Hidden Gems

Motley Fool Hidden Gems Review

Hidden Gems is the Motley Fool’s small-cap investing newsletter, started in 2004. From their website, they “specialize in finding and recommending undervalued small-cap companies that offer capital gains potential… We prefer to hold stocks for at least three years, and, like Warren Buffett, our ideal holding period is forever.”

They define small cap stocks as those under a 2 billion dollar market cap. Some of their successful recommendations will eventually grow beyond small cap status, but that does not mean they need to sell the stock at that point. They even allow themselves an exemption to recommend stocks that are over $2 billion if they feel it’s a good opportunity.

Hidden Gems started out as a monthly recommendation service, but in 2009, they converted into a real money portfolio recommendation service. However that model of the service proved to be rather confusing, and less than successful, and in August of 2013, they converted the service back to a monthly recommendation service. For more detail on that change, see my update here.

The price of a subscription includes the following:

  • 2 stock recommendations each month (usually the 4th Thursday of each month)
  • An additional 10 Best Buys each month from their overall list of active recommendations
  • A list of 5 Core investment recommendations, which they consider their strongest overall picks
  • A monthly newsletter (including a print copy mailed to your home)
  • Weekly email updates
  • Access to the members-only Hidden Gems website and forums.

Motley Fool Hidden Gems is a long-term, buy and hold long-only service with the intention of holding stocks for at least 3 years.

Seth Jayson and Andy Cross are the lead advisors.

Hidden Gems Performance

You can view up to date Hidden Gems performance, along with all other Motley Fool services, here. As of this writing, the Total Average Returns for Hidden Gems stocks since 2004 is 60% vs. 35% for the S&P in the same time frame.  These are strong results, but unlike some of their other investment newsletters (e.g. Stock Advisor), there are fewer winning picks vs. the S&P (44%) than there are losing picks. And if you look at only currently open positions, that number only improves to 51%.

As a result of being long-term holders of stocks, combined with the volatility of the small cap stocks they choose, Hidden Gems’ losing picks tend to be big losers. A big part of the philosophy is geared towards holding companies until something has changed about the fundamental investment thesis. So they give their stocks a lot of time to turn things around, and when that doesn’t happen, the result is typically a very big loss.

On the winning side, there have been a handful of tremendous out-performers vs. the S&P with a margin of greater than 500%, and over a third of their picks are beating the market by 20% or more. This is the positive side of being a long-term investor – outsized returns. A number of these stocks were in the red at one point or another but the Motley Fool philosophy of holding for the long-term allows these companies time to turn things around.

Performance vs. the S&P

Only 40% of Hidden Gems picks have outperformed the S&P 500 over their lifetime. Also note although they’ve had a few big winners (17% outperforming the S&P by 50% or more), they’ve had an even larger percentage of big losers (32% underperforming the S&P by 50% or more).

What Hidden Gems is Not

Motley Fool Hidden Gems is not an active trading service. They view their investing horizon as at least 3 years, and they hold stocks for the long-term. If a stock issues a bad earnings report and the stock drops 7% in the morning, you will not get an immediate notification with an update and definitely no alert to sell. You can however go to the message board for that stock, and are likely to find an update from one of the knowledgeable fellow members or one of the various other analysts assigned to keep an eye on the boards. This lack of immediate guidance has at times been a source of frustration for some members who panic when they see a stock in their portfolio taking a sizable hit. However it’s important to understand that this is not what the Hidden Gems service is about. It’s about long-term investing, and you should be able to stomach some rocky days.

Even in cases where the stock drops on potentially alarming news like a CEO resigning or even a rumored accounting scandal, for example, they rarely will issue a Sell or Hold recommendation that day. Their tendency is to digest and analyze the news and issue a more detailed response a day or two later.

Motley Fool Hidden Gems is not a penny stock service. Do not confuse “small cap” with “micro cap” or “nano cap”. The Hidden Gems team is still looking for strong businesses with a long growth horizon ahead of them. They aren’t looking for stocks trading at 45 cents a share that will be “the next big thing”. The lowest price stocks (no relationship to value by the way) that they have recommended have been in the $5-$7 range. A more typical recommendation will be in the $20-$30 range.

Motley Fool Hidden Gems is not a valuation based serviceYou get the Monthly Recommendations and you get the monthly Best Buys, but they do not tell you when to buy the stock, and more importantly, nor do they tell you at what price to buy them.  They do not issue “Buy Below” guidance nor do they give any valuations of what they think their picks are worth. It is implied that at the time a stock is selected as a Monthly Recommendation or a Best Buy that the price represents a good entry point, but the service focuses on the overall quality of the company as an investment, and not on specific price levels or momentum indicators. There have been many instances where the a stock drops significantly shortly after being recommended, which again can cause some frustration, but unless there is a substantial change to the investment thesis, Motley Fool’s general view is that they are investing for the long-term and if the stock pick plays out as expected, a small dip in price will not matter.

Motley Fool Hidden Gems is not a portfolio service either.  You do not receive any guidance on how many shares of a recommendation to buy. They also do not view their picks as being part of a holistic portfolio so if they recommend 4 housing industry-related firms in a row, that doesn’t necessarily mean they are recommending their members go overweight on an allocation in that industry. It is up to each individual to assess for themselves how they want to build their portfolio.

My Take

Hidden Gems has a lot of potential, with a very alluring mission statement to invest in small cap stocks. Small cap stocks tend to outperform other stocks over the long run, and from the view of an investor, the possibility of getting in on a company at its early stages is what we all look for. Everyone wants to find the next Microsoft or Apple, and be one of those people who can brag at the cocktail party that they invested in XYZ stock when it was only $X (insert your favorite single digit number here). In fact Hidden Gems had that kind of success when it recommended Chipotle Mexican Grill (CMG) at only $40 back in 2008, and they have over a 1000% return on that pick. But that kind of success is difficult to repeat. Looking at the performance stats in the section above, you can see the wide range of results their picks have experienced.

Hidden Gems also gets overshadowed by the Rule Breakers service, which also invests in very high growth companies, but not all of which are small cap stocks. Rule Breakers overall performance has been better than Hidden Gems. Rule Breakers also tends to recommend more high profile companies than Hidden Gems, which captures the imagination of investors more than the lower profile companies that Hidden Gems tends to pick. Finally, although Andy Cross and Seth Jayson are solid advisors, Rule Breakers is headed up by David Gardner, who has a strong established track record and of course the star power of being a co-founder of Motley Fool.

In my opinion Motley Fool Hidden Gems is much like Rule Breakers in that is better utilized as a complementary investment service rather than as a stand-alone service. The companies they recommend offer too much volatility for the average investor. I would not recommend Hidden Gems to new investors who don’t already have an established portfolio. I think Stock Advisor or Inside Value is a better all in one service for new investors.

If you are an investor that is looking for new investment ideas that offer a little more growth potential, and are comfortable with some additional risk, Hidden Gems might be worth exploring. However I think in that case you are still probably better off with the Motley Fool Rule Breakers service. The performance is stronger, with a better track record, and the advisor team is generally stronger. I also have found the Rule Breakers message forums to be more active than the Hidden Gems boards, and the community is a big draw for any Motley Fool service.

Motley Fool Hidden Gems is currently available at the price of $199/year ($100 less than Rule Breakers), and you can find their sign up page here. You can also sign up for a 30-day trial, during which time you will have access to the entire site, including the full archive of prior issues and updates. My suggestion for those interested in trying out Hidden Gems, is to sign up for the trial when you know you’ll have some free time to dive into all the different areas of the site. And make sure to visit the boards and post a question or two to test out this vital part of the service.

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  • ed May 17, 2014, 11:01 am

    Just wondering how the Hidden Gems picks perform compared to the Russell 2000. I think that would be a useful comparison, since that tracks small caps.