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 6, 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.
Marvel (NYSE:MVL)
New York
, N.Y.
$19.86
52-week low-high: $12.15-$21.95
$2.1 billion market cap
By Rick Aristotle Munarriz (TMF Edible)
Let me tell you what Bill Mann won't. He made a brilliant call two years ago when he recommended Valero to what eventually became our Motley Fool Hidden Gems subscribers. Everyone hated the oil services sector at the time, and it was the perfect contrarian play: The stock has essentially quadrupled. Buy a cyclical stock when it's out of favor, and wonderful things like that are bound to happen.
Yet buy into that same company when everybody digs it -- like now, when Valero breezes past the first two rounds of tournament play on the strength of its loyal traveling alumni -- and you're looking for nothing but counter-cyclical trouble. Yes, Valero earned a whopping $6.53 a share last year, but it is looking to earn just $6.41 a share this year, with analysts banking on just $5.80 a stub in profits come 2006.
Sure, one can argue that Marvel has also had a meaty run-up since first being singled out in our Stock Advisor newsletter service. The difference is that while Valero's refinery business may have hit its cyclical peak, Marvel is only starting to drill.
Sure, we all saw the Spider-Man and X-Men movies. Marvel's licensing prowess is tapping those hit properties for sequels and enhanced related merchandising opportunities. But we also have the eagerly anticipated Fantastic Four coming out this summer. Other Marvel characters in movie development deals include Captain America, Thor, and Silver Surfer.
Now that Marvel's creations have proved to be popular on the big screen, the movie studios are bidding up Marvel's library of hundreds of dynamic superheroes and sinister villains. So if you think that Marvel's 24% net profit margins are impressive -- and surely you must if you think Valero's sub-4% net margins are tantalizing -- the freaky truth to Marvel's greenery-generating super power is that you haven't seen anything yet.
Fool contributor Rick Munarriz does not own shares in any of the companies mentioned in this article.
Valero (NYSE:VLO)
San Antonio, Texas
$73.27
52-week low-high: $27.95-$77.15
$18.8 billion market cap
By Bill Mann (TMF Otter)
Too bad it's not "Valerm." Then Valero and Marvel would be anagrams.
I'll wait while you check this amazing little piece of trivia out for yourself.
Meanwhile, as we trundle on along in the Stock Madness tournament, Valero has stood down a paper-milling company and a utility. Now we get Spider-Man.
Are there two businesses that could possibly be any different than Valero and Marvel? One is an oil services company -- with some vertical integration -- that mainly makes its mark in the refining business. The other is a comic book and, ahem, character property management company. Cartoons and fantasy vs. making money doing the business of converting petroleum into products on which we're utterly dependent in our everyday lives.
Hmmmmmm.
I mean, I know what business is prettier, and it's not Valero. I also know which company operates in a market with a demand that outweighs supply. This doesn't exist in the entertainment world. Each Marvel-based movie represents big risk for the company. If Spider-Man 2 failed (it didn't, and it was a capital movie), the impact to Marvel is very big. There is, in fact, a serial correlation for entertainment products: Once they start to stink, people lose interest and tend not to come back.
Let's call this the Starship corollary. Jefferson Airplane created one of the best albums of all time: Surrealistic Pillow. But once the Airplane changed to a Starship and lost the "Jefferson" -- and sang "We Built This City" -- it would have taken an act bordering on the divine to get people to come back. They lost their edge, and that was that. What is the potential coefficient of Starship corollary for Marvel? It's actually pretty high, and what's worse, it doesn't just depend on what Marvel does. There are other companies putting out gobs of cartoon and comic-based entertainment products.
Meanwhile, refineries have about as much fashion risk as, well, refineries. Valero has even less risk, since it doesn't even depend on the pricing of that hoity-toity "sweet" crude -- it spent billions a few years back converting much of its refining base to be able to handle raw petroleum with a high sulfur content. And did I mention that Valero's building a refinery down the street from you? Yeah, that's because it isn't. Wherever you are, if there isn't a refinery near you, rest assured that your local officials will ensure that one won't be built there anytime soon. That's a benefit of being an unloved business that everyone needs. as opposed to a loved business that few truly need.
Bill Mann owns none of the companies mentioned in this article.
Who won? Go here to cast your vote.
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