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!
