Motley Fool Battle Royale: YRCW, TEVA, GT, AFFY, VMW, DRYS, NAT, HTS

Welcome to the historic third Motley Fool Battle Royale! I'm David Gardner, co-founder and Chief Rule Breaker here at The Motley Fool. My Battles Royale feature eight stocks drawn at random from the top 250 of most interest to Fool readers, randomized again into a standard eight-team tournament bracket. They battle off against each other to see which one wins. "Winning," in this case, is winning my confidence to select one of these eight as my favorite market-beater over the next 12 months. And I always hold myself accountable by picking my winner to outperform on Motley Fool CAPS.

Both my first and second Battles Royale got dozens of recs, so with Sally Field, I'm thinkin', "You like us -- you really like us." With this third, we're introducing a new feature: the video companion! (Check out the intro here.) If you prefer to see me talk my way through this Battle Royale, we'll have a video rundown of the competition. What follows below, though, is the full blow-by-blow. 

Let us now to return to The Arena, and see what Mr. Randomizer picks this week.

GONG!

YRC Worldwide (Nasdaq: YRCW) vs. Teva Pharmaceutical (Nasdaq: TEVA)
YRC Worldwide is a seriously down-in-the-doldrums trucking company that, according to this Rich Smith article of a week ago, has been embroiled in a "less-than-truckload-weight shipping" price war with ... UPS. OK, so a trucker with a $212 million market cap fighting a cutthroat pricing battle with Brown: Strike one. Strike two, YRC has dropped from $90 to $4 over the past year. And, strike three, YRC Worldwide five years ago traded at $1,000. Yep -- from a thousand, down to four. So Teva gets my first-ever Battle Royale automatic pass. Pass TEVA PHARMACEUTICAL to the SECOND ROUND.

Goodyear Tire & Rubber (NYSE: GT) vs. Affymax (Nasdaq: AFFY)
Goodyear Tire & Rubber was founded by Frank Seiberling, who in 1898 nearing the age of 40 was jobless with a wife and three kids. He's said to have paid $13,500 to buy an old factory and 7 acres, and borrowed $3,500 from his brother-in-law to enter the rubber business. He named the company after Charles Goodyear, the founder of vulcanization, who himself had died penniless around the year of Seiberling's birth. The rest is history. What may surprise you: As large and well-known as Goodyear is, its market cap ($2.8 billion) is less than half of Netflix's ... after a 100-year head start. Affymax is a biopharmaceutical micro-cap that got that way in one brutal day this summer when the stock dropped from $23 to $7 following bad trial results for its anemia treatment Hematide. The company has about as much cash as its market cap. TRANSLATION: The market considers its business operations worthless. You know which gladiator wins this battle -- the one that actually has a weapon (albeit, made of rubber). Pass GOODYEAR TIRE & RUBBER to the SECOND ROUND.

VMware (NYSE: VMW) vs. DryShips (Nasdaq: DRYS)
As a seemingly impartial judge sitting high in the arena so as to avoid the bloodshed, I would -- you would think -- be above favoring any competitor. And yet one of our six core Motley Fool values is Honesty, so I must lay my cards on the table: I picked VMware for my Motley Fool Rule Breakers service in June 2008. So yes, I'm biased. I'm biased, and rewarded, because the stock is up 17% vs. the S&P 500's 15% lossover the same period. VMware is a software company that has helped lead the virtualization movement, enabling its customers to save huge amounts of cost and space and time by using VMware to exploit more effectively their own computer hardware. DryShips, by extreme contrast, is a shipping company with a dodgy CEO and a stock down from $120 to $4. Yes, I'm biased, and yes, I have no problem telling you that VMware is much more likely to outperform DryShips over the next 12 months, even if the worldwide economy rebounds (which helps shippers a lot). Pass VMWARE to the SECOND ROUND.

Nordic American Tanker Shipping (NYSE: NAT) vs. Hatteras Financial (NYSE: HTS)
Speaking of shippers, Nordic American Tanker CEO Herbjorn Hansson has led his tanker company well since 1995. Though the five-year stock chart looks like a balanced EKG reading, up and down at similar amplitudes without creating much value beyond a small dividend, if you dial it out to a longer-term view you'll find a market beater. Hansson has gone on a six-year buying spree by floating new shares on the market and using the proceeds to increase his fleet of tankers to 18, with more growth expected in the coming years. Hatteras Financial is a real estate investment trust, which means it's obligated to pay out 90% of its taxable income to shareholders as a dividend. It is yielding (get this) 15.2%. Hatteras has been a beneficiary of (some might say unsustainably) low interest rates profiting from a wide spread between the cheap rate it can borrow money and the high rate at which it's been earning interest income. These two make for an interesting matchup, easily my toughest first-round call. But I'm going to go with the business I understand slightly better: Nordic American Tanker. Boats. Oil. And stay away from the pirates. I get that. Pass NORDIC AMERICAN TANKER SHIPPING to the SECOND ROUND.

Second round preview
Those first-round matchups were mostly walkovers, leaving some heavy favorites still kicking dust around the arena with nary a scratch. Many onlookers are no doubt watching the judge carefully, knowing his biases, aware that one of his own -- carrying the judge's own weapon, mayhap! -- walks the pitch. Is this a fair fight?

Teva Pharmaceutical (TEVA) vs. Goodyear Tire & Rubber (GT)
Teva got a virtual first-round bye, its survival never in question. Hailing from Israel, sporting a market cap of almost $50 billion, this competitor develops, produces, and markets generic drugs. Selected by my colleague Jim Mueller as his 11 O'Clock Stock, Teva is the No. 1 generic maker in the world, and its portfolio covers all major categories of treatment. I note with great interest that over its 100-year history, Teva has grown to about $50 billion, while over its 100-year history, Goodyear has grown to ... about a sixteenth of that. Is it because Teva is much better managed? Maybe. But I suspect it's even more that pharmaceuticals are just a much better business to grow and profit from than rubber. That's all it takes for me to pass TEVA PHARMACEUTICAL into the FINALS.

VMware (VMW) vs. Nordic American Tanker Shipping (NAT)
Did you get a chance to click around Nordic American's website? On the day I did, I got to watch an August video of CEO Herbjorn Hansson's appearance on CNBC. I love his accent, and he speaks a darn sight better English than I speak Norwegian. (The CNBC hostess needs some language help herself -- calling him "Herb-JORN" -- one wonders whether she pronounces Bjorn with a hard "j" as well.) But let's get serious, here: VMware is a virtualization leader and virtualization is the foundational enabler of cloud computing. As much as I admire the neat trick of issuing more shares to buy more oil tankers, I would far better bet on a high-tech company helping to drive the great computing revolution of our time. We've made a small mint on cloud computing companies at Rule Breakers by figuring them out well before Wall Street. (Salesforce.com is now a four-bagger and counting for us, held for less than two years.) You better believe I'm not about to count out my big-time heavyweight (... who took my own weapon into the arena). Pass VMWARE to the FINALS.

Final Battle, to the death:

Teva Pharmaceutical (TEVA) vs. VMware (VMW)
Do you want to own a pioneer or a fast-follower? It's the classic argument -- some of us lionize the groundbreaking inventors, while others point out how often the pioneers wind up with "arrows in their backs," preferring those that come after. Unlike at least one past Battle Royale, I really do like both of these finalists to beat the market over the next five years. Teva helps drive down health-care costs -- a great trend. VMware helps drive down hardware costs and enables cloud computing -- a great trend. Both companies are capitalized in the tens of billions, but don't act complacent. It isn't fair that one of these titans should fall ... but ... Wait! ... Did Teva get backed into a corner briefly, and did the judge just stab him from behind? The judge?!! Yeah, well no one will ever be able to prove it. For this third Motley Fool Battle Royale, I therefore crown VMWARE as my CHAMPION!

Conclusion
Is it any surprise that the stock I picked to win this Battle Royale is a stock I picked to beat the market in June 2008? Probably not. VMware's 32-percentage-point outperformance of the S&P 500 since that time very closely mirrors the average pick performance in Rule Breakers. Since Rule Breakers debuted in October 2004, we have made 148 monthly selections (two a month), with an average gain of 36% each against the S&P 500's directly comparable return of ... 0%. This in a world where many financial professionals will tell you that no one, and especially no one outside Wall Street, can consistently and dependably beat the market. With every passing month, VMware and its brethren prove the efficient markets hypothesis drastically wrong.

Again: Is it any surprise that the stock I picked to win this Battle Royale was a true-blue Rule Breaker? Well, maybe, yes. In our first Battle, I picked against another Rule Breaker and a stock I own, 13-bagger Baidu.com. I still love Baidu for the long term. But I found another stock I also really liked over the next 12 months. 

So as VMware and I walk together out of the arena, I'm now committed to picking the stock right now -- in conjunction with publishing this article -- to beat the market over the next 12 months on Motley Fool CAPS. Given my 99+ CAPS rating earned patiently over the past four years, this is not a commitment I throw around lightly -- my CAPS scorecard has beaten the market 64% of the time, and by an average of 15 percentage points per pick. So VMware, whether this Battle Royale was fixed or not, I'm accountable; I'm now getting scored not on the past, but your future!

Meantime, dear Fools, if you're not already a member of Motley Fool Rule Breakers, I invite you to take a 30-day free trial of our service. Come see how we're beating the market by an average of 36 percentage points across 148 selections. Come see how long-term investing in the great leading companies of our time provides outsized returns. In fact, we just released our list of five Rule Breakers Best Buys Now last night ...

Read Battle Royale No. 1, where Baidu fell, and Battle Royale No. 2, where David picked (rare for him) a dividend payer.

Fool co-founder David Gardner owns shares of Baidu. Baidu, Salesforce.com, and VMware are Motley Fool Rule Breakers selections. Netflix is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Teva Pharmaceutical. 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 (15) | Recommend This Article (51)

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 28, 2010, at 6:21 PM, Mustang6147 wrote:

    The fools Battle Royal. Strike one, reporting wrong information. strike 2 repeating tactics of reporting bad information, and strike 3 claiming there is a shipping war when there isnt. Where do you guys get this info from fedex?

  • Report this Comment On October 28, 2010, at 6:49 PM, TMFSarahGen wrote:

    Umm, David, there are plenty of reasons to dislike YRCW (although I own it in real life and have a green thumb in CAPS - I'm up 10pts there), I think you've picked the wrong one. I think Rich's article actually mentions a truce in the price war. And YRCW may have a small market cap, but it's a giant company with giant revenue. The reason to give it a pass is due to the high risk of bankruptcy. I'm betting on no-bankruptcy. But it's hanging over its head. And before a recent reverse split, YRCW was trading for just a few cents.

    As to letting TEVA all the way through almost to the victors circle?! <gasp> I guess I have to applaud your not taking the MNTA side automatically because it's a RuleBreaker, but I wouldn't go near Teva until the generic Lovenox war is over. Teva keeps saying "they're very close to approval," but the digging of folks on the boards has suggested this is not at all true.

  • Report this Comment On October 28, 2010, at 7:52 PM, TMFSpiffyPop wrote:

    @Mustang6147 -- just lay out any wrong information you see and we'll get it corrected. You didn't specify.

    @SarahGen -- okay, sounds like your reasoning (which I respect as you know) and mine may be different. In my Battle Royale format, there isn't time to say everything -- I could have talked about how I don't favor companies whose market caps are a fraction of their revenues. And you're right, they may go bankrupt. These are all the very sorts of reasons that I favored Teva.

    Keep the comments coming, Fools. It's a motley world and I like to hear viewpoints. I'll say this: I'm accountable to my article in that I pick my champ on CAPS. If you think I got it wrong, back it up -- sign onto CAPS and thumb my champ down, or thumb your own stocks up. That way your comments -- just like mine -- get scored. Fool on. --David

  • Report this Comment On October 28, 2010, at 8:01 PM, Zundels wrote:

    David do you think YRCW will recover or go bankrupt? I own a small amount in real life. I bout 3100 shares at about 0.38$. Thanks for any information.

  • Report this Comment On October 28, 2010, at 8:31 PM, TMFSpiffyPop wrote:

    @Zundels, good question -- I don't know -- I would say the market is pricing it as if it will, but @SarahGen knows more about this company than I do. My task in the article is just to determine which of any two pairs of stocks I would favor over the next 12 months, and that matchup for me was pretty easy. Good luck. I don't mess with penny stocks.

  • Report this Comment On October 28, 2010, at 8:34 PM, Zundels wrote:

    Thank you for your comments David.

  • Report this Comment On October 28, 2010, at 9:02 PM, TMFSarahGen wrote:

    @TMFSpiffyPop - oh I don't blame you for choosing Teva over YRCW - it's the lower risk choice. But I would have chosen GT over TEVA. In fact, I may just go to CAPS and do a green thumb on GT and red thumb on TEVA sometime in the next couple days. I'll let you know. I think I have too many picks to do it right now.

    @Zundels - this all has to do with age, total assets to invest, if you've got an income etc etc. No investment is ever 100% safe and YRCW is at the most risky end of the curve. There are analysts who have a price target of zero on this stock. Buying or choosing to keep YRCW stock is like holding onto a lottery ticket. I do own some. It's a very small part of my portfolio. And it's the most risky stock I own. The Teamsters have done so much to help this company stay in business, even standing up to shorters and bond holders last December, and repeatedly taking paycuts and making concessions - that I just would hate to see it go bankrupt. But I know that hope is not an investing strategy, so my investment is very small. I'm not sure that helps you. But this is a longshot.

  • Report this Comment On October 28, 2010, at 9:09 PM, TMFSpiffyPop wrote:

    Sure, @Zundels -- I've been thinking a bit more about this. I personally think that investing in YRCWD is basically gambling in two senses: first, it's really just a guess whether the company goes bankrupt or not, and second, I would feel like the odds are stacked against me because the House knows more. Finally, heed my point above about generally avoiding companies whose market caps are a fraction of their revenues. --DG

  • Report this Comment On October 28, 2010, at 9:11 PM, Zundels wrote:

    SarahGen thank you for your comment. I knew if was a risky choice when I first bought it. It wont kill me if it goes to 0, just wanted some other peoples opines who know more then me. Thanks again.

  • Report this Comment On October 28, 2010, at 9:13 PM, Zundels wrote:

    Thanks again David for your comments.

  • Report this Comment On October 28, 2010, at 10:02 PM, TMFSarahGen wrote:

    For Zundels and anyone else reading this because of interest in YRCW, just a note that there is a critical vote going on now, counting is tomorrow for the Teamsters to agree to certain concessions. Listening in on trucking forum discussions, it seems like most union members were told that if they did not vote yes that YRCW would lose out with the banks and would go bankrupt and thousands of jobs would be lost.

    In fact, the banks gave YRC an extension until January 10th to work out a deal. http://www.bizjournals.com/kansascity/news/2010/10/26/yrc-wo...

    Expect an announcement tomorrow, possibly after market close.

  • Report this Comment On October 29, 2010, at 9:40 AM, DjangoTravis wrote:

    David, In reading your comments about YRCW portrays you in less than favorable mental prowess. All of your points are the same. You should have said 1) market cap, 2) Market Cap, 3) MArkEt cAp. They all look different, but they are all the same fricking thing. What are you related to someone there at the Fool or just the poster child?

  • Report this Comment On October 29, 2010, at 11:14 AM, itstherecit wrote:

    A little inside/outside info about AFFY:............because of the way the arbitration case vs. JNJ was ruled the way it was, JNJ will be able to sue when, and if ever, AFFY is able to commercialize it's anemia drug HEMATIDE. JNJ will, if the suit is won, be able to scarf a portion of AFFY's profits. What's also some inside/outside info is that AFFY's CEO Ms. Morris was being mentored/or is still being mentored by JNJ's CEO Bill Weldon. Seems like a conflict of interest to me. But how many investors might be interested to know those tidbits of info?

  • Report this Comment On October 29, 2010, at 12:01 PM, itstherecit wrote:

    However I do believe that AFFY's one and only product HEMATIDE, will see the market place because of JNJ's new found pending capital interest. Maybe up to a 50% bite from the profits of AFFY. Not to mention clout! Cash and Market Cap numbers are just numbers to AFFY. They also have big brother TAKEDA watching over them because of their investment and potential mega profits. Last month AFFY's B of D awarded/conjured itself mega shares pending a buyout or merger with another Co. I wonder who that might be? Does JNJ seem the logical buyer?

  • Report this Comment On October 30, 2010, at 1:38 AM, aleax wrote:

    "generally avoiding companies whose market caps are a fraction of their revenues" -- you mean like WMT, with price/sales < 0.5? Funny (1), Ken Fisher back when he was young and Foolish first pointed to low price/sales as the single BEST numerical indicator of when to buy a stock. Funny (2), Global Gains just recommended WMT *just for its awesome global growth prospects*...!-).

    Truth: low P/S (and low price/book, and other cherished indicators of value) mostly mean that Mr Market (cfr Graham's "The Intelligent Investor") is on one of his depressive binges regarding said company, and the stock theeof is thus a steal;-).

    Indeed, don't you routinely recommend COST, with a market cap that's an even LOWER fraction of its sales, close to one/THIRD...?!

    Truth: there are lines of business (low-cost retail, as practiced by COST and WMT, being a great example) where the margins are just inevitably lower than other businesses, which means low price/sales, i.e., "market cap just a fraction of revenue". That doesn't mean such stocks can't be great investments (COST with P/E > 20 is not for me, not with WMT at < 14 and the latter's great global prospects, but I guess that's an understandable "style difference";).

    If you feel trucking can't be such a line of business, then you could argue about why (I know nothing much about trucking so I'm not going to get into the sector anyway, but I'd still be curious;-). But just tossing the "low price/sales" out there as a negative is not a good nor valid point at all!

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