3 Gravity Defying Stocks, and 1 Lesson Learned

3 Gravity Defying Stocks, and 1 Lesson Learned

Through books such as Million Dollar Portfolio, and The Motley Fool's investment newsletter services, TMF co-founder David Gardner has laid out his market-beating criteria in "rule breaker" investing.

I've learned a lot from this strategy over the years. Like many Fools, I've learned to look for "first mover" growth companies, as well as businesses with great management teams.

The biggest thing that rule breaking investing has taught me, however, is to challenge my biases. Like most investors I have an inescapable urge to sell a winning stock that has had a huge run up in price; this is an urge that's cost me a lot of money, and it has also taught me a valuable lesson.

By watching companies like Google, Starbucks (NASDAQ: SBUX), and Chipotle crush the market, I've learned that great stocks don't always come back down to earth.

Here are three high-priced stocks that just might defy gravity indefinitely.

More than a hill of beans

Starbucks is a perfect example of how a company can keep shattering growth expectations without doing anything flashy. Starbucks recently reported earnings growth of 28% year over year, led by rising margins and increased foot traffic. Going forward this coffee maker should see increased growth from its newly-aquired Teavana brand, as well as an increase store-bought products (which currently account for less than 10% of sales).

Good coffee isn't the only factor behind Starbuck's growth. The business has been on an unheralded run since Howard Schultz returned as CEO. Starbucks really owes a great deal of its growth to the passion that Schultz has for the product.

Here's a perfect example of what I'm talking about:

In 2008 Schultz ordered a worldwide, three hour shutdown of all Starbucks stores for training. The move was criticized by many investors, as closing the stores cost Starbucks revenue in the short-term. But shutting down during peak hours to "perfect the art of espresso" was exactly the kind of message that Schultz needed to send to the market.

The company recently raised its profit forecast and expects to grow earnings by double digits again this year. I've followed, and held, Starbucks for years and have heard investors call it "expensive" at $16 per share, and at $30, and at $50.

I can understand why Starbucks growth is always in doubt--many people just view it as an overpriced coffee shop, but it's so much more than that. When you buy a share of Starbucks, you're really buying a piece of Schultz. Sure the company could be overvalued now, but I feel you can't put a valuation on the passion of a founder like Schultz. I may end up looking foolish (small "f") for recommending the stock at this high of a price, but not any more foolish than those who feel it must drop in price simply because it has gone up. I won't bet against Starbucks, at least not as long as Schultz is leading the company.

High risk, high reward

After reporting second quarter earnings that were down 9%, and missing expectations, 3D Systems saw its shares tumble. In the two weeks that have followed the announcement the stock price has rebounded, but the short interest in the company still sits at a lofty 27.25%.

In my opinion, with quarterly revenue growth at 45%, you should be cheering the presence of short sellers. For truly long-term investors, the short-sellers offer a potential catalyst via a "short squeeze."

Clearly these shorts are flocking to this stock based on valuation. 3D Systems has been a phenomenal growth story in recent years, but it currently trades at a P/E of over 100. To some investors, this may be a stock that has rallied too far, too fast.

However, earnings matter a little less to a company like 3D Systems, so the P/E is less relevant. This business is in an early stage of its growth, and it needs to spend money. 3D was wise to increase spending in the second quarter, focusing on R&D and marketing instead of the bottom line.

If you believe in this stock, I wouldn't be discouraged by the quarter. If anything, you should be encouraged that management is focused more on growing the business than "looking good."

The PG-13 version of "Hooters"

Buffalo Wild Wings is another stock that seems richly valued, but may be going higher. The company resembles both Starbucks and 3D Systems in that it has a great CEO in Sally Smith, and it also has high short interest at over 10%. This wing-slinging business just reported a blow-out second quarter , with net income growth of 41%. Still, with a P/E ratio over 30 and a run up in share price of $40 just this year, some investors are calling the stock pricey.

I understand the concern over valuation, but Buffalo Wild Wings has a hidden sneaky moat that may keep competitors at bay for a while. It's a large scale wing and beer place to watch the game, but it is also family friendly. Most people wouldn't bring their kid's to Hooter's, but they can bring the kids to Buffalo Wild Wings, and that is a huge competitive advantage.

For this reason alone, I feel that any short-term price drops will be outweighed by long-term growth at Buffalo Wild Wings. Until a viable competitor offers something similar on the same scale, there's no reason that this stock can't go even higher.

Say it with me: in the stock market, gravity does not exist

It's natural to believe that a high-priced stock must come down to earth, or that a low-priced stock must bounce back, because most things in life work this way. Computers have dropped significantly in price from their early days, and everyone looks for a bargain at the super market.

But in the stock market, our instincts can hurt us. The truth is that great stocks don't always come back to earth, and an underlying businesses performance matters more to a stock than a P/E does.

If a business is delighting its customers, growing its market share, and fending off competitors, there is no reason that it cannot go higher indefinitely.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

The article 3 Gravity Defying Stocks, and 1 Lesson Learned originally appeared on Fool.com.

Adem Tahiri owns shares of Starbucks. The Motley Fool recommends 3D Systems, Buffalo Wild Wings, and Starbucks. The Motley Fool owns shares of 3D Systems, Buffalo Wild Wings, and Starbucks and has the following options: short January 2014 $36 calls on 3D Systems and short January 2014 $20 puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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