Stocks for 2011

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STOCKS2011The Investors Guide to the Year Ahead

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Published by

The Motley Fool, LLC

2000 Duke Street, Alexandria, VA 22314, USA

Published November 2010

The studies in this book are not complete analyses of every

material fact regarding any company, industry, or investment,

and they are not buy or sell recommendations. The opinions

expressed here are subject to change without notice, and the

authors and The Motley Fool, LLC, make no warranty or

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Editor: Tracy Dahl

Financial Editor: Bryan White

Publishing Manager: Adrienne Perryman

Design and Production: Sara Klieger

Cover Design: Dari Fitzgerald

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STOCKS2011

Contents

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IN TR ODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV

by bryan white

A P P L E :ITS N OT TOO LATE TO TAKE A B IT E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

by david gardnerand t im beyers

A R R I S G R O U P :TH E B ACKB ON E OF A MEGATR EN D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

by nick crow

C I T G R O U P :

N O T A S N A U G H T Y A S I T S E E M S . . . . . . .. . . . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . . . .. . . . . 7by alex scherer , cfa

D I A M O N D H I L L I N V E S T M E N T G R O U P :I N V E S T I N I N V E S T I N G . . . . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . . . .. . . . 9

by t im hanson

E X P E D I T O R S I N T E R N AT I O N A L O F W A S H I N G T O N :S H A P E D - U P S H I P P I N G . . . . . . . . . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . 1 2

by joe magyer

GAP :FALL (B ACK) IN TO TH E GAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4

by r ich gre ifner

L I N I N G :B R A N D I N G M E E T S B A S K E T B A L L . . . . . . .. . . . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . . . .. . 1 7

by bryan white

L O R I L L A R D :G E T H O O K E D O N T H I S D I V I D E N D . . . . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . . . .. . . . . . . . 1 9

by charly travers

R E D R O B I N G O U R M E T B U R G E R S :A N A C T I V I S T I N V E S T O R S B L U E P L A T E S P E C I A L . . . .. . . . . . . .. . . . . . .. . . 2 1

by j im gill ies

S Y N A P T I C S :Y O U R F I N G E R O N T H E P U L S E O F T E C H N O L O G Y . . . . . . .. . . . . . .. . . . . . .. . 2 3

by david meier

WAL-MAR T:S T I L L D E L I V E R I N G D E E P V A LU E . . . . . . . .. . . . . . .. . . . . . .. . . . . . . .. . . . . . .. . . . . . .. . 2 5

by james early

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STOCKS2011Introduction

BY BRYAN WHITE

DEAR FELLOW FOOL,

Markets are like rubber bands. Stretch them too far in one

direction, and snap! they eventually pull back. Lets take

bonds. About this time last year, a bond bubble was brewing.

Now, bonds appear on the verge of reverting to the mean, ready

to snap back to their usual slow and steady growth.

But guessing which direction markets will be pulled, and for

how long, is a fools game. We capital-F Fools prefer a more

measured investing approach to make our money. Our secret

weapon: time.

WHY WE GO LONG

Long-term investors like us view the market as a tool to

build wealth over long periods of time. Instead of focusing on

the next three weeks, we fixate on the value of an asset three

years from now maybe more. This discipline allows us tospend our time researching and analyzing businesses rather

than watching ticker feeds all day.

Well leave that to the professional traders. Those guys have

a completely different motivation (read: financial incentive)

that makes it impossible for them to think beyond a quarter or

two. Their clients are after short-term gains and arent willing

to wait around for a few years for an investment to work out.

But we are. Were not concerned with staying ahead of the

crowd. In fact, well look for opportunities where others have

fled and profit from them.

One of my favorite recent stories about the herd mentality

is Priceline.com (Nasdaq: PCLN). Business at the travelwebsite was zooming right along when an earthquake in Chile

called the companys short-term growth into question, and the

stock stalled.

About a month later, Europe Pricelines largest and

most profitable market became a cauldron of chaos fueled

by government austerity plans. Traders and investors alike

worried about a slump in travel, and they dumped the stock.

Priceline lost about one-third of its value in a matter of a few

weeks. Soon after, the companys earnings blew away analysts

expectations, and the stock is now at an all-time high.

The moral here is that you lose out when you reflexively try

to trade ahead of others. If Pricelines sellers had slowed down

and given the business some real thought, they would have

realized that travel websites are used to plan the minority of

trips in Europe. Yet the online travel industry is growing almost

10% a year in the region, so Priceline faces a huge growth

opportunity there. Makes that frenzied selloff seem silly,

doesnt it?

Thats why I encourage you to take things slow and profit

from measured, reasoned investing. To help, my fellow Foolish

analysts and I have put together this investors guide for the

year ahead.

YOUR STOCKS FOR 2011 AND BEYOND

Inside, youll find 11 great stock ideas with compellinggrowth stories. Weve included buy-below prices and sell

guidance to help you get into and out of these stocks at

the best time.

So take a spin through our best timely stock ideas, which

include opportunities for value, international, and dividend

investing. We even have a special-situation stock for those of

you who dont mind digging through traders trash (with gloves

on, of course).

Some of these stocks have snapped up sharply in the recent

market rally. We still think theyre stellar companies, but you

shouldnt overpay for them. Use your advantage of time to wait

for a price closer to our buy-below guidance.

After all, good things come to investors who wait for

opportune buying prices, for investment theses to play out, and

for the right time to sell at a handsome profit.

Stay patient, long-term investor and happy investing!

Foolish best,

Bryan White

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STOCKS2011

Stocks 2003 Performance

Company RecentPrice * Return **

AllianceBernstein Holding (AB) $24.28 16.3%

WP Stewart & Co. (WPL) $5.95 -96.8%

Activision (ATVI) $11.46 445.7%

Cheesecake Factory (CAKE) $29.12 28.5%

Cognos (COGN) *** $58.00 157.9%

Cemex (CX) $8.77 -2.9%

Hollywood Entertainment *** $13.25 -31.0%

Ligand Pharmaceuticals (LGND) $1.62 -63.8%

Noven Pharmaceuticals (NOVN) *** $16.50 62.7%

Quality Systems (QSII) $64.26 1,203.5%

WPP Group (WPPGY) $58.04 60.9%

Expedia (EXPE) / InterActive (IACI) $28.95 / $27.90 55.8%

Total Return 153.1%

Return vs. S&P 500 127.4%

* As of 10/29/10** Cumulative as of 10/29/10*** Last closing price as of corporate event (acquisition,bankruptcy, spinoff, etc.).



BioMarin Pharmaceutical (BMRN) $26.11 461.5%

Ceradyne (CRDN) $23.81 -27.2%

Deckers Outdoor (DECK) $58.10 320.1%

Walt Disney (DIS) $36.13 41.2%

Deswell Industries (DSWL) $3.20 -71.2%

iShares Russell 1000 Growth Index Fund (IWF) $53.89 20.1%

Lowrance Electronics *** $37.00 20.1%

Palm (PALM) $5.69 -44.2%

Par Pharmaceutical Companies (PRX) $32.51 -21.1%

RH Donnelley (RHD) *** $0 -100.0%

Shimano (SHMDF) $49.50 88.7%

Ultralife Batteries (ULBI) $5.25 -62.7%

Total Return 52.1%





Alderwoods *** $20.00 139.0%

Bandag *** $50.75 40.6%

Cephalon (CEPH) $66.44 41.4%

Chico's (CHS) $9.72 -47.5%

Point Blank Solutions (DHBT) $0.28 -96.2%

Garmin (GRMN) $32.84 39.3%

Guangshen Railway Co. (GSH) $20.34 94.6%

MIVA (VTRO) $4.19 -95.4%

7-Eleven *** $37.50 132.2%

Lone Star Steakhouse & Saloon *** $27.35 31.4%

UnitedHealth Group (UNH) $36.05 14.1%

Total Return 26.7%





American Eagle Outfitters (AEOS) $16.02 6.8%

BioMarin Pharmaceutical (BMRN) $26.11 157.8%

Bridgeway Large-Cap Growth (BRLGX) $11.76 -1.8%

Brookfield Asset Management (BAM) $29.72 56.4%

Disney Co. [Pixar] (DIS) **** $36.13 49.2%

Harley-Davidson (HOG) $30.66 -36.8%

Headwaters (HW) $3.40 -90.5%

Markel (MKL) $335.02 5.4%

OSI Restaruant Partners (OSI) *** $41.15 3.5%

Patterson-UTI Energy (PTEN) $19.41 -35.4%

United Natural Foods (UNFI) $35.76 25.0%

Urban Outfitters (URBN) $30.79 -6.2%

Total Return 11.1%


* As of 10/29/10** Cumulative as of 10/29/10*** Last closing price as of corporate event (acquisition,bankruptcy, spinoff, etc.).**** Pixar was acquired by Walt Disney on May 5, 2006, for stock.Starting from then, the performance tracking indicates holdingDisney shares at the 2.3 share ratio and prices as of that date.

The Motley Fool has published The Investors Guide to the Year Ahead series each November since 2002. What follows is a list

of recommendations and their performance for all years from our Stocks 2003 publication (published in November 2002) through last

years Stocks 2010 (published in November 2009). All dividends are considered reinvested, including for the S&P 500.

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STOCKS2011Stocks 2007Performance


Abercrombie & Fitch Co. (ANF) $42.86 -33.2%

Braskem S.A. (BAK) $20.85 53.9%

Centene Corp. (CNC) $22.32 -13.1%

Chico's FAS (CHS) $9.72 -57.5%

Coventry Health Care (CVH) $23.42 -50.0%

First Cash Financial Services.(FCFS) $29.07 41.3%

International Business Machines (IBM) $142.96 67.9%

Logitech International (LOGI) $18.80 -32.4%

Marchex (MCHX) $6.42 -50.8%

Paychex (PAYX) $27.74 -17.8%

Pulte Homes (PHM) $7.85 -73.9%

Sprint Nextel (S) $4.13 -78.7%

Oakmark Select (OAKLX) $26.56 -7.2%

Urban Outfitters (URBN) $30.79 38.1%

Total Return -15.3%

Return vs. S&P 500 -7.1%

* As of 10/29/10** Cumulative as of 10/29/10



Colfax (CFX) $16.07 84.7%

Dolby Labs (DLB) $61.68 109.5%

Domino's Pizza (DPZ) $14.84 181.1%

Guess (GS) $38.92 107.2%

Netflix (NFLX) $173.57 655.0%

Parker Hannifin (PH) $76.28 107.7%

Tenaris (TS) $41.43 102.7%

XTO Energy (XTO) *** $41.81 14.9%

Rydex S&P Equal Weight Materials RTM) $57.38 67.3%

Total Return 158.9%





Brinker International (EAT) $18.54 -12.0%

Canadian Imperia l Bank of Commerce (CM) $76.60 4.4%

Charlotte Russe Holding (CHIC) *** $17.51 15.6%

Faro Tehcnologies (FARO) $24.14 -6.4%

Fomento Economico Mexicano (FMX) $54.91 83.7%

Intuit (INTU) $47.98 64.4%

Marvel Entertainment (MVL) *** $54.08 96.0%

Portfolio Recovery Associates (PRAA) $67.05 73.6%

Spectra Energy (SE) $23.53 11.4%

Starbucks (SBUX) $28.56 27.5%

Thor Industries (THO) $31.49 -2.4%

Janus Contrarian (JSVAX) $14.56 -19.4%

Total Return 28.0%


* As of 10/29/10

** Cumulative as of 10/29/10*** Last closing price as of corporate event (acquisition,bankruptcy, spinoff, etc.).



BD (BDX) $75.52 5.1%

China Mobile (CHL) $51.37 10.3%

Compass Minerals (CMP) $78.87 25.0%

Devon Energy (DVN) $65.02 -7.5%

Hillenbrand (HI) $21.49 11.0%

Nike (NKE) $81.44 25.1%

Olin Corp. (OLN) $19.79 20.5%

Somanetics (SMTS) *** $24.98 66.8%

Take-Two Interactive (TTWO) $10.67 -10.2%

Yum Brands (YUM) $49.56 41.0%

Total Return 18.7%



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STOCKS2011Apple:

Its Not Too Late to Take a BiteBY DAVID GARDNER AND TIM BEYERS

APPLE

Nasdaq: AAPL

Headquarters: Cupertino, Cali.

www.apple.com

FINANCIAL SNAPSHOT

Recent Price: . . . . . . . . . . . . . . . . . . . . . . . $317.13

Market Cap: . . . . . . . . . . . . . . . . . .$291.9 billion

Dividend Yield: . . . . . . . . . . . . . . . . . . . . . . . . . NA

CAPS Rating:. . . . . . . . . . . . . . . . . . . . . . . . . 3 Stars

Buy Guidance:. . . . . .No recommendation.

Apple is a wellpositioned business with

a volatile stock. Buy it with a plan to hold

for years.

Data as of 11/8/10

WHY BUY

Apple is becoming the most powerul

content distributor in history.

Taking its computer and iPad sales

together, Apple is the market leader in

personal computing.

Its hard to believe now, but Apple (Nasdaq: AAPL) is a prototypical two-guys-in-a-garage success story. (Sound familiar, Fools?) In Apples case, the two guys werent

the brothers Gardner. They were CEO Steve Jobs and future Dancing With the Stars

contestant Steve Wozniak.

Long before he was doing the tango on the telly, The Woz was building the first

few Apple I computers by hand. By 1976, Apple was selling its machines to retail

customers, and in 1984, the companys Macintosh computer splashed onto the scene

during a Super Bowl ad. Thats when Jobs and Wozniaks business efforts really

began to bear fruit.

Since then, Apple has fired and rehired Jobs, teetered on the verge of bankruptcy,

rebuilt its Mac operating system, changed the way we consume music, and reinvented

the cell phone and tablet computer. Effectively, its built an iEmpire. Apple is now

the worlds third-most valuable company behind ExxonMobil (NYSE: XOM) and

PetroChina (NYSE: PTR).

And yet we think the stocks rally is just beginning. Invest in Apple today, and you

can expect to nearly double your money over the next four years.

THE COMPANY

Thats because Apple is no longer simply a leader in the computer business. Its

also become a driving force in the media business, in which there are content creators

and content distributors. Apple is emerging as the most powerful distributor in history

thanks to its means of sharing written, audio, and visual material.

Take Apples iTunes store. In 2009, iTunes accounted for more than 99% of mobile

app sales, according to research firm Gartner. Today, music and apps are about a $5

billion business, and Apple rakes in more than $1 billion of that.

Apple owns this market, and it not only sells music and apps but also books and

articles (through the iPad) and video games (through the iPod Touch, iPhone, and iPad).

As more of this content is produced, sales of Macs and mobile devices that use Apples

operating system should rise.

The increasing use of iPhones in emerging markets, such as India and China, should

boost sales, too, as should Apples forthcoming agreement with Verizon (NYSE: VZ) in

the United States.

WHY INVEST?

Yet its the iPad that has us most excited about Apples future. When you add iPad

and Mac sales together, Apple becomes the market leader in personal computing. Sure,

we know the iPad isnt technically a computer, but we dont think its a stretch to think

that it will be used like one. There are already accessories out there that can transform

an iPad into a laptop equivalent, and Apple could easily beef up the iPads data-storage

capability in future generations of the device.

And consumers already prefer the iPad over alternative e-readers for reading

magazines and newspapers. Theyre also excited about streaming Netflix (Nasdaq:

NFLX) movies to the iPad, a feature neither the Nook nor Kindle offers. (Heck, were

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STOCKS2011excited about that, too.) And once the Game Center social-

gaming platform moves from the iPod Touch up to the iPad

which we think will happen in 2011 teens should yearn

less for consoles and more for the portable, widescreen gaming

experience the iPad offers. In short, consumers will keep finding

ways to work and play with the iPad, and Apples stock should

keep rising because of it.

Research company IDC predicts that the overall market for

converged devices like smartphones and tablets will reach

594.4 million devices by the end of 2014 and that Apple will

own just 10.9% of that market. Thats down from an estimated

14.7% this year, which makes sense when you factor in the

increasing popularity ofGoogles (Nasdaq: GOOG) Android

operating system.

Whats funny is, if you do the math, Apples worst performance

would still generate $30 billion in iPhone and iPad sales in 2014.

We think $40 billion is far more likely. Add in $30 billion more

just from Mac sales, and todays Apple, which generated $65.2

billion in fiscal 2010 revenue, starts to look small.

And remember, this estimate doesnt include the kickers.Apple TV is starting to gain traction, the iPod is still a must-have

personal accessory, and social additions to Apples App Store

could transform every mobile device that runs Apples operating

system into a gaming platform. This would create billions of

dollars more in high-margin revenue.

FINANCIALS AND VALUATION

Yet investors arent accounting for this huge growth

opportunity. If anything, theyre pricing Apples stock lower than

they did just a few years ago. Check out these multiples:

Average

Multiples Year to date 2009 2008 2007Price toearnings

21.78 25.51 29.40 38.69

EV to EBIT 13.99 15.42 19.02 26.62Source: Capital IQ, a division of Standard & Poors

If youre not familiar with the EV-to-EBIT ratio, we think its

the most valuable metric to use when assessing Apples relative

value. It measures a companys enterprise value (that is, its

market cap plus debt, minus cash) against its earnings before

interest and taxes.

The advantage of looking at the EV-to-EBIT ratio is that we

can account for Apples $24 billion (yes, thats billion with a b)

cash hoard in pricing the companys pre-tax earnings power:

Balance Sheet Sept. 2010 Sept. 2009 Sept. 2008 Sept. 2007Cash andequivalents

$11,261.0 $5,263.0 $11,875.0 $9,352.0

Short-terminvestments

$14,359 $18,201 $10,236 $6,034

Operatingleases

($2,168) ($1,848) ($1,656) ($1,208)

Diluted sharesoutstanding

924.7 907.0 902.1 889.3

Cash per share $25.36 $23.83 $22.67 $15.94Numbers in millions, except per share. Source: Capital IQ, a division of Standard & Poors

Historically, investors have been willing to pay 30 times EBIT

for Apple during the Jobs reign, or more than twice the stocks

recent price. Some investors argue that 30 is too high a multiple

to pay given Apples size. Others say Apple will realize just 13%

aggregate growth in EBIT from 2011 to 2014 as volume sales cut

into margins. Apple is fully and fairly priced, they argue.

But we dont buy it. Jobs and his team have so consistently

blown away estimates that were comfortable working with amultiple of 20 times estimated EBIT, which brings our estimated

2014 enterprise value to $554 billion. Mix in Apples $25 billion

in net cash and dilute the number of shares outstanding by 1.5%

annually, and you get a stock worth $587 per share in 2014.

Thats nearly double todays price in just four years.

RISKS AND WHEN WED SELL

Even though it seems as if Apple has an app to accomplish

anything, the company isnt invincible. Android is winning

a larger share of new smartphone buyers, and Microsofts

(Nasdaq: MSFT) revitalized Windows Phone 7 could shape up

to be a sizable rival. The old standbys Research In Motion(Nasdaq: RIMM) and Nokia (NYSE: NOK) arent going

away, either.

In terms of computer sales, low-cost Asian manufacturers are

the biggest threat to Apple. Strapped consumers are more likely

to turn to cheaper alternatives in a down economy, though we

also cant count out Dell (Nasdaq: DELL) and Hewlett-Packard

(NYSE: HPQ). Fortunately, our intrinsic value estimate assumes

zero market-share gains in smartphones or computers.

Some say Steve Jobs himself is another risk facing the

company. They worry that too much of the companys success

is wrapped up in the CEO and that an Apple without Jobs wouldbe an Apple without a core. We strongly disagree. Tim Cooks

successful run as interim CEO proves that Apple has a deeper

bench today than ever before.

If youre thinking theres almost no scenario in which wed

recommending selling your Apple stock, youre right. Apple

is one of the worlds great brands, and were both delighted

to be shareholders. Short of proof of outright fraud or rapidly

deteriorating market share for its Macs and mobile devices, we

recommend holding Apples stock for many years.

THE FOOLISH BOTTOM LINE

Apple has made millions for investors willing to bet against

the establishment. Now, the iEmpire is the establishment. Yet

Apple retains its purpose and the competitive edge its built

through brand loyalty and design pretty great for a company

that began in a garage. Its stock is insanely cheap for a growth

story that still has years to play out so Apples pretty great for

your portfolio, too. Take a bite of this stock today.

David Gardner, co-founder of The Motley Fool, is the advisor

forMotley Fool Rule Breakers and co-advisor forMotley Fool

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STOCKS2011Stock Advisor with his brother and Fool co-founder, Tom. David

owns shares of Apple and Netflix.

Tim Beyers is a member of Davids Rule Breakers stock-

picking team and a contributor to The Motley Fools online

content and special reports. Tim owns shares of Apple and

Google and has options positions on Apple.

The Motley Fool owns shares of Apple, ExxonMobil, Google,

and Microsoft.

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STOCKS2011


Arris Group:The Backbone of a Megatrend

BY NICK CROW

ARRIS GROUP

Nasdaq: ARRS

Headquarters: Suwanee, Ga.

www.arrisi.com

FINANCIAL SNAPSHOT

Recent Price: . . . . . . . . . . . . . . . . . . . . . . . $10.13

Market Cap: . . . . . . . . . . . . . . . . . . . . $1.3 billion


CAPS Rating: . . . . . . . . . . . . . . . . . . . . . . . . 5 Stars

Buy Guidance: . . . . . . . . . . . . . . . Below $10

Data as of 11/8/10

WHY BUY

The Comcasts o the world compete to

oer customers the astest networks and

Arris helps the service providers build them.

The U.S. government is backing aster

connection speeds, and theres a global

push or increased bandwidth.

The stock is cheap relative to the

companys worth.

Do you dig all things digital? Want to invest in a megatrend where consumptiondoubles every 18 to 24 months?

Then I present Arris Group (Nasdaq: ARRS), a stock that benefits from our lust

for increasingly more oomph from our cable providers. This thirst goes beyond my

co-workers playingHalo in the game room at Fool HQ: Bandwidth consumption per

user has increased 50% annually since 1982. Given our fanaticism for HD video on

demand, voice over Internet protocol, YouTube, Netflix, Facebook, and online gaming,

this trend shows no signs of abating.

That means multiple systems operators (MSOs), such as Comcast (Nasdaq:

CMCSA), are falling all over themselves to provide you with a triple play of telephone,

high-speed data, and video services. This competition combined with our insatiable

demand for richer, more personalized content and faster download speeds requires cable

companies to continually improve their networks. And Arriss head ends, hubs, nodes,

and other devices are most efficient way for them to do that.

THE COMPANY

Arris designs, engineers, and provides the infrastructure needed to create broadband

networks. That includes selling MSOs the physical equipment that makes up the

backbone of broadband infrastructure as well as helping them with digital advertising.

Accounting for about three-fourths of revenue, the biggest part of Arris business is

its broadband communication systems unit. This part of the business helps send and

receive data at high speeds, and its what enables cable operators to provide voice over

Internet protocol, video over IP, and high-speed data services. All this is made possible

through Arris Cable Modem Termination Systems (CMTS). Cable operators need thesepieces of equipment at their hubs to provide subscribers with broadband services. Arris

has increased its CMTS market share from 18.6% to 42.9% over the past five years,

even as industry giant Ciscos (Nasdaq: CSCO) has dropped from 54.4% to 38.4%.

Arris is also dominant in Embedded Multimedia Terminal Adapters (EMTA) think

broadband cable modems and voice over Internet protocol where its been No. 1

globally for more than five years.

Perhaps most importantly, Arris products conform to the latest international telecom

standard, version 3.0 of the Data over Cable System Interface Specification (DOCSIS).

This keeps Arris products relevant and sought-after as cable operators seek to upgrade

their networks.

In addition to its send-and-receive business, Arris access, transport, and suppliesbusiness offers hybrid fiber-coaxial equipment, such as head ends, hubs, repeaters, and

terminals, that make up much of the networks physical infrastructure. That business

accounts for about 15% of Arriss revenue and has a 24% gross margin. The high-

margin media and communication systems business (6% of revenue) helps MSOs with

ad insertion, digital advertising, and video on demand.

WHY INVEST?

In the race to provide the fastest connection speeds and the most reliable networks,

MSOs have no choice but to continually reinvest in Arriss offerings or risk falling

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STOCKS2011behind and losing valuable subscribers. Sure, they can delay

major capital expenditures for a while, but eventually they pay

up or risk going the way of dial-up. Because of these dynamics,

they tend to invest at a rate just fast enough to barely leap-frog

their competitors. But theres reason to believe that the rate of

investment will increase in the near future.

Thats because the U.S. ranked 16th in the world in Akamais

(Nasdaq: AKAM) State of the Internet report. U.S. residents havean embarrassingly slow average connection speed of 4.7 megabits

per second. Thats 60% slower than users in South Korea and

25% slower than Facebook fiends in Latvia and Romania. To

combat this, the Federal Communications Commission is pushing

for substantially increased investment through the National

Broadband Plan (see www.broadband.gov).

Among the plans key goals is the creation of the Connect

America Fund, which would provide nearly $16 billion to support

affordable broadband and voice services with download speeds

of at least 4 Mbps. The primary long-term goal is for at least 100

million U.S. homes to have access to a download speed of 100

Mbps a speed that Arris DOCSIS 3.0-compliant equipmentenables. But right now, only 0.8% of Americans have access to

connections faster than 25 Mbps (even if you include universities

and companies), and about a quarter of the population has speeds

above 5 Mbps. Were a long way from 100 Mbps.

Why should the government (or you) care about our connection

speeds? Well, according to studies from the Brookings Insititution,

Massachusetts Institute of Technology, and World Bank, modest

increases in the use of broadband can create hundreds of thousands

of jobs. FCC Chairman Julius Genachowski says broadband is

akin to the advent of electricity. And were still in the early

stages here; high-speed Internet will continue to reshape oureconomy and our lives for decades.

Revolutionary new technologies such as smart grids that cut

power-plant emissions while lowering consumers energy costs

and networks that connect first responders, law enforcement,

and hospitals to help save lives all depend on faster

broadband access. And for cable companies that have invested

in connections to our homes and businesses, upgrading to the

DOCSIS 3.0 specification is the fastest and most cost-effective

way to meet the demand for 100 Mbps speeds.

This need for speed isnt limited to the States. Developed and

emerging countries alike want the economic and social benefitsthat come with faster broadband. Its a global trend, and you can

see it in Arris sales. International sales accounted for 26% of

total revenue in 2009, and that proportion has risen to 37% so

far in the first half of 2010. When looking at Arris prospects, the

market is missing this demand shift.


Already, Arris is profiting from the industry move to DOCSIS

3.0. The product shift to selling more DOCSIS 3.0-compliant

CMTS and EMTAs has bumped Arris gross margin to more than

40% in 2009 from about 35% in 2008. The companys EBIDTA

is about $220 million, and its profit margin is nearly 20%.

Its a bit surprising that a company so dominant in its core

businesses has a market cap of just $1.3 billion clearly, Arris

has room to grow. But for now, with more than half its market

cap in cash and short-term investments and just $200 million in

debt, it has an enterprise value of $833 million. That puts ArrisEV/EBITDA ratio at just 4.1, which suggests that this business

is incredibly cheap right now. It might even be an attractive

acquisition target for a larger competitor, such as Cisco, or one

of its primary customers, such as Time Warner Cable (NYSE:

TWC) or Comcast.

Using a free-cash-flow-to-firm model, I value Arris at $12 to

$15 per share, which is 20% to 50% higher than its recent $10

price.


Arris is a good business at a great price, but its not a

superior business. Thats because other companies can and do

provide the products MSOs depend on. Arris has to compete for

business, which is tough because the industry it serves is pretty

concentrated. Think about it: How many choices do you have for

broadband access? (And how many times have you cursed the

answer?) Its frustrating for Arris, too, as it leads to high levels

of customer concentration. In the first half of 2010, Comcast

made up 21% of Arris revenue, and Time Warner accounted

for 17%. Together, they made up 53% of sales in 2009. Losing

one of its major customers to a rival is the most obvious risk

for Arris. As the MSO industry consolidates, each operator

gains bargaining power and could force price concessions,

compressing Arris margins.

Whats more, the operators tend to be highly leveraged, and as

we witnessed during the credit crunch, even good companies can

lose access to capital. If this happens to Arris customers, they

wont make any capital expenditures, and Arris revenue will go

out the window.

Id recommend selling Arris if the company lost either of

its major customers. Id also recommend selling if its top two

customers ever made up more than 70% of sales. Likewise, if

competition forced price concessions without a commensurate

increase in volume, Id also suggest selling.

This isnt a buy-and-hold-forever business. I expect you to

profit because Arris stock is cheap relative to its worth. When

Arris starts to trade in the range of my fair-value estimate, you

should sell and pocket your profit.


Arris gives you a compelling opportunity to invest in the

megatrend of growing broadband consumption. Industry

competition, the National Broadband Plan, and a global push

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STOCKS2011for increased bandwidth speeds act as a catalysts to unlock the

stocks value.

For now, the stock is cheap relative to its potential. But that

wont be the case for long, so buy into broadband while its still

a bargain.

Nick Crow is a senior analyst forMotley Fool Pro, a real-

money portfolio that uses stocks, ETFs, and options strategies;

andMotley Fool Options, the Fools options ideas service. Heowns shares of Arris Group.

The Motley Fool has options positions on Cisco.

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STOCKS2011CIT Group:

Not as Naughty as It SeemsBY ALEX SCHERER, CFA

What would you call investing in (1) a specialty finance company thats (2) fresh outof bankruptcy and (3) has an ugly, high-cost financing structure? Oh, and (4) regulators

are breathing down its neck, and (5) the CEO is infamous for buying a $35,000

commode (no, not thatkind of commode this one was a fancy cabinet) on his earlier

companys dime?

Five kinds of crazy? Well, Id call it exhilarating like dating the bad girl. Thats

because what makes CIT Group (NYSE: CIT) seem so naughty is in fact a batch of

low-hanging fruit the market has largely ignored. Special-situation investors, take note.

THE COMPANY

CIT is a commercial finance company that makes loans to small and medium-size

businesses in about 30 industries and 50 countries, though primarily in the U.S. and

Canada. Its historically served smaller, niche lending areas for example, partnering

with an office equipment provider to provide financing for its customers copier and

computer purchases. More than 100 years of experience and millions of bread-and-

butter loans made for a staid yet successful business until rapid expansion from 2005

to 2007 ran smack into the credit crisis. CIT was dealt a liquidity squeeze it wasnt

prepared for.

Like many of its non-bank financial peers at the time, CIT restructured. In December

2008, it became a bank holding company and accepted more than $2 billion in

federal rescue funding in an attempt to outlast the liquidity crisis. But as fear of

credit implosions soared in 2009, CIT was deemed not quite too-big-to-fail, and it

was ultimately denied the kind of federal rescue that kept the biggest companies like

Citigroup and Bank of America out of bankruptcy court. So CITs lenders arrangeda prepackaged bankruptcy that brought the company into and back out of Chapter 11

intact and in only 40 days, a feat unheard of for a complex finance company. The

old stock was wiped out along with more than $10 billion of debt, and CITs lenders

became the new owners of a company in fighting condition.

And then the company cleaned house. Seven of the 13 board members are new,

including Chairman and CEO John Thain. In the cocktail-party crowd, Thain is known

as one of the villains in the Wall Street bailout saga. But he also successfully turned

around the New York Stock Exchange during a time of major turmoil. That experience,

plus his marquee name, made him a natural selection for this high-profile turnaround.

Hes hit the ground running, hiring a new CFO, chief administrative officer, chief risk

officer, and chief credit officer in the past year, and hes focusing on the right issues toset CITs turnaround in motion. Importantly, many longtime CIT executives have stuck

around at the individual business level, each with many years of experience in their

roles and very knowledgeable about their clients and products.

WHY INVEST?

In large part, CITs woes were caused by overextending itself and using short-term,

finicky lenders to finance its business. Today, the new company is steadily shrinking so

it can pay off the high-cost debt it took on as part of the prepackaged bankruptcy deal.

The net effect will be a smaller company but one that has a more profitable funding

CIT GROUP

NYSE: CIT

Headquarters: New York, N.Y.

www.cit.com

FINANCIAL SNAPSHOT

Recent P rice: . . . . . . . . . . . . . . . . . . . . . . . . . $43.46




Buy Guidance:. . . . . . . . . . . . . . . . Below $42

Data as of 11/8/10

WHY BUY

The switch to a new unding model will

make this specialty inance companys stock

more valuable.

CEO John Thain has experience with

corporate turnarounds.

Book value should increase as accounting

adjustments are reversed.

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STOCKS2011model and is therefore more valuable on a per-share basis.

Much of the shrinkage will come smoothly, through the natural

maturities of its customers loans, and the rest will come in

lumps as CIT sells off parts of its business that are no longer

relevant to its core operations.

Another big boost to the stock price will come when CIT

successfully makes the transition from a lender reliant on

capital markets to fund its lending to one with a bank-centricmodel that uses a base of deposits to fund its lending. To get

there, CIT has to extricate itself from a series of regulator-

imposed limitations that are preventing its bank subsidiary from

increasing its deposit base. This will be an important catalyst

for the stock over the next 12 months, as current funding costs

are nearly 6%, compared with the approximately 2.5% CIT

pays out on its deposits.

For a business that makes money simply by borrowing dollars

at one rate and lending them out at another, the cost of those

borrowings is a big deal. Historically, the company could loan at

nearly 4% higher than its borrowing costs, but that spread is now

less than 1% because of its high-cost debt and the anchor of $10

billion in cash on its balance sheet thats earning nearly nothing.

But todays pain is tomorrows gain. Through debt reduction and

a rising deposit base, the spread should approach its historical

3% to 4% level by the end of 2012.


As with all companies in bankruptcy protection, CIT went

through a mind-numbingly complex fresh-start accounting

process, during which its entire balance sheet was reset to then-

prevailing fair market values. This occurred when the credit crisis

was still fresh in everyones minds, so those fair-value figureswere draconian assumptions about the value of CITs assets (the

collectability of the loans it had made) and liabilities (CITs

promises to repay its lenders). Those values were marked down

severely, with about $8 billion of value whacked off of CITs $57

billion in non-cash assets.

But all that has turned out to be a good thing today. CIT now

has one of the industrys cleanest balance sheets, with a legitimate

book value and earnings power baked in. As of Sept. 30, CITs

tangible book value per share was $42, and the remaining

accretable discount per share (the portion of CITs write-downs

that will reverse as loans mature and are paid off) was about $14.

Most of that will flow through earnings into book value over the

next several years, so by the end of 2013, tangible book value

should be more than $52 per share.

The stock now trades right around CITs conservative $42

book value, so the shares potential downside if the U.S. economy

goes south again is substantially lower than at nearly any other

financial company. (Most of them trade at or above their own

less-conservatively stated book values.) This margin of safety is

the first clue that CIT is a tempting special-situation stock.

An additional $4 to $5 per share of book value should accrue

over the next several quarters as CITs fresh-start accounting

adjustments are reversed. More normal earnings should

further enhance book value starting next year, as CIT progresses

back toward its true economic book value of about $53. At that

point, CIT should be able to earn more than $3.75 per share as

a baseline and theres significant upside beyond that after

the bank-centric model takes root. All told, I value the stockconservatively at $58, or 1.1 times economic book value.


The biggest risk facing CIT is that another major recession

could sink its turnaround effort before it has a chance to flourish.

If a double-dip recession leads to a new round of credit losses,

book-value growth wont materialize, and CIT wont be able to

repay its debt fast enough. Given the current margin of safety

built into the stock, CIT will probably outperform its peers

but it wont give you too much to cheer about, so you might

want to sell your shares.

CITs bank is widely expected to get out of its current

regulatory restrictions in the next year. If that finagling takes

longer, it would weigh on the stock price. And while CIT

should shrink its balance sheet over the next two years, if it

shrinks more than expected because it cant increase its lower-

cost funding from bank deposits, the turnaround effort would

be half-baked, and CIT wont achieve a return to its previous

baseline earning power. In that situation, Id recommend you

sell your stock.


CIT is a show-me investment that requires proof of steady

progress. If management starts waffling about regulatory

clearance or if credit losses rear their ugly heads again, dont

stick around hoping for the best. This isnt a hold-it-forever

stock. After all, CIT is in a highly competitive business that

generally produces mediocre returns on equity.

If CIT stock kisses the $60s without a major change in the

companys business prospects, youd be wise to show this

one the door. How well Thain navigates the turnaround willdetermine whether this special situation pays off, but todays $43

price gives you a nice margin of safety, and that makes the date

worth the while.

Alex Scherer is an associate advisor for Stock Advisor, the

Fools flagship general equity newsletter service. He owns shares

of CIT Group.

The Motley Fool owns shares of Bank of America.

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STOCKS2011Diamond Hill Investment Group:

Invest in InvestingBY TIM HANSON

The past 10 years havent been kind to stocks. In fact, investors dubbed the Aughtsa lost decade because for the first time ever, the S&P 500 closed a calendar decade

in the red. Investors have responded this year by pulling more than $45 billion from

domestic stock funds. Yet the last time investors showed such disdain for stocks was

1979, whenBusinessWeekannounced The Death of Equities. The start of the next

market rally, of course, soon followed.

The reason for this is that although the stock market can be cyclical, its also one of

the greatest creators of wealth ever known. So even though equities are out of favor

today, I suspect they will move back into favor during the next decade making it a

far better 10 years for investors.

Youll benefit from this, particularly if you invest in other superior investors, such

as the team at Diamond Hill Investment Group (Nasdaq: DHIL). This asset manager

has done an excellent job gathering and managing money during a challenging time for

stocks, and the companys performance should only improve as the market does.

THE COMPANY

Diamond Hill is an asset manager with nearly $7 billion under management. At

the end of October, $2.9 billion of that resided in separate accounts that the company

manages for high-net-worth individuals, and $4.9 billion was invested across the

companys seven retail mutual funds. These include four value-oriented equity funds:

small cap, small-mid cap, large cap, and select; and three alternative funds: long/short,

financial long/short, and strategic income, with the majority of those assets stashed

in the large cap and long/short funds. The company ranks reasonably well as a fund

manager, according to Morningstar data, with five of its seven funds earning 4-star

ratings. And although the companys flagship long/short fund doesnt stack up well

against its peers over the trailing five-year period, the funds 10-year profile is more

favorable: Its 6.24% total return puts it among the top 25% of funds in its category.

FundAssets undermanagement

Morningstarrating

Five-year annualizedreturn

% rank incategory

Diamond Hill Small Cap (DHSCX) $714.4 million 3 stars 3.90% 37%Diamond Hill Small-Mid Cap (DHMAX) $54.5 million 4 stars 2.20%* 2%*Diamond Hill Large Cap (DHLAX) $949.2 million 4 stars 2.58% 20%Diamond Hill Select (DHTAX) $35 million 4 stars -3.76%* 6%*Diamond Hill Long-Short (DIAMX) $1.9 billion 3 stars 2.31% 58%Diamond Hill Financial Long-Short(BANCX)

$12 million 4 stars -5.39% 56%

Diamond Hill Strategic Income(DSIAX)

$150 million 2 stars 6.02% 67%

*Trailing three year results. Fund does not yet have a five-year track record.

The managers of these funds are all either long-tenured, have been with their fund

since inception, or both. Diamond Hill has recently been investing heavily in its

research staff to keep improving returns and to expand its capabilities to open new

funds. CEO Ric Dillon alluded to a potential international fund in his most recent letter

to shareholders.

The company is also regarded for doing well by its investors and its shareholders.

Diamond Hill has received nothing but A stewardship grades from Morningstar, a

proprietary rating that judges funds based on their corporate culture, board, quality,

DIAMOND HILL INVESTMENT GROUP

Nasdaq: DHIL

Headquarters: Columbus, Ohio

www.diamond-hill.com

FINANCIAL SNAPSHOT

Recent P rice: . . . . . . . . . . . . . . . . . . . . . . . . . $81.67

Market Cap: . . . . . . . . . . . . . . . . . . . $227 million

D i v i d e n d Y i e l d . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 %

CAPS Rating: . . . . . . . . . . . . . . . . . . . . . . . . 3 Stars

Buy Guidance: . . . . . . . . . . . . . . . Below $75

(Buy below guidance changed from $55 to $75 on 11/11)

Data as of 11/8/2010

WHY BUY

Although the past decade has been

challenging or investors, Diamond Hill has

bucked the trend and increased its assets

under management at a remarkable rate.

The insider-owned company rewards

investors with sizable special dividends.

It should easily exceed the growth

and proit margin expectations priced into

the stock.

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STOCKS2011incentives, fees, and compliance. And the company carries

over that respect for stewardship to the treatment of its owners.

Investors have shared in the companys recent success thanks to

special $10 per-share dividends in 2008 and 2009 and a declared

$13 per-share dividend for 2010. Dillon, a 7% owner of the

company and an admirer of Warren Buffett, regularly emphasizes

that the companys commitment to sustainable growth increases

its per-share intrinsic value. This is truly a company run by

investors for investors.

WHY INVEST?

Despite the tough market over the past decade, Diamond

Hill has had no trouble increasing its business. Assets under

management (AUM) has increased from a scant $524 million

at the end of 2004 to more than $7 billion today thats better

than 57% annual growth. Whats more, while that growth is

slowing, Diamond Hill has continued to be robust even as

investors pull money from other domestic stock funds.

Year 2005 2006 2007 2008 2009 2010 YTDYear-end

AUM $1,531 $3,708 $4,403 $4,510 $6,283 $7,080YOYGrowth

192% 142% 18.7% 2.4% 39.3% 29%

Dollar amounts in millions. Source: Company filings.

Given that the biggest challenge to collecting assets is

its investment performance, Diamond Hill should be able

to maintain this AUM momentum if domestic stocks regain

favor with investors. The company also recently began a new

relationship with Nationwide to sub-advise an additional $800

million portfolio. As a result, Diamond Hill has several new

avenues for growth in addition to its investment performance,

including creating new funds and expanding its relationship with

Nationwide. Put it all together, and Diamond Hill looks like acompelling long-term opportunity at todays $81 price.


One of the best-known methods to value asset managers is

Marty Whitmans rule: 2% of AUM plus tangible book value. This

is useful as long as the asset manager has substantially more cash

than debt on its balance sheet. Diamond Hill fits that bill, though

its $35 million dividend payout will temporarily alter its balance

sheet profile. That said, as of its last report, the company was

sitting on $18.7 million of cash and $15.5 million of investments

in its own funds. It had no debt and was on track to generate $10

million to $20 million of free cash flow again this year.If we apply Whitmans method to Diamond Hill, we get a fair

value of almost $70 per share:

AUM $7,965Nationwide relationship $800Total estimated AUM $7,8802% of estimated AUM $158Cash and investments $34Shares outstanding 2.8Fair value $69.11Dollar amounts in millions, except fail value.

Yes, $70 is below todays stock price, but this valuation is

conservative because it doesnt account for Diamond Hills AUM

growth profile or its attractiveness as an acquisition by a larger

asset manager. Recent buyouts in this industry have been for 3%

to 4% of AUM, which would value Diamond Hill at $98 to $126

per share.

Its also important to note that AUM is not just a product of

marketing and asset-gathering but that it also rises as returnsimprove. This is a negligible fact in a flat or down market (like

the one we had over the past decade), but if you believe that

stocks will rise over the next decade, then Diamond Hill will

benefit from an AUM tailwind that wont cost it anything in

the way of additional marketing expenses. Further, although the

company has dramatically increased its AUM in the past five

years, its also paid up to improve its infrastructure:

Year 2005 2006 2007 2008 2009Compensation $6.9 $18.1 $20.0 $26.1 $24.1Fund administration $0.8 $1.7 $2.4 $2.3 $2.3Selling, general and administrativeexpense

$0.9 $1.5 $3.3 $3.4 $3.9

Total operating expense $8.6 $21.3 $25.7 $31.8 $30.3YOY Increase 148% 21% 24% -5%Dollar amounts in millions.

All told, AUM growth has been proportionally offset by

growth in operating expenses, with the companys operating

margin stable at about 30% each year.

What last years results with AUM up nearly 40% and

expenses down 5% suggest, however, is that the company has

enough people to continue to increase AUM without increasing

expenses. That means investors should begin to see operating

leverage lead to a higher profit margin. As Dillon wrote in this

years letter to shareholders, Diamond Hills staffing levels

are above average for the industry, with that excess capacityenabling high AUM growth rates. Yet as those numbers revert to

the mean (the companys website currently advertises just one

job opening), operating profitability should improve to about

35% the industry average.

Tweak the model to assume 8% to 10% AUM growth during

the next decade (to reflect a better investing environment) and

35% operating profitability, and Diamond Hill stock is worth

$85 to $95 per share. All told, the upside potential of a $126-per-

share acquisition scenario significantly outweighs the downside

of a $70 Marty Whitman model. Furthermore, Diamond Hill

has shown a propensity for rewarding shareholders with hefty

dividends, so this stock is a solid investment.


Although asset management is an attractive business

because its asset- and capital-light, that also means theres

little to prevent a competitor from setting up shop. That makes

performance and networking critical to a companys continued

success. The most important things to watch at Diamond Hill

are the performance of its funds and the ratings they receive

from Morningstar.

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STOCKS2011Deterioration there would suggest that AUM growth could

slow or even revert. If Diamond Hills funds and particularly

the small-cap and long-short funds because they have the most

AUM underperform the market in the next one to two years,

you should think about selling your shares.


Diamond Hill has many of the attributes I look for in a

promising small-cap investment. Its well-run, its owners are

vested in the business, it has a track record for rewarding

shareholders with dividends, and its performed at the top of

its peer group despite a challenging economy. When the stock

market rises, investors in superior investors, such as Diamond

Hill, should be richly rewarded.

Tim Hanson is co-advisor ofMotley Fool Global Gains, the

Fools international investing research service. He owns shares

of Diamond Hill.

The Motley Fool owns shares of Morningstar.

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STOCKS2011


Expeditors International of Washington:Shaped-Up Shipping

BY JOE MAGYER

Eureka! An idea for a revolutionary new device hits you like a thunderbolt while yourescrubbing in the shower. By the time youve put on your socks, youve already settled on

producing the device in China, lining the walls of your executive office with cedar, and

asking Leonard Nimoy to be your pitchman.

Theres just one problem, and it isnt that Spock is your spokesman. You dont know

the first thing about the nuts and bolts of global trade. You dont speak Mandarin, dont

know a lick about navigating customs, and you will probably get bullied by transporters

because you cant negotiate favorable terms.

But dont bail on your dreams of a woodsy-smelling office just yet. Expeditors

International of Washington (Nasdaq: EXPD), a global logistics solutions provider, has

been helping companies worldwide shape up their shipping for the past three decades

and making a mint for Expeditors investors while doing it. And given its strong balancesheet, asset-light model, and entrepreneurial culture, Expeditors is poised to profit from

global trade for years to come.

THE COMPANY

Expeditors doesnt own a fleet of boats or planes. Instead, it buys big blocks of

space on other companies vessels and resells that space to its clients. The joy of the

arrangement for clients is that theyre able to get lower shipping costs than if they tried

to buy the space themselves. Expeditors, meanwhile, avoids shelling out the cash it

would cost to buy a fleet.

Founded in 1979 and based in Seattle, Expeditors helps companies seamlessly and

cheaply move goods from Point A to Point B. The company offers services such as air

and ocean freight forwarding to customs brokerage and a host of international shipments-

centric services. From Hong Kong to Hanoi to Houston, Expeditors has a global reach

and positioning in virtually every major city. The company operates 183 full-service

offices, 65 satellite locations, and two international service centers on six continents.

WHY INVEST?

Expeditors capital-light business model allows it to grow without having to

reinvest much in its business. That model allows its profit to grow faster than revenue.

Historically, about 35% of Expeditors net revenue comes from air freight services, 25%

from ocean freight, and 40% from customer brokerage and other services.

Third-party logistics management has fantastic tailwinds, as lower barriers for trade

and many companies desire to outsource amplify the long-term upswing of the globaleconomy. And with Expeditors good standing in the industry thanks to its results-

oriented culture, the company should continue to benefit handsomely.

Individual Expeditors branches are considered their own profit centers, with most

compensation for branch managers coming through incentives based on that branchs

operating income. That extraordinary focus on branch-level success fosters an

entrepreneurial spirit thats a win-win-win for customers, employees, and investors.

The company is led by a straight-shooting CEO, Peter Rose, whos been in place

since 1988. Rose isnt your typical CEO, eschewing forecasts and Wall Street-style

EXPEDITORS INTERNATIONAL OFWASHINGTON

Nasdaq: EXPD

Headquarters: Seattle, Wash.

www.expeditors.com

FINANCIAL SNAPSHOT

Recent P rice: . . . . . . . . . . . . . . . . . . . . . . . . . $51.78

Market Cap: . . . . . . . . . . . . . . . . . . . . . $11 billion

Dividend Yield: . . . . . . . . . . . . . . . . . . . . . . . 0.8%

CAPS Rating:. . . . . . . . . . . . . . . . . . . . . . . . .4 Stars


Data as of 11/8/10

WHY BUY

Expeditors is a market leader poised to

proit rom outsourcing and global trade.

It has a capital-light business model that

allows the company to grow with minimal

investment.

A pristine, cash-rich balance sheet

enables the business to think and spend or

the long term.

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STOCKS2011quarterly conference calls. A recent quote from him neatly sums

up Roses style and the culture he has built:

Our philosophy these last several years has been to try to

not do anything stupid. We simply did what weve always done:

focusing on improving customer service, taking market share

by adding new customers, taking care of our people by not

doing lay-offs, and making ourselves more productive through

continued process improvement efforts. Boring consistency is

what we do best.


Expeditors operating profit grew at an impressive 15%

clip during the past five years during a tumultuous economy.

At many companies, that kind of heady growth is fueled by

acquisitions. Not at Expeditors. The companys primary focus is

on organic growth. You wont hear about Expeditors overpaying

for a splashy acquisition. Thats because a large-scale deal

would introduce systems integration risks and water down the

companys entrepreneurial, customer-centric culture. And if it

aint broke, dont fix it.Expeditors balance sheet, meanwhile, is strong with no debt

and $1 billion in cash. That cash cushion makes for nice padding

if the market takes a spill, though of course it would be nice to

see some of that cash go to shareholders. To Expeditors credit,

though, it has raised its bite-sized, 0.8%-yielding dividend at a

25% clip over the past five years.

2009 2008 2007 2006Revenue $4,092.3 $5,633.9 $5,235.2 $4,634.0Net Revenue $1,382.8 $1,603.3 $1,453.0 $1,291.0Operating Profit $385.0 $473.1 $423.4 $375.1Dividend Per Share $0.38 $0.32 $0.28 $0.22

All numbers in millions except dividend. Net revenue is determined by deducting freight

consolidation and customs brokerage costs from total revenue.

Expeditors stock isnt cheap by traditional valuation metrics,

trading around 29 times analysts 2011 earnings estimates. The

stock is pricey right now, but Expeditors has always traded at a

premium. Exceptional, well-run businesses with bright futures

always do. That doesnt mean you should pay any price for

Expeditors, but snatching up shares for $45 or less is a safe,

money-making bet. Youll want to take advantage of any short-

term dips in price to get started with this stock.


Expeditors performance is tethered to global trade, meaning

its profit and stock will get hit if the global economy sputters.

Meanwhile, the fragmentation of Expeditors industry is a double-

edged sword. On the plus side, it affords a window for superior

operators such as Expeditors to more easily grab market share. On

the down side, though, competitors are more likely to use price as

a weapon, and theres a chance that aggressive pricing by even just

a few players could crimp profit industrywide.

Finally, while I love Expeditors asset-light model, its lack

of control over the full shipping chain could be a disadvantage

if full-service rivals like United Parcel Service (NYSE: UPS)

get their act together or if shippers and airlines start muscling

Expeditors around.

Id also have second thoughts on the stock if Rose steps

aside or if Expeditors abandons its focus on organic growth

in favor of an acquisition-happy strategy. Expeditors isnt a

classically cheap stock, but thats not an excuse to own it at

nosebleed-section high prices. You should consider sellingExpeditors if its price-to-book ratio nears 7 thats just too

darn expensive.


Expeditors has great growth prospects, a fantastic culture,

and a cash-rich balance sheet. These qualities should check a

lot of boxes for long-term investors you included, so keep a

sharp eye on this outstanding business, Fools. If the stock dips

back below $45, dont hesitate to buy Expeditors in bulk.

Joe Magyer is the advisor ofInside Value, the Fools value-

driven investing service.

The Motley Fool owns shares of United Parcel Service.

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STOCKS2011


Gap:Fall (Back) Into the Gap

BY RICH GREIFNER

Theres a fascinating phenomenon in the world of fashion, where a style of clothingcan be out of favor for so long that it eventually becomes en vogue. Its called retro

(and its the reason I refuse to part with my Zubaz pants).

A similar phenomenon occurs in the world of investing, where the stocks that Wall

Street shuns tend to produce the most attractive long-term results. Its called value

investing.

Put those two concepts together a fashion retailer thats out of favor with

consumers andinvestors and you have the makings of market-crushing returns. Its

called Gap (NYSE: GPS).

THE COMPANY

Founded in 1969, Gap sells casual apparel for men, women, and children under

the Gap, Old Navy, and Banana Republic brands. The company operates more than

3,000 stores across the globe and owns two small but growing online apparel sites,

Piperlime and Athleta.

If you bought a pair of khaki pants during the 1990s, theres a good chance youre

already familiar with the Gap story. Theres also a good chance you havent shopped

at the Gap in years, think Bananas styles are bland, wouldnt set foot in Old Navy

if it were giving away clothes, and are strongly considering moving on to the next

recommendation in this report. But before you do that, give me a minute to try to

change your mind.

Although your memory of it might be foggy today, there was a time when Gap wasubiquitous. Adam Sandler wore Gap on Saturday Night Live. Sharon Stone wore Gap at

the Academy Awards. Monica Lewinskys infamous blue dress? You guessed it Gap.

Under the leadership of merchant prince CEO Mickey Drexler, Gap could do no

wrong. Between fiscal 1994 and 2000, the companys stores more than tripled their

square footage as revenue rose 267%, to $13.7 billion. The greatest surge of all was

in Gaps stock price, which increased six-fold.

But in 2000, Drexlers designs stopped resonating with the companys core

customers, just as the economy took a turn for the worse. Although Gaps

comparable-store sales dropped for 10 consecutive quarters, the company stubbornly

continued expanding. Adding insult to injury, Gap bloated its balance sheet with abig slug of debt to fund those new stores, as well as an accelerated share buyback

program at what would later prove to be lofty prices. By the time Drexler was forced

out in 2002, Gaps stock had plummeted 70%.

Eight years and two CEOs later, Gap is still out of fashion with consumers and

investors. Sales per square foot have slumped for five straight years (and eight

of the past 10), as nimbler competitors such as H&M, Zara, and Forever 21 have

consistently offered shoppers fresher looks, while Target (NYSE: TGT) and

Aeropostale (NYSE: ARO) haven stolen the cheap-chic crowd away from Old Navy.

GAP

NYSE: GPS

Headquarters: San Francisco, Cali.

www.gap.com

FINANCIAL SNAPSHOT

Recent P rice: . . . . . . . . . . . . . . . . . . . . . . . . . $20.81

Market Cap: . . . . . . . . . . . . . . . . . . . $12.9 billion

Dividend Yield: . . . . . . . . . . . . . . . . . . . . . . . 1.9%



Data as of 11/8/10

WHY BUY

Overseas expansion should spur sales,

while a burgeoning Internet business

should propel margins to new highs.

Management is dedicated to cutting

costs and returning capital to shareholders.

The stock is out o avor, so you can snag

it on the cheap.

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STOCKS2011Tired of waiting for a turnaround to take hold, Wall Street

has all but abandoned the stock. Everyone has given up on Gap

which means its prime time for value-minded Fools to go

on a shopping spree.

WHY INVEST?

Here are three reasons Gap looks good in your portfolio:

1. Expanding margins

Current CEO Glenn Murphy hasnt been able to boost sales,

but he has done wonders behind the scenes. Gaps gross margin

has swelled by 5.4 percentage points since 2007, largely due

to disciplined inventory management that resulted in fewer

markdowns. Gaps trailing 12-month gross margin of 40.9%

represents a 3.1 percentage-point improvement over last years

level and its within spitting distance of the companys all-

time high.

Gaps operating margin has also risen steadily since Murphy

became CEO. This is partially due to strategic store closures

and a streamlined organizational structure (Gap has 50 fewer

VPs than it did three years ago), but much of the improvement

can be attributed to a sustainable source: the Internet.

Gaps Internet-based revenue has doubled over the past five

years, which is especially encouraging because these sales

come with an operating margin of 22.5%, compared with 12%

for the companys brick-and-mortar stores. In addition to the

Web commerce for Gaps big three brands, this segment also

includes sales at Piperlime, which offers fashionable footwear,

handbags, and accessories, and Athleta, a brand based on

womens athletic apparel and footwear.

Gaps 13.6% operating margin over the past 12 months is

the best performance the company has posted in a decade, but

Murphy thinks that number can be even better.

Fiscal 2006 Fiscal 2007 Fiscal 2008 Fiscal 2009Trailing 12

monthsGross margin 35.5% 36.1% 37.5% 40.3% 40.9%Operatingmargin

7.8% 8.4% 10.7% 12.9% 13.6%

Data from CapitalIQ, a division of Standard & Poors. Gaps fiscal year ends on the Saturday closest

to Jan. 31.

2. Cash is flowing

Without much need for capital expenditures (Gap is still

trimming down its store count) or inventory replenishment

(theres no need to restock what customers arent buying), free

cash has been flowing straight to shareholders pockets. Over

the past six years, the company has generated about $6 billion

in free cash flow. Over that same period, its paid out $1.25

billion in dividends and bought back $7 billion worth of shares

while simultaneously paying off all of its debt. Due to those

buybacks, Gaps share count has decreased by 30% since 2004.

3. Revenue revival?

Operationally, Gap is now a well-oiled machine. Theres only

one challenge remaining: Can the company produce clothing

that customers actually want to buy?

Last year, Gap took a step in the right direction by retooling

its outdated denim offerings. Its new 1969 line of jeans is a

significant style upgrade, and the $55 to $70 price point is a

fraction of what designer labels like True Religion (Nasdaq:

TRLG) and V.F. Corp.s (NYSE: VFC) Seven For All Mankind

charge. And straight out of the if you cant beat em, hire

em playbook, Gap has lured Sevens vice president of design,

Rosella Giuliani, to lead the 1969 brand.

In addition to denim, Gaps emphasis this year is on its new

black magic line of premium black pants. The company has

also cut its product-development time by a third, so its new

offerings will no longer be so far behind the fashion curve.

These are all smart steps, but with the North American

market largely saturated, Gaps real growth will have to come

from abroad. This year, Gap will open its first locations in Italy

and China, and the online division will start selling in Europe

and Canada. The company expects its international and online

businesses to contribute 27% of total revenue in 2013, up from

18% today.


Still, its no wonder the stock market isnt giving much

credence to Gaps turnaround efforts. After all, this is hardly the

companys first attempt to round a corner and yet sales per

square foot have been in a downward spiral for the better part of

the past decade:

Investors are smart to be skeptical of Gaps latest turnaround

attempt, but theyre missing the bigger picture. The market

is pricing Gap as if its present levels of profitability will be

fleeting, but the current margins are sustainable and theres

even upside. If Gap improves at all on the top line, its stock

Sales Per Square Foot

$325

$375

$425

$475

$525

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

FY96

FY95

FY94

FY93

FY92

FY91

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STOCKS2011should solidly beat the market. And if the company can boost

sales per square foot to pre-recession levels, investors will be

sitting pretty. Check out these potential growth scenarios:

Pessimisticscenario

Moderate scenario Optimistic scenario

Sales per SquareFoot

325 365 385

Operating Margin 10.8% 12.6% 14%Estimated Value per

Share $16.10 $23.00 $27.50

From the stocks current $21 price, the downside of investing

in Gap is limited (and is cushioned by the companys steady

dividend and rock-solid balance sheet) while the upside

is significant.


Gap recently made headlines when it clumsily attempted to

revamp its logo and then even-more-clumsily tried to pass the

episode off as a crowdsourcing project. Although the universal

ridicule of Gaps proposed logo resulted in some bad press, I see

it as an encouraging sign. It suggests that consumers are moreattached to the brand than their shopping habits indicate. But

I would consider selling your shares if Gap continues to make

moves that alienate its core customer base especially if the

company shifts its focus from basics and starts chasing trends.

In a similar vein, Id also consider selling if Gap committed a

significant amount of capital to developing a new concept. With

the failure of its Forth & Towne stores (the companys botched

attempt to reconnect with women who outgrew the Gap brand)

still fresh in managements mind, I doubt this will be an issue.

However, if Gap starts blowing shareholder capital on risky new

concepts or worse, overpriced acquisitions it will be time

to return your shares.


Telling your friends youre buying Gap shares at a cocktail

party is almost as embarrassing as wearing an Old Navy T-shirt

to said cocktail party. But thats the only reason we can buy

shares in this quality company at such a bargain price. Gap has

learned from its mistakes and is ready to reclaim its rightful

position as a respectable brand. This is a stock you should get

into before it becomes expensively en vogue.

Rich Greifner is advisor forDuke Street, the Fools premier

investing-advice service.

The Motley Fool owns shares of Aeropostale.

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STOCKS2011Li Ning:

Branding Meets BasketballBY BRYAN WHITE

Ever wonder what Olympic gymnasts do after they give up the pommel horse? Well,

1984 gold medalist and Prince of Gymnastics Li Ning has been busy building an

eponymous Chinese sportswear company, Li Ning (Pink Sheets: LNNGF.PK), for the

past 20 years.

Maybe naming the company after himself was a little over the top, but Mr. Li has

successfully created one of the few homegrown Chinese consumer brands with some

national traction. The company is the leading domestic sportswear brand in China a

country whose economic growth is measured in the double digits and whose residents

are gaga for consumer brands. Theyre also nuts about basketball. A reported 300

million Chinese residents casually play, and 450 million tune into NBA games. Thats a

hodgepodge of trends, to be sure, but by investing in Li Ning, youre getting your foot

in the door on all of them.

THE COMPANY

Li Ning focuses on selling athletic footwear throughout mainland China. Its built

up a broad supply chain, distribution system, and retail network, with more than 130

distributors and 6,800 retail outlets on the mainland. The company has the No. 1 market

share in mid-size and smaller cities and is right on the heels of international brands Nike

(NYSE: NKE) and Adidas (Pink Sheets: ADDYY.PK) in Chinas largest cities.

The company built its following in Chinas mid-size and smaller cities by selling

its shoes at a substantial discount to Nikes and Adidas offerings. Now that Li Ning

is well established, management is ready to move up the value chain and take on its

international rivals. Li Ning recently announced a brand-revitalization strategy that

includes a small change to its Nike-like logo, a shift to higher prices and moreimportantly higher-quality products. The plan is a smart one: Brand recognition and

product quality have led the way in Chinas sporting-goods industry, where consumers

have shown they are more than willing to pay up for superior sneakers.

Another important aspect of this strategy is Li Nings entrance into the U.S. market.

Its shoes have already been seen in the States through Li Nings endorsement deals

with NBA players Shaquille ONeal, Baron Davis, Jose Calderon, and last years No.

2 draft pick, Evan Turner. Now the company has established its U.S. headquarters

right in Nike and Adidas backyard, in Portland, Ore., and will sell its shoes through

select retailers, such as Eastbay and Champs. Im not counting on Li Ning becoming

a sought-after shoe brand here, but the more its recognized in the States, the better

chance it has to compete as a premium brand in China.

WHY INVEST?

But of all things, why would Chinese consumers care about owning premium

sneakers? In a word: basketball. More than 350 million Chinese residents play and

watch hoops on a regular basis. Recreational games are played at most factories across

mainland China. So an investment in Li Ning is partly a bet on the continued popularity

of basketball in the worlds most populous country. If this fascination holds, we can

expect the sportswear industry to continue its double-digit growth while the ranks of

Chinas middle class swell in the next decade.And those middle-class consumers are

LI NING

Pink Sheets: LNNGF.PK

Headquarters: Shanghai, China

www.lining.com

FINANCIAL SNAPSHOT

Recent Price: . . . . . . . . . . . . . . . . . . . . . . . . $3.00


Dividend Yield: . . . . . . . . . . . . . . . . . . . . . . . . . 2%

CAPS Rating: . . . . . . . . . . . . . . . . . . . . . Not rated

Buy Guidance: . . . . . . . . . . . . . Below $3.50

Data as of 11/8/10

WHY BUY

The Chinese sportswear market has a

long runway as the middle class purchasing

power grows.

Li Ning is well established as Chinas

most popular domestic sportswear brand.

It beneits rom the growing popularity

o basketball in China.

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STOCKS2011extremely brand-conscious. Outside the automotive industry,

though, China doesnt have many national brands. Given

Li Nings established name and its recent strategy shift, the

company has a great opportunity to increase its popularity in

Chinas largest cities and become a truly national brand with

all the cachet and aspiring customers that go with it. If Li Ning

plays things right, it could be a shoo-in as one of Chinas biggest

brands for years to come.


Li Ning has been consistently profitable for nearly 10 years

and has doubled its sales and earnings over the past three. The

company also has the best margins among its peers, including

Nike and Adidas. Gross margins are consistently in the mid to

high 40% range, and operating and net margins have grown to

16.5% and 12% in the past 12 months. The profit margin should

remain in this range even as Li Ning charges more for its shoes,

because its also paying more for better raw materials.

A glut of products has reduced the industrys growth over

the past year, and expectations for athletic apparel makers including Li Ning have been reduced for the next 18 months.

But in Li Nings case, management thinks this has more to do

with its strategic shift and new logo, which could lead to major

discounts or even inventory writedowns. Industry-wide, the glut

has mostly worked its way out of the system, with only Adidas

experiencing lingering inventory problems. Industry growth

should resume its typical 20% rate in 2012, thanks in part to the

summer Olympics. Still, Li Nings inventory turnover has been

steadily improving, as has its average cash-conversion cycle.

McKinsey research estimates that between now and 2015,

50% of Chinas population will be in the middle class, up from

todays 35%. Thats more than 50 million additional households

that could start buying Li Ning shoes so at 20 times trailing

earnings and free cash flow, our hurdle for success with this stock

is low.

Over the next three years, concerns about Li Nings strategic

shift should dissipate, and the stock should revert to more

historical multiples, eventually hitting $5 a share. It could rise

even higher depending on how long the company can grow

and I think it has much longer legs than the market is giving it

credit for.

Whats more, Li Ning knows how to take care of

Stocks for 2011

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