Why Rule Breakers Buy a Stock That's Already "Won"

You found a great company, then watched it double before you got round to buying. So you crossed it off your list and waited for a pullback that never came.

Every investor has one. Team Rule Breakers has a rule for not collecting them, the one Fools argue with most: before we buy, we want the stock to have already gone up .

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

Motley Fool co-founder and Chief Rule Breaker David Gardner calls this Trait #3 of six in Rule Breaker Investing : stellar past price appreciation . The idea comes from William O'Neil, founder of Investors ' Business Daily , whose research on past market winners found that the best stocks rise, then rise again. Most investors build watchlists from 52-week lows; O'Neil taught David to hunt among the highs.

David took that one idea and left the rest of the system. O'Neil also told traders to sell any stock that fell 7%. Our Foolish belief is that buying high only pays if you then refuse to sell.

Three buys after a jump (and what they're worth now)

Guardant Health (NASDAQ:GH), a cancer-diagnostics company, went public on Oct. 9, 2018, at $19. Six weeks later, we recommended it at $37.16, after the stock had already gained 96%. By Feb. 14, 2019, it was $48.87, up another 32%, and we bought it again.

Then it broke. Guardant peaked above $180 in February 2021, then ground down for three years to $15.81 on April 19, 2024, a low it has never revisited.

We were holding it that day, badly. Those two positions were down 57% and 68%. Every instinct says: average down .

We didn't. Seven weeks later we bought it at $30.50, nearly double the price we'd just walked past.

The science hadn't changed. On May 23, 2024, an FDA advisory panel reviewed Guardant's Shield blood test for colorectal cancer screening and voted 8–1 that it was safe, 7–2 that its benefits outweighed its risks. We recommended the stock a third time on June 11. The FDA approved Shield on July 29.

Colorectal screening fails on compliance. Roughly three-quarters of deaths happen to people who weren't up to date, because colonoscopies work superbly and get skipped. Shield is a blood draw at a physical they already booked.

The June 2024 recommendation has returned 430%, against a shade under 48% for the S&P 500 -- a gap of 382 percentage points. The 2018 pick has more than quadrupled, beating the market by 106 percentage points. The 2019 pick has more than tripled.