This month's NCAA college basketball tournament has got me thinking about stocks.
Let me explain. Unlike football (where defense wins) or baseball (where pitching wins) or hockey (where goal-tending wins), there's no single formula for a winner in college hoops. In that sense, the game can be a lot like the stock market.
Wisconsin or West Virginia?
Think about it. Some teams base their offense on pure ball control. They won't shoot before a certain number of passes. They're ruthless rebounders, feasting on missed shots like a dog on a bone. And they'll hit with you screens till it feels like you're up against a chain-link fence. There's a name for this sort of team. It's called (please picture me making the quotation marks) "value." In today's college hoops, no team represents value better than the Wisconsin Badgers.
Then there are the teams that rush the floor. They don't always appear organized, but they keep coming after you. Give them an inch, and it might as well be the entire gymnasium. They're going to shoot from behind the arc. A lot. They'll miss a fair amount, of course, but they're also going to get hot. And when that happens, they're going to drop 20 on you in three minutes. There's a name for this team, too. It's called "growth." In today's college hoops, no team represents growth better than the West Virginia Mountaineers.
Let's briefly break down how these teams win, beginning with the value squad, Wisconsin. Here's reason No. 1: No one expects them to. The Badgers have won only three of seven games against Top 25 teams. They've been ugly at times.
But this team is also ruthlessly efficient when it's on. For example, four different players average at least four rebounds per game, and two others have at least three. That means Wisconsin is prone to burying opponents that have a bad night shooting the ball, like when then-No. 7 Michigan State shot 35% in an 82-63 loss in Madison, Wis., in January.
Now think about stocks. Take BorgWarner (NYSE: BWA ) , for example. This manufacturer of drive trains suffered an awful run before Tom Gardner picked it for the February 2003 issue of Motley Fool Stock Advisor. It probably didn't help that the Borg's biggest customers, including Ford (NYSE: F ) and General Motors (NYSE: GM ) , were ailing. But Tom saw a management team at Borg that was executing. The dividend had recently been hiked by 20%. Debt was being paid down. Revenue was up by double digits. And the valuation suggested that the stock could double within 36 months. It has -- up more than 101% as of this writing.
Now let's talk growth and West Virginia, the No. 2 team in the nation when it comes to three-point shooting. In fact, if you've watched the Mountaineers play at all this season, there's a good chance you've heard this phrase: "Beilein...for three...Good!"
West Virginia shoots, and then shoots some more. And when they get hot, they are un-freaking-beatable. Just ask Villanova. The Mountaineers shot a lights-out 57.7% from behind the three-point line in upsetting then-No. 3 'Nova in Philadelphia.
Now, once again, think about stocks. Take Palm (Nasdaq: PALM ) , for example. David Gardner picked it for the April 2005 issue of Stock Advisor, despite the obvious warnings. There had been management problems, inventory issues, and tough competition from the likes of Research In Motion (Nasdaq: RIMM ) . What's more, its personal digital assistant business was in rapid decline, making this a one-product company, with the Treo smartphone.
But, oh, what a product. It was earning rave reviews from everywhere and winning customers as a result. David saw no reason this couldn't continue and, with a forward P/E of 12 at the time, reasoned there was plenty of room for the shares to advance. He was right -- the stock is up more than 86% as of this writing.
So, which is better? How about neither? My own investing experience leads me to believe that employing both value and growth strategies leads to market-crushing returns. For example, I own shares of fast-moving Akamai (Nasdaq: AKAM ) , which has doubled for me, as well as shares of cheaply valued, dividend-paying Barnes & Noble (NYSE: BKS ) , which is up nearly 80% for me. Both have absolutely pummeled the index in the time that I've owned them.
That's why I appreciate Stock Advisor. You've got Tom, the ball-control value guy, whose picks are crushing the market by an average of more than 50% over the index. And then you've got David, the three-point-shooting growth guy, whose picks are up an average of nearly 30% over the market. (By the way, if that sounds enticing, ask us for a guest pass to Stock Advisor. You'll get free access for 30 days.)
A Foolish finish
I'll understand if you don't watch hoops and think about stocks as obsessively as I do. I'm just a freak like that. But remember that both growth and value win. So, if you want market-crushing returns over the long haul, don't limit yourself. Work the ball and shoot the three. The best teams, and investors, always do. Oh, and, by the way, go Orange!
Akamai is a Motley Fool Rule Breakers recommendation.
Fool contributor Tim Beyers shoots for three ... Good! Fools win! Fools win! Or so goes the fantasy. Tim has a graduate degree from Syracuse University. He owns shares of Akamai and Barnes & Noble. You can find out what's in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.