Stocks 2010 The Investor's Guide to the Year Ahead

STOCKS 2010

The Investor's Guide to the Year Ahead

Published by

The Motley Fool, LLC 2000 Duke Street, Alexandria, VA 22314, USA Published November 2009

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 representations as to their accuracy, usefulness, or entertainment value. Data and statements of facts were obtained from or based upon publicly available sources that we believe are reliable, but the individual authors and publisher reserve the right to be wrong, stupid, or even foolish (with a small "f"). It is sold with the understanding that the authors and publisher are not engaged in rendering financial or other professional services. Readers should not rely on this (or any other) publication for financial guidance, but should do their own homework and make their decisions. Remember, past results are not necessarily an indication of future performance.

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Editor: Kate Herman

Financial Editor: Todd Wenning

Publishing Manager: Adrienne Perryman

Design and Production: Sara Klieger

Cover Design: Dari Fitzgerald

STOCKS 2010

Contents

I n t r o d u c t i o n ................ .......................................................... i v

by todd wenning

BD: A h e a lt h - c a r e p l ay t h at 's wo r t h t h e r i s k......................... 1

by michael olsen

C h i n a M o bi l e : d ia l u p s u cc e s s f o r yo u r p o r t f o l i o . ................................. 4

by tim hanson

Compass Minerals: d i g g i n g d e e p f o r d i v i d e n d g o l d ......................................... 7

by james early

Devon Energy: g e n e r at e r e t u r n s yo u c a n co u n t o n ................................ 1 0

by philip durell

Hi l l e n b r a n d : A funeral business with cause to celebrate. ................. 12

by todd wenning

Ni k e : s wo o s h! t h at 's t h e s o u n d o f s u cc e s s.............................. 15

by alex scherer, cfa

O l i n Co r p.: A n I n v e s t m e n t to f i r e u p yo u r p o r t f o l i o ........................ 1 8

by ron gross

S o ma n e t i c s : A m e d i c a l t r ai l b l a z e r c l e a r s a pat h to r e t u r n s ............ 2 0

by jim gillies

Ta k e - T w o I n t e r ac t i v e : a t u r n a r o u n d ta l e s co r e s bi g . ......................................... 23

by david gardner and tim beyers

Y u m B Ra n d s : These shares are a tasty treat......................................... 26

by joe magyer

t h e m o t l e y f o o l | S t o c k s 2 0 1 0 : T h e I n v e s t o r ' s G u i d e t o T h e Y e a r A h e a d | p a g e iii

STOCKS 2010

Introduction

by tODD WENNING

Dear Fellow Fool,

There's another bubble brewing right under our noses. Investors, despite fresh memories of two equity bubbles in the matter of a decade, continue to make highly emotional decisions when it comes to investing. This new bubble, however, is not in the stock market. It's in the bond market. Through October, investors have sent $306 billion to bond mutual funds, while withdrawing more than $20 billion from equity funds. When the herd moves in such a pronounced way, prudent investors must ask themselves: "Why is everyone doing this?" And more important: "How can I profit from it?"

The Whys It's easy to see why people would seek relative refuge in the

less-volatile bond market -- we've seen this before, as recently as the dot-com crash at the turn of this century. But as nauseating as those days were, it's the latest bust that has really shaken equity investors to the core.

Leading up to last year's crash, individuals on the whole were overexposed to the more volatile equities and real estate markets. In fact, a 2008 survey done by the Investment Company Institute found that 35% of households whose head is 65 or older had more than 51% of their financial assets in equities, and just 7% of them had more than 50% in bonds.

The financial impact was simply devastating to those approaching retirement. Between 2004 and 2009, the median household whose heads were between the ages of 45 to 54 lost 45% of their net worth; those aged 55 to 64 saw half of their net worth evaporate.

It's no wonder, then, why investors needed to undergo a serious reexamination of their risk tolerance, lest the economy hit the brakes again and really put them into dire straits.

It's human nature, of course, to be once-bitten, twice-shy -- and it's a good thing for investors to be honest about their unique risk tolerance. But flocking en masse to bonds after the crash could be just as disastrous as being underexposed to bonds before the crash.

A Matter of Time Warren Buffett's two golden rules of investing are: 1. Never lose money. 2. Never forget rule No.1. What's missing from this clever axiom is, "By when?" If

you don't want to lose money today, you simply save it -- but over time, inflation will eat away the value of today's dollar saved. That dollar needs to be invested if you plan to not lose purchasing power down the road.

And while bonds can and should play a role in a balanced portfolio, they can't do it alone. According to data from Wharton Professor Jeremy Siegel, bonds averaged a real return of just under 2% from 1900-2003. Stocks, by contrast, averaged just over 6%.

Moreover, just as is the case with buying stocks, when it comes to buying bonds, price is what you pay, and value is what you get. This year's flood into fixed income has driven bond yields, which move inversely to prices, to absurd levels. Consider that a McDonald's (NYSE: MCD) bond maturing in 2019 recently quoted a yield-to-maturity of 3.98%. Meanwhile, McDonald's dividend yield was 3.8%.

Call me crazy, but I think if you invested equal amounts in the bond and the stock and locked both away until 2019, you'd be more satisfied with the ultimate results of the stock. With the McDonald's stock, not only would you receive a comparable income stream to the bond -- indeed, McDonald's will likely increase its dividend payout at least once during this period -- but you'd also be entitled to a share of McDonald's profit growth.

Sadly, this example is not unique today. This environment, in which a number of high-quality companies' 10-year bonds are yielding about the same as the stock dividend, is unsustainable. The fact is that interest rates have only one way to go from zero. As the global economy begins to recover, central bankers will be under mounting pressure to increase rates in order to fend off inflation from the trillions spent on stimulus programs during the recession. And since bond prices decline when interest rates rise, you don't want to be holding longer-term bonds if you believe we're on the road to economic recovery. Like any bubble, it too will burst.

We Must Protect This House Your Foolish advisors and analysts felt the slings and arrows

of last winter's stock market panic right alongside you. If anything, the panic and subsequent rally reinforced our belief that the best time to be buying stocks is when other people aren't. Today, with hundreds of billions being redirected to an already overbought bond market, it's still a good time -- despite the recent rally -- to give stocks more attention.

This report features 10 quality companies from diverse industries -- funeral products, video games, medical companies, and more -- and their growth profiles, from the slow-and-steady to the full-steam ahead. So no matter what type of companies you prefer, you'll be sure to enjoy Stocks 2010.

And no matter what the markets may throw our way in the coming years, always remember: Stay focused. Stay patient. Stay Foolish.

Foolish best,

Todd Wenning

page iv | the motley fool | Stocks 2010: The Investor's Guide to the Year Ahead

STOCKS 2010

The Motley Fool has published our "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 year's Stocks 2009 (published in November 2008). All dividends are considered reinvested, including for the S&P 500.

Stocks 2003 Performance

Company

Recent Price *

Return **

AllianceBernstein Holding (AB)

$26.36

2.45%

WP Stewart & Co. (WPL)

$6.25

-55.4%

Activision (ATVI)

$10.68

151.0%

Cheesecake Factory (CAKE)

$18.01

-20.5%

Cognos (COGN)

$58.00

157.9%

Cemex (CX)

$10.93

1.7%

Hollywood Entertainment ***

$13.25

-31.0%

Ligand Pharmaceuticals (LGND)

$1.66

-72.2%

Noven Pharmaceuticals (NOVN)

$16.50

62.7%

Quality Systems (QSII)

$59.51

996.8%

WPP Group (WPPGY)

$45.24

25.4%

Expedia (EXPE)

$22.43

13.5%

Total Return

114.4%

Return vs. S&P 500

88.7%

* As of 11/5/09 ** Cumulative as of 11/5/09 *** Hollywood Entertainment was purchased by Movie Gallery for $13.25 cash on April 27, 2005.

Stocks 2005 Performance

Company

Recent Price *

Return **

BioMarin Pharmaceutical (BMRN)

$16.22

248.8%

Ceradyne (CRDN)

$15.95

-51.2%

Deckers Outdoor (DECK)

$90.07

117.1%

Walt Disney (DIS)

$28.03

5.6%

Deswell Industries (DSWL)

$4.28

-68.8%

iShares Russell 1000 Growth Index Fund (IWF)

$46.35

0.3%

Lowrance Electronics ***

$37.00

20.1%

Palm (PALM)

$10.86

-43.5%

Par Pharmaceutical Companies (PRX)

$21.73

-47.2%

RH Donnelley (RHD)

$0.02

-100.0%

Shimano (SHMDF)

$39.56

49.0%

Ultralife Batteries (ULBI)

$4.15

-70.5%

Total Return

4.8%

Return vs. S&P 500

11.3%

* As of 11/5/09 ** Cumulative as of 11/5/09 *** Lowrance was acquired for $37.00 per share in cash on March 13, 2006.

Stocks 2004 Performance

Company

Recent Price *

Return **

Alderwoods ***

$20.00

139.0%

Bandag ***

$50.75

40.6%

Cephalon (CEPH)

$57.63

22.6%

Chico's (CHS)

$12.51

-33.1%

Point Blank Solutions (DHBT)

$0.65

-91.2%

Garmin (GRMN)

$26.84

2.0%

Guangshen Railway Co. (GSH)

$21.42

81.9%

MIVA (VTRO)

$0.38

-97.5%

7-Eleven ***

$37.50

132.2%

Lone Star Steakhouse & Saloon ***

$27.35

31.4%

UnitedHealth Group (UNH)

$27.87

15.2%

Total Return

22.1%

Return vs. S&P 500

16.7%

* As of 11/5/09 ** Cumulative as of 11/5/09 *** Alderwoods was acquired for $20.00 per share in cash on Nov. 28, 2006. Bandag was acquired for $50.75 per share in cash on May 31, 2007. 7-Eleven was acquired for $37.50 per share in cash on November 8, 2005. Lone Star Steakhouse & Saloon was acquired for $27.35 in cash on Dec. 13, 2006.

Stocks 2006 Performance

Company

Recent Price *

Return **

American Eagle Outfitters (AEOS)

$17.86

7.7%

BioMarin Pharmaceutical (BMRN)

$15.72

55.2%

Bridgeway Large-Cap Growth (BRLGX)

$10.28

-15.9%

Brookfield Asset Management (BAM)

$21.24

3.8%

Disney Co. [Pixar] (DIS) ***

$28.83

-2.8

Harley-Davidson (HOG)

$24.92

-53.0%

Headwaters (HW)

$4.45

-87.5%

Markel (MKL)

$322.00

1.0%

OSI Restaruant Partners (OSI)

$41.15

3.5%

Patterson-UTI Energy (PTEN)

$15.74

-50.9%

United Natural Foods (UNFI)

$24.39

-14.8%

Urban Outfitters (URBN)

$32.32

-1.6%

Total Return

-11.4%

Return vs. S&P 500

2.4%

* As of 11/5/09 ** Cumulative as of 11/5/09 *** Pixar was acquired by Walt Disney on May 5, 2006 for stock. Starting from then, the performance tracking indicates holding Disney shares at the 2.3 share ratio and prices as of that date.

t h e m o t l e y f o o l | S t o c k s 2 0 1 0 : T h e I n v e s t o r ' s G u i d e t o t h e Y e a r A h e a d | p a g e v

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