The following article is part of The Motley Fool's " Stock Madness 2006," based loosely on the annual NCAA College Basketball Tournament, a.k.a. "March Madness." Throughout the competition, our writers and analysts will engage in head-to-head competition. You, dear readers, are the fans and referees -- after you read these exciting duels, your votes will determine who moves on to the next round of play. The writer who survives the tournament will be our champion and most valuable "coach."
But, please, make no mistake -- " Stock Madness 2006" is a GAME!
I've got 500 or so words to tell you why my five stocks are more awesome than Nathan Slaughter's. Easy.
The good ol' days
There are three traits that my portfolio of Berkshire Hathaway
- High expectations
- High prices
I'm fine with that. Historically, those three traits are most likely to sink a stock. Instead, I have a collection of undervalued, underappreciated, and misunderstood workhorses. We're old-school. We're skunks at the growth garden party. I love it.
Even Valero and Old Dominion, which have run up dramatically over the past few years, still trade at earnings multiples of just nine and 17. Yet these companies are excellently run, holding moats and competitive advantages -- Valero refines high-sulfur crude oil, while Old Dominion thrives as a less-than-truckload carrier -- that will keep their top and bottom lines growing for years.
In Valero's case, folks continue to doubt that current energy demand and prices are sustainable. Given current demographic and demand trends, globalization, and the costs of alternative energy, we'll need refiners for many, many more years.
We're also getting three of these companies -- Berkshire, American Financial, and National Research -- for bargain prices.
Berkshire is big, complex, boring, and battered by recent difficulties in the insurance industry. Yet the company is led by Warren Buffett, the world's greatest investor. Enough said. This stock is a core holding, offers immediate diversification, and the fair value of a B share is at least 10% greater than its current price.
Investors don't understand American Financial or its strategy. While AFR's enormous dividend doesn't seem to be covered by funds from operations (FFO), adding back the company's property sales proves that the dividend is solid money. Management has even been buying shares in the face of analyst skepticism. This 9% yield will be closer to 5% in a few years, not because the dividend was cut but because the stock will have appreciated nearly 50%.
National Research is a $140 million company that helps health-care organizations measure everything from customer satisfaction to patient outcomes. In the years to come, health-care spending will increase at a record rate, while consumers, hospitals, insurers, and government officials will want to spend smarter. That's exactly where NRCI fits in.
The company also offers everything micro-cap investors should look for:
- High insider ownership
- A dedicated founder who has served as CEO for 25 years
- A growing dividend
National Research has been quite candid about the recent failures of its sales staff, but more training and experience seem to have solved that problem, and the stock has the potential to go much higher. Even management, which has impressed me with its conservative claims in conference calls, called the stock attractive.
The Foolish bottom line
The risk/reward profile of this portfolio is incredible. These companies offer tremendous upside without much room to fall. And wouldn't you know it? I've hit my word count without trashing Nathan at all. No worries. That's why we have the rebuttals.
Nathan Slaughter's rebuttal
True, my team generally trades at a premium -- a well-deserved one. While my opponent's lineup sports a five-year projected earnings growth rate (assuming an equal weighting) of just 9.1%, mine is looking at annual bottom-line growth in excess of 14%. Furthermore, we will hit the court with a sensational average ROE of nearly 30, roughly triple the 10.4 produced by our rivals.
It's always important to enter the tournament on a hot streak, and aside from Verisign
Fool editor Tim Hanson owns shares of Berkshire Hathaway, Valero, and American Financial Realty. Fool contributor Nathan Slaughter holds no financial position in any stocks mentioned. American Financial Realty is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.