This article is part of our Rising Star Portfolios Series.
As a kid, I hated green beans because I thought they tasted like dirt. I refused to eat them. Now that I'm all grown up, I still think they taste like dirt -- but I eat them, because they're low in calories and loaded with vitamins A, K, and C. My brain wins out over my taste buds. And Fools, that's exactly how I invest, too. Care to join me?
Please un-vest (but keep your clothes on)
Un-vesting is my way of trying to keep from making stupid decisions based on emotion. When I realized it wasn't in the cards for me to be tall, dark, and handsome (perhaps because I didn't eat enough green beans), I began to pursue cool, calm, and collected instead. When it comes to investing, this strategy means I look for bargains in areas that other people find unknown, unloved or unsexy -- in other words, companies that are ugly, boring, or just plain hated. Restricting my universe to these uncouth names helps me ensure that I'm looking strictly at the merits of an investment, rather than the polish and gloss of a great story.
Here's a pair of guidelines to explain why I think un-vesting is the right approach, and why you should check back each week to see what's going on with my Un-Portfolio.
1. Be dispassionate
Media reports on this summer's Deepwater Horizon rig explosion and ensuing oil leak featured vivid imagery that opened the door for emotion to trump reason. Millions of investors became incensed by the devastation and the way it was handled. As a result, any company remotely associated with deepwater drilling saw its stock get rocked.
Such was the case with Bristow Group (NYSE: BRS), which operates a fleet of more than 500 helicopters that provide taxi services to the deepest of deepwater drilling and production rigs. From the beginning of May to the end of June, the height of oil-related selling, Bristow sank 27%, even though just 6% of its operating income in fiscal 2010 came from the Gulf.
By remaining calm and dispassionate and focusing on the facts, I could see that the company earned revenue on its flight contracts even if it didn't fly, and that deepwater oil and gas production was too important to global energy needs to be meaningfully altered. Moreover, Bristow is one of only two companies in its industry with a global presence, giving it a strong competitive position. Since July, cooler heads have prevailed, Bristow has executed its business -- and shares have risen more than 30%.
2. Think independently
For-profit education stocks are quite possibly the most hated corner of the market right now. Industry participants, led by Apollo Group (Nasdaq: APOL), have been put in detention for questionable recruiting practices, high student loan default rates among graduates, and offering degrees that don't actually help students gain employment. As a result, for-profit colleges and universities could lose as much as 90% of their revenue if federal student aid dollars disappear. And shares of for-profit education companies reflect these fears:
| Company |
6-Month Return |
EV-to-EBITDA |
|---|---|---|
| Apollo Group |
(34.7%) |
3.2 |
| ITT Educational Services (NYSE: ESI) |
(36.2%) |
3.1 |
| Career Education (Nasdaq: CECO) |
(40.1%) |
2.9 |
| Strayer Education (Nasdaq: STRA) |
(42%) |
7.8 |
| Corinthian Colleges (Nasdaq: COCO) |
(66.5%) |
1.9 |
Source: Capital IQ, a division of Standard & Poor's.
It's easy to hop on board and hate these stocks. But I think there is a very real need for these institutions. After all, President Obama stated that by the end of this decade, eight in 10 American jobs will require higher education or workforce training. At the same time, the United States has slipped to 26th in the World Economic Forum's ranking of educational system quality. With budget cuts hurting community colleges, and traditional universities slow in catering to minorities, women, and professionals, for-profit universities fill a high-demand niche.
While I'm not ready to invest in these companies yet, investigating the situation independently has helped me to uncover Strayer Education, an extremely well-run company that takes its academic responsibilities very seriously. In fact, its growth has been restrained because of a focus on educational outcomes. With a stellar operating model, an invested management team (insiders own about $60 million in stock), and an unloved share price, Strayer is on my radar.
Un-vest with me
Removing emotion from investing ensures that your brain wins out over your own tastes, or the prevailing winds of conventional wisdom. A focus on fundamentals and a willingness to look where others won't can point you toward opportunities you'd never otherwise uncover. I hope the Un-Port will demonstrate that your investing "taste buds" are often a far worse guide than your brain.
Over the next few weeks, I'll officially begin my un-vesting journey -- plunking down some of The Motley Fool's money by making buy recommendations. Along the way, I'll dive into the finer points of valuation and competitive analysis on the Un-Port's discussion board. I'm looking forward to engaging with other Fools, discussing my picks, and talking shop. Check back frequently for updates to the portfolio, to track its performance, and to keep up to date on live recommendations.
