The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
Adobe
(NASDAQ:ADBE)
San Jose
, Calif.
$67.81
52-week low-high: $34.89-$68.30
$16.5 billion market cap
By Rich Smith
Let's give our Stock Madness organizers a round of applause for this pairing: paper producer, Hidden Gems pick, and stock market newcomer Neenah Paper versus virtual paper pioneer Adobe. Fantastic.
As a dedicated Hidden Gems fan myself, I realize I'm tempting fate by going up against any recommendation of Tom Gardner's. After all, his selections have romped all over the S&P 500's average returns for the past two years -- crushing the market by a margin of nearly five to one. So perhaps rooting for Adobe over Neenah is a sucker's bet, but I'm going to give it a go.
First, though, I want some backup to counterbalance the "Gardner aura" surrounding Neenah. Allow me to introduce Peter Lynch. Mr. Lynch, say those magic words!
Lynch: "Buy what you know."
Thank you, Mr. Lynch. And speaking of buying what you know, how well do you know the premium and specialty paper market -- Neenah's stock in trade? I'll bet not too well. On the other hand, take a quick glance at your desktop, and chances are you'll see a little multicolored Adobe Reader icon.
You know Adobe. You likely use it all the time. Even my fellow Hidden Gem-ers probably view their newsletters on Adobe's Acrobat Reader every month. A product you use constantly -- that's a great place to look for an investment.
And once you start looking, you'll see that Adobe sports a 27% profit margin, backed up by a return on equity of 36%. Adobe has more than $1.3 billion worth of cash in the bank, generates consistently large amounts of free cash flow, and over the past 12 months grew its profits by a whopping 69%.
Adobe: Paper for the new millennium.
Fool contributor Rich Smith has no position, short or long, in either company mentioned in this article.
Neenah
Paper (NYSE:NP)
Alpharetta, Ga.
$34.21
52-week high-low: $29.88-41.50
$499 million market cap
By Nathan Parmelee
Hidden Gems pick Neenah Paper certainly has a very tough matchup against electronic document experts Adobe, but the company comes in prepared. Spun off from paper products behemoth Kimberly-Clark (NYSE:KMB) in late 2004, Neenah is now free to focus solely on its own operations without the meddling distractions of a corporate parent. Aside from the pulp business, which is deeply cyclical, the fine paper and technical paper markets have excellent margins and unique customer development requirements that should benefit from this more focused management structure.
The fine paper business produces the kind of paper you see in annual reports and specialty packaging. This is not your typical ream of paper from an office supply store. These are markets where the quality of the paper is perceived to communicate the quality of the product and message, and in turn, these customers are willing to pay for quality that allows them to differentiate their message.
On the technical paper side of the business are products that range from heat-transfer applications to products that meet the stringent labeling and packaging needs of the medical industry for safety and durability. Again, these are specialized products that bring along with them higher margins and more predictable pricing than the cyclical pulp portion of the business.
We'll wrap up with the fact that Neenah comes out of the gates sporting a dividend yield of 1.2%. It's not huge, but the payment shows management's faith in the cash-generating capabilities of the business.
Fool contributor Nathan Parmelee owns shares in Neenah Paper.
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