This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

In his new book, Rule Breaker Investing, Motley Fool Co-Founder David Gardner lays out the strategy for stock picking that has been the foundation of his investing for nearly three decades. The investing approach described in this book has also formed the philosophy of The Motley Fool's Rule Breakers investing service, which has handily beaten the S&P 500 since its inception.

The book outlines numerous habits, traits, and principles, but three nuggets of wisdom resonated with me especially. The Rule Breakers philosophy provides a concise yet powerful framework that has guided numerous investors to success.

Add up, don't double down

One of the more famous sayings in investing is to "buy low and sell high." Of course, buying a stock when it's cheap and selling it when it's expensive means you've made money -- that's simple enough. However, Rule Breakers habit No. 2 is "add up, don't double down."

David lays out a few reasons that adding to your winners works better than the traditional investing advice. First of all, it focuses on the buying and not on the selling. Put another way, Rule Breakers will "buy high and try not to sell." When the emphasis is on buying great companies that have strong past price appreciation (Rule Breakers stock trait No. 9), you're throwing "good money after good," as Gardner puts it.

And rather than adding to losing stocks in an effort to get back to even, or doubling down, Rule Breakers add to their winners because they believe that winning stocks continue to win.

"Overvalued"

Anyone who has followed Rule Breakers or David Gardner knows that one of the six traits of a Rule Breakers stock is that it is considered overvalued by Wall Street. For anyone with even an ounce of value investor in them, this trait may seem contrarian at best and ridiculous at worst. Despite being aware of this trait for many years, I also find myself struggling with it at times.

However, when you peel back the layers, there's an insight here that is often missed in the world of investing. Typically, when the valuation of stocks is discussed, it's numerical. You might hear about the price-to-earnings ratio or the price-to-sales ratio as the defining metric for a stock's valuation. Then, investors compare that multiple to those of the company's peers or its historical levels, or they project this out to the future based on their expectations for the company's performance.

But the traditional way of measuring valuation overlooks some of the intangible aspects of a business that contribute to its success. Gardner mentions brands, management, and a company's culture as important "inputs" to a company's success and posits that these drive the "outputs" of profits and cash flows. To put it succinctly, "There are no numbers for the things that matter most."

Fair starting line

The book's last part outlines the six principles of a Rule Breaker portfolio. After spending parts one and two focusing on the habits of a Rule Breaker investor and six traits of a Rule Breaker stock, the focus turns to portfolio construction. Among the wisdom in this last part of the book is the idea of giving your stocks a fair starting line.

When buying a stock for the first time, it's natural to allocate more money to the companies you have high conviction in and less to those where there may be some uncertainty. Again, what seems intuitive is challenged by Rule Breakers as Gardner believes each stock should receive the same initial allocation.

The term "fair starting line" comes from Gardner's love of the horse track, where the horses line up at the gate to ensure they all start at the same point. Gardner brings this analogy to portfolio construction and believes each stock deserves the same amount of starting capital, regardless of your belief in its future prospects.

To continue the horse racing analogy, Gardner suggests that you want a horse with 3-2 odds to start at the same point as one with 80-1 odds because you don't know how things will turn out. It's possible the long-odds stock becomes your big winner, and the favorite flames out and loses most of its value.

There's one last piece to this principle that is vital to remember, and it relates to what is written above. Unlike horse racing, you can play through the whole race in the stock market. Despite the equal starting point, you can add to the stocks that are winning as the race progresses (add up, don't double down), building a portfolio full of winners over decades of investing. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 excellent investing lessons from Motley Fool founder David Gardner appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Over the past 10 years, semiconductor equipment manufacturer ASML (NASDAQ: ASML) has been a massive winner, producing a total return of 761% vs. 270% for the S&P 500. But this has been a tough month. Since the company's latest earnings report in mid-October, the stock has dropped 18% -- a reaction to both results and guidance that fell below analysts' expectations.

The post-earnings drop erased almost a year's worth of gains for ASML, returning the share price to where it was in early 2024. The question investors are asking is if this presents a buying opportunity, or if the market's reaction is warranted, considering the financial picture moving forward.

Let's see if ASML is a buy before the stock price recovers.

An indispensable link in the semiconductor supply chain

Semiconductors have been top of mind for investors over the past few years, as the rush toward artificial intelligence (AI) has injected billions of dollars of capital into developing the most leading-edge chips that can power the large language models behind AI chatbots like ChatGPT. While companies like Nvidia have gotten the most headlines, ASML makes the entire chip manufacturing process possible.

To oversimplify, ASML makes the machines that make the chips. When it comes to cutting-edge chip manufacturing, ASML is the only company in the world that makes the extreme ultraviolet lithography machines necessary to make the chips that power the most advanced technology.

Long-term trend or short-term challenge?

The headline results for ASML's third quarter of 2024 were not bad. Year over year, revenue grew by 12% and exceeded the company's guidance, while earnings per share increased by 10%. However, net bookings only increased by 1% to 2.6 billion euros. ASML doesn't provide guidance for bookings, but analysts who cover the company were expecting 5.6 billion euros. Whenever there's that large of a discrepancy between expectations and reality, the stock will often pay the price.

Bookings is an important metric for ASML because it captures all sales for which written authorization has been received. Essentially, it accounts for current revenue, plus revenue it can expect in the future. Management spoke about this on the earnings call, pointing out that market conditions include a customer who is still cautious and slower to make buying decisions. The company expected that 2025 would be the year when they would return to growth, but it now appears that some of the challenges ASML faces will continue into next year.

Investors' patience is wearing thin

The stock reaction would indicate that investors are less willing to wait for this return to growth than they may have been a few weeks ago. However, some context is worth mentioning. At ASML's 2022 investor day, it forecast revenue for 2025 of between 30 billion euros and 40 billion euros. The company now expects that to be in the low end of the range, between 30 billion and 35 billion euros.

Even with slower-than-expected recovery for its customers, revenue in 2025 should still be within a range predicted almost two years ago. This indicates management has pretty good clarity into its business results several years in advance. This is worth keeping an eye on over the next few quarters. If 2025 revenue guidance gets revised down again, it could mean an even longer delay for a return to growth and could lead to another share price fall.

Is ASML a buy?

Long term, it's hard to argue that ASML won't be a more valuable company in the future than it is today. That said, the semiconductor industry is cyclical, so periods where the share price falls should be expected by investors.

Even after the post-earnings decline, ASML's stock still trades for a price-to-earnings (P/E) ratio of 38, which does not appear to be cheap. However, consider where today's valuation compares to the longer-term median P/E ratio.

ASML PE Ratio data by YCharts

The case could be made that, historically, ASML shares are cheaper than they've been in a while. On the other hand, there's enough uncertainty in the coming quarters that it's possible even more attractive buying opportunities could be on the horizon.

Adding to or starting a position at today's price could make sense, but I think ASML is the kind of stock to add to opportunistically over time, as short-term challenges present compelling valuations.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post This Semiconductor stock just dropped 18%. Is it a buy before it recovers? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• 2 ASX small-caps with 40% upside

Jeff Santoro has positions in ASML and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ASML and Nvidia. The Motley Fool Australia has recommended ASML and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Prior to the pandemic, Moderna (NASDAQ: MRNA) was like many other small biotechs. It had a promising technology that had yet to be proven, and no products available commercially. In fact, for the full year of 2019, Moderna had only $60 million in revenue, entirely from collaborations and grants, and it posted a net loss of $514 million. While this is not uncommon for biotechs, it's a stark contrast to what was to come. 

As we know, Moderna's ability to rapidly produce a vaccine for the COVID-19 virus changed the financial prospects for the company and put it in a completely different position today. In the most recent quarter, Q1 of 2022, Moderna's revenue was $6.1 billion and net income was $3.7 billion. That's a far cry from the full-year results of just a few years ago.

But the past is the past, and what matters is what happens next. Here are three things about Moderna that smart investors know.

1. COVID-19 revenue will decrease but remain

As much as I wish it were not the case, it appears that Moderna will see COVID-related revenue for the foreseeable future. The most immediate catalyst is the recently received Emergency Use Authorization for Moderna's COVID-19 vaccine for children 6 months of age and older. This was the last age group in the U.S. to receive approval to be vaccinated and should help sustain COVID-related revenues for Moderna.

When you consider the global vaccine demand, as well as the need for boosters and possibly new vaccines to combat future variants, there's still a large market for sales worldwide. In Q1, Moderna reported it had approximately $21 billion in advanced purchase agreements for 2022. The company also believes that sales in the second half of 2022 will be slightly higher than in the first half. This revenue is a far cry from the pandemic highs, but it won't decrease to zero anytime soon.

2. There's more in the pipeline

While Moderna's COVID-19 vaccines get the headlines, there are another 46 development programs in the company's pipeline. Of these programs, Moderna has three programs in phase 3 trials. One program is its COVID-19 boosters, but there are also vaccines for two other viruses nearing their trial endpoints.

Respiratory syncytial virus is one of the leading causes of severe respiratory illness in older adults as well as younger children. The vaccine for older adults is currently in phase 3 trials, and the vaccine for children is in phase 1. A vaccine for cytomegalovirus, the leading cause of birth defects in the U.S., is also undergoing phase 3 trials.

By the end of Q2, Moderna hopes to add an Omicron-specific COVID-19 booster as well as a flu vaccine to its list of programs in phase 3 trials. 

There's no guarantee that any of these programs will reach commercial sales, but with dozens more products in the pipeline at various stages, it would be reasonable to invest with the expectation that Moderna is able to bring additional products to market.

3. The current valuation is a double-edged sword

It's clear that the market has priced in the uncertainty around Moderna's ability to bring future products to market. At the time of this writing, Moderna has a price-to-earnings ratio of 4.3, near its all-time low of 3.4. This is for good reason. While COVID-19 revenue is likely to remain, it won't return to its peak levels, and even if all the programs in phase 3 trials come to market, the revenue won't replace what's lost in COVID-19 sales. 

That said, the COVID-19 vaccines have shown that mRNA technology can be successful, and the revenue generated over the past few years has put Moderna in a much better position to finance the development of future products. There's risk in buying shares, but there's also reward if Moderna can replicate its past success with future vaccines.

The bottom line for investors

Whether or not to buy shares depends on each investor's risk tolerance and investing timeline. There's reason to believe that over the long term, Moderna can grow to be a mainstay in the biotech space. As biotech investments go, there are certainly more risky investments out there. If Moderna is able to bring more and more products to market over the coming years and decades, it has the chance to be a smart investment for shareholders.

I think Moderna provides a nice balance of risk/reward because the valuation is such that investors don't need a COVID-like pop for the investment to be successful. However, investors who buy shares expecting another short-term run-up like we've seen over the past few years are likely to be disappointed. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 things about Moderna that smart investors know appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here's what $10,000 invested in ASX tech shares 5 years ago would be worth now
• 4 ASX shares which could improve by 25% to more than 100%
• Which ASX All Ords share could rocket 90%?
• Australian Age Pension: Income test, assets test and payment amounts explained
• 2 ASX small-caps with 40% upside

Jeff Santoro has positions in Moderna Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Moderna Inc. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.