wants to tackle this question, but which one of you would like to tell me a little bit about what IDP was like. What was that experience like for you?

King: It was about six months. Basically we had about three hours of classes a week and then in between those classes we had various assignments and projects we were working on. The pace was reasonably brisk but it was not overwhelming, so it was very pleasant.

Southwick: And now what services do each of you work on? The idea is to educate people in Foolish investing and then send them off to work on different services that we provide. We can go around the table, here. Which ones do you work on?

King: I'm working on the Discovery services right now. 

Hughes: I'm working on Marijuana Masters.

Piggott: Extreme Opportunities.

Gallagher: Working on Stock Advisor and Rule Breakers. And we're now doing a rotational program, kind of like we're doctors. So we have a year and we'll each do all of these programs one at a time. Until this June we'll all be doing different rotations of analysis.

Southwick: That's cool!

Gallagher: Yes. 

Southwick: Are you guys enjoying it?

Graduates: Yes.

Gallagher: It's interesting.

Hughes: I'm enjoying it. I was a very conservative investor and I think the rotation puts you in programs that force you to look at stocks you may not have originally looked at on your own. I think it's great exposure.

Southwick: Is it hard to think about investing in marijuana as a stock if you're conservative?

Hughes: It's an adjustment. A lot of research and due diligence.

Southwick: Well, we brought you on here to each pitch a stock to our listeners. I haven't decided, yet, if I'm going to let our listeners vote on which stock they are most interested in. Does that seem fair?

Gallagher: Yes. 

Southwick: Just to up the competition?

King: Yes, why not. 

Southwick: I love it! So know that you are being judged and this basically is like writing an exam. That's not how you would use that. 

King: Writing an exam? That's how you'd say it. 

Southwick: Oh, OK. So each of you has come with a stock that you would like to talk about -- why you like it -- and then [you'll] also highlight a Foolish investing principle [that you've learned at IDP]. Obviously you can tackle more than one if you want, but I think each of you, at least one. Who goes first? Eeny, meeny, miny, moe, Catch a tiger by the toe. If he hollers, let him go. My mother told me to pick the very best one, and you are it! [pointing at Hughes]

Hughes: OK.

Southwick: I saw that coming. All right, Auri. 

Hughes: To introduce the stock I'm going to talk about, I tend to gravitate toward companies that I believe have one of the major competitive advantages or [many] of them; and those are network effects, switching costs, and tangible assets or cost advantages. 

The company I'm going to talk about today is Etsy (NASDAQ: ETSY), which I believe has tremendous network effects within its niche. Etsy is essentially a global marketplace for unique and creative goods. Think your local arts and crafts festival, but online and with global scale. 

And what this does is it connects creative entrepreneurs with consumers looking for items intended to be special, so most of these items you cannot find on Amazon, or anywhere else for that matter, so we see kind of protection from Amazon there. And these categories of items that are for sale are homeware, home furnishings, jewelry, personal accessories, apparel, craft supplies, paper party supplies, beauty and personal care -- anything these entrepreneurs want to create.

As of June 30th, 2019 Etsy had 42 million active buyers and two million active sellers on the platform, so we see this platform growing more and more valuable as more users come to it. It's the premier place for those homemade goods. It's also survived a direct threat from Amazon Handmade, which was [created] to compete with Etsy. Etsy was still able to thrive after Amazon launched this and still grow revenues.

How does Etsy make money? Well, they have what's called a "seller line business model." Essentially Etsy makes money when its sellers make money. The seller is looking at a $0.20 listing fee and then 5% of the transaction fee. That's what you'd call your "take rate." If I'm a seller and I sell an item on Etsy, Etsy takes 5% of the value of that item. 

They also provide tools for their sellers to make the platform more valuable. They have promoted listings [where] your store appears higher on search lists. They also offer discounted shipping labels with USPS and FedEx so you can get your packages out to your customers on time.

[As for] market opportunity, the market for special goods in its six core geographies is estimated to be $100 billion and if we compare that to Etsy's gross merchandise sales, it's $3.9 billion. We only see 3.9% market share, so we see a lot of upside to grow revenue within the future. 

If we look at the financials as of June 30th, 2019, we see 40% year over year revenue growth and 69% gross margins. This is a very profitable business, and they've increased free cash flow over 100% over the last year. It's a very clean balance sheet -- over $250 million of net cash on the balance sheet -- so this business is very safe. It's small and growing very profitable, which we don't see in some smaller businesses. This is one of my highest-conviction ideas. Thank you!

Southwick: That's adorable that you just said thank you. I use Etsy to buy lots of things, but I've never invested in it largely because it's not the same as Amazon, in my mind, where I think, "Oh, I need this daily thing. I'm going to go to Amazon." Etsy's where I go when I need to buy a present for someone, or something very specific. 

The other day I wanted to find a Baby Shark Nationals t-shirt. There's got to be someone out there who thought they'd jump on this trend and make a Baby Shark mashup with the Nationals. Well, it's a whole Nationals thing and we're going to the World Series! It's amazing!

Piggott: Yes, it's very exciting!

Southwick: And that's something that I would go to Etsy for, because it would be crafted by someone who really is a fan of the Nationals and gets it. But they didn't have anything, yet. 

Piggott: Oh, that's unfortunate!

Southwick: I am so bummed!

Brokamp: That sounds like a business opportunity, Alison.

Southwick: I know. We need to make some Baby Shark Nationals shirts now.

Hughes: You could be a seller on Etsy.

Brokamp: That's true.

Southwick: I could. 

Brokamp: It's very easy to do.

Gallagher: I just got customized mugs on Etsy.

Southwick: They're great!

Gallagher: My friend and her boyfriend moved in together and they like the TV show Friends, so I got them a mug that says, "The One Where [Elissa and Patrick] Move in Together]" like the title of Friends. They both loved it. It was an A+. It was really well received. 

Hughes: That's an item you'd never find on Amazon.

Southwick: No. It's so great! Even though I love Etsy and I've bought tons of things off of it, I guess it just doesn't seem as necessary and I worry that when the economy goes south -- someday it will, I know, but someday it will also come back.

Piggott: Not with cheap money. There's tons of cheap money out there. 

Southwick: Oh, no! TJ's our doomsday guy on the show. [I worry that] Etsy will also take a bigger hit than other retailers because it's something that's not a luxury, but it's a website that's nice to have.

Piggott: Right. 

Southwick: I think that's where I struggle with investing in Etsy. Does anyone else have any thoughts on investing in Etsy?

Brokamp: I feel the same way. I'm a very seasonal shopper on Etsy. As we've talked about on the show, my daughter sold stuff on Etsy and actually it is very easy to do, but it was a luxury item -- Slime -- so when the economy turns down, I think the Slime market will take a hit. 

Southwick: But I love Etsy as a consumer and so, yes, I probably need to look into them a little bit more and think more long term. 

Hughes: And I think that's something that worked and is kind of that reoccurring element. Usually people go only on those special occasions, so maybe that results in one purchase per year. I think that's something they're aiming to address, but I definitely see that concern.

King: So how do we convince people that they need customizable cactuses on a regular basis? 

Gallagher: Well, think about how often there are new holidays. It's almost Halloween, and then it's almost Thanksgiving, and then it's almost Christmas and then there's somebody's birthday and somebody's bridal shower and somebody's something. So there are consistent gift-giving opportunities if you look for them.

And also when you're thinking about the downturn, you can get a wedding dress on Etsy and wedding dresses from Kleinfeld's. Those are much more expensive, so there are opportunities within Etsy, where Etsy is actually cheaper than other higher-scale things, yet also still has that special thing. So if you are doing a wedding on a budget or a baby shower on a budget, Etsy might actually be a cheaper option for you than other potential stores you could go to.

Southwick: Thank you! That was great! Do you want to talk a bit more about what investing lesson [you learned]? When I look at Etsy, The Foolish investing principle that really stands out to me is...

Hughes: So maybe not so much in Etsy, but one of my principles that I did take away from IDP is management alignment. One of the things I look for now, that I wasn't doing prior to starting at The Fool, is high inside ownership. Looking to see if the executive owns a large stake in the company. He's going to be incentivized for the company to perform. He does well, you do well. Just that alignment there and making sure his incentives are aligned with investors. That's a big takeaway for me from IDP and I think that's one of our guiding principles at The Fool. 


Southwick: All right, TJ, are you ready to go? What's your stock?

Piggott: You mentioned the Nationals, right? So big shots of the Washington Nationals flew into NLCS and best of luck to them during the World Series. 

Southwick: Do you mean that?

Piggott: I do. 

Southwick: Because you're saying that as if you don't really mean that.

Brokamp: You know, he's an understated guy.

Hughes: Are you a Nationals fan?

Piggott: I am. I'm from Michigan originally. I kept most of my teams with the exception of baseball. I kind of split the difference, but I can't get on the Redskins train because their management and their ownership is not great, and how do you give up the Red Wings for the Caps? Yes, the Caps got one Stanley Cup, but the Red Wings have multiple. So it is what it is. 

Gallagher: Would you buy your son a Baby Shark National jersey from Alison? 

Piggott: Of course I would!

Gallagher: You have another customer. 

Piggott: Yes, they've got purchase No. 1 rate, right?

Southwick: Right?

Piggott: No. 2. Yes, I'll do it.

Southwick: Can you imagine why? It can be Daddy Shark and Baby Shark. And then it would be Nationals somehow?

Piggott: And then we could sing the song and drive my wife nuts. She'll go crazy!

Southwick: Well, she gets a Mommy Shark shirt. It's great for the whole family. 

Piggott: And Halloween's coming up, too, so you can recycle it.

Southwick: Absolutely!

Piggott: Let's do it!

Southwick: All right, we have to figure out how to make t-shirts fast. 

Piggott: So we've got the World Series getting ramped up. Football's in full effect. Hockey. Basketball. Everybody's out there. What pairs well with sports and a cold one? A cold one could be a beer. Soda. Kombucha. I'm not going to judge. Whatever you want. But you know what goes well with that? Wings. 

So the company I like a lot is called Wingstop (NASDAQ: WING). The ticker is [WING]. They have a market cap around $2.6 billion. But they aren't cheap, so I just want to preface that right now and say to all you value investors out there, just shut me off for the next three to five minutes and...

Southwick: Tap 30 seconds forward a few times. 

Piggott: Yes, just tap forward because on a trailing P/E multiple around 131x. Yeah, and then on a forward basis 112, so they're getting there, right? 

Hughes: That makes things a lot better!

Piggott: It's a lot better. Obviously, like I said, they specialize in wings. They have a great vision of being a top 10 global restaurant brand. As of midyear they had around 1,200 stores globally in 10 markets, so they're still really small. Their long-term goal is to have 3,000 domestic and 3,000 international, so a good runway for growth for these guys. Unit sales have grown at 15% compound annual growth rate since 2013. So pretty respectable numbers there. 

What's also great is the fact that in the 15 years they've had consecutive same-store sales growth, so no slowdown, at all, for the past 15 years. I think that's part of the reason why they trade at a high premium, because people are bidding them up because they believe in the franchise growth, here. 

I said franchise, but also it's a franchise business, so low capex, they get a nice revenue take from those stores, so it's beautiful in that regard. They do pay a baby dividend while you wait, so around 0.5% on an annual basis. Not terrible, but not great in this environment. They are building brand awareness by a national TV advertisement. They're really ramping that up. They've increased the contribution to that pool. They went from 3% to 4% this year and they foresee they'll continue that as they try to roll out the stores.

The focus is big on digitizing all the customer experience via their new mobile app, which is actually translating into about 5% higher average check size. If you do that over multiple sales, that's a pretty significant add. In addition to that they're trying to improve their margins by having "order in a kiosk" similar to what Panera has. Has anybody used Panera? So they're doing that. 

They're doing delivery only in locations -- think of ghost kitchens -- so they're really cutting down on the cost of labor and benefits there. And also doing pickup, trying to drive the margin expansion. Delivery is a big part of the story, too. Also a delivery roll out just this year. They partnered up with DoorDash, so they're getting new exposure to new customers that never experienced Wingstop. On delivery orders, eight out of 10 are new customers that never had Wingstop. So a nice driver there, as well. Their forecasted goal is roughly 80% of stores will have delivery by the end of 2019. 

So I like where they're going. I like the growth there. That's it!

Southwick: What do you think of their wings?

Piggott: They're delicious!

Southwick: Are they? 

Piggott: They're really good for a takeout. Everything is trending more to the fast casual. People are eating out less and taking stuff home. They're really playing on that, so their footprint is really small. I think it's roughly around 2,000 square feet max, so you can eat there, but generally speaking most people do take out. And now delivery -- you compound that. Plus they're also working up [...] in their markets so they get as fast a delivery time as possible. 

Southwick: I've never heard of this company. Have you guys?

Hughes: I have once.

Brokamp: I haven't either. 

Hughes: It's pretty good.

Southwick: It's funny to me, because I'm not really big on wings, so the idea of "Wings! We've got wings!" For some people it may make their heart go pitter-patter. I mean like bonchon. I'll eat a lot of bonchon. 

Hughes: Bonchon is delicious! There's one opening up by my house and I'm so excited.

Southwick: Are you like South Route 1? Down that way?

Hughes: In Alexandria? Yes, I'm just waiting. 

Gallagher: Auri's camped out outside. He's got the iPhone on and he's sitting there waiting for bonchons. 

Southwick: It's funny how you're talking to me about wings at Wingstop. I guess, OK, investing in a wings company, but I've never had their wings. Whereas if it's like, "Oh, yeah, I think we should invest in bonchon," I'm like, "Here, take my money! I would like to invest all of my money in bonchon." It's just funny that if you try something and it's like, "Oh, I love this," then you really want to see more locations. You want a location right at your house and you really want to see it grow. 

What about opportunities beyond wings? Is it like, "They need to figure out what to offer more than wings," or is it like, "no, they can go and become a bajillion-dollar company and just serve wings?"

Piggott: They've addressed that in the past and they said, "Look, we want to do something really well. This is our niche. This is where we want to dominate." And they're doing a really good job of it. I don't see them branching out. If anything, they might offer different varieties of wings, or different kinds of specials with the wings. For example, a recent special they had was instead of just having the wing or the drum, there was actually the whole wing. That was their new idea.

Brokamp: Feathers and all. 

Piggott: No feathers. Sans the feathers. But also they roll out with specialty sauces for a limited time only. They try to play to that. They also do fries in small sizes, but not really. They're just a wing company. Buffalo Wild Wings branched out, but also...

Southwick: It's wings.

Piggott: It's wings. 

Brokamp: It's wings. 

Piggott: It's what people want.

Southwick: It's what people want. It's maybe not what they need, but it's what they want.

Piggott: Everything in moderation.

Southwick: Everything in moderation. There's room for wings. And what is your Foolish investing principle that you want to highlight today?

Piggott: I think it's one that's important, especially when we get to the top of the market and things might get a little dicey. That's the fact that we're long-term investors, here, at The Fool, to make sure that you keep an eye on what your plan is and why you did what you've done already, and don't let the markets gyrate your long-term goals. 

Southwick: Awesome! All right, Maria, are you ready?

Gallagher: Yes. 

Southwick: What's your stock today?

Gallagher: I have a question. If we win, what do we win? 

Piggott: World Series Tickets. 

Brokamp: Wings. 

Southwick: A Baby Shark t-shirt and some wings. 

Gallagher: I don't want either of those things. I do want to win, though. My stock, today, is Planet Fitness (NYSE: PLNT). For those who aren't familiar, Planet Fitness is a franchise gym community with over 1,800 locations throughout the U.S. and internationally. About 96% of those locations are franchised and about 4% are corporate owned. It's a pretty distinct brand. 

They're known for being the judgment-free zone. That's their slogan. They had a great commercial where there was a man [...] things and put them down and walked out. I don't know if anyone remembers that commercial, but I loved it. 

The main way they make money is they have three different revenue streams. Because the majority is franchised, the first is royalties. They get 7% of the money that the franchisees make. The second revenue stream is every franchisee is required to buy the equipment from Planet Fitness, so they have to buy it and then replace it every five to seven years. That's a secondary revenue stream. If there's a slowdown in store openings, that will still generate cash for the company. And the third revenue stream is they do have that 4% of corporate-owned stores that they own and operate. 

I think their competitive position is they're low cost, high value. They [charge] $10 a month for their regular membership and then $22 a month for their Black Card membership, which is increasing in popularity. Their Black Card membership is now over 60% of their customers, so it's at that low price point but you get a good gym. 

It's big. You have all of the things you need and then it is at that lower price point so if you don't go to the gym that month and you say, "Oh, well, I'll pay for next month and maybe I'll go," if it was a super-expensive gym you might be like, "Well, I didn't go one month. I can't afford to pay for a place I'm not going to." It doesn't have that problem at Planet Fitness. 

And then the second thing that I really like about it is their strong brand. They're known as the judgment-free zone. They're known for their bright purple and yellow equipment. It's a non-intimidating environment, so it's for people who have never been to a gym before and just want to get healthy because it's good for you. They don't necessarily want to be exercise fiends. They just want to run on the treadmill because their doctor told them they had to and then go home and take a nap. It doesn't have to be an intense lifestyle choice. And then the franchise model, like TJ said before, is a little less risky and it's a good model for a business to have. 

Some things I want to look for in their next conference call are things I've noticed recently that I think are exciting. Planet Fitness and Kohl's are doing a little agreement.

Southwick: The department store?

Gallagher: Yes, the department store. There's going to be five Planet Fitness-Kohl's mishmashes by the end of 2019, so it will be a Kohl's store with a Planet Fitness attached to it. Most of the people who go to Planet Fitness will combine it with other activities. In a time when bricks and mortar is hurting, people will go out of their house to go to the gym, so they're really attractive to the REITs and the people who are renting out the spaces of the landlords. Planet Fitness is a tenant that a lot of people want because it consistently has foot traffic. In a time where bricks and mortar is hurting, that's really attractive for them. I'm excited to see how that works out for them. 

They also did something over the summer called the Teen Summer Challenge where any teenager between the ages of 14 and 18 was able to join Planet Fitness for free. They actually had over 900,000 teens sign up for the Teen Summer Challenge. From their next conference call hopefully we'll get some color on how many people then converted and some more metrics around that, but I think that's exciting. They have an app opening. I'm excited about that.

The last thing I wanted to highlight is I think Planet Fitness is really unique because they have a pretty big total addressable market in the sense of when you think about other fitness companies -- somebody like Peloton; the people who can afford Peloton bikes is a pretty niche part of the population.

Planet Fitness isn't looking to compete for that 20% of the Americans that already go to the gym. They're not trying to compete with Peloton and SoulCycle and all those other highbrow boutique fitness studios. Planet Fitness is looking in the exact opposite direction with the 80% of the population who just doesn't go to the gym at all and seeing that as their opportunity, which I think is pretty unique. 

The Global Wellness Institute just came out with their yearly report and the global physical activity economy was $828 billion in 2018, and $109 billion of that was fitness spending. So there's a pretty big addressable market. That statistic is global, so it's obviously smaller than that, but for people who are spending money in fitness, this is a pretty big opportunity. 

The average person in America spends $1,345 a year on some sort of fitness-related activity, which is much higher than the global average. I thought that was also interesting, because that is lower than the price point that most of those boutique fitness studios allow and that's all fitness, so that includes new sneakers and new sports team leagues that you join. I think Planet Fitness is a really attractive opportunity. Thank you! The end. Vote Planet Fitness!

Southwick: A vote for Planet Fitness is a vote for health unlike "wings." 

Piggott: You have some wings and then you go to Planet Fitness to reduce the [calories]. The pizza.

Gallagher: Planet Fitness does free pizza...

Piggott: On Tuesdays. 

Gallagher: Free pizza and bagels. They're going for the 80% of the population that does not go to the gym.

Hughes: Put those calories right back. How about Wing Wednesday at Planet Fitness?

Brokamp: There you go!

Gallagher: Way to do it!

Hughes: It's a partnership. 

Southwick: All of the machines are just covered in sauce. 

Rick Engdahl: Oh, the habanero!

Southwick: I think with gyms it's so tough because we all have really good intentions in January. Then comes January 15th and we're like, "Never mind." How do they do it when other gyms have failed in the past? The industries of like, "Well, you really should be doing this, even if we don't always want to."

Gallagher: First of all there's that low price point. $10 a month is pretty affordable for a lot of people. Having that kind of motivation of, "Well, I am paying $10. It's not free, so I can't just ignore it. Like I am paying some money for it, but it's not so much money that if I don't go one month I am completely off the bandwagon." And I think because they have that non-intimidating environment.

I go to SoulCycle -- I love SoulCycle! -- but SoulCycle is intimidating. Like I couldn't go to SoulCycle when I had just started working out because I knew I wouldn't be able to keep up and it's a very hard environment if you're new to fitness. I started going to Planet Fitness in high school and it was just like everyone looked like everyone. It was such a range of people who go there. 

I think their environment is a really good advantage for them in the fact that they have free personal training so people can teach you how to use the machines if you've never stepped foot into a gym before. It's a really welcoming environment and so I think that. And as people realize more and more how important it is just to move your body in any capacity. You don't have to be a total gym rat that goes six times a week for seven hours. Just going three times a week for a half-hour is good for your heart. As people find that more and more important, spending $10 a month and just not going super frequently I think is a model that most gyms don't utilize. I think that's their unique story.

Southwick: Thanks! And what is your Foolish investing principle that you want to highlight today?

Gallagher: My Foolish investing principle -- and I touched on this a little bit -- is I think a lot about the total addressable market, thinking about where a company's money is coming from if it's a really cool business idea. If there's no need for it or no desire for it, it just isn't going to be profitable. I hadn't really thought about that or really quantified an addressable market other than being like, "It sounds big." 

But thinking about going through census data and going through statistics and figuring out how many people can this company potentially serve and how is it going to serve them. What is their path to growth? That's something I learned a lot in IDP. Learning just how to think it through in a logical manner was really exciting for me. I liked it a lot. I like numbers. 

Southwick: Awesome! Thank you! All right, Tom. Do you want to bring us home?

King: Yeah. I just want to start off by warning the growth investors, here, that the company I'm about to pitch is actually profitable, so if you're not interested in profits, then...

Piggott: Wingstop is, too.

King: And they've heard me rhapsodize about this company so many times, so if you hear me choking you know it's because one of them has clasped their hands around my throat. 

This is Constellation Software (TSX: CSU). It is a Canadian-based business. Basically it acquires small software companies that generally have a small number of employees -- not more than 150 or so. These software companies it acquires are what they call "vertical market software operators."

They create software that provides a solution in a unique niche vertical, so something like the software which schedules trains in a transit system, for example. That kind of technology is very sticky in the sense that the users of that technology, once you trained up on how to use it, is integrated into your system -- integrated with the hardware, etc. -- and you're not going to want to change it unless you really have to. So it's very sticky in that sense.

Obviously software is an asset-light business, so Constellation, as an owner of all these asset-light businesses generates a lot of cash from a pretty small amount of investment. That's basically the business model of how it makes money. It's got very high returns on invested capital, so cash that it spins off from the money that it invests is very high. That ranges between 24% and 38% over the past 10 years, so it's a very impressive number. 

I have a lot of respect for the management team, there. It's really one of those companies where you read the communication from the executives and you genuinely feel like they're trying to help you understand the business. They're not trying to promote it or sell it or make themselves look good. They genuinely tell you everything in a true and honest way and I really appreciate that. It saves you a lot of stress in having to second-guess them all the time. I'll stop there. I could go on and say a lot more things, but that is my recommendation.

Southwick: Are companies like this what you gravitate toward? Tech companies? For me, I shop at Etsy. I eat food and wings, and I know what it's like to go to a gym, but I don't have any understanding of a software company or a tech company. Is this a space where you're like, "Yes, I've got this," or is it like, "I know a little bit, but I really like this company."

King: No, I don't consider myself a tech guy at all. This is a business which earns very high returns on invested capital and whether this was a tech business or a steelmaking business, I would still be interested. It just happens to be in tech and that's all there is to it.

Southwick: And you said it's Canadian?

King: It's headquartered in Canada. 

Southwick: Canadia?

King: Canadia. Canada, but most of the businesses it owns are actually in the U.S.

Southwick: So it trades on...

King: It trades on the Toronto Stock Exchange. It is on the Nasdaq on the over-the-counter market.

Piggott: They poached the great tech from the United States and they took it over to Canada.

King: It's fair.

Piggott: It's fair. 

Hughes: TJ, what do you call Canada?

Piggott: Oh, no, no! Hey, I love Canadians! I have family that are Canadians. They're great, great people!

Southwick: We'll leave it there. I don't need to get any hate mail. What is the investing principle that you want to bring today?

King: I just wanted to highlight a return on invested capital is something you should really focus on as investors. That we should focus on. It basically answers the question of what "bang am I getting for my buck?" What am I spending and what am I getting in return? It captures a lot of important information in a single metric and it's very hard to manipulate if calculated correctly. 

I think it's a number that tends to get ignored at certain times in the market -- when it's particularly bullish like now -- but it's my favorite number.

Southwick: It's your favorite number. So there we have it. We have Etsy. Etsy is [ETSY]. Is that their ticker?

Hughes: Yes.

Southwick: Wingstop. I want it to be [WING], but it probably isn't. 

Piggott: It is. 

Southwick: Oh, that's so great! And then Planet Fitness' ticker is...

Gallagher: [PLNT].

Southwick: And we have Constellation Software. Their ticker on the Toronto exchange is...

King: [CSU].

Southwick: [CSU]. So there we go! Thank you guys so much for bringing these stocks and these Foolish investing principles today! Now it's your turn, listeners, to vote for the stock that you think was the best. I don't know. Are they voting on which stock they want to invest in or which pitch was the best? How do you want to decide that?

Brokamp: I would say which pitch was the best.

Southwick: OK, vote for the best pitch. Or the best stock. I don't care. Nothing we do here is scientific. 

Engdahl: Just vote for the best!

Southwick: Just vote for the best! I'm going to post something on our Twitter account and then I'll also post something to The Motley Fool Podcast group on Facebook. So keep an eye out for your chance to vote on the winner and again, they don't win anything other than bragging rights, but I think that's enough.

Brokamp: That's enough. 

Southwick: I think that's enough for them. Also, if you're looking for more stock ideas and recommendations, you can check out our Stock Advisor service. You'll get stock recommendations from David and Tom Gardner every month, Best Buys Now, and a whole lot more. Just go to and we've got a special 50% discount for our listeners. Again, check it out at Do you mind sticking around and having even more competition by playing a game?

Gallagher: Yeah!

Hughes: Let's do it!

King: Yup!


Southwick: Here at The Motley Fool we have a Chief Collaboration Officer named Todd Etter and he creates some pretty cool games for us to play. This is one that I stole from him that he created for FoolFest, so if anyone was at FoolFest and played this, you're going to have a leg up. 

How this works is it's kind of like puns or Dad jokes. I'm going to give you a clue and then you are going to come up with the name of a company, but with one letter changed. For example, if I say, "What electronics chain is known for their blue-shirted employees and their contest to see who has the best rear in the U.K.," the answer is Best Bum, because it is Best Buy, but with one letter changed. 

Gallagher: Because I got Best Buy.

Southwick: So Best Bum. 

King: Todd's games -- always fiendishly difficult.

Southwick: They are fiendishly difficult. 

Hughes: I'm going to do terrible.

Southwick: It's OK. And I can give you clues, too. If you guys don't get it immediately, I can tell you how many letters. Most of these are two words. Are you ready? Here we go. Previously famous for telegrams, what company does electronic wire transfers of the daily... Gong! All right, TJ. 

Piggott: Western Union?

Southwick: But what is the fake company that does wire transfers of the [...], shallots and scallions? What is the company with one letter changed? 

Piggott: I don't know! 

Gallagher: Western Onion.

Southwick: There we go!

Gallagher: I have a pun-thinking brain. 

Piggott: Do you like blooming onions, by the way? Just a quick aside. Blooming onion, yes or no?

Gallagher: I never had one of those.

Southwick: How come you never had one of those? 

Piggott: Oh, no!

Gallagher: What is it?

Southwick: It's basically a massive onion ring, but it's an onion, also.

Hughes: You know, deep fried. 

Southwick: Oh, you know it's deep fried. 

Hughes: Amen!

Gallagher: I can't say I've ever had one, but it sounds like I would like it. 

Brokamp: They have them at Planet Fitness. 

Gallagher: I'm sure they do!

Southwick: The next one. What used auto retailer will help you pave your driveway?

Brokamp: I can think of that.

Piggott: I know the business. I can't...

Southwick: You've got to change one letter. What used auto retailer will help you pave your driveway? What substance do you use to help pave a driveway? You've got gravel and tar. 

King: Tarmac. 

Gallagher: Cement. Gong!

Southwick: There we go!

King: Tarmac?

Southwick: Close.

Piggott: As in CarMax.

Hughes: TarMax.

Southwick: There you go!

Gallagher: I thought it was CarMax but I thought CarMax was two words. 

Southwick: No it's not. It's smushed together. 

Gallagher: That's confusing!

Piggott: This is a clever game!

Southwick: I know. This is why we rely on Todd. I'm going to give that one to you, Auri. What global aerospace and defense company develops giant, 10-foot fish with a spear-like snout and a long, rigid dorsal fin?

Piggott: Boeing

Southwick: You forgot to buzz in, but no. We're going for the fictitious company. 

Piggott: OK. 

Southwick: That is one letter off from a real company. Gong!

Hughes: Lockheed Marlin?

Southwick: Yes!

Piggott: There we go!

Hughes: That is good!

Southwick: That was a good one! What company operates theme parks in Florida and California where people show off their paintball wound marks? What kind of a mark do you get after a paintball hits you?

King: A bruise?

Southwick: What kind?

Piggott: A welt? Oh, oh... Gong! Oh, oh! Welt Disney!

Southwick: So Auri buzzed in first. 

Gallagher: I just yelled it. 

Southwick: You just yelled it.

Gallagher: That's how you win competitions in my family. It's whoever is loudest. 

Southwick: The next one. This is one word. What pharmaceutical giant specializes in showing compassion and forgiveness? One word, five letters. Gong!

Piggott: Nfizer. No? Because of Pfizer

Southwick: Oh, I said the "fz" was like one [letter].

Piggott: Then never mind. 

Gallagher: Can you give the hint again? 

Southwick: So it's five letters. What pharmaceutical giant specializes in showing compassion and forgiveness?

Brokamp: It's the last letter that's changed. 

King: How do you know the answers, Bro?

Brokamp: Because I'm playing along, but not really playing. 

Gallagher: Do you want to hit my buzzer so you can get the point?

Brokamp: Well, yeah! Mercy.

Southwick: Yes! Merck

Piggott: Oh, yeah!

Southwick: Good job, Bro!

Piggott: Of course!

Gallagher: And because it's my buzzer do I get the point?

Brokamp: Sure, why not? 

Southwick: Known for film animation, what production company recently created the smashes Time After Time and Spoon and Me? Gong!

King: Well, I know the company must be Pixar. 

Southwick: Nope.

Hughes: I thought the company was Pixar.

Southwick: The other one.

Hughes: DreamWorks?

Southwick: OK. They made the film Time After Time and Spoon and Me? Gong!

Gallagher: Steamworks? Gong!

Southwick: There we go!

Piggott: Nice! Well done!

Gallagher: He just comes in with the company and I can turn it into the joke. 

Hughes: Teamwork.

Southwick: This is one word, five letters. What multinational delivery services company will send you a bovine that is obviously not hungry?

Gallagher: What's a bovine?

Piggott: A cow. 

Southwick: What? Oh, Tom wants to hit it. Gong!

King: My contribution is FedEx. I can't get it into a pun.

Pigott: A cow. 

Southwick: Bro thinks he knows it.

Gallagher: The pun?

Brokamp: Yes.

Gallagher: FedEx the cow? Gong!

Brokamp: FedOx.

Southwick: There we go! Good job, Bro! Two more. I wonder if the listeners at home are screaming these at whatever their listening device is.

Gallagher: [...] You don't know anything. 

Southwick: It's a setup!

Engdahl: So I'll edit it so that it sounds like you get them right away. 

Piggott: There's a speed dial in the [...].

Gallagher: Perfect! Thank you!

Southwick: The last one. What designer and manufacturer of airplanes and rockets specializes in jeering during sports events?

Gallagher: Gong! Joeing. 

Southwick: Hey! Very nice!

Piggott: Well done!

Gallagher: That one was a guess. 

Engdahl: I'm going to edit that one so it seems it takes longer. 

Gallagher: No! 

Southwick: We've got to get the listeners at home a little time to ponder it. What company makes routers and other networking equipment for dance clubs?

Hughes: Disco. Gong!

Southwick: There we go! Nice!

King: Good work!

Southwick: Disco Systems. That's right!

Engdahl: It took a little warming up.

Southwick: Yes, you got the hang of it. A typical Todd game where at first you hear the directions you're like, "What?" And then eventually by the end of it, you're like, "Oh, I got it!" So thanks for Todd Etter for letting me steal this game! And thanks to you guys for playing! And in true form, I failed to keep track of who got the most answers. 

Hughes: I had three. 

Gallagher: I had three and if you count that I only rang my buzzer twice I had five.

Southwick: Well, I think in the end we're all winners. 

Brokamp: That's right. Everyone gets a medal!

King: That's a nice way to put it!

Southwick: You guys, thank you so much for joining us today! I really appreciate you coming and this was a lot of fun!

Gallagher: Thanks for having us!

Hughes: Thank you for having us!

Piggott: Great time! Thank you!

Gallagher: Bye!

Southwick: Go Nats!


Southwick: The show is edited developmentally by Rick Engdahl. Our email is Don't forget to go to Twitter and find us on AnswersPodcast or join The Motley Fool Podcast Facebook group to vote for the best -- however you want to define it -- to vote for the best stock or stock pitch or whatever. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Alison Southwick owns shares of Amazon. Auri Hughes owns shares of Facebook. Maria Gallagher has no position in any of the stocks mentioned. Rick Engdahl owns shares of Amazon, Etsy, and Facebook. Robert Brokamp, CFP owns shares of Facebook. The Motley Fool owns shares of and recommends Amazon, Constellation Software, Etsy, Facebook, FedEx, Planet Fitness, and Twitter. The Motley Fool recommends CarMax. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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