Sit Back Relax and Enjoy the Payoff

Motley Fool Stock AdvisorVolume 10, Issue 6, June 2011 stockadvisor.fool.com

TM

TM

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David & Tom GardnerMotley Fool Co-Founders

Dear Fellow Fools, On the Stock Advisor discussion boards, a longtime member named Todd

(who goes by tharbold in our community) recently posted a funny line often echoed over the years. The gist is that the “magic new way” for all of us to beat the market is simply to do the opposite of whatever we’ve recently done. Todd’s joke brought a smile to several faces that day, mine (David here) included.

Why? Because I have always felt the same way. Unfailingly, the market seems to immediately move against any trade I’ve just made. My brand-new buy seems to drop, while whatever I’ve just sold makes me feel like the “last seller,” taunting me with quick rebounding gains.

Timing Isn’t EverythingBut, fellow Fools, here’s the good news: You can score exceptional returns for

your portfolio even if you’re also a victim of the market-timing curse Todd and I seem to share. We may feel that we blunder into or out of positions at just the wrong time — but our transaction timing is not the whole story. Not even close. If you’re a long-term investor like me, in fact, transaction timing is largely ir-relevant. It might make a few pennies’ worth of difference a decade hence — but by then you’ll probably be unable to remember which day you bought the stock.

Too many investors obsess over the moment of action. They click “buy,” or call up and sell, and it seems so significant that a second later, they (make that we — I do it, too) are already checking to see whether the stock has made them money. But those few minutes, and even the ensuing few weeks, count for so little. If, like me, you think your timing on trades leaves something to be desired, take heart: When you concern yourself with transaction timing, you’re really just reacting to the first few pitches in the game. Likewise, if you think you’re good at making these trades, more power to you — but I wouldn’t spend too long celebrating the rewards of irrational market zigs and zags.

Let Your Winners WinIn investing, it’s about the whole ball game. It’s about the days (and the years)

when you’re not taking action. Ideally, you’ll find truly exceptional and valuable for-profit corporations doing great things in this world — and then you’ll buy them, sit back, and let them make you money. We often create the most value for our portfolios by merely watching. Yes, that sometimes means sitting on your hands and letting your decision to buy the stock play out.

Finally, our Motley Fool Duke Street service, which offers access to every Foolish product in our arsenal, is open to new members this month. Think of it as a chance to keep tabs on every team in the Fool’s league. Maybe you want that comprehensive view; maybe you want to stick to your hometown team for now. Either way, I want you, Todd, and every other Fool to know that in each case, our investing coaches are in it for the entire game. So don’t worry about hitting that first pitch just right. There’s plenty of heat to come.

New Recommendations

Sociedad Química y Minera de Chile (NYSE: SQM)

- David: We head to South America to dig up a company with oppor-tunities in two key trends. . . . .p. 2

- Dueling Fools: Can management thrive in tough times? . . . . . . . .p. 3

Kennametal (NYSE: KMT)- Tom: Serious manufacturing

requires serious tools, and this innovative leader keeps global industry humming along. . . . . .p. 4

- Dueling Fools: Will Kennametal’s picks and shovels pick up? . . . .p. 5

InsideCore Coverage

- See the community’s favorites, plus the latest news from this group of stocks we love. . . . . . .p. 6

Best Buys Now- We call out 10 stocks worth a

closer look this month. . . . . . . . .p. 7Earnings Hits and Misses

- Our stocks are making headlines, and we’ll help you sort out the news from earnings season. . . .p. 8

Community Page: - Gear up for next month’s review

with My Scorecard, and you could win a free year of SA . . . . . . . . . .p. 9

Got Membership questions? Email [email protected]

or call 888-665-3665.

Sit Back, Relax, and Enjoy the Payoff

Did You Know?Coming Up NextIt’s time to put down the newspaper, grab your wireless controller, and get ready for Stock Advisor‘s full coverage of the E3 expo in Los Angeles. In June, we’ll be bringing you backstage at the world’s premier gaming showcase to uncover companies that are geared up to profit. Stay tuned!

2 Motley Fool Stock Advisor June 2011 stockadvisor.fool.com

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Headquarters: Santiago, Chile

Website: www.sqm.cl

Recent Price: $57.37

Risk Level: Moderate

Position in Industry: Leader

Market Cap: $15,100

Cash/Debt: $595 / $1,278

Revenue (’08/’09/’10): $1,774 / $1,439 / $1,830

Earnings (’08/’09/’10): $501 / $338 / $382

Insider Ownership: 32.6%*

Biggest Threat: Commodity Prices Go South

The Team Says: Pass the Potash

Data as of 5/18/11 *See Dueling Fools. Dollar amounts in millions except recent price

Sociedad Química y Minera de Chile (NYSE: SQM)By DaviD GarDner anD Karl Thiel

It’s easy to lump mining companies into one investing category, but it pays to look at what they’re pulling out of the ground. This month, Karl and I are recommending Sociedad Química y Minera de Chile (NYSE: SQM) (which trans-lates to Chemical and Mining Company of Chile — but it prefers to go by “SQM”), a company that mines valuable chemicals from the Atacama Desert of northern Chile.

SQM is a leading producer of compounds used in animal feed, fertilizers, and batteries. We think it’s a good bet that demand for these commodities will balloon alongside the global population — and that investors in SQM will profit.

Origins Worth Their SaltThis mining story goes back to the early 1800s, when a

ship carrying sodium nitrate set sail from South America bound for Europe. Although potassium nitrate, or saltpeter, had been used for centuries as a fertilizer and a key ingredient in gunpowder, nobody wanted the cargo. The ship owners dumped it into the harbor to avoid paying a customs toll.

Fast-forward 60 years later, and sodium nitrate — known as Chile saltpeter because of the large deposits there — had become so important that it spurred the five-year Saltpeter War among Chile, Bolivia, and Peru. Thousands died, and when South America’s borders were redefined, Chile gained land while Bolivia was locked away from the sea. Chile’s position as a dominant force in mining was cemented, and SQM still mines saltpeter there today. But it’s the company’s other opportunities that really have us excited.

Mining for Growth More than half the world’s iodine — a vital ingredient in

animal feed and a key component of X-ray contrast media, LCD displays, and more — comes from Chile. SQM produces one-quarter of the world’s overall supply and derives 22% of its gross margin from the chemical. The second-largest producer of iodine is Japan, where the recent earthquake has disrupted production — so prices should be on the rise.

Fertilizer ingredients, including potassium chloride and potassium sulfate, are another big part of SQM’s business and are vital for feeding the world’s burgeoning population. In many developing economies, a rising middle class is increasingly demanding meat, and feeding livestock requires a large amount of grain and, thus, fertilizer.

SQM also produces lithium, which is used to make lithium-ion batteries for our smartphones, laptops, and hybrid cars (so it’s practically a necessity these days). SQM accounts for about 31% of the globe’s lithium.

The final area of SQM’s business includes industrial chemicals used in solar panels and ceramics used in heavy manufacturing. The company’s experienced management team keeps all this production humming while skillfully navigating the volatile global commodities market.

Financials and ValuationLike other mining companies, SQM’s commodities busi-

ness can’t just boost production on a dime; it takes time and money. Because supply is relatively fixed, business growth requires strong pricing and rising demand. We’ve already laid out the case for rising demand, and SQM’s dominant position in the production of iodine and lithium gives it more pricing

SQM is the world’s largest producer of lithium and iodine and a major producer of fertilizers and industrial chemicals.

Why Buy: » SQM produces key commodities used in high-growth industries.

» The company’s mining rights, proven reserves, and a capital-intensive business create a strong competitive moat.

» The global demand for SQM’s commodities lends your portfolio interna-tional exposure.

Caution: This Is a Thinly Traded StockWe suggest using a limit order when buying SQM.

stockadvisor.fool.com June 2011 Motley Fool Stock Advisor 3

power than your typical commodity player. (Its lithium busi-ness has even been described as being part of an OPEC-style cartel.) Strong prices helped the company hit a net margin of 21% last year, with a return on invested capital topping 16%.

SQM is trading at about 28 times this year’s estimated earnings, which are expected to jump 40% from 2010 levels. Quite simply, thanks to rising global demand for fertilizers, as well as electronics that depend on SQM’s commodities, we think the company can maintain strong revenue growth and outstanding margins for a long time — so the stock justi-fies a relatively rich valuation. What’s more, the company is steadily improving infrastructure and bringing new capacity online — expansion it funds out of cash flow rather than debt, which is modest (it has a debt-to-capital ratio of 43%). Operating cash flow has consistently outpaced earnings.

Risks and When We’d SellYou may have heard that we’re in the middle of a com-

modities bubble — or that it just popped. That must make this exactly the wrong time to buy a mining stock, right? We don’t think so.

First of all, much of the bubble talk relates to a relatively high global level of mistrust of currencies and even stocks. Institutions and governments looking to avoid dollars, euros, or yuan are attracted to commodities as an alternative — but particularly to highly liquid, cash-like commodities such as precious metals and oil. Fertilizer prices, on the other hand, are in an upward trend, although they’re still at only about half their 2008 peak level.

Nevertheless, commodity prices can be volatile and are driven by global economic factors that are hard to predict and impossible to control. If the global economy slows, so will SQM. And as an energy-intensive business, SQM is tied even more tightly to commodity prices. Its cost of raw materials and energy jumped from 12% of the cost of sales in 2006 to 24% in 2009. It’s more than made up for this through higher prices, but the gross margin has declined since 2008. If prices trip up again, we’d reconsider our case.

The Foolish Bottom LineSQM gets a large chunk of its revenue from selling fertil-

izers used to feed a growing global population. But it’s also the world’s dominant producer of iodine and lithium — the latter a big opportunity as hybrid and electric vehicles start to take off. With SQM, we recommend you give your portfolio some international exposure and buy into two safe long-term growth bets: food and energy.

Dueling Fools: Getting Chile in Here

Tom: What can you tell me about management? How experienced is SQM’s team?

David: Every C-level executive at the company has been on board for at least 11 years, and CEO Patricio Contesse has been there 21 years. Go down a level to the senior vice presidents, and tenure averages more than 16 years. These folks have seen an economic cycle or two. Moreover, the top brass came up through the business, and they all have engineering backgrounds, which I consider a big plus.

Tom: SQM doesn’t boast much insider ownership of its stock. Is this a red flag?

David: I like management with skin in the game, but that doesn’t always happen — particularly with older companies. SQM doesn’t grant management stock op-tions, which keeps investors from getting their shares diluted. Chilean businessman Julio Ponce and his partners control just over 32.6% of the company, and Potash (NYSE: POT) controls 32% of shares. Potash’s CFO is on SQM’s board.

Tom: I’ve heard that China is producing more of its own lithium — a convenient supply for its domestic battery-makers. Is this a threat to SQM?

David: China’s government has made some bold claims about expanding production (try a tenfold increase by 2015) that it’s subsequently scaled back. Sure, China has the potential to become a significant competitor and affect global prices (SQM itself wasn’t in the lithium business until 1996, which is an indica-tion of how quickly things can change), but we also believe that surging demand for lithium batteries will keep demand — and prices — high. At 11% of SQM’s gross margin last year, lithium is an important part of our investment thesis, but it’s hardly the whole story.

Tom: I see that SQM trades as American de-positary receipts on the NYSE. How should SA members proceed?

David: ADRs are certificates that represent owner-ship in a foreign company. From the purchaser’s point of view, it’s simple: Just buy the ADRs like you would any other stock; you shouldn’t see a difference in com-mission, and you can collect the dividend in dollars or reinvest it in further shares. For SQM, one ADR represents one ordinary share, so it’s easy to think of the ADRs as equivalent to shares. The trading volume is relatively low, so be sure to use a limit order.

Follow the Full SQM StoryAdd SQM to My Scorecard so you can track your returns — or just follow all our coverage until you’re ready to buy.


Headquarters: Latrobe, Pa.

Website: www.kennametal.com

Recent Price: $40.30

Risk Level: Medium

Position in Industry: Innovator

Market Cap: $3,297

Cash/Debt: $184 / $318

Revenue (’09/’10/TTM): $2,000 / $1,884 / $2,248

Earnings (‘09/’10/TTM): ($120) / $46 / $184

Insider Ownership: 0.7%

Biggest Threat: Rising Tungsten Prices

The Team Says: Get a Cutting Edge

Data as of 5/18/11 Dollar amounts in millions except recent price

Kennametal makes high-end, precision metal-cutting tools and corrosion-resistant parts for construction, mining, and transportation customers.

Why Buy: » This leader will enjoy rising demand as global manufacturing jumps to life.

» Innovation runs deep for Kennametal, with new products leading the way.

» A multiyear restructuring plan has the company on solid ground to increase cash flow for its shareholders.

By Tom GarDner anD anDy Cross

Here at Stock Advisor, we believe investing is an en-deavor that takes years — not days. Trading in and out of tickers doesn’t interest Fools like us in the least. What does interest us is buying and holding leading companies poised to thrive in their industries and beyond. And although not every recommendation will be a multibagger for us, that’s our hope every time we tap a new stock for you.

This is the lens through which Andy and I see Kennametal (NYSE: KMT), a manufacturer of high-end, precision, customized metal-cutting tools — and our recommenda-tion this month. This company leads the way in bringing its aerospace, energy, transportation, and industrial clients what they need. It has developed a culture of innovation while navigating the thick and thin of business cycles over the years. And we love that it has its mission blazed on the homepage of its website and that it publishes a 30-page (30!) brochure about living its six core values (we Fools have six core values, too — as we wrote about last July). That’s a ringing endorsement that Kennametal is about more than just next quarter’s earnings.

Warren Buffett says that his favorite holding period is forever, an aspiration we echo and one that’s worked beau-tifully for both Berkshire Hathaway (NYSE: BRK-B) shareholders and SA members over the years. We welcome Kennametal to our family this month and look forward to following this company with you for years to come.

Blades of GloryFounded in 1938 by metallurgist Philip McKenna,

Kennametal is one of the largest suppliers of consumable metalworking tools and parts in the United States. But

you won’t find these products at your local Lowe’s. These are high-end drill bits, saw blades, and crushing bits used by large equipment and auto makers, oil and gas drillers, power generators, and transportation providers, to name a few. Pretty much any industry that requires constant use of metalworking tools depends on Kennametal, which is the sales leader in all of its primary markets.

As part of its materials business, the company also makes tungsten carbide products that fight corrosion and wear-and-tear in mining, highway construction, and industrial markets. Tungsten is hard, dense, and durable in alloy form, and Kennametal shapes it into turbine blades and other devices that need to resist the elements.

Kennametal boasts a team of 700-plus scientists and engineers who research and develop new ways to cut things up, earning an average of 30 U.S. patents a year. More than 40% of Kennametal’s sales come from products designed within the past five years. Innovation is a core value for the company and should help it remain on top for the long haul.

Financials and ValuationThe recovering global economy has been a welcome

relief for Kennametal, which last quarter derived close to half its sales from the U.S. and approximately a quarter each from Western Europe and the rest of the world. Last quarter, organic sales in Asia grew 32%, while total sales have grown 25% or better during each of the past four quarters. Kennametal’s operating profit has returned to just about pre-recessionary levels. The gross margin, a key measurement to watch for industrial companies dependent on raw-material costs, improved this quarter on higher

Kennametal (NYSE: KMT)

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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: Ellen Bowman, Managing Editor: Allyson Cohen, 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.

David: What’s the lifespan of Kennametal’s disposable tools? Are we talking one use only, and then it goes in the trash?

Tom: Typically, a device lasts a few hours, or up to a full day’s work. A hefty 80% of the company’s sales are from consumable tools, amounting to a nice chunk of recurring sales for Kennametal — the kind of dependable, profitable business model that Fools love. Once a customer integrates a Kennametal part into its system, odds are that the customer will keep ordering that part again and again. This is one reason most of the company’s tool brands are No. 1 or No. 2 sellers in the industries they serve.

David: Industry top dogs are among my favorite investments, so that’s a good answer. But what about its customer base? Are big companies like Caterpillar generating most of Kennametal’s sales?

Tom: Hardly. Kennametal serves more than 80,000 customers across 60 countries, and no single client makes up more than 3% of sales. That won’t change, and in fact, the number of distinct customers will prob-ably expand now that Widia — one of Kennametal’s key metal-cutting brands — just signed a distribution agreement to be sold in Fastenal’s 2,500 tool stores in North America.

David: That sounds like another reason Kennametal will hit its $3 billion annual sales target sooner rather than later. The company has done a nice job of increasing its efficiency, but will that slow as the company grows?

Tom: I don’t think so. During the past two years, the management team has boosted the company’s margins by eliminating 20 facilities and cutting the workforce by 20% — yet Kennametal still sells as many tools as it did five years ago. Of course, to reach the upper echelons of annual sales, the company will have to add plants and equipment. But I expect Kennametal to keep its expansion right in line with sales and cash-flow growth. This is an efficient, well-run leader, and I can’t wait to see what’s ahead.

sales and prices. Operating profit, net of restructuring costs, nearly doubled over last year, with the adjusted operating margin and return on invested capital hitting all-time highs. The balance sheet carries $184 million in cash and $318 million in debt, most of which is due in June 2012.

Since 2008, Kennametal has been restructuring its opera-tions to focus its product portfolio and reduce its manufac-turing costs. And it’s been working: The company realizes about $165 million per year in cost savings and estimates it can reach $3 billion in sales (nearly a 40% increase) without significant capital expenditures.

The company’s outstanding financial performance has led management to boost 2011 earnings guidance for the third straight quarter (and given this year’s success, I’m banking on seeing it hit that target). Off an owner earnings base of about $220 million and analysts’ long-term growth estimates of 15% to 25%, Andy and I expect Kennametal to be a $7.5 billion company in five years, giving us annual-ized returns approaching 15%. As we ride the gains, we’ll also collect a 1.2% dividend yield.

Risks and When We’d SellTungsten is a key ingredient for Kennametal’s materials

business, so raw-material costs can cause profit to wobble. On a per-ton basis, tungsten prices have increased 33% since the December quarter, rising to more than $400. But by raising prices (something Kennametal expects to con-tinue this year), the company should recoup all of its extra raw-material costs and keep its gross margin healthy.

If Kennametal continues driving higher sales, it will be bumping up against its $3 billion annual sales expectation within a year — at which point it may require additional capital expenditures. It won’t be a big splash right away, but we’ll have to make sure management invests in new plants and finances the spending with skill.

The Foolish Bottom LineA vibrant and growing global economy depends on

the picks and shovels that keep its industrial companies humming along. And Kennametal provides the tools these businesses need. Just as Warren Buffett saw promise in metal-cutting toolmaker Iscar — and scooped it up for Berkshire Hathaway — we see promise in Kennametal. Join us by cutting into some shares today or adding it to My Scorecard so you can follow along.

For disclosure information, see page 10.

Dueling Fools: Testing Your Metal


CostcoCostco (Nasdaq: COST) is a value proposition that’s

pretty tough to pass up, especially these days. An annual membership fee gets your foot in the door for hot tubs and caskets, groceries and jewelry (and virtually everything in between) — and Costco passes all the savings on to you. Scale allows the company to cope with food and material costs better than its smaller competitors and offer cus-tomers some of the lowest prices in town. Co-founder and CEO Jim Sinegal has a passion for the business and has created a culture that should continue to succeed. Costco’s 17% dividend hike and $4 billion share repurchase plan are more signs that this company just keeps getting better — for customers and shareholders alike.

NikeIt’s hard to imagine sports without Nike (NYSE: NKE)

— and that’s just one of the many reasons it’s part of our Core. It’s no secret that we love founder-led businesses, and co-founder and chairman Phil Knight is still active in the company today. The rising costs of materials and transpor-tation have been a concern, but thanks to Nike’s large size and sterling reputation, long-term investors like us needn’t be worried. Emerging markets will play an important role in the company’s growth, so Foolish investors should take advantage of the opportunity and add some Nike today.

Walt DisneyLet’s name the reasons Walt Disney (NYSE: DIS) de-

serves a place at the Core of our hearts: It boasts a treasure trove of characters, including Thor, which sits in the No. 1 spot at the box office, creating an intellectual-property powerhouse. It’s the proud owner of the self-proclaimed worldwide leader in sports, ESPN, while its award-winning animation studio, Pixar, will get a big boost from the re-lease of Cars 2 in June. Iconic venues and networks such as Disneyland, Disney World, and ABC seal the deal.

Whole Foods MarketWhole Foods (Nasdaq: WFM) doesn’t just have two

new kinds of quinoa on shelves this month; it has a new ticker! (Notice the “I” missing on the end?) More shoppers are trading up to higher-end organic and branded products, while Whole Foods relentlessly focuses on delivering quality and value to all of its stakeholders. The organic grocer is less than one-third of its way to its goal of 1,000 total stores, giving this Core stock an excellent chance of beating the market over the next decade.


AppleApple (Nasdaq: AAPL) continues to push the innovative

envelope with rumors swirling on its intentions to include voice-recognition technology into its up-and-coming gadgets, such as the iPhone 4S and the iPad 3. Apple’s smartphone market share should also receive a boost later this year if T-Mobile and Sprint become the latest carriers joining Verizon and AT&T in Apple’s plans for iDomi-nance. With the tablet and smartphone markets still in the early innings, investors should be more than happy to pick up shares of this Core holding on the cheap.

Amazon.com Amazon.com (Nasdaq: AMZN) may be synonymous

with online shopping, but let’s not forget that this empire-builder is in the business of innovation. Not only did Amazon just cross a digital threshold — selling more electronic copies of books on its Kindle reader than it sells print versions — but it continues to pepper the market with new and improved products and services. Amazon Cloud Drive, Cloud Player for Web, and Cloud Player for Android all help customers manage their music, documents, videos, and photos in the cloud. These groundbreaking releases, combined with unstoppable retail dominance, keep us excited about Amazon and remind us yet again why it’s a Core stock.

Coach“Affordable luxury” is one way to define Coach (NYSE:

COH), so you’d expect the accessories purveyor to have a tough time after the earthquakes in Japan. But it’s not. Yes, Japan contributes about 20% of sales, and yes, the devasta-tion has disrupted Coach’s business there. But Coach is still making it happen, delivering a strong quarter thanks to excellent performance in China and North America. The business is even starting to recover in Japan, making this a great time to buy Coach.

Core Coverage: Apple iDominates; Thor Hammers Home Returns for DisneyBy The Stock AdviSor Team

Core Stocks on the MoveWhere do Stock Advisor Fools like you rank our Core stocks? These are the top five you’ve added, in order, to My Scorecard most since we unveiled our new Core in mid-March:

1. Apple (AAPL)

2. Berkshire Hathaway (BRK-B)

3. Amazon.com (AMZN)

4. Netflix (NFLX)

5. Whole Foods Market (WFM)


Next Month: Our Twice-Yearly Review!Go to stockadvisor.fool.com to play along as we get ready to cover the stocks you care about most.

Best Buys Now: BMW Revs Up; Netflix Still Defies GravityBy The Stock AdviSor Team

Team DavidThings are so good at BMW (Pink Sheets: BAMXF.PK)

right now that its three main brands — BMW, Rolls-Royce, and Mini — are setting sales records. While BMW has been a big winner over the past year, we see further upside thanks to a growing appetite for its luxury wheels in China. BMW isn’t a favorite stock among Stock Advisor members, but we think it deserves another look.

Discovery Communications’ (Nasdaq: DISCK) cable networks are raking in advertising revenue and affiliate fees, and the company continues to create content, adding to its more than 100,000 hours of archives. The archived content is being redistributed internationally, which will help Discovery expand its audience to about 1.5 billion viewers in 180 countries.

Despite the rumors, it looks as if Nuance Communications (Nasdaq: NUAN) will remain an independent company. And we’re glad, too, because this means we can still buy shares of this exciting innovator. Nuance held talks with Apple (Nasdaq: AAPL), but neither side disclosed whether the gabbing was about a merger or a licensing deal. Voice recognition seems like an obvious app for Apple’s prod-ucts, so it wouldn’t surprise us to see an announcement on a licensing deal soon.

Panera Bread (Nasdaq: PNRA) pulls a Best Buys Now three-peat this month as same-store sales — what CEO Bill Moreton refers to as the “core driver” of the company’s strong financials — led to another successful quarter. Also bringing us back to the bread bin are initiatives such as table service and an expanded drive-through, catering, and the “Panera Cares” concept.

Online advertising continues to grow for Sina’s (Nasdaq: SINA) Web portal — it’s up 33% and accounts for about 70% of total revenue. Sina is using this solid cash flow to fund its rapidly growing microblog, Weibo. The “Twitter of China” added 40 million more registered users in two months after hitting the 100-million user mark in February.

Sina plans to invest $100 million in Weibo this year to expand marketing and add features, so don’t fret about the daily market moves — just keep your eyes on the growth.

Team TomSales at our newest alternative-energy player, Ameresco

(NYSE: AMRC), jumped 39% from last year, and earnings per share skyrocketed 300%. But lackluster growth in orders kept a lid on the stock. Now that federal guidelines for energy-savings contracts have been finalized, business proposals should ramp up through the rest of 2011, fueling our 20%-plus growth expectations over the next few years.

CORE Despite having to make insurance payouts in one of the worst quarters on record for natural disasters, Berkshire Hathaway (NYSE: BRK-B) is still filling its coffers with cash and putting the money to use in profitable opportuni-ties. The combination of Warren Buffett’s premium talent at a discounted price is a can’t-miss combination.

National Oilwell Varco’s (NYSE: NOV) order backlog and margins keep growing, helping power the energy equipment maker higher. Recent new orders for oil-drilling platforms, along with surging profit in the rest of the busi-ness, are good signs of progress. We see more of the same ahead — and additional upside as this big dog of the oil-services-equipment industry keeps making acquisitions.

CORE Bucking the law of gravity, membership growth at Netflix (Nasdaq: NFLX) just keeps rising — up 69% year over year most recently. As the company starts to expand beyond North America in earnest next year, its careful “test and see” attitude should help it avoid the inevitable pitfalls. Adding two countries per year beginning in 2012 should be a steady, controlled pace that keeps start-up costs manage-able. Netflix’s growth should defy gravity for years.

We’ve pounded the table on TTM Technologies (Nasdaq: TTMI), re-recommending the stock in March and highlighting it as a Best Buy last month. But the printed circuit board leader still isn’t among the top 20 stocks owned by SA Fools. This play on demand for smartphones and tablets is dirt cheap, trading for about 10 times 2011 earnings estimates — but TTM deserves more credit than that, both from the market and from you. Here’s hoping you wake up to the opportunity first.


David’s Best BuysCompany Recent Price

BMW $87.70

Discovery Comm. $39.76

Nuance Comm. $21.75

Panera Bread $122.91

Sina $111.40

Tom’s Best BuysCompany Recent Price

Ameresco $15.28

Berkshire Hath. CORE $79.62

National Oilwell Varco $67.74

Netflix CORE $242.54

TTM Technologies $16.63

Data as of 5/18/11

Company Updates: Earnings Hits and MissesBy The Stock AdviSor Team


II-VI’s (Nasdaq: IIVI) infrared laser-optics market is heating up as demand bounces back. Revenue grew 33%, while earnings more than doubled as orders for II-VI’s infrared and near-infrared technology surged. “Two-Six” blew out earnings estimates and ramped up guidance for next quarter, sending shares up more than 20% after earn-ings were released. Since then, the stock has drifted lower, and it still presents a solid buying opportunity.

MissesHigher raw-material costs and operating expenses shook

investors right out of their Timberlands (NYSE: TBL). The stock initially dropped 26% after the boot-maker missed earnings estimates by a wide margin. Despite the short-term concerns, we believe in CEO Jeff Swartz’s long-term vision and strategy. The stock has bounced back a bit after earnings, and we believe it has a long way to go as Timberland solidifies itself as a top global outdoor brand.

Titanium Metals (NYSE: TIE) is declaring that growth is back. Revenue and earnings both grew substantially in the most recent quarter, a feat that management attributed to increased volume and demand for titanium from the aerospace and industrial sectors. The company’s backlog (orders for future delivery) increased to $680 million, up $100 million from the end of last year. Use of titanium for infrastructure and chemical applications is climbing as the global economy continues to improve. Management expects this overall trend to continue, and given what we’ve seen across many industries this earnings season, we concur. If you haven’t already, there’s still time to get into Timet.

Three-time SA recommendation Sina (Nasdaq: SINA) is investing for the future, and Weibo is where management sees the biggest payoff. The “Twitter of China” has grown at a phenomenal pace, with 140 million registered users at the end of April — 40 million more than just two months before. Continued solid performance in advertising is al-lowing management to focus on content and offerings for Weibo; the goal is to enhance user engagement and reach third- and fourth-tier cities to make the most of the customer base. We like the company’s long-term view and think Weibo is a compelling argument for significant growth for Sina. Take advantage of the market’s short-term view and add a few shares of Sina to your portfolio today.


There’s been plenty of news on your Stock Advisor com-panies since our last issue — here’s a look at a handful of headlines we think are worth your attention.

HitsBlackboard (Nasdaq: BBBB) made some noise when it

said it’s retaining Barclays Capital as a financial advisor “in response to receiving unsolicited, non-binding proposals to acquire the company.” Trading was halted briefly before the announcement, and once it resumed, the stock shot straight up and never looked back. Investors in the educational-software provider gained almost 29% that day.

We don’t have many details at this point — only that management has received unsolicited offers to buy the company and is examining its options. There are no names or numbers, so the rest is pure speculation. We’re patiently waiting for more information and don’t recommend you sell. Blackboard remains a buy; however, if you have new money to invest, take a look at our Best Buys Now. We still like the company’s position in its field and its prospects. Apparently, someone else does, too.

UnitedHealth Group (NYSE: UNH) knocked the cover off the ball as medical costs stayed under control and rising membership led to earnings growth of 18%. The mega health insurer raised its full-year earnings guidance 11%, and the stock surged 10%, as the higher guidance cleared up uncertainty about how the company would fare under the new health-care laws. UnitedHealth spent its cash wisely this quarter, repurchasing 15 million shares for about $41 a pop, or $620 million in total. UnitedHealth remains a buy.

Nvidia’s (Nasdaq: NVDA) volatile ways continue after the company crushed earnings estimates and provided solid guidance. The semiconductor chip-maker’s stock promptly fell 11% and left many investors wondering why. Frustrations surrounding the lack of growth in its Tesla chips, an analyst downgrade, and worries about increased competition seem to be the culprits. While the stock’s volatility can be unnerving, it does open up solid buying opportunities for long-term investors.

Netgear (Nasdaq: NTGR) surprised investors as revenue and earnings shot up more than 30% on strong demand for its networking gear, rocketing the stock to an all-time high. Netgear has strong winds at its back after introducing 20 new products in the quarter, closing the Westell customer-networking acquisition (which gives Netgear a stronger foothold in the telecom space), and enjoying increased demand for its TV and mobile connectivity products. All systems are go for Netgear.

More Stocks, More UpdatesFollow your favorites online with My Scorecard, discussion boards, and weekly updates — all at stockadvisor.fool.com.


others through June 6 will get extra coverage from the SA team in next month’s issue. Plus, you get another chance to win: On June 6, we’ll pick five members at random who are following one of the fastest-rising stocks and reward them with a free year of Stock Advisor.

To get you warmed up, here’s a peek at the five non-Core stocks that SA members added to My Scorecard the most during the past month:

This Month’s Five Biggest Movers:

» Rosetta Stone (NYSE: RST) » Ameresco (NYSE: AMRC) » Sina (Nasdaq: SINA) » Titanium Metals (NYSE: TIE) » TTM Technologies (Nasdaq: TTMI)

Spotlighting Your Top StocksFinally, we’ll also be shining a light on your all-time

favorites, giving you added coverage of the 10 overall most-followed SA companies among our members. Here’s what your top 10 list looks like today, in alphabetical order:

Top 10 Stock Advisor Stocks:

» Activision Blizzard (Nasdaq: ATVI) » Amazon.com (Nasdaq: AMZN) » Apple (Nasdaq: AAPL) » Berkshire Hathaway (NYSE: BRK-B) » Costco (Nasdaq: COST) » Dolby (NYSE: DLB) » Ford (NYSE: F) » Hasbro (NYSE: HAS) » Netflix (Nasdaq: NFLX) » Rosetta Stone (NYSE: RST)

Will it change? You decide. Your most-followed stocks will get more attention next month.

So what are you waiting for? Help us make next month’s review issue one that you can’t put down. Grab your chance to win at stockadvisor.fool.com.

Data as of 5/17/11. For disclosure information, see page 10. For full contest rules, visit stockadvisor.fool.com.

Next month is a big one for Stock Advisor. Not only are we bringing you our twice-yearly review issue, but it’s also our service’s 112th issue! (OK, 100th sounds much cooler than 112th, but it’s still a milestone in our book.)

What’s more, we’ve just hit another big number: Excluding the two new picks in this issue, we now have 100 active recommendations on our Stock Advisor scorecard. That’s 100 top-notch stocks we stand behind and believe will bring you winning returns for the long haul. As David talked about earlier in this issue, our companies are truly exceptional and valuable for-profit corporations — and they’re doing great things in this world.

As we get set to review all 100 — er, 102 — recom-mendations for your investing enjoyment, letting you know where each company is now and where it’s headed next, we’ll also be bringing you more in-depth coverage on a select handful of these stocks.

The catch? We want you to tell us which stocks you want us to cover. By doing so, you’ll be entered to win a free year of Stock Advisor in our two new contests. We’re giving away 10 free one-year memberships (meaning you can extend your time with us at no cost!), so read on to find out how you can let your voice be heard and win.

Contest No. 1: Overlooked ChampionsOur overlooked champions are among the least-followed

stocks among SA members. Sure, they’re not your favorites, but they still promise big rewards.

Of the lovable My Scorecard losers that we’ve called out below, the two that gain the most followers between now and June 6 will get special coverage in our review issue.

Do any of these underappreciated wallflowers speak your language? Add one (or more!) to My Scorecard today. We’ll pick five SA Fools who are following any of these stocks on June 6 and give them a free year of Stock Advisor:

Company CompanyAmerigroup (NYSE: AGP) Embraer (NYSE: ERJ)BMW (Pink Sheets: BAMXF.PK) InterDigital (Nasdaq: IDCC)BorgWarner (NYSE: BWA) MSC Industrial (NYSE: MSM)Copart (Nasdaq: CPRT) PetSmart (Nasdaq: PETM)Dassault (Pink Sheets: DASTY.PK) Precision Cast. (NYSE: PCP)

Contest No. 2: The Best of the RestHave another favorite SA stock that you think deserves

more love? Add it to My Scorecard for your chance to give it some more attention. Of our remaining, non-Core picks, the three that you add to My Scorecard more than any

Community Page: Shape Your Review Issue and WinBy Jim mueller

It’s a Snap to Enter Our Contests OnlineJust click the My Scorecard tab on stockadvisor.fool.com to start following stocks and be entered to win a free year of SA.

100%

Prin

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on R

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100.

RECOMMENDATION REPORT CARD

MOST RECENT RECOMMENDATIONS

Stock AdvISor CORE

MEMBER POSTS OF THE MONTH

Data as of 5/18/11

Our discussion boards have something for everyone — jump in with some of the most-recommended posts of the month:

» heathwcasey: Inside Activision Blizzard’s numbers

» SarahGen: Don’t sweat the Sina short-term noise

» brianmccurdy: My notes from lunch with Pickens

» TMF1000: Building a portfolio slowly

What do you think? Share what’s on your mind and you could make the list — helping us all become smarter investors!

DaVID’s Tom’sIssue Company Ticker Company Ticker

6/11 Soc. Quím. y Minera sQm & Kennametal KmT

5/11 Sina sINa & Ameresco amRC

4/11 II-VI IIVI & TTM Technologies TTmI

3/11 Westport Innov. WPRT & Techne TECH

2/11 Cognex CGNX & Tennant TNC

1/11 Amazon.com amZN & LabCorp LH

59%

86 beating the market

59 lagging the market

41%

Excludes sold positions.

DaVID’s CoRE Tom’s CoRECompany Ticker Company Ticker

Amazon.com amZN Berkshire Hathaway BRK-B

Apple aaPL Coach CoH

Netflix NFLX Costco CosT

Walt Disney DIs Netflix NFLX

Whole Foods WFm Nike NKE

disclosures: David owns shares of AAPL, AMZN, ATVI, DIS, F, NFLX, PNRA, RST, SINA, and WFM; Andy owns BRK-B, CPRT, and IIVI; Alex owns BRK-B; Karl owns AAPL and HAS; Jim owns AAPL, AMZN, ATVI, BAMXF.PK, BRK-B, DLB, F, NFLX, TIE, and TTMI and has op-tions on NFLX; and Jason owns AMZN, ATVI, BRK-B, and PNRA. The Motley Fool owns shares of AAPL, ATVI, BBBB, BRK-B, COH, COST, F, IIVI, RST, TBL, UNH, and WFM.

MY SCORECARD: BY THE NUMBERS

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!

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.

BEsT Buys NoW

DaVID’s BEsT Buys NoWCompany Ticker Recent Price

BMW BAMXF.PK $87.70

Discovery Communications DISCK $39.76

Nuance Communications NUAN $21.75

Panera Bread PNRA $122.91

Sina SINA $111.40

Tom’s BEsT Buys NoWCompany Ticker Recent Price

Ameresco AMRC $15.28

Berkshire Hathaway BRK-B $79.62

National Oilwell Varco NOV $67.74

Netflix NFLX $242.54

TTM Technologies TTMI $16.63

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.


SCORECARD

Details on all recommendations available at stockadvisor.fool.com

AVERAGE RETURNS

Since inception, includes sold positions.0% 15% 30% 45% 60% 75% 90% 105% 120% 135% 150%

David’s Returns 144.6%

Tom’s Returns 78.9%

S&P 500 23%

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