5 Stocks We Own -- Here's Why

Hedge fund pioneer Michael Steinhardt is arguably the greatest investor you've never heard of. At Steinhardt, Fine, Berkowitz & Co., he achieved a 24% annualized return over a 28-year period. Steinhardt coined a wonderful expression for a concept that was at the heart of his success: "variant perception." Simply put, if your view is no different from the consensus when you buy a stock, you may as well be putting that money into an index fund. Below, I'll describe the Motley Fool's variant perception on five stocks from our real-money Million-Dollar Portfolio service.

Yongye International (Nasdaq: YONG  )
After a spate of accounting scandals at Chinese small-cap companies, a cloud of suspicion has understandably tainted the entire group. As a result, investors want nothing to do with Chinese small-caps right now.

We believe there is evidence that fertilizer manufacturer Yongye International isn't one of the frauds. In May, the Asia private equity unit of Morgan Stanley invested $50 million in Yongye after conducting "extensive due diligence." Private equity investors typically have access to a company's detailed accounts, along with its management and operations, prior to making an investment. Homer Sun, one of Morgan Stanley's top executives in China, now sits on Yongye's board of directors. Furthermore, Yongye has used KPMG, one of the "Big Four" auditors, since May 2009, well before the recent scandals erupted.

Berkshire Hathaway (NYSE: BRK-B  )
The last few years have not been kind to Warren Buffett's reputation. His investment in and defense of Goldman Sachs and the botched handling of former Berkshire executive David Sokol's trading in Lubrizol shares immediately prior to its acquisition has raised eyebrows. That said, it's Buffett's age (he's 81) that really has the market worried.

We think these concerns are overblown. Berkshire's current valuation doesn't contain much of a Buffett premium, if any, and he has put in place a carefully considered succession plan. In last month's share repurchase announcement, Buffett indicated that the shares are significantly undervalued at 1.10 times book value; shares currently trade at 1.18 times book.

Yahoo! (Nasdaq: YHOO  )
Yahoo! made a monumental error in 2008 when it rebuffed Microsoft's (Nasdaq: MSFT  ) generous buyout offer of $33 per share. Since then, it has done little to convince shareholders that it was justified in choosing to remain independent. Last month, Carol Bartz, the fiery CEO who was brought in two years ago to turn the company around, was summarily fired. Meanwhile, Facebook and Twitter appear to be well on their way to carving up the social networking space, overshadowing "old tech" companies like Yahoo!, Microsoft and Google (Nasdaq: GOOG  ) in the process.

Investors have understandably soured on Yahoo!, but the company's high-profile missteps have obscured a very valuable asset: Yahoo!'s 43% ownership interest in Alibaba Group, which owns the top Chinese e-commerce platform. That's a significant oversight: We believe the Alibaba stake could be worth as much as twice the value of Yahoo!'s U.S. operations.

Bridgepoint Education (NYSE: BPI  )
Between a high-profile short-seller and intense government scrutiny, the for-profit education sector has received a lot of negative exposure. In March, Senator Tom Harkin called Bridgepoint Education "a scam." Last month, the House of Representatives proposed a cut in Pell grants, which are a critical source of funding for lower-income students.

The market hates uncertainty; as a result, we believe the market is overweighting the regulatory risk in this sector. At eight times forward earnings, Bridgepoint's share valuation reflects a very grim outcome for a company that continues to add students and generate generous amounts of cash flow.

Denbury Resources (NYSE: DNR  )
Oil driller Denbury Resources is expert at buying and extracting oil from fields that no longer produce under conventional methods. Denbury's process for recovering the oil is called tertiary recovery and it consists of pumping carbon dioxide into the wells.

Combine rapidly increasing global energy consumption with finite resources, and the result is that incremental sources of oil will become increasingly valuable. Denbury Resources already masters a complex drilling process and is a low-cost producer. Oil stock prices are linked to the spot price of oil, which has pulled back recently on fears of slowdown in global economic growth. We believe that investors who can look beyond the next six to 12 months -- which is the typical timeframe of many institutional investors -- stand to earn healthy returns on Denbury's shares.  

This is the basis of beating the market: You must be prepared to articulate your variant perception for every stock you add to your portfolio. Million-Dollar Portfolio advisor Ron Gross follows that discipline in constructing the portfolio from the best picks across Motley Fool newsletter services. If you'd like to know his variant perception for another five stocks he owns in the portfolio -- stocks that remain actionable ideas today -- enter your email address in the box below and we'll send you Ron's free report, "5 Stocks for the Next Bull Market." Find out what the market is missing!

Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of Google, Yahoo!, Yongye International, Bridgepoint Education, Microsoft, Denbury Resources, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Yongye International, Microsoft, Yahoo!, and Google. Motley Fool newsletter services also have recommended writing puts in Bridgepoint Education and creating a bull call spread position in Microsoft. 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.


Read/Post Comments (13) | Recommend This Article (57)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2011, at 5:14 PM, Howard1ii wrote:

    Regarding Yongye using KPMG as auditors. You have to remember that Enron used Arthur Anderson for years.

  • Report this Comment On October 25, 2011, at 5:29 PM, WikiCPA wrote:

    ^With SOX and what happened to Arthur Anderson, I would have to say the same is very unlikely to happen again to KPMG. Also, KPMG has reviewed and restated Yongye's past financials twice already.

  • Report this Comment On October 25, 2011, at 5:31 PM, ddammerman wrote:

    Didn't Yahoo lose their Alibaba asset?

  • Report this Comment On October 25, 2011, at 8:34 PM, PeakOilBill wrote:

    Don't invest in anything until you see what the Europeans will do with Greece and Italy. They can melt down the financial system with derivatives.

  • Report this Comment On October 25, 2011, at 11:41 PM, Mega wrote:

    "We believe the Alibaba stake could be worth as much as twice the value of Yahoo!'s U.S. operations."

    Well that's just silly.

    YHOO's stake in Alibaba.com is worth about $1.8B. Nobody has a clue what the rest of Alibaba Group is worth, but Yahoo's total stake is probably not worth over $3.5B.

    Here are some realistic values.

    US: $8B

    Japan: $6.5B

    China: $3.5B

    Rest of world: $2.5B

    Total: $20.5B

  • Report this Comment On October 25, 2011, at 11:43 PM, Mega wrote:

    *Yahoo Japan and Alibaba.com stakes are based on current market prices. US versus rest of world is based on their revenue breakdown in the latest 10K.

  • Report this Comment On October 25, 2011, at 11:45 PM, mamuang wrote:

    I wonder if Yongye is a better bet than China Gree Agriculture(CGA), a former MF recommendation. If so, in what way? Any comments?

  • Report this Comment On October 26, 2011, at 12:39 AM, NycityInvested wrote:

    what valuation formula do you use?

  • Report this Comment On October 26, 2011, at 8:20 PM, FOOLTOCROSS wrote:

    2 anyone pls, do u think google can hit the 1000 dollar mark?

  • Report this Comment On October 29, 2011, at 12:36 AM, rel77 wrote:

    I can only say that these are many of the things I avoid in picking a stock. I know yahoo and Berkshire are well known, the but the other ideas were for esoteric companies that do inexplicable things like drag oil out of dry ground, or something...companies thought to be good because some agency gave them a good rating? Hello?? Arthur Anderson is on line two for you.

    I see a rocky weather pattern ahead, there's too many unresolved difficulties in the world economy. So I look for solid companies with easy to explain purposes. If we're talking small cap companies, I think the only reliable choice is a company you and every one of your friends loves - case in point, Sam Adams beer, which we bought very, VERY cheap, or Amazon, at a similar discount. Because we knew and loved their product or service, we thought everyone else would to, and they did, about 10X as much as we did.

    Any stock for a company that you don't have a personal relationship with is not a risk worth taking.

  • Report this Comment On October 31, 2011, at 12:30 PM, WikiCPA wrote:

    I don't understand why people bring up Arthur Anderson like it could happen again. Did we forget about Sarbanes Oxley? I hear excuses...

  • Report this Comment On October 31, 2011, at 9:02 PM, bewisegan wrote:

    Chinese-U.S. listed stocks are replusive nowadays because of fraud. So much so that when an announcement is made that Yong has received the Top Science & Technology Award in Inner Mongolia, people start to wonder whether this is another fraud.

    After you have been bitten by a snake, even a rope is a fearful thing to you.

    Yong can only be restored to its former glory if it can give out some good dividends to its shareholders.

  • Report this Comment On November 19, 2011, at 11:34 AM, buffalonate wrote:

    Yongye is growing at a 100% clip and has a 2.8% p/e ratio. That is hilarious. Everyone thinks that company is a fraud. If they were really a legit company somebody out there would have bought this company out by now because they are an epic bargain.

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