Apollo Group (APOL), Rosetta Stone (RST) Among Ariel Investments’ Top Picks

John Rogers founded Ariel Investments in 1983 following a stint at William Blair & Company. Rogers received an AB in economics from Princeton University and started his own investment firm with only $100,000 from Howard University’s endowment. From 1983 to 1986, Rogers managed to grow Ariel Investments’ assets to $45 million. After reviewing Ariel’s latest 13F, we have outlined five stock picks that the fund was bullish on last quarter. These stocks are off the beaten path, so to speak; check out Ariel’s entire portfolio here.

After a 275% stake increase last quarter, WMS Industries Inc. (NYSE:WMS) is now one of Ariel’s big bets. WMS designs and sells gaming devices for casinos and expects revenues to be up 4% in FY2013. A return to leisure spending and gaming expansion should drive demand for the company going forward. WMS trades on the low end at 13x earnings, compared to Multimedia Games (15x) and International Game (16x). Billionaire Ken Griffin – founder of Citadel Investment Group – is one of the top name investors in WMS, having upped his stake almost 250% last quarter (see all of Ken Griffin’s newest picks).

The Western Union Company (NYSE:WU), the payment processing company, saw Ariel increase its stake by 170% last quarter. Analysts expect revenues to be up only 2% this year on volume concerns, primarily due to payments tied to consumer credit. What bodes well for Western Union, though, is its solid dividend yield of 3.7% and its bargain-bin 7x P/E, compared to Green Dot (13x) and Heartland Payment (13x). The stock also trades at a lowly PEG of 0.72, indicating that investors are shy about its 5-year EPS estimates (9.3% annually). The sell-side’s estimates are actually slightly (20 bips) above Western Union’s bottom line growth post-2007.

Apollo Group Inc (NYSE:APOL) saw Ariel increase its stake by 85% last quarter. Apollo saw revenues down 10% in FY2012 and is expected to see further declines of 13% in FY2013. This comes on the back of continued lower student counts, whereas new student enrollments were down 40% last year. Further declines are related to poor perception of for-profit schools, which have been questioned about subpar graduation and loan repayment rates. Apollo’s P/E looks cheap at only 6x earnings, but its low earnings growth rate justifies this valuation. Intriguingly, billionaire Ray Dalio doubled his stake last quarter (check out Ray Dalio’s other big bets).

What stocks comprise the rest of Ariel’s top five? You may be surprised…