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.


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!

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.