Reflecting last night upon my fantasy football championship win, I thought about the similarities between fantasy sports and stock picking. As fantasy sports have been brought online, playing on a team has become so automated and simple that any fan (or non-fan) can jump right in and play. Old-schoolers used to spend hours tracking stats and assigning value to each player, using the sports section of The New York Times as their guide. These days, all of those stats are available in multiple online formats.
Those of us who buy individual stocks have a similar advantage over our predecessors. We have access to online trading platforms, research, reports, The Motley Fool, and more. The availability and quality of information is endlessly advancing. This has brought the barrier of entry down so the layman can play the game.
What separates the winners from the losers in the stock-picking game? Investors often win and lose for the same reasons as those with fantasy sports teams. In fantasy sports, having a solid draft strategy will get you started on the best possible foundation. You need your top picks to be proven high scorers that are consistent, not prone to injury, supported by a stellar team, and possessed of a certain competitive edge. Similarly, portfolio-worthy stocks tend to possess a track record of increasing revenue and profit, strong balance sheets with little debt and plenty of cash, savvy and inspiring management, and that special something that separates them from the competition.
With these criteria in mind, let's talk about what your first-round and second-round fantasy stock picks might be. I'll follow up with subsequent articles this week and next in order to cover your next-round picks. Happy hunting!
1. Markel (NYSE:MKL)
This $7.8 billion company is a scrappy and physical specialty insurer -- like a little brother to Berkshire Hathaway (NYSE:BRK-B) and an all-around investment vehicle for everything from bakery equipment to mobile dredging equipment. Leadership at Markel is particularly focused on the humble CIO Tom Gayner, who, like Berkshire analogue Warren Buffett, prefers to hold his investments forever. Executive pay incentives are directly correlated to five-year book value and are payed primarily in restricted stock. This aligns executives and common shareholders as "partners" in Markel (as stated at the outset of the company's annual shareholder letters).
As a "special sauce" bonus, Gayner leverages insurance premiums and cash produced by Markel's subsidiaries into a $2.9 billion equity portfolio that continues to do quite well. According to Markel's 2012 annual shareholder letter (link opens PDF), the company has a compounded annual growth rate of 16% over 20 years and an equity return of 10% versus the S&P 500's 8%. Wrapping up the stats from Markel's most recent quarterly balance sheet, we can see the company is in a strong position, with $2.11 billion in cash, $1.15 billion in short-term investments, and $2.25 billion in debt (likely attributable to the Alterra acquisition and an ongoing share buyback, which are good debts to have). With a firm grip on the wheel, conservative yet market-beating investment returns, and an eye on the distant horizon, Markel should be your No. 1 pick for 2014.
2. Facebook (NASDAQ:FB)
Facebook has proven itself a top-five player to investors over the past year:
This is only Facebook's second year in the big leagues, so if you haven't stepped up and bought in yet, now's the time. Facebook is well ahead in the social-advertising business and has embedded its ecosystem into the daily lives of both businesses and consumers. This quality is the special sauce that what we look for in an advertising business. Facebook solves the age-old Internet challenge of how to make the Internet a place where we can all create, rather than simply consume. Creative engagement is ultimately more sustainable than pure consumption, as the feedback loop is complete: create-consume-comment-consume-create. This process sets the daily activity on Facebook's social network to autopilot.
According to a recent Facebook press release, the platform is unleashing a new video timeline technology that its metrics have shown to increase views by more than 10%. Facebook has the unique platform to test out new technologies on a massive scale to its users, receive feedback, and then deploy to marketers who will then hand them cash. With the Instagram product monetization currently underway, this shows a Facebook track record and future trajectory of innovation and delivering gains to shareholders.
The Facebook story shows in the balance sheet for the third quarter of 2013. Its current cash balance is $3.1 billion, with no debt and very low operating expenses. At this juncture, we can see that Facebook is positioned for major spending on new innovations and acquisitions to propel its growth. It most recently pushed for a $3 billion purchase of Snapchat, which would have taken market share back into the ecosystem while acquiring new talent. Even though this deal did not go through, we can see that management is open to making big moves. 2014 could offer many similar opportunities for Facebook to grow into its market cap (currently $133 billion).
One big question regarding Facebook's viability as an investment has been its management. We all recall the insider reports about what CEO Mark Zuckerberg was wearing (plenty of hoodies) during the Facebook road show on Wall Street, as well as concerns about his ability to manage growth for the long haul. However, not only has he been deemed capable, but he has smartly surrounded himself with an incredibly talented support team. Zuckerburg has also earned himself a 99% ranking on Glassdoor.com as the No. 1 CEO as graded by employees.
Management quality and corporate culture should be serious considerations for long-term investors. Many investors look to quantitative stats as ideal measures for winning stocks, often failing to take the time to investigate what companies look like from the inside. The creative juices and animal spirits that fuel innovation will also help propel a company's stock price higher.
Fool contributor Josh Allwine owns shares of Facebook and Markel. The Motley Fool recommends Berkshire Hathaway, Facebook, and Markel. The Motley Fool owns shares of Berkshire Hathaway, Facebook, and Markel. 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.