Brian and I have some exciting news to share we are teaming up with commonstock to put
real money behind our favorite stocks and we're gonna show you the step-by-step process of
how we would build a brand new stock portfolio from scratch starting in 2022. each week we're
going to be putting $250 of our own money into our favorite stock ideas best of all
you'll be able to track our portfolio and follow our results in real-time for free and to kick
things off we'll be letting you know what our first investment will be today so what stock are
we buying we'll explain everything next my name is Brian Feroldi and my name is Brian Stoffel
thanks to commonstock for sponsoring today's video all right Brian we're gonna be building a
brand new portfolio from scratch what is the very first step well you'd think that the first step
is just to go out and get started but actually we believe that forming an investor policy statement
beforehand is gonna save a lot of headaches down the road an investor policy statement is a simple
document that spells out the guidelines that we will use to help us achieve our investing goals
that includes things like our objective time horizon guidelines expectations and rules about
when we're going to sell so let's start at the beginning our key objective is long-term growth
in this portfolio and specifically we want that growth to outpace the s p 500 and while we're
doing it we want to be able to simulate what building a new portfolio would be like for a
brand new investor why do we insist in beating the s p 500 we're doing extra work as stock
pickers to find and buy these stocks we want to be compensated for that extra work with market
beating returns otherwise we're spending extra energy to end up less wealthy but next let's
focus on time horizon when we're investing we're thinking about decades not days or weeks or even
months and this is money that we won't need at any point in the near future it is for our consumption
much later down the road so how is this going to work each week we're going to be investing $250
into our favorite stock idea of the week this week we're going to be buying Brian Stoffel's
top stock next week we're gonna be buying my top stock and you should expect videos from us
on these top stocks every Saturday now that being said what are we actually going to be investing
in well we are going to be squarely focused on high quality high growth companies these
will be companies that have scored well on brian ferrari's quality checklist or have scored well
on my anti-fragile framework now since we're going to be primarily investing in high-growth companies
we need to cover valuation that's right brian and that's something that we get a lot of questions
about on this channel when it comes to valuation we don't take the same approach for myself i don't
focus on valuation at all and sometimes that can be frustrating for other investors personally
i always look at valuation myself however when the opportunity is huge i de-emphasize valuation
when the opportunity is more limited i emphasize valuation we're going to share the valuation that
we're paying for these stocks at any given time but since our time horizon is measured in decades
we're not going to be emphasizing valuation now why do we take that approach well this
research by morgan stanley is a key reason why one thing that this chart shows is that the key
mover of stock market returns over a one year time frame is in fact valuation or multiples however
when you look at what drives stock prices over long periods of time it's actually growth in sales
and profits that's the main growth driver and valuation is not a major factor in the long term
next let's turn to expectations because setting these might be one of the most important parts to
controlling our emotional health with regards to this portfolio we expect to beat the market over
rolling five-year periods however we expect wild results in the meantime that's right we will not
be surprised if we are wrong a lot specifically we won't be surprised if about 40% of our picks
actually lose money and about 60% lose to the market that means that we only expect about 40%
of our stock picks to beat the market and we only believe that about 1 in 10 of our stock picks will
actually deliver huge returns so why do we think that are we pulling these numbers out of thin air
no some research has been done by jpmorgan which found when you looked at the russell 3000 over
a 40-year time frame 42 of the stocks actually lost money about 66% of stocks or about two-thirds
of stocks underperform the index over time but how can that be the case two-thirds of the stocks are
underperforming the average it's because a small number of stocks about 10 percent were clarified
as mega winners in other words they increased in value at least 500% now we believe that our
investing checklist will help us to improve upon these percentages however it's just a fact of
investing that you should expect that a majority of your stock picks will actually underperform the
index that's okay so long as you get your hands on a few mega winners that literally drive the
portfolio's returns and that is par for the course when it comes to investing this research done by
jp morgan and facts that shows that a few of the stocks become mega winners and drive the vast
majority of returns so those are our expectations for the portfolio but we also need to cover
volatility we need to prepare ourselves for huge drawdowns both in the individual stocks
that we make investments in and our portfolio as a whole again we're okay with that because
we have such a long time frame we also expect that our portfolio will probably be at all time
highs only about 5 to 10 percent of the time the rest of the time it will be under its all-time
high that is how the stock market actually works finally and we cannot emphasize this enough
we expect to be surprised we live in a world of black swans things come along that we never even
thought of and can significantly affect not only our portfolios but our lives we are prepared to
be surprised by the unexpected finally we need to talk about when we're going to sell by and large
we plan to buy and hold these companies for a long period of time and we just expect that we're going
to be right sometimes and wrong others that said there's going to be two instances where we will
consider selling shares of a company the first relatively simple is if the company that we own
gets acquired the second is when news comes out that busts our thesis for investing in the company
in the first place aside from that we plan on holding our shares that we buy indefinitely
all right so you're on board you want to follow along you're excited to go on this journey with us
well how do you follow along we're opening up a brand new brokerage account and linking it to our
profiles on common stock you can head on over to common stock and follow us there and you'll
be able to see our portfolio transactions in real time if that interests you click the link that you
see in the video description all right brian with that out of the way what is the very first stock
that we're purchasing for this new portfolio the first stock that we're buying for this
portfolio is axon enterprise an 8.7 billion dollar company that trades under the ticker symbol axon
axon's mission statement is to protect life this is one of the best mission statements we've ever
seen i agree brian but how do they actually do that well primarily for most of their history
they did it by manufacturing taser stun guns non-lethal options that police forces could use
primarily in the united states however over the last 10 years they've expanded
dramatically their business now includes acts on body cameras but what's really interesting
are the software solutions that they are making with this footage for instance evidence.com
is a repository to store and search all of that footage axon records allows for paperwork to be
autofilled and gets police out in the community instead of behind their desk and axon dispatch
helps municipalities respond to crises in a more safe manner axon makes its money from both
the sale of hardware such as the stun guns and the body cameras as well as from those software
solutions that's right and they have a great track record of increasing customer spend by about 19
each year and when you consider that these are largely municipalities that is a solid
track record because they're primarily targeting police forces they actually don't have to spend
that much money on sales and marketing to acquire new customers and because these police forces will
be around during boom or bus times we believe that this is a recession-proof business what's
more because the company's products are primarily consumable or subscription-based the majority of
this company's revenue is recurring now this chart right here shows you that growth has been strong
across the board the gray section is the taser section which is the primary one the light yellow
those are the cameras the one that we're really focused on is the high margin software revenue
growth at the top and it's been growing at a 44 clip over the last five years turning to moat we
think that axon benefits from the network effect specifically on the software side police forces
can use the software to share information with each other therefore the more people that join
the network the more powerful the software becomes for everybody else but the real moat is provided
by switching costs once a police department or any other organization gets all of their footage
on one interface they would be loath to switch to another not only would it be a headache to
retrain a police force but you'd also run the risk of losing vital evidence in the process we
also believe that the names taser and axon do have some brand value within their customer base and if
you add all of that together we have no doubt that the moat around this company is rapidly expanding
taking a look at the company's financials as we already showed this company's revenue growth has
been high and growing for many years what's also impressive given that this is primarily still
a manufacturing company is that gross margins are above 60% that's because they make a fair
amount of profit from those taser consumable cartridges and while the company is losing
money on a gaap basis that's mostly due to high stock based compensation expenses that's right
if we shift the view to free cash flow we can see that the company does have a history of producing
positive free cash flows and axon has always maintained a pristine balance sheet currently
with more than $550 million in cash and zero debt but because of that stock-based compensation which
we'll get to in a second returns on capital are currently negative axon was founded by rick smith
who is still the ceo to this day he also gets solid if not stellar reviews from his employees
getting a 90 approval rating and the company as a whole getting 3.9 out of four stars now when
we look at insider ownership which is currently at about 6.9 percent of the company there's a caveat
to note a number of years ago smith gave up any and all salary associated with running the company
and in return if axon met certain goals he would be rewarded in the form of stock-based
compensation they reached many of those goals last year which is why the company was losing
money on a gaap basis this is a trade-off that investors need to be aware of if they're going
to invest in the company turning to potential axon clearly has demonstrated the ability to roll out
new products and new services that open up new revenue opportunities we think this company has
a lot of optionality built into it yeah brian it's also worth noting that in the past year
they've announced that they believe the consumer market is their biggest growth driver which might
be surprising and this right here is their bolt two it is a stun gun that is designed for use
by normal citizens and we'll have to wait and see if that really catches on now the combination of
high gross margin and the fact that the company is currently not profitable give us confidence that
this company has a lot of operating leverage ahead of it and by highlighting the potential of that
consumer market the addressable market recently grew markedly to 52 billion dollars of which axon
has captured less than two percent and while the company has made some acquisitions in its history
most of the products and services that it's rolled out were homegrown and hence revenue growth has
been organic now all that is nice and good but how is axon performing as an investment the answer is
really good since it's ipo it has returned over 20,000% for investors and over the past five years
it's been more than a five bagger while the s p 500 is only up 106 percent company
has also established a track record of exceeding expectations on the bottom line
and while we're happy that the company doesn't have any debt to pay down it's unsurprising that
they're not returning cash to shareholders in the form of buybacks or dividends at the moment
so what risks should investor keep an eye on first and foremost is dilution as mentioned
above this company has doled out a lot of stock based compensation to its ceo and that means
the share count has grown higher over time beyond that the other risk to be aware of is that this is
a richly valued stock it is currently trading hands at over a hundred times trailing free cash
flow and in no world is that considered cheap so how can we tell if our investing thesis for this
company is on track first and foremost we're going to be watching cloud-based revenue this
is a category of revenue for the company that we think has lots of potential and also increases
switching costs we want to see this number continually move higher each quarter second keep
an eye on something that management calls future contracted revenue if you're familiar with the
software as a service space this is very similar to bookings or remaining performance obligations
it lets you know about big contracts the company has signed that will be bringing in money down the
road third keep an eye on growth and sales to non-core clients this is any sales that happen
outside of police forces axon has devoted resources to growing in these key areas and
we want to see that the company is successfully doing so so how did exxon score on our investing
checklists the answer there is excellent on my investing checklist this company got a score of an
80 which is a very high number and on my checklist it got a 12 which is in the anti-fragile category
it's worth stating that if glass door ratings go up and insider ownership goes up it could
be as high as a 14. so there you have it we're going to be making our first investment into axon
enterprises in the next couple of days if you want to follow along on portfolio click the link to see
in your screen and let us know what you think of this video if you like it give us the thumbs up
and hit the subscribe button we hope that you'll enjoy following along as we build this brand new
portfolio from scratch we're incredibly excited and we can't wait to get started brian's out