The Oracle of Foxboro

The Carolina Panthers are out, replaced by another happy-to-be-here hopeful, the Philadelphia Eagles. And the defending champs are back, seeking their third title in four years.

(There's a connection here to stocks, which I'll get to after a few more sporting paragraphs.)

The New England Patriots are not your typical sports juggernaut. The last comparable NFL dynasty, the Dallas Cowboys of the 1990s, featured an all-American quarterback, a running back who would go on to break Walter Payton's all-time rushing record and a wide receiver who will beat his former teammates to the Hall of Fame. Troy Aikman, Emmitt Smith and Michael Irvin were all drafted in the first round — Aikman first overall. The trio combined for 21 Pro Bowl Selections. If those guys were a stock, they'd be Google (GOOG).

The Patriots are led by a quarterback picked in the sixth round after fighting for a starting job on his college squad. He also happens to be the team's lone recognizable star. The leading rusher fled a bad Cincinnati team with a malcontent label but without so much as a sniff of the playoffs during his seven-year career. The Pats' top wide receiver this season was a seventh-round pick. Their second most productive pass catcher wasn't drafted at all, getting to the NFL by way of gigs as a landscaper, electrician, coffee bean hauler and gladiator in the Arena Football League. I'm not making this up.

Head coach Bill Belichick dresses like Rain Man, speaks softly and inspires the zeal of true believers from employees. He's well-prepared for every contingency. Belichick's teams talk no trash, strike no poses and take no prisoners. They can out-muscle opponents or out-think them, prevail in a blowout or on a long last-second field goal with the title on the line.

Quite possibly, Belichick keeps his millions locked in a safe under a bed he seldom sees. But if he did venture into the world of stocks, Bill clearly would be a deep value investor on the Warren Buffett model. He finds novel uses for underappreciated players, and they always seem to pay big dividends at the right time.

Belichick plays his home games in Gillette Stadium, named for the razor maker that Buffett so loves. Dividend-paying Gillette (G) would be a Belichick-type stock, if it hadn't just sold itself to Procter & Gamble (PG) for a hefty premium. So what else might Bill like, if Bill liked stocks?

He'd look for dividends, cheap growth and innovative management. He'd look for stocks that could weather all sorts of markets. He'd look for something off the beaten path.

As it happens, my own very limited stock-picking experience is colored by chance encounters with two "Belichick specials." Back in 2003, defense contractor DRS Technologies (DRS) and prison operator Corrections Corp. of America (CXW) got notice in this space because they looked cheap given the rising tide of federal spending on defense and homeland security. They also appealed to my macabre sense of what constitutes a growth industry in our times.

DRS is up 49% since I laid eyes on it, while Corrections Corp. has risen 56%. I'm not boasting, because then I'd have to mention that the only stock I've ever actually purchased, Newmont Mining (NEM), is down 12% since I sang its praises last year. I'm merely trying to suggest the sorts of stocks that might qualify as "Belichick's type."

What I set out to do this week in honor of Belichick, Brady and the Patriots is to find another worthy underdog with championship potential. And I think I did. The guys who run it are probably Redskins fans, but why let that ruin a good story line?

Friedman Billings Ramsey (FBR) may look like an undersized bunch, but they exhibit Tom Brady smarts and Corey Dillon hunger. They're two-way players, useful on offense and defense. And if you put them in your lineup they'll put points on the board right away.

FBR's mortgage REIT arm is financing what now amounts to a juicy 7% dividend yield. That's the defensive part. The offense is supplied by a booming investment banking business. Effectively, the partners who've assembled this profit machine from a start-up brokerage in 15 years are paying you to come along for the ride.

A telling peek at the corporate culture can be gleaned from a recent Washington Post feature which described "an alchemy of unusual ideas and entrepreneurial chutzpah." Sounds like the Patriots. Also like the Patriots, FBR engages unblushingly in family nepotism. But the record indicates that the relatives in both organizations pull their weight.

Now, I'm painfully aware that this is the sort of fluff people used to write about Enron. But for all its complexity, FBR appears to be on much firmer footing. Co-executives Manny Friedman and Eric Billings don't seem to be the toga-party type. And they reportedly don't stray far from the corporate trading floor even as they outgrow their neighborhood brokerage roots.

Rain Man

It took 12 gallons of Gatorade and a conference championship to coax a half-smile out of Belichick.

Their role is to allocate available capital to the parts of the business offering the best returns, a function they've performed admirably well. Return on equity checks in at an impressive 23%. It's 17% at Morgan Stanley (MWD) and 20% at Goldman Sachs (GS).

While Wall Street giants are hiring legions of investment bankers to cope with rising merger activity, FBR makes do with 600-plus employees, who combined for a cool billion in revenue over the last year. That's pretty lean. SmartMoney's stock snapshot estimates FBR's revenue per employee even higher, at some $2 million, 33% above the comparable metric for Goldman Sachs and nearly triple the per-capita production at Morgan Stanley.

Management plays quarterback, putting capital to work in mortgage trading when margins in that business look attractive, then shifting it into merchant banking when the winds shift.

FBR has helped itself to a nice tax break by wrapping the investment bank and brokerage into a REIT, and has worked with mortgage-market pioneer Louis Ranieri of "Liar's Poker" fame on a novel REIT specializing in bank branches. The company has a stake in an insurance venture. It has also developed a streamlined capital-raising strategy whereby shares in private companies are sold to private institutional investors, who hold them pending completion of SEC paperwork permitting their resale to the public.

FBR is expanding opportunistically, recently luring a team of top mortgage traders from Freddie Mac (FRE) following changes at the reforming mortgage giant. It has also bought an originator of high-rate (and riskier) home loans to boost its portfolio returns. The company remains exposed to declining lending spreads if short-term interest rates should continue to rise.

In fact, FBR shares fell 4% Thursday after another REIT, New Century Financial (NEW), warned that its 2005 profit could fall short of Wall Street's estimates. But if you believe, as I do, that the Fed will be done hiking rates by autumn, if not sooner, you won't be too put off.

A rising rate requirement should hurt FBR less than other REITs, because of what it would mean to its underwriting and merchant banking arms. Here, FBR is punching well above its weight, muscling into seventh place among IPO underwriters last year, ahead of such giants as UBS (UBS) and Lehman Brothers (LEH), after a landmark third-place finish in 2003.

While the firm is starting to attract large-cap clients, it still specializes in small caps, precisely the companies that would seek to sell equity first should borrowing costs rise. The merchant banking unit should also do OK, having already returned an annualized 32% over the last five years, according to a recent tally by Sandler O'Neill. That's splitting the uprights like Adam Vinatieri.

Overall, revenue net of interest expense was up more than 50% year-over-year in the most recent quarter. Net income jumped 61%. The stock now trades at nine times its projected 2005 earnings, vs. a P/E multiple of 11 for Merrill Lynch (MER) and 13 for Piper Jaffray (PJC). Did I mention that FBR yields 7%? While Friedman Billings now does research on hundreds of large caps, its own stock is tracked by just three analysts, who are bullish but not unduly so as a group.

The FBR name is only starting to become widely known, with the company recently agreeing to sponsor the Phoenix Open golf tournament for the next five years. The renamed FBR Open gets under way today. FBR remains based where it began, in Arlington, Va., and its principals are well regarded on the D.C. philanthropic scene.

I'm going to eat my own cooking on this one, and spend some of my tax refund, when it comes, on FBR shares for a Roth IRA account (where, as an extra perk, that fat yield won't be taxed at my income-tax rate). I think the stock is as good a bet as the Patriots on Sunday. Except that while Patriots bettors are giving 6 1/2 points, I'm taking seven.