Three Ways to Spot the Next Genius Leader Before Others Do

From lunchtime seminar attendee to Nobel Prize winner... Three ways to spot the next genius leader before others do... An 'outsider' who turned the cable industry on its head... An oncologist who helped investors make 18 times their money... A former investment banker with a front-row seat to one of tech's greatest shows...

Thirty years ago, Dr. Martin Chalfie attended a casual lunchtime seminar outside his area of expertise...

By the time it was over, the biology professor had formulated an idea that would revolutionize the field of medical research... and eventually earn him the Nobel Prize in chemistry.

Chalfie, who worked at Columbia University, was studying the central nervous system of C. elegans at the time. These microscopic worms are model organisms for a variety of biology-related experiments.

Researchers like Chalfie study their biological processes at the cellular level to better understand how these worms develop and function, laying the foundation for new drugs and therapies.

But C. elegans are just one millimeter long, and their individual cells measure just two-hundredths of a millimeter – about the diameter of a single human hair. In Chalfie's day, ordinary microscopes weren't up to the task of observing their basic cell functions in action.

During this particular seminar, Chalfie learned for the first time about a species of jellyfish that produces a green fluorescent protein ("GFP"). Suddenly, he got the idea to connect the glowing GFP gene with genes from other proteins, allowing researchers to track the C. elegans' movements under a microscope.

It took two years for fellow researchers to isolate the GFP gene. Then, Chalfie finally turned his idea into reality, getting E. coli to produce GFP that glowed green when irradiated with ultraviolet light.

In the 17th century, Antonie van Leeuwenhoek's pioneering work with the microscope helped his fellow scientists observe things they didn't even know existed. Chalfie's discovery produced the next great leap, enabling researchers to observe the progression of Alzheimer's disease or the growth of cancerous tumors under a microscope.

You're probably wondering why I (Mike Barrett) am telling you this story...

Chalfie saw what others didn't. This insight translated into a tremendous competitive advantage.

As luck would have it, the analogy translates well to investing. Management teams with similar mindsets build businesses commanding top dollar, which generates extraordinary shareholder returns.

The trick is finding them.

You don't come across executives with exceptional, Chalfie-like insight every day...

Finding them takes work. Over my years of investing, I've found three different ways to do just that. In today's Digest, we'll look at examples of each...

The first kind is an established company with a new 'outsider' CEO...

As I mentioned earlier, Chalfie was a biology professor who won the Nobel Prize in chemistry. Often, an outsider's fresh perspective sparks big breakthroughs.

In 2012, author William Thorndike's instant classic, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, took an in-depth look at eight CEOs who fit this profile. As a group, they shared several important attributes...

• All were first-time CEOs
• Many came into the job with limited managerial experience
• None came from high-profile positions
• All but one was new to the industry
• All were quantitatively adept (more of them had engineering degrees than MBAs)

Take "Cable Cowboy" John Malone, for instance. Armed with multiple degrees in engineering and operations research, Malone became CEO of the nation's fourth-largest cable company – Tele-Communications ("TCI") – when he was just 32.

Malone was a quick study, and it didn't take him long to figure out that scale was the key to success in the cable industry. If TCI could become the largest operator, he figured that would give the company leverage to negotiate the industry's lowest programming costs per subscriber.

Other cable executives also understood the importance of scale and focused on growing. Malone's unique insight was that getting bigger would enable TCI to pay more for new acquisitions and still earn equal (or better) returns due to growing scale and financial leverage.

So over the next decade and a half, Malone embarked on a spectacular buying binge, acquiring 482 smaller cable operators – about one every other week. By 1987, the company was two times larger than its next-largest competitor, Time's American Television and Communications.

Telecom giant AT&T (T) eventually acquired TCI for $55 billion in 1999. Longtime TCI shareholders watched as the stock outperformed the S&P 500 more than fortyfold during Malone's tenure as CEO.

The second type of genius management involves CEOs exploring new approaches to big challenges...

Every year, dozens of biotech companies go public. But few ever break the kind of new ground that Loxo Oncology did. Even fewer see their shares rise 1,700% in five years.

Loxo was the 2013 brainchild of Dr. Joshua Bilenker, a board-certified oncologist. Bilenker did a two-year stint as a medical officer at the U.S. Food and Drug Administration's ("FDA") Office of Oncology, then spent several more years managing a health care-focused private-equity firm. This gave Bilenker a unique perspective on cancer-drug development and approval.

Historically, new cancer-fighting therapies have focused on the organ where the disease originated. But Bilenker had a better idea: to kill it early, regardless of location, by altering a key enzyme the cancer cells rely on for growth and survival.

Three years after going public, Loxo presented updated results for its lead product candidate (LOXO-101) at the American Society of Clinical Oncology's 2017 annual meeting.

They were spectacular.

My colleague and Stansberry Venture Technology editor Dave Lashmet was there. As he told his subscribers...

In the past 16 years that we've been following cancer treatments, we've never seen better drug results against solid tumors.

Last November, for only the second time in FDA history, Loxo's drug candidate was finally approved for cancer treatments based on a common biomarker across different types of tumors, rather than the organ where the tumor originated. As the FDA noted, "the approval marks a new paradigm in the development of cancer drugs that are 'tissue agnostic.'"

Shareholders who bet on Bilenker were handsomely rewarded for his extraordinary insight. In February, pharmaceutical giant Eli Lilly (LLY) acquired the company for $235 per share. Those who bought when the company went public five years earlier made 18 times their initial investments.

Last up are exceptional but lesser-known managers venturing out on their own...

In the late 1990s, Robert F. Smith was a young investment banker for Goldman Sachs (GS). Just three years after joining the firm, he moved to San Francisco and oversaw $50 billion in merger and acquisition activity involving Apple (AAPL), Microsoft (MSFT), eBay (EBAY), and Yahoo, among others.

As co-head of Goldman's Enterprise Systems and Storage division, Smith had a front-row seat to one of tech's greatest shows over the past two decades – the emergence of the enterprise software industry. His vantage point helped him spot a huge and growing problem desperate for a solution: Great code writers knew almost nothing about how to run a successful software business.

The exception was Universal Computer Systems, which made auto-dealership software. A client of Smith's, Universal provided the ideal case study for running a software business efficiently. Smith figured if he could take Universal's best practices and deliver them across the world of enterprise software, he could create massive value for the industry, his investors, and himself.

So in 2000, just six years after joining Goldman Sachs, Smith ventured out on his own and founded Vista Equity Partners.

Vista put its seed money to work immediately, acquiring poorly run software companies with great promise. Using a proprietary set of best practices, Vista greatly boosted their profitability, making each company worth far more than the original investment. In 2016, for instance, Vista acquired cloud-sharing software provider Marketo for about $1.8 billion. After growing revenue more than $100 million, it sold the company to Adobe (ADBE) last year for nearly $4.8 billion.

With more than 300 deals under its belt, Vista now manages more than $30 billion of capital for its clients. The firm has reportedly never lost money on an investment, and since 2000, it has returned a phenomenal, market-beating 31% per year, on average.

The next Malones, Bilenkers, and Smiths are out there, just waiting to be discovered...

It's easy to get caught up in a company's quarterly numbers. But that's a mistake.

Dig a little deeper...

You just might find a CEO laying the groundwork for exceptional long-term investment returns because he's laser-focused on something others don't yet fully appreciate.

In Extreme Value, we're always on the hunt for the next genius leader...

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New 52-week highs (as of 5/1/19): MarketAxess (MKTX), NetEase (NTES), and Wells Fargo – Series W (WFC-PW).

We'd love to hear about some of the genius leaders you've come across in your investing career. As always, you can tell us about them at feedback@stansberryresearch.com.

Regards,

Mike Barrett
Orlando, Florida
May 2, 2019