Seek Profit Not Perfection

Motley Fool Stock Advisor

TM

Volume 10, Issue 5, May 2011 With

David & Tom Gardner Motley Fool Co-Founders

New Recommendations Sina (Nasdaq: SINA) - David: Sina’s Weibo won’t wobble when it comes to turning a socialmedia profit . . . . . . . . . . . . . . . . . p. 2 - Dueling Fools: Is the competition too stiff for Sina? . . . . . . . . . . . . . p. 3 Ameresco (NYSE: AMRC) - Tom: When this company shows customers how saving energy saves money, everyone wins . . p. 4 - Dueling Fools: Is Ameresco’s experience enough? . . . . . . . . . . p. 5

Inside Roundtable: The 3 Core Stocks to Start With - SA team members spotlight stocks they’d begin with today . . . . . . .p. 6 Best Buys Now - See our top 10 buys for your portfolio today . . . . . . . . . . . . . . . . . . . . p. 7 Company News - Sokol signs off, Schwab makes a deal, and Vasco climbs high . . . p. 8 Fool’s Tools: Why Most Valuation Models Fail - How to help your brain, not your model, do the thinking . . . . . . . p. 9

Did You Know? Get the Berkshire Meeting Buzz Tag along (virtually) as Foolish analysts Joe Magyer, Rich Greifner, and Alex Pape head to Omaha for the Berkshire Hathaway annual meeting on April 30. Coming your way, we’ll have real-time blogging from the meeting, videos and pictures on The Motley Fool’s Facebook page, takeaways on the SA discussion boards, a dedicated Twitter feed, and more! Got Membership questions? Email [email protected] or call 888-665-3665.

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Seek Profit, Not Perfection Dear Fellow Fools, “The show doesn’t go on because it’s ready; it goes on because it’s 11:30.” — Lorne Michaels, creator of Saturday Night Live Most writers, producers, and actors would agree with Lorne Michaels. At some point, the house lights turn down, voices turn to whispers, and the curtain goes up. It’s showtime, ready or not. I (Tom here) have no idea whether Tina Fey, the gifted and hilarious creator of 30 Rock and former head writer of Saturday Night Live, or Michaels, the creator of SNL, has ever bought a stock. But reading Fey’s take on SNL in The New Yorker last month — in which she retells Michaels’ lesson that even if you’re not 100% ready, when the clock strikes, you have to give up on perfection and put on a show — got me thinking: Just like actors putting on a live TV show, we Fools must embrace the unknown.

Get Loose and Go With Your Gut Investing is akin to predicting the future, and we try to find the clearest crystal ball we can before making any recommendation for you. We get to know a business inside out, study the management team, and comb through the competition. But we can’t know everything that will happen. If we wait for perfect awareness about what the future might bring, we’ll never invest a single dollar in any company. Here’s the good news, Fools. Embracing the uncertainty in investing gives individual investors like you and me the chance to explore the dynamic futures of companies such as TTM Technologies (Nasdaq: TTMI) and Westport Innovations (Nasdaq: WPRT), two recent Stock Advisor picks. Over the years, some of our biggest multibaggers have come from our most transformational companies: Amazon.com (Nasdaq: AMZN), Marvel, Netflix (Nasdaq: NFLX), Priceline.com (Nasdaq: PCLN), and Quality Systems (Nasdaq: QSII). That’s not to say every recommendation we make will be a winner. Every investor, including David and me, has some duds. But that’s OK, Fool. Just as we have to embrace uncertainty, we have to embrace failure as well. Our most valuable lessons come from the mistakes we had the courage to make. In her New Yorker piece, Fey writes that “while bombing is painful, it doesn’t kill you.” She urges, “You can’t be that kid standing at the top of the waterslide, overthinking it. You have to go down the chute.” Without taking a chance, you’ll never win.

This Month, Embrace the Unknown You’re here because you want to earn your financial freedom. So read through the next nine pages with an eye to putting some of your money behind the stock ideas featured here, whether our two new picks, our Best Buys Now, or our Core Stocks. Consider this month’s issue of Stock Advisor your friendly nudge down the investing chute. It’s showtime, Fool. You’re on.

Motley Fool Alpha LLC has an options position on Netflix.

TM

Sina (Nasdaq: SINA) By David Gardner and K arl Thiel Sina is China’s No. 1 Internet portal, offering online media, advertising, and mobile services, as well as the social media platform Weibo.

Headquarters:

Why Buy:

Recent Price:

Shanghai, China

Website: www.sina.com $119.95

»» Sina is the Web portal of choice in the world’s largest Internet market.

Risk Level:

»» Weibo, Sina’s social microblog, is fast-growing and serves as a short-

Position in Industry:

Leader

Market Cap:

$7,341

messaging service as well as a social media platform. »» The market is underestimating Weibo’s potential as the company continues

to build out its network and monetize its services. $120 $95

Cash/Debt:

$370 / $359 / $403

Earnings (’08/’09/’10):

$81 / $412 / ($19)

Biggest Threat:

The Team Says:

$45

$883 / $99

Revenue (’08/’09/’10): Insider Ownership:

$70

$20

High

0.3% Government Pressure

We Love Weibo Data as of 4/13/11

4/09

4/10

4/11

Dollar amounts in millions except recent price

When Chinese software company Qihoo 360 (NYSE: QIHU) spent two weeks drumming up support for its IPO last month, investors woke up to something Stock Advisor has known for a long time: China’s old guard of Web companies is transforming itself with new software and bold plans.

Weibo, known as the “Chinese Twitter,” has grown at a rate that’s nothing short of incredible. The service launched in August 2009, and by the end of 2010, its user base had increased 25 times over, to more than 100 million. That’s already about half the number of people using Twitter Qihoo’s Wall Street campaign kicked off a remarkable worldwide — and Sina’s management expects Weibo to rally, as investors boosted shares of China’s top search gain another 50 million users by the end of this year. engine, Baidu (Nasdaq: BIDU) 19%, and lifted portal But we think the “Chinese Twitter” moniker gives Sina’s Sohu (Nasdaq: SOHU) 25%. This enthusiasm should platform too little credit. Yes, Weibo works as a 140-charonly get stronger with the continuing success of Qihoo’s acter short-messaging service like Twitter, but it’s built more incredibly popular browser, Sohu’s ubiquitous program for along the lines of a social media platform like Facebook. It typing Chinese characters, and Baidu’s development of a allows users to create profiles, post photos and videos, and new mobile phone operating system. exchange threaded messages. It even supports third-party But Karl and I are more interested in the opportunity for apps for functions such as voice-to-Weibo on mobile devices. a player I’ve recommended twice before in Stock Advisor: Another reason Weibo outweighs Twitter: You can say a lot Chinese Internet portal Sina (Nasdaq: SINA). This winning more with 140 characters in Chinese than you can in English. stock is up 35% in the past month, and it’s primed to push higher as Sina’s newest service capitalizes on the hottest trends in social media.

We Know Weibo Like Twitter, Weibo isn’t producing any meaningful revenue yet. But we think things will start to change this year as Sina introduces ads and experiments with other 3-Bagger Returns? Yahoo! We tapped Sina as the “Yahoo of China” in 2004 and means of monetization — including straight e-commerce again in 2005, and things have largely played out as we’d and a Groupon-like deals service. hoped on the way to better than a 370% gain for both In 2010, Sina turned in a net loss because a large investpicks. China jumped from the world’s fifth-largest Internet ment in its former real estate ad business sank in value, but market to the largest by a long shot (there are about 50% operating cash flow was up 19% from 2009. What’s more, more Internet users in China as there are people in the we believe that 19% growth is understated because of the United States), fueling great growth for Sina’s ad-driven money Sina is putting toward expanding Weibo. In this Internet portal as well as for its products for mobile early stage, management has made it clear that it’s more phones. But Sina’s microblog service is becoming its big- interested in cementing Weibo’s leadership by attracting gest hit yet. users than it is in generating revenue. 2

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Of course, for investors, all this promise leads to one question: What’s Weibo worth? Is it on par with Twitter, at $5 billion? Is it closer to the massive $55 billion value attributed to Facebook? Or, for a better comparison, should we look to Tencent Media, Sina’s domestic rival with an established social media presence, valued at $48 billion? We believe Weibo is easier to monetize than Twitter. Its social-media platform lends itself better to ads, an area in which Sina is already an established expert. Even assuming Weibo is worth $2.6 billion (about half of Twitter), that figure suggests a $3.6 billion valuation for Sina’s core business and pegs it at 31 times last year’s operating cash flow, roughly in line with the multiple it fetched at the end of 2009 — when Weibo wasn’t yet part of the picture. Yes, this is a rough take on Sina’s valuation, but that doesn’t detract from the big upside we see. Not only does Weibo have sky-high prospects, but economics in the rest of the business should also improve as Sina has to invest less in building out Weibo and its scale continues to climb.

Risks and When We’d Sell Weibo has claimed dominance in China’s microblogging market in part because the Chinese government blocks Twitter, Facebook, and even an earlier domestic competitor, Fanfou. That’s good for Sina, but it’s a stark reminder that an authoritarian government can change a company’s fortunes on a whim. We think our risk is reduced because Weibo has tacit government support — in fact, it boasts many government users — but this is a sensitive area. The Chinese government is well aware of the roles Facebook and Twitter played in the recent Middle East revolutions. If China suddenly shutters Weibo, we would have to step back and reasses Sina’s value. A concern that’s more at the forefront is whether Sina can maintain the right balance of censorship (to satisfy the government) and outspokenness (to make the service appealing). If we think it’s drifting too far toward bland infotainment, we’ll log off. The Foolish Bottom Line Although this twice-recommended stock has already performed well for us, we don’t think Sina commands the attention it deserves among Stock Advisor members (it ranks No. 74 on My Scorecard). We’re hoping that will change. Surf to your broker and watch Sina transform itself from a portal of one-way information to an interactive ad- and commerce-driven juggernaut that might just teach Twitter a thing or two about turning popularity into profit. For disclosure information, see page 10.

Follow the Full Sina Story Add SINA to My Scorecard so you can track your returns or just follow all our coverage until you’re ready to buy. stockadvisor.fool.com

Dueling Fools: Profit in 140 Characters Tom: Tell me about Sina’s rival, Tencent Media. Does it have anything that would challenge Weibo? David: Tencent is a much bigger company than Sina, and it has a microblogging service that boasts almost as many users. But Weibo is pulling ahead because Sina’s registered users are actually using it. Tencent has significantly less activity and on-site time, which tells us that consumers are getting more of what they want from Weibo. Tom: You say Sina has a large investment in its real estate advertising business. But isn’t China supposed to be in a real estate bubble right now? David: Sina’s involvement is only arm’s-length — its stake in China Real Estate Investment (Nasdaq: CRIC) was part of an ad channel aimed at real estate and related services, and now it’s just a stake in a separate company. We like it that way. China’s government is trying to slow growth in the real estate market, and in turn, Sina’s investment lost some value. The company could take a future earnings hit, but cash flow, which we care most about, should be just fine. Tom: Facebook may be banned in China, but didn’t I hear that it’s partnering with search giant Baidu? Would that be a big threat to Sina? David: That’s the rumor, Tom, and Baidu is certainly a force to be reckoned with. But keep in mind that Weibo is a different kind of service from Facebook, and China can have — in fact, it already does have — multiple winners in social networking. The BaiduFacebook partnership could succeed if the companies can establish a site that meets government censorship standards, but I don’t believe that will derail Weibo. Tom: Those are some pretty heady valuations on Facebook and Twitter! Are they for real, or are we witnessing a social-networking bubble? David: It’s true that there are some lofty valuations out there, but many of the services getting filled with investing hot air are not as proven as Facebook, Twitter, or, we believe, Weibo. All of these social networking companies are just learning how to monetize their products, but when we look at how entrenched the top players are in our daily lives, it only reinforces their value. You know I’m going to be happy when you tweet to our Stock Advisor fans and post on Facebook that Team David’s third investment in Sina is thumping the market!

May 2011

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Ameresco (NYSE: AMRC) By Tom Gardner and Alex Scherer, cfa Ameresco is the largest independent energy-services company in the United States, focused on energy efficiency and renewable energy projects.

Why Buy: »» Ameresco is the largest independent player in a high-growth business.

Headquarters:

Framingham, Mass.

Website: www.ameresco.com Recent Price:

$14.35

Risk Level:

High

»» Founder, CEO, and majority owner George Sakellaris is an industry visionary.

Position in Industry:

»» A recent IPO with no public peers, Ameresco is an underfollowed and

Market Cap: $593

underappreciated opportunity.

Cash/Debt:

$20

$45 / $211

Revenue (’08/’09/’10):

$396 / $428 / $618

Earnings (‘08/’09/’10):

$18 / $20 / $29

Insider Ownership:

$15

Biggest Threat:

71% Municipal Bond Credit Crunch

The Team Says: $10

Leader

Green Is Good Data as of 4/13/11

10/10

1/11

4/11

Dollar amounts in millions except recent price

success. These contracts are guarantees that an energy-services company’s project will save customers cash and that lenders will be repaid out of those savings. This approach means immediate and permanent budget savings and no upfront spending from customers, a proposition that’s hard to refuse. But with real dollars on the line, engineering expertise is a must. Ameresco’s talented staff makes the grade, with billions of dollars in cost-savings guarantees made but less than $100,000 in penalties paid out since the company’s founding in 2000.

Caution: This Is a Thinly Traded Stock We suggest using a limit order when buying Ameresco.

From solar and wind power to electric cars and natural gas trucks, the promises of energy independence and clean, green solutions have politicians and citizens fixed on big projects — and investors fixed on the players involved. At Stock Advisor, we’ve got two picks in the field: transmission utility ITC (NYSE: ITC) and natural gas engine maker Westport Innovations (Nasdaq: WPRT), both off to strong These contracts comprise about 75% of Ameresco’s busistarts for us. But despite its equally promising future, the ness. The remaining 25% involves renewable energy projrealm of energy efficiency isn’t getting much attention. It’s not a political hot button or a hot new cleantech trend, ects, primarily partnerships to build landfill gas-to-energy but the fast-growing energy-services industry is profiting plants that convert gas leached from garbage dumps into from those same desires for alternative energy solutions. power for local communities (and removing that rotten-egg This month, Alex and I will help you capitalize on that smell, too). These projects are typically followed by longneed, bringing you a visionary leader running the industry’s term service and supply agreements, giving Ameresco a strongest independent player. Underfollowed and underap- steady stream of sales once construction is complete. preciated Ameresco (NYSE: AMRC), fresh off a recent IPO, gives us a clean shot at some serious green of our own.

Guaranteed Savings for All Ameresco is the largest independent energy-services company (the “esco” in Ameresco) in the U.S. Part engineer, part consultant, and part contractor, Ameresco brings its customers comprehensive energy-saving solutions — everything from upgrading basic light bulbs and HVAC systems to building and operating small-scale clean energy installations right next to a customer’s location. The work brings immediate cost savings, and the setup is a true win-win. The energy-savings performance contract, pioneered by Ameresco CEO George Sakellaris, is a key to the industry’s 4

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Leading the Energy Pack Talented leadership is key in every company we recommend, but in the energy-services industry, it’s especially true. This is a people business, similar to engineering or accounting firms where the companies’ greatest assets walk out the door every night. And evidence of Sakellaris’ talent abounds, not just as an industry pioneer but also as a passionate business leader. Ameresco is Sakellaris’ second bite of the energyservices apple — he first founded Noresco in 1989, sold the company in 2000, and founded Ameresco shortly after. More than 30 former Noresco executives joined him when he founded the new company, and today hundreds of ac-

May 2011

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count executives and development engineers specialize in sourcing profitable projects, primarily from government and nonprofit agencies.

Financials Ameresco’s strong performance in 2010 included 44% gains in revenue and earnings, though the IPO knocked pershare growth to 14%. A $1.1 billion backlog and another $1.2 billion in proposals reflect a big opportunity that Alex and I believe will only get bigger. With proposals accelerating, deals getting bigger, and win rates rising, Ameresco could achieve sales growth of 15% to 20% for the next five years, with even better performance on the earnings line. Management’s 2011 guidance seems conservative at 13% sales and 15% EPS growth, but we’re happy to invest alongside managers who underpromise and overdeliver. Ameresco’s bread-and-butter government channels have a long runway of growth. Similar programs for commercial and industrial clients bring huge expansion potential, prompted by President Obama’s Better Buildings Initiative. The plan calls for 20% more efficiency and a $40 billion reduction in businesses’ energy bills by 2020. Even with that kind of opportunity, Ameresco’s $14 stock is trading at a reasonable 21 times earnings — a fine place to start building your stake.

Risks and Why We’d Sell Sakellaris’ shares give him an 80% vote, so confidence in his leadership is paramount. He’s committed to delivering long-term profit, but given his lock on the company, any moves that harm shareholders would be a red flag. Much of Ameresco’s work involves expensive upgrades, so credit markets must remain healthy for its municipal clients to benefit from cost savings without committing big chunks of cash up front. We’d more likely lick our wounds and sell than stick around through a municipal bond credit crunch. The Foolish Bottom Line Ameresco combines some of the best features of Stock Advisor’s previous alternative-energy winners. Like ITC, it’s taking advantage of favorable government policies. And like Westport, it has a big growth opportunity primed by a visionary’s search for green domestic energy solutions. As we push toward energy independence, Ameresco should profit mightily from the benefits of energy efficiency. Put some green behind this efficiency machine.

Dueling Fools: Energizing Potential David: You tout President Obama’s Better Buildings Initiative as a win for Ameresco. But does the government’s big investment in energy efficiency also mean that we should expect Ameresco’s competition to heat up? Tom: Although there are dozens of small energyservices companies, Ameresco’s chief competitors are actually equipment manufacturers. These are much larger companies, such as Carrier and Johnson Controls, but their energy-services divisions are focused on selling manufacturing equipment — they’re not independent givers of advice. Being an experienced consultant in the field is a key advantage that Ameresco uses to sign up customers, and its success so far suggests that’s a meaningful edge. David: Given the sorry state of government finances, how can Ameresco sustain its growth rate? Tom: Thanks to the nature of energy-savings contracts, municipalities and other agencies aren’t required to sign deals that demand upfront, big-budget spending. The energy-savings contracts I mentioned mean that any early costs are financed through longterm debt arrangements and rely on the energy savings to pay off whatever is borrowed. Given the guaranteed savings that energy efficiency can bring, these projects are actually more in demand when budgets are tight. It’s a common misunderstanding of the business, and it’s one we intend to capitalize on. David: Finally, the recent IPO gives me pause. Are insiders cashing out just when you want us to get in? Tom: Ameresco’s IPO last year was prompted by a surge of growth and the company’s desire to position itself to take advantage of it. Notably, Sakellaris held on to more than 99% of his stock, unlike a great many IPOs that provide original investors with their big payday. We expect that commitment to the business to continue, although Alex and I would not be surprised to see the company sold for a tidy profit five to 10 years down the road, as Noresco was.

Motley Fool Stock Advisor™ (ISSN: 1539-218X print version) is published monthly by The Motley Fool, LLC, 2000 Duke Street, Alexandria, VA 22314. Periodicals prices paid at Alexandria, VA and additional mailing offices. POSTMASTER: Send change of address to: Motley Fool Stock Advisor™, 2000 Duke St., Alexandria, VA 22314. Phone (toll-free): 1-888-665-3665. Website: www.fool.com. Email: [email protected]. Please email or call if you have any subscription questions. Editor: Allyson Cohen, Managing Editor: Denise Coursey, Publisher: Danny Hsia, Business Manager: Mark Brooks, Designers: Paul Chun, Sara Klieger, CEO: Tom Gardner. Subscription $199 per year. © Copyright 2011 by The Motley Fool, LLC. All rights reserved. Photocopying, reproduction, quotation, or redistribution of any kind is strictly prohibited without written permission from the publisher. Motley Fool Stock Advisor™ bases recommendations and forecasts on techniques and sources believed to be reliable in the past but cannot guarantee future accuracy and results. The Motley Fool is a company of investors writing for investors, and as such, its analysts may own stocks mentioned in the Stock Advisor newsletter. For a complete list of stocks owned by any Motley Fool writer or analyst, please visit www.fool.com/help/disclosure.htm. The Motley Fool, Fool, and Foolish are registered trademarks of The Motley Fool Holdings, Inc. Unless otherwise indicated, the authors do not own shares of the companies discussed in this issue. An affiliate of The Motley Fool provides investment products that may hold securities mentioned in our publications. Editorial personnel have no nonpublic knowledge of the affiliate’s holdings, and the affiliate’s personnel have no knowledge of any editorial content before it is published.

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Roundtable: Which 3 Core Stocks Should You Start With? By the Stock Advisor Team

Rewind: What Makes a Core a Core? 1. Green Circle: Like a beginner’s ski slope. Easy to grasp. 2. So Team David or Team Tom: Represents the heart and soul

of the Gardner brothers’ investing philosophies. 3. Room to Grow: Has a big opportunity to expand. 4. High Conviction: Has strong potential to beat the market. 5. Worldly: Braves the international waters or will someday. 6. Community-Happy: Generates discussion among Fools. 7. Innovative Culture: Marches to the beat of its own drummer.

When we unveiled our renovated list of Core stocks last month, it led to a great Stock Advisor community debate about our decision-making. One question from our live chat (get the full transcript on stockadvisor.fool.com) sparked a discussion for the SA team: “I’m new and don’t have any Core positions. Which three would you suggest I start with?” Broadly, we suggest you select the Core stocks that resonate the most with you. Which do you think have the best growth opportunities over the next decade? Do you understand some more than others? Which Core stocks would you feel comfortable holding for years and years?

Alex: Amazon, Berkshire Hathaway, and Coach Although I might not buy it in bulk at today’s price, I’d feel great about averaging into Amazon.com (Nasdaq: AMZN) over the long term. Amazon is far and away the fastest-growing recipient of my family’s spending, including diapers and toys, (multiple) Kindles, and pretty much all of my holiday shopping. I think families worldwide are in the same boat as me, so Amazon is an easy choice as a “buy what you know” Core holding. I cut my investing teeth studying Berkshire Hathaway (NYSE: BRK-B) and know this company better than any other. That’s why I’m comfortable sitting through the market’s ups and downs in exchange for long-term gains from Warren Buffett’s tremendous collection of business gems. That’s exactly what I want from a Core stock. If I slept through the next 10 years, the biggest difference I’d see when I woke up would be the emergence of a huge middle class in China. Nike’s growth opportunity there is big, but I think the impact of market growth and potential market share gains for Coach (NYSE: COH) outstrips that of the already more successful Nike. So Coach is my “emerging markets for the long term” Core pick.

Jason: Apple, Berkshire Hathaway, and Nike I love global powerhouse brands, and Nike is no excepTo help guide you, SA analysts Bryan White and Jason Moser and associate advisor Alex Scherer asked themselves tion. Nike has dominated in the U.S. for years, but the world which three Core companies they’d start their portfolios is bigger, and growth in emerging markets is what seals the deal for me. With exposure to just about every sport in the with today. Here’s what they had to say. world and a reputation for excellence, Nike is a brand that Bryan: Apple, Costco, and Nike should stand the test of time. Apple’s (Nasdaq: AAPL) relevance in consumer elecI’ve followed Berkshire for years and own the stock. tronics keeps growing as innovative gadgets expand the Buffett is reason enough to invest, but he won’t be there brand beyond its loyal followers. Don’t be fooled by what forever. Although questions about who will lead when appears to be a premium price tag; this stock is far from Buffett leaves remain, one of this company’s greatest expensive. A shortage of materials after the devastation in strengths is its diversity and the culture Uncle Warren has Japan could open up an even better buying opportunity. created through the years. With Berkshire, the whole is CEO Jim Sinegal and the fine folks at Costco (Nasdaq: truly more than the sum of its parts. COST) represent everything I look for in a Core stock. As Apple has one of the most profound effects on our daily food and material costs rise, discount retailers will gain im- lives of almost any company I know. It’s much more than portance because they can buy in large quantities and offer just consumer electronics. Today’s iPods, iPhones, and consumers low prices. Costco might not knock anyone’s iPads are just links in the chain of what this company can socks off with growth, but it makes a great low-risk holding. do. One day I expect to retire in my iHouse. It doesn’t get much more “green circle” than Nike Which Did You Choose? (NYSE: NKE). Pricing power will become more important Once you’ve bought your first three (or more) Core as the economic recovery trudges along, and Nike has it. stocks, come share your thinking on the SA discussion Down the road, emerging markets will present great growth boards at stockadvisor.fool.com. prospects for the iconic sports-apparel brand. Nike already has the No. 1 market share in China. For disclosure information, see page 10. 6

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Best Buys Now: Netflix, Nike, and 8 More Get the Nod By the Stock Advisor Team

David’s Best Buys

Tom’s Best Buys

Company

Company

Recent Price

Amazon.com CORE $182.29 Netflix



Recent Price

Berkshire Hath. CORE $80.76

$238.75

Dolby $49.87

Panera Bread $123.38

Nike CORE $79.41

Titanium Metals $17.87

Techne $73.70

Whole Foods CORE $64.59

TTM Technologies $16.89

CORE

Data as of 4/13/11

Repeats, Threepeats, and More Amazon.com (Nasdaq: AMZN) keeps boosting its relevance with consumers after its introduction of free streaming videos for Prime members and the Cloud Drive for music aficionados. Although it’s the e-commerce king’s dominant position in a growing retail market that attracts us, it’s the added services that make the platform stickier and the network potentially larger. CORE

Berkshire Hathaway’s (NYSE: BRK-B) recent fiasco — ending in the resignation of Warren Buffett lieutenant David Sokol — had the world chattering. We took a step back, reconsidered our investment case, and came out still convinced that there’s plenty of opportunity in this Core holding. The stream of cash pouring into the Berkshire fold will be a high-class problem for Buffett’s eventual successor, but we’ll take problems like that any day, especially at such an attractive price. CORE

Fresh Favorites CORE Netflix (Nasdaq: NFLX) is the biggest disruptive innovator among our recommendations. Not only did it change the way we rent movies, but it’s now also pushing change on how and where we get content. Successful expansion in Canada will help lead Netflix’s streaming service into another country later this year and, assuming Dolby (NYSE: DLB) lands on our Best Buys list for the that also goes well, more rapid expansion in 2012. Don’t let third month in a row. The sound technology pioneer rethe high stock price scare you away from this winner. cently showcased how much traction its Dolby Digital Plus CORE Nike (NYSE: NKE) expects rising input costs service has in movie theaters, homes, and mobile devices, to crimp margins for the next few quarters — news that and the blogosphere has been buzzing about Dolby’s thirdprompted the market to crimp the stock price. But inno- party licenses. We don’t think the Via subsidiary on its own vation is driving sales, with Nike Free, Lunar, and other is a reason to buy, but it does demonstrate what we love brands leading to strong demand. Nike is building more about this three-time recommendation — an innovative capacity to meet that demand, and even more important, culture and a breadth of opportunity well beyond today’s Nike can handle the pressure of rising costs better than any apparent borders. competitor because of the pricing power it enjoys as the Techne (Nasdaq: TECH) signed a small acquisition last worldwide brand leader. Run toward this opportunity. week that demonstrates exactly what this biotech darling TTM Technologies (Nasdaq: TTMI) had a great 2010, does best — carefully expanding its reach through both bringing its purchase of Meadville into the fold. It’s ex- research and smart buys of smaller competitors. Techne panded the market for its printed circuit boards and reduced will grow its mountain of products by about 800 from the its reliance on selling to just a few customers. We expect Boston Biochem purchase — small potatoes in isolation, but 2011 to be another great year as TTM rides the coattails one more reason to be confident Techne is headed higher. of Apple, a major customer. The company is building up Panera Bread (Nasdaq: PNRA) makes the list for the its Asian capacity, which adds all kinds of possibilities for second month in a row thanks to concerns over potential future growth. food cost inflation. Although higher costs in dairy, wheat, Titanium Metals (NYSE: TIE) continues to fly under the radar, and that’s OK by us. Advancements in plane construction technology mean big business for the company, and although the Boeing Dreamliner has been slow to take off, once it does, this stock should reach higher altitudes. Investors will want to get in before it’s wheels-up.

Whole Foods’ (Nasdaq: WFMI) high-quality organic treats are resonating with an increasing number of healthconscious consumers despite rising food prices. CEO John Mackey and friends still have plenty of room to spread the Whole Foods brand, so put some in your cart.

and coffee may lead to incremental price increases, chairman Ronald Shaich sees the company’s ability to maintain stable margins as a source of strength — and so do we. If you haven’t added Panera to your portfolio yet, now is an excellent time to take a bite. For disclosure information, see page 10.

CORE

stockadvisor.fool.com

Video Extra: Tom and the Team’s Favorites! Go to stockadvisor.fool.com to watch Tom and the SA team offer up their top Best Buys Now of the month.

May 2011

Motley Fool Stock Advisor

7

Company Updates: Sokol Signs Off; optionsXpress and Vasco Move to Hold By the Stock Advisor Team

It was an eventful month filled with ethical goofs, stock run-ups, winning deals, and earnings hits and misses. Here’s a roundup of the top news we believe Fools shouldn’t miss about their Stock Advisor companies.

commerce leaders such as Amazon.com (Nasdaq: AMZN) on a global scale. EBay is counting on its role as a partner rather than a retail competitor to help it stand out from the pack. We love eBay’s position as a payment processor with PayPal and firmly believe there’s room for more than one Berkshire Hathaway winner in e-commerce — and that both eBay and Amazon It’s not often that a corporate middle-manager’s will help Stock Advisor investors win. resignation lights up the press. But when David Sokol Embraer — the presumptive successor to CEO Warren Buffett at Although Embraer (NYSE: ERJ) wrapped up a strong Berkshire Hathaway (NYSE: BRK-B) — abruptly left his roost, it was different. Sokol, who was instrumental in 2010 by delivering 101 commercial and 145 executive jets putting together Berkshire’s Lubrizol (NYSE: LZ) acqui- to customers, management lowered guidance for 2011. sition, bought about $10 million worth of Lubrizol shares Embraer might have to shutter its Chinese manufacturing while he was conducting the initial due diligence for the plant after expected orders didn’t materialize and the deal. That trade landed him a $3 million payday when the Chinese government created a mid-sized jet competitor. merger was announced — and it also landed him squarely Even though Embraer faces short-term turbulence, we still in the ethical crosshairs. Buffett cautions his leaders to like the flight plan and are keeping this company as a buy. conduct themselves in a manner that wouldn’t tarnish optionsXpress: Now on Hold Berkshire’s reputation if their actions were splashed In an arrangement that we think makes sense for both across the front page of The New York Times, and although Buffett never came right out and said it, Sokol failed that parties, Charles Schwab (NYSE: SCHW) agreed to buy test. This controversy is still reverberating, but we rate optionsXpress (Nasdaq: OXPS) in an all-stock deal worth about $1 billion. Schwab, the largest retail broker, gains a Berkshire a Best Buy Now. dedicated options platform, while optionsXpress gets access to Schwab’s broader audience. Both stocks are selling at a Best Buy Best Buy (NYSE: BBY) continues to struggle because discount because of low interest rates and stalled activity of sluggish sales for high-end TVs and laptops. Same-store from retail investors after the financial crisis, but we’re sales fell despite solid growth among smartphones and moving optionsXpress to Hold as a result of the deal. Don’t voice and broadband plans. Management expects the lag- buy more, but if you own optionsXpress, take the shares of ging demand to hamper sales and earnings growth in the Schwab after the deal closes in the third quarter. Schwab year ahead. If you’re comfortable buying a company with remains a buy on David’s side of the scorecard. a few short-term troubles knowing that they often lead to great entry points, Best Buy is for you.

Cintas Cintas (Nasdaq: CTAS) has momentum in its favor. Stabilizing demand and a keen focus on cost controls helped the uniform supplier improve margins on its way to a solid third quarter. An improved outlook for the rest of the year spells brighter days ahead. Cintas is a buy. eBay In a deal worth about $2.4 billion, eBay (Nasdaq: EBAY) is acquiring e-commerce service provider GSI Commerce (Nasdaq: GSIC). GSI helps big retailers and brands such as Bed Bath & Beyond (Nasdaq: BBBY) and Timberland (NYSE: TBL) reach more buyers through better website management, fulfillment, and marketing. The combination of GSI, eBay’s marketplace, and payment processor PayPal will form a complete suite for retailers to compete with e8

Motley Fool Stock Advisor

Vasco Data Security: Now on Hold Online security expert Vasco Data Security’s (Nasdaq: VDSI) stock has run up about 40% during the past month, and we’re at a loss to explain why. With security breaches at rival RSA Security and online marketer Epsilon, investors may be hopeful that Vasco will have a big leg up competing for new business. But no concrete news has come out of Vasco or any other reliable source. The run-up has left Vasco’s stock looking pricey given its modest long-term growth expectations. We’ve moved the stock to Hold until we can get comfortable that Vasco’s future is indeed significantly brighter — or until we determine that it’s not. For disclosure information, see page 10. More Stocks, More Updates Follow your favorites online with My Scorecard, discussion boards, and weekly updates — all at stockadvisor.fool.com.

May 2011

stockadvisor.fool.com

Fool’s Tools: Why Most Valuation Models Fail By Jim Mueller

When you’re considering a potential investment, what’s more shipments or pay for some products it had received, the first thing you look at? The stock price? The price-to- American Superconductor’s stock dropped more than 40% earnings ratio? Maybe the dividend yield? — losing nearly half its value in a single day. At Stock Advisor, the first thing we look at is the under2. Blockbuster was flying high in 2002, only to enter lying company itself. What does it do? How does it make bankruptcy a few short years later. Investors who didn’t money? And how will it make more in the future? recognize the size of Netflix’s (Nasdaq: NFLX) threat We read annual and quarterly reports, go over earn- — with its new way of connecting movies and viewers — ings releases and conference calls, and delve into proxy weren’t paying attention. Netflix’s mailing model trumped statements to make sure management is aligned with Blockbuster’s local store model. Result? A 99.8% drop shareholders. We look at the industry to determine trends, from Blockbuster’s high. watching for both opportunities and threats. We compare 3. Eastman Kodak was a stock market stalwart for decades, what the management team says with what it actually does. but today it’s a shadow of its former self. It was the king of Only after all this digging do we begin to value the film products and processing in 2000. And did you see that company’s stock and how that compares with its price. But 4.5% dividend yield?! No-brainer buy, right? However, the dividend had been flat since 1997, and free cash flow had not using valuation models Foolishly takes practice. been enough to cover the payments. Plus, sales growth had How We Approach Value declined for three of the previous four years. Investors who In the course I’m currently teaching on the SA website looked no further than the high yield were shocked when and our Becoming an Investing Master discussion board, the company slashed its dividend by more than 70% in 2003 we’re going through the mechanics of building a discounted before eliminating it in 2009. Digital cameras overtook this former blue chip, a potential development that was visible to cash flow (aka DCF) model Foolishly. those who did some digging back in late 2000. Investors use DCF models to project growth in revenue, As these blowups show, we can’t afford to shut off our earnings, and cash flow — so it’s good for companies that sell things, such as Ford (NYSE: F) and Costco (Nasdaq: minds — it puts our financial future at risk. COST). There are other ways to value a company, too, Enroll and Learn including comparing the stock price with a company’s book In my course, I’m demonstrating how to look more deeply value — the preferred way to determine what banks and at a company, using Dolby (NYSE: DLB) as the case study. insurance companies, such as Safety Insurance Group The two central lessons focus on SWOT (strengths, weak(Nasdaq: SAFT), are worth. You can also measure assets nesses, opportunities, and threats) and Porter’s Five Forces. under management, a good choice for companies that invest At Stock Advisor, we find these frameworks helpful when people’s money, such as Legg Mason. investigating companies. At the course’s end, we’ll put toAll of these valuation methods involve building a model gether what we’ve learned and build a DCF model for Dolby. of what we expect a company to do in the future. More Valuation models aren’t the be-all, end-all of investing. important, in my class I cover why you might build this It’s the thinking that’s behind the model that’s critical. And model, what the model does — and does not — tell you, and how to build a model that has a reasonable chance of while you don’t have to do the full-blown analysis that we do at Stock Advisor or build a valuation model for every being in the same ballpark as reality. company you own, if you join my DCF valuation course 3 Model Meltdowns you’ll almost certainly learn something that will make you That “how” part is key. It’s what helps Fools like us avoid a better investor. And if you just ask the questions I opened the Wall Street trap of letting the models do the thinking. To this article with, you’ll be light years ahead of 90% of demonstrate, here are three examples of what can happen investors out there — and I’ll be a happy Fool. when investors choose metrics over meaning: For disclosure information, see page 10. 1. Many investors who bought shares of American Superconductor only saw two years of growing revenue and earnings. They didn’t realize that nearly 75% of that revenue came from a single customer, Sinovel. On April 6, when news broke that Sinovel had refused to accept any stockadvisor.fool.com

Join Jim’s DCF Class Online Come to stockadvisor.fool.com to download the PDF of Jim’s class or join the discussion on our boards.

May 2011

Motley Fool Stock Advisor

9

Scorecard Details on all recommendations available at stockadvisor.fool.com Average Returns

Most recent recommendations David’s

David’s Returns

142.7%

Tom’s Returns

Tom’s

Company

Ticker

5/11 Sina

21.3%

0% 15% 30% 45% 60% 75% Since inception, includes sold positions.

90%

105% 120% 135% 150%

BEST Buys NOW

Ticker

SINA & Ameresco

4/11 II-VI

75.2%

Company

IIVI & TTM Technologies

AMRC TTMI

3/11 Westport Innov.

WPRT & Techne

TECH

2/11 Cognex

CGNX & Tennant

TNC

1/11 Amazon.com

AMZN & LabCorp

12/10 Panera Bread

PNRA & Watsco

LH WSO

Stock Advisor Core David’s Core

David’s Best Buys Now Ticker

Company

Recent Price

Tom’s CORE Ticker

Ticker

Amazon.com

AMZN

$182.29

Netflix

NFLX

$238.75

Apple

AAPL

Coach

COH

Panera Bread

PNRA

$123.38

Netflix

NFLX

Costco

COST

TIE

$17.87

Walt Disney

DIS

Netflix

NFLX

WFMI

$64.59

Whole Foods

Ticker

Recent Price

BRK-B

$80.76

Dolby

DLB

$49.87

Nike

NKE

$79.41

Techne

TECH

$73.70

TTM Technologies

TTMI

$16.89

Titanium Metals Whole Foods

Tom’s Best Buys Now Company

Berkshire Hathaway

AMZN

Company

Amazon.com

WFMI

Berkshire Hathaway BRK-B

Nike

NKE

My Scorecard: By the NUmbers Five Core companies gained ground among SA members in the past month as you cast votes for our new starter stocks. Quickly rising in the ranks: »» Nike (NKE) stepped up seven spots, to No. 32, while Coach

(COH) climbed four spots, to No. 43. Three stocks that nudged up one spot:

We believe that every Stock Advisor member should build a portfolio of 15 stocks or more. If you’re ready to invest new money, we recommend starting with our Best Buys Now — the top opportunities for timely investments from among all our past selections. (They’re listed here alphabetically.) We also encourage you to own at least three Core stocks — timeless companies that we believe can be part of every investor’s portfolio. For more new ideas we like this month, turn to the new recommendations in this issue.

»» Apple (AAPL) moved to No. 2, Berkshire Hathaway (BRK-B)

recommendation report card

Listen up: MarketFoolery

40%

Excludes sold positions.

Costco (COST) slipped one spot, to No. 10. Go to stockadvisor.fool.com and add your favorite stocks to My Scorecard to stay on top of the companies you care about.

You’ve already helped make Motley Fool Money the No. 1 rated business podcast on iTunes — now, tune into The Motley Fool’s new daily radio show, MarketFoolery!

60% 57 lagging the market

rose to No. 6, and Whole Foods (WFMI) bumped to No. 18.

86 beating the market

Each episode features a team of Fool analysts discussing the top business and investing stories of the day, along with some of their favorite stock ideas. Ready to subscribe to the podcast or just listen in? Go to MarketFoolery.com and get your daily dose of Foolish stock market commentary.

Disclosures: David owns shares of AMZN, AAPL, BBY, BIDU, SCHW, F, NFLX, PNRA, PCLN, SINA, and WFMI; Andy owns BRK-B; Alex owns BRK-B; Karl owns AAPL; Jim owns AMZN, AAPL, BRK-B, DLB, LM, NFLX, TTMI, and has options on F and NFLX; and Jason owns BRK-B and PNRA. The Motley Fool owns shares of AAPL, BRK-B, BBY, COH, COST, F, LM, and TBL and has options on AAPL. Motley Fool Alpha LLC has options on NFLX. 10

Motley Fool Stock Advisor

May 2011

Data as of 4/13/11 stockadvisor.fool.com

Printed on Rolland Enviro100.

Company

100%

S&P 500

Issue