Motley Fool Stock Advisor

six-monTh Review
Volume 8, Issue 1, January 2009
With

TM

TM

stockadvisor.fool.com

David & Tom Gardner

Motley Fool Co-Founders

Dear Fellow Fools, When the stock market loses 40% to 50% in a years time, few individual investors will escape carnage in their portfolios. Of those who do, most are able to use some hedging techniques, which I (Tom here) will talk about in a moment.
Stock Advisor holds many of the same principles as other long-only investing services: We buy stocks expecting them to go up. In an environment where outright fear and forced selling are driving prices, our scorecard has taken a hit. Certainly we feel the pain not only as advisors who pick the stocks, but also as investors who buy the stocks right along with you. While were aware of the short-term paper losses, were excited about buying stocks at these depressed levels. The mayhem we see now is laying the foundation for the next bull market. These crazy, scary periods come with the territory, and odds are well see another such period at some point over the next 30 years. Some investors deeply bothered by these sharp drops and extreme volatility are considering pulling out of the market. Though their heads tell them this is not the right thing to do, their hearts just cant take the short-term pain. Sound familiar? If so, there may be an option for you in the form of Motley Fool Pro. Led by my brother David and our longtime friend and colleague Jeff Fischer, Pro aims to soundly beat the market while avoiding the wildness that runs rampant in times like these. Unlike other Foolish services, Pro uses advanced hedging techniques such as options and ETFs, along with long and short positions, to reduce the volatility of its returns. This is a real-money portfolio designed to thrive in any market. Since Pros first transaction in October 2008, the teams total return is near breakeven, while the market is down about 7%. (You know it kills me to give my brother credit for that kind of performance.) The service is just getting rolling and will be open to new members again in January. You can learn more about Pro in the insert mailed with this issue of SA, or check it out online at pro.fool.com. Pro is simply another option for you as the Fool continues to expand our offerings for all types of investors, in all types of markets. In the meantime, were excited about SAs future and our tradition of beating the market. Looking back over the past 12 months, weve slightly underperformed the S&P 500s 32% loss. Well have such periods. But better days are ahead, my Foolish friends. The market turned northward after the last bear, the economy improved, and portfolios shifted from red to green. Whether its a matter of weeks or months, it will happen again and you need to be in the market to take advantage of it. You can start right now, with this issue, which includes the six-month review of Davids side of the scorecard, plus my latest recommendation, Cintas (Nasdaq: CTAS). Weve got guidance galore, so dig in and know that were right there with you. Fool on!

Recommendations
Cintas (Nasdaq: CTAS) . . . . . . . . . . . . . . . . .p . 2 marvel (NYSE: MVL) . . . . . . . . . . . . . . . . . . . .p . 4

inside
Davids six-month Review - A detailed look at Davids scorecard favorites plus three sell recommendations . . .p . 4 special Pullout Guide - Buy and Hold guidance on all of Davids stocks scorecard . . . . . . . . . . . . . . . . . . . . . . .p . 8

Did You Know?

Coping with the market winners Congratulations to Jeff Bjorck (jbjorck) and Matthew King (mJKPayDay), the winners of our recent contest that challenged members to share their most Foolish approaches to dealing with todays market . Jeff has been busy counting his blessings, while Matthew has seized the day and made some big life decisions . An honorable mention goes to Eduardo Atamoros (eddieCabo), whose whirlwind experience caught our eye . Read all of their posts on the sA Buying strategies board . more stock Coverage online Head to stockadvisor .fool .com for more news on your favorite stocks! Hover your mouse over any ticker on our site to see its current performance, or click the ticker for full coverage . Got subscription questions? Email membersupport@fool.com or call 888-665-3665.

Cintas (Nasdaq: CTAS)

By Tom Gardner WiTh andy Cross
This is the largest provider of rental uniforms and other garb for millions of workers around the globe, from casino dealers to grocery clerks . Headquarters: Website: Recent Price: Risk Level: Position in Industry: Market Cap: Cash/Debt: Revenue (TTM/07/06): Close Earnings (TTM/07/06): Insider Ownership:
$30 $20 $10

Cincinnati, Ohio www .cintas .com $25 .28 Medium-Low Stalwart $3,860 $181/$951 $3,971/$3,938/$3,707 $333/$335/$335 14% Clothing-optional Fridays

why Buy:
More than 5 million people head to work dressed in Cintas work-wear . It serves a network of more than 800,000 clients ranging from mom-and-

pop shops to large multinationals .

This steady cash flow machine is a nice cushion in volatile times .
$50 $40

Biggest Threat:

The Team says:

12/06 12/07 12/08

Finally in style
Data as of 12/16/08

Except share price, dollar figures in millions. Fiscal year ends in May.

I started off today like most days over the past 15 years since David and I started The Motley Fool. I flipped to SportsCent um, I mean CNBC and threw on my typical work clothes: jeans, shirt, and sneakers. At global Fool headquarters (stop by anytime to check it out), we like having a homey feel around the office, and that includes a dress code thats more collegiate than business casual. Its just one reason we love coming to work each day. (Of course, we love being able to eat and breathe stocks, too.) But not everyone has this casual-life luxury. Millions of workers around the globe wear standard uniforms five days a week. Thats where my recommendation this month comes in. Cintas (Nasdaq: CTAS) is in the business of putting uniforms on peoples backs and its the biggest in that business. It leads the industry in sales and rentals of uniforms worn by employees of restaurants, grocery stores, gas stations, and just about any service organization whose workers sport a standardized look. Its been a predictable cash flow generator for years, but the stock had always been too rich for me. Times are a-changin, Fools, because today we can buy a premier service company for about 12 times cash earnings, the lowest multiple weve seen in decades. So don your investing garb, because its time for us to take a closer look.

of this business, as well as the deep relationships and broad network Cintas has built over its 80-year history. And just as with FedEx or trash hauler Waste Management, the broader the network, the more valuable and powerful the competitive edge. Through its 8,400 local delivery routes, 405 operations, and eight distribution centers, Cintas can reach nearly 95% of the North American worker population, giving it the deepest moat in the industry. Uniform rental and facilities maintenance (cleaning restrooms) generate 70% of Cintas revenue. The remaining 30% is split among custom uniform sales, first aid and fire protection services, and document shredding and storage. These may seem like divergent businesses, but they capitalize on Cintas vast distribution and customer network. A company that rents uniforms could easily sign up for fire extinguishers or first aid kits at a nice marginal profit for Cintas.

Dressed for success Its no secret that Andy and I are fans of stable, predictable businesses that churn out lots of cash for shareholders and are run by smart insiders who own chunks of stock. Cintas is a perfect fit. The companys primary business is renting and selling uniforms to 800,000 corporate clients in North America, including Starbucks baristas, McDonalds servers, and W Hotel concierges. I love the recurring nature
2 Motley Fool Stock Advisor

Pocket Change Cintas network has delivered amazingly steady results. This decade alone, its gross margin has ranged between 40% and 42% and operating margins between 14% and 16%, both industry-leading numbers. Thats good, because the company wont set any land-speed growth records. Revenue has grown 8% annualized over the past five years and just 6% for the recent 12-month period.
But Andy and I are fine with that because in Cintas, were following the cash. During the same five-year period, free cash flow has grown nearly 11%, and per-share dividends (thats actual cash in our pockets) have increased 11.2% per year. Further evidence of managements shareholder focus is Cintas 15% returns on equity, boosted by the companys
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January 2009

$800 million in share repurchases since 2005. Ill admit, the $951 million in debt is a little high for my taste but its very manageable at less than 30% of total capital.

Dueling Fools: Uniform Performance

David Gardner: Talk to us about the founding family, the Farmers. Do they wear matching uniforms to work? Tom Gardner: Thats about as likely as me donning a David Gardner signature turtleneck. Not going to happen. Richard Farmer took his grandfathers rag cleaning business into uniform rentals by locking up exclusive contracts with developers of new polycotton blended uniforms that lasted twice as long as their cotton counterparts. He also converted the companys laundry facilities to dry cleaning for the new blend. Today, a fourth-generation Farmer, Scott, is CEO, while his father (Richard) holds the chairmans seat. All told, the family owns 12% of the business. DG: Investors who have held this stock for the past eight years havent made a dime. What does that say about the companys ability to generate excess returns? TG: The stock was priced at 40 times earnings in early 2000, so I think the expected return was a little unrealistic. But at 10 to 12 times earnings, the stock looks downright sexy now at least to us value hunters. Per-share earnings have increased from less than $1 to $2.16 this decade, and per-share dividends have tripled. Thats shareholder friendly. DG: I love the distribution network. Are there other ways to leverage it besides what the company is already doing? DVD delivery, perhaps? TG: I think Netflix has that covered. Over the years, Cintas has done a great job adding in other businesses to its core uniform delivery document management, cleaning services, and fire and safety. The fast-growing document business has a lot of potential but faces stiff competition in Iron Mountain (NYSE: IRM). But Im excited about that segment. DG: Does Cintas play nicely with its 34,000 employees? TG: Its a mixed bag. Cintas has been involved in a few class-action lawsuits over compensation, discrimination, and worker safety. Yet the company has received awards as a best place to work, and Fortune magazine has listed it among its most admired companies for eight consecutive years. Only 400 employees are unionized, but Unite Here, a union representing textile and service workers, has been actively pushing for more union representation at Cintas.
Motley Fool Stock Advisor 3

Pressed to Fit I dont mind paying up for great businesses (neither does Warren Buffett, who bought Coca-Cola years ago when other investors feared it was too expensive), but I also dont want to stretch it. Over the past decade, investors consistently paid 30 or 40 times earnings for Cintas way too rich for my taste. But now were looking at a stock selling at around 12 times sustainable free cash flow, with solid growth prospects in its core businesses as well as in document management (a potential billion-dollar segment). This uniform provider also has promising international expansion opportunities and a 1.9% dividend yield. Its not likely to be a high-flyer, but I see it as a consistent marketbeater for your portfolio. Possible wrinkles The obvious risk for any service company these days is the economy, and for Cintas specifically, were talking employment rates. Fewer hired worker bees means fewer uniforms and fewer links on the network chain. I may be a little early in picking Cintas (U.S. unemployment rate projections run as high as 10% from todays 6.7%), but Im not worried Im confident were getting a great company at a good price, and I would use any price pullback to build out your position.
Earlier this decade, the companys interest coverage ratio a measure of how many times over a companys annual operating profits cover the annual interest due on its debt was north of 20. Today its around 11, still comfortably at an AA-rated level but lower nonetheless. We dont want Cintas interest payments eating up too much of the companys profits, so Ill be watching this number closely. Lastly, the company is planning to push overseas into Europe, as well as into Latin America and the Middle East. This is exciting but could be costly as Cintas builds out its network (think Starbucks). Ill grow concerned if margins start to suffer.

The Foolish Bottom Line With a broad distribution network, solid core business, and growing ancillary lines, Cintas is in a great position to continue its industry-leading ways. And todays historically cheap stock gives us an entry point to start adding shares. Nibble today and wait for more price pullbacks to add more. In five years, when our homey Fool headquarters has a mini fridge at every desk, well be stylin with our Cintas shares. Now, where are my socks?
The Motley Fool owns shares of Starbucks.
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January 2009

marvel (nYse: mvL) and Team Davids six-month Review

By david Gardner and The sToCk advisor Team
Its a licensing, publishing, toy-making, film-producing powerhouse with a library of more than 5,000 characters . Recent Price: $29 .75 Risk Level: Medium Position in Industry: Innovator Market Cap: $2,330 Cash/Debt: $126/$182 Revenue (TTM/07/06): $561/$486/$352 Earnings (TTM/07/06): $170/$140/$59 Insider Ownership: 39% Biggest Threat: Box-office flops

why Buy:
The companys budding

movie studio is hugely undervalued by the market .

Publishing, toys, and

licensing deals generate gobs of cash and are a nice cushion against any potential box-office blues .
Insiders, er, marvel at

the companys potential, buying up stock in recent months .

The Team says:

Undervalued superhero
Data as of 12/16/08
Except share price, all dollar figures in millions.

Welcome to Davids six-month review, which includes his official re-recommendation of Marvel plus expanded coverage of his top stocks and three sells. For a ranking of his scorecard with specific buy/hold guidance, see the Report Card in this issue. Superheroes were born out of the aftermath of the Great Depression, with D.C. Comics Superman created in 1932, a year before unemployment peaked at 25%. He made his comic book debut in 1938, and a year later Marvel (NYSE: MVL) founded its comic book arm all while the nation was still deep in economic turmoil. People may not have had a lot of extra cash, but they sure liked to escape into the story of a hero who could transcend real-world frustrations. That desire rings just as true today. But you dont need some highfalutin socioeconomic justification to buy Marvel shares these days. The stock has held up remarkably well its up 12% in 2008 and down a mere 22% from its 52-week high yet this companys $2.4 billion market cap hugely undervalues its budding movie studio. In a year when the companys first two self-financed features, The Incredible Hulk and Iron Man, brought in more than $840 million at box offices worldwide, only the current market turmoil could keep this stock earthbound.

Consider that next year, Marvel wont have any selffinanced film releases but will have a share of the expenses of making a slate of four films for release in 2010 and 2011 and still expects to earn $1 to $1.35 per share. That doesnt even reflect millions in sales of Iron Man DVDs, since some of that revenue is coming in earlier than expected and will be recorded this year. Even outside of the movies themselves, Marvel is arguably worth the 22 to 30 times 2009 earnings it trades at thanks to its publishing, toys, and licensing deals that include a Wolverine film next year and Spider-Man 4 in 2011. Buy Marvel today and you get a movie studio thrown in for next to nothing. Although 2009 will be light at the box office, were looking toward a huge 2010 and 2011 for the company, with the release of Iron Man 2, Thor, The First Avenger: Captain America, and The Avengers, the last of which we think has the potential to be a mega-blockbuster. Certainly, company insiders seem to like the way the future looks. Executive Vice President David Maisel bought almost $2.5 million in Marvel stock in late November, following a smaller purchase in mid-October by the companys CFO. As is often noted, there are a million reasons insiders sell stock, but only one reason they buy: They think its going up, up, and away, and we couldnt agree more.

Apple
Recent Price 52-Week Range Action

$95.43

$79.14-$202.96

BUY

Things have certainly changed since Apple (Nasdaq: AAPL) was re-recommended in the July 2008 issue. The iPhone surpassed Motorolas (NYSE: MOT) RAZR as the top handset in the United States and outsold Research in Motions (Nasdaq: RIMM) BlackBerry in the third quarter. Apple which exceeded its goal of selling 10 million iPhones in calendar 2008 also reported two more quarters of strong Mac computer unit sales and revenue growth, while the iPod continues to show its long legs with expanding sales. Oh, and the stock is 44% cheaper than it was in July. Were not happy about that last part, but it just makes us more excited about Apples prospects. There will always be competitive threats in the cutthroat smartphone market, but we are actually more sanguine about the iPhones chances of continued dominance than we were several months ago.

Motley Fool Stock Advisor (ISSN: 1539-218X print version) is published monthly by The Motley Fool, LLC, 2000 Duke Street, Alexandria, VA 22314 . Application to mail at Periodical rates is Pending 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: membersupport@fool .com . Please email or call if you have any subscription questions. Editor: Kate Herman, Publisher: Jill Ralph, Business Manager: Kate Ward, Designer: Sara Klieger, CEO: Tom Gardner . Subscription $199 per year . Copyright 2008 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 http://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.

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January 2009

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The SA Takeaway
Last month we delivered Toms six-month review, and Davids is naturally the second act for our SA Takeaway . This special removable section brings you our thoughts on every one of Davids 41 active recommendations as well as three sell recommendations from this issue . Pull it out and keep it with Toms report card for the whole SA universe at a glance!

Weve sorted through Davids scorecard to find the best stocks for you and we found a couple of laggers, too. We looked at management, competitive edge, market value, and other factors to determine which stocks are great buys in this market and which ones are off-limits for now.

re-recommendation plus five Best Buys Now) the best places for new money. If these are already in your portfolio, move on to the other Buys in this review. Weve labeled a few stocks as Holds dont buy them now and were also recommending you sell three stocks: American Eagle, We consider the top six stocks listed below (Davids Garmin, and Royal Caribbean.

Davids Report Card

Company Marvel Recent Price $29.75 $95.43 $9.56 $16.68 $50.15 $28.65 $54.49 $24.95 $23.78 $12.42 $36.51 $13.60 $52.63 $28.87 $63.39 $41.93 $17.58 $27.68 52-Week Range $23.28$38.50 $79.14$202.96 $8.99$19.28 $14.28$26.20 $32.00$74.90 $17.90$40.90 $34.02$79.69 $16.20$28.98 $18.60$35.02 $10.50$34.95 $31.69$58.50 $10.88$26.14 $34.68$97.43 $21.57$41.68 $53.90$101.53 $29.80$54.63 $13.27$28.86 $16.42$53.60 Comments From the Team Our top pick, MVL, has been given short shrift for its incredibly successful debut as a commercial movie studio. (Hello, Iron Man?) We expect the stock to climb in anticipation of a super-heroic 2010 and 2011. AAPL has outperformed our expectations in every area but one: its stock price. That makes it an exceptional deal right now, especially with its bulletproof balance sheet and fanatical base. The Vivendi Games merger makes ATVI a juggernaut. Add rock-star CEO Bobby Kotick, an impressive slate of new blockbuster games, and $1 billion in free cash flow earnings power, and you'll want to buy more than great games. Founder Charles Schwab has built a well-diversified, top-quality financial services powerhouse that has withstood the mother of all credit crunches and grown profits in the process. What can SCHW do in a positive stock market? Win! Are you among the millions of gift-givers struggling to find a Wii this holiday season? Buy shares in NTDOY instead, and you'll own perhaps the most innovative video game entertainment company on the planet. The DVD-by-mail pioneer has grown its subscriber base in a recession. More impressive? NFLX's steady progress in making digital delivery a reality. Putting streaming content into Blu-ray players and XBox 360s is a stroke of genius. This maker of specialty cameras and imaging systems is a rare winner in an awful year, and we expect it to continue to make great strides. AXYS's strong backlog points to a solid 2009. IDCC's $188 million cash hoard is about to get a whole lot bigger thanks to its settlement and new licensing agreement with Samsung. IDCC can expect fat, growing streams of royalty payments in the years to come. Whats not to like? Wall-E reminds us that despite the headwinds facing ad revenue and travel destinations, DIS has plenty of cash-minting assets to make up for any near-term problems. Meanwhile, well thank the market for offering shares on the cheap! Low interest rates have hurt OXPS, but it's managed to expand customer accounts and meet or beat guidance every quarter so far in 2008. Expansion into the futures business should drive further growth, sending the stock up. We continue to like this railway's extensive lines and advantageous ports. CNI benefits from declining diesel costs and steady demand for moving commodities including, in all likelihood, all the foreign coal China has started to need. The acquisition of MSG makes MINI a huge player in the construction services industry. Expect big things from this well-run company and its stock once the economy and construction market turns. AMZN isn't just the world's foremost e-tailer it's also a computing giant that's seeing increasing demand for its Elastic Compute Cloud. Plus, we're excited about Kindle's success in driving customer loyalty to e-books. Brian Goldner took home Marketwatch's CEO of the Year award in 2008, but that's not all HAS has going for it. The success of Transformers turns a page toward capitalizing on its robust intellectual property. A slowing economy is hurting FDX's shipping volumes, but lower fuel costs and DHL's exit from the U.S. shipping market bode well for the global shipper's future prospects. Were on board for more stock deliveries. Resistant to economic slowdown, MHS has fared relatively well as it profits from a growing tide of generic drugs at attractive margins. Potential health-care reform creates some uncertainty, but the company should come out a winner. In a doggish retail market, PETM isn't making its shareholders beg for a treat. Same-store sales growth has been solid, and the company's high-margin pet services continue to show stellar growth. Wolf down some PETM shares today. It's a horrible economic environment for BBY but also a golden opportunity for it to knock off its two main competitors, Circuit City and Radio Shack. BBY will emerge from this economic slump more dominant than ever. Davids Six-Month Review | January 2009 Motley Fool Stock Advisor

BesT BUYs now BUY

Apple Activision Blizzard Charles Schwab Nintendo Netflix Axsys Technologies InterDigital Comm. Disney optionsXpress Holdings Canadian Natl Railway Mobile Mini Amazon Hasbro FedEx MedCo Health PetSmart Best Buy

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Davids Report Card (continued)

Company Strayer Education Titanium Metals Atwood Oceanics DreamWorks Animation Embraer NVIDIA Montpelier Re Recent Price $207.27 $9.00 $16.80 $25.01 $17.24 $8.88 $15.82 $29.18 $9.72 $15.17 $67.40 $49.12 $4.10 $11.00 $16.06 $22.29 $25.69 $10.80 $10.80 $7.50 $31.40 $5.70 $38.06 $9.96 $20.57 $10.72 52-Week Range $142.14$239.99 $5.31$30.25 $12.60$63.46 $20.39$32.73 $12.17$48.73 $5.75$36.40 $10.13$17.94 $21.49$58.60 $7.06$22.98 $10.91$35.12 $45.15$144.34 $37.21$78.57 $3.35$8.24 $7.15$35.88 $15.50$60.35 $18.82$47.88 $16.91$63.77 $8.21$37.00 $7.04$44.07 $5.98$22.00 $21.05$63.6 $5.05$29.84 $24.51$47.2 $6.98$23.84 $14.40$112.68 $5.97$43.96 Comments From the Team Few industries are booming right now, but education is. Traditionally strong during recessions, STRA serves people who are looking to improve or find new job skills, especially if they're still working. Fuel may be cheaper than it has been in ages, but the airline industry wasn't designed to thrive on oil at $40 a barrel new, more efficient planes are a necessity. That and other demands on titanium will drive TIE's ongoing growth. Oil dropped further and faster than we ever expected, and ATW is likely to see dayrates dip dramatically as it negotiates new contracts but much of this is reflected in the stock price. We expect strong returns long term. This year's blockbuster hit, Kung Fu Punda, delivered a strong kick to DWA's bottom line. Results might be lumpy for this creative animator, but its growing library of strong franchises should mean sweet dreams for shareholders. While it's suffered a mild slowdown in deliveries, ERJ's backlog of new planes remains robust. With nearly $500 million in net cash on the balance sheet and growing global demand for its jets, this Brazilian aviation company should take off. We cant say how long NVDAs cyclical downturn will last, but this cash-rich, debt-free company makes a best-in-class product. It will come back strong, particularly with the new Tegra family of chips for mobile devices. Hurricanes Ike and Gustav blew the stuffing out of MRH's recent earnings. But asset losses, higher capital requirements, and increased risk-aversion among primary insurers should lead to more demand for reinsurance ahead. Thanks in part to China's Olympics, SINA has reported gold-medal results. But business now could be more tinmedal-worthy, thanks to more competition and a post-Olympics ad slump. Still, shares are compelling at these prices. CEO Howard Schultz believes his cost-cutting initiatives will render SBUX a much better company when the economy recovers. Until then, we'll happily drink our cup o' joe while picking up shares on the cheap. The core auction business has been uninspiring, but Paypal continues to be a great profit driver, and EBAY's sterling balance sheet and cheap valuation make it a good deal. PCLN continues to effectively negotiate quality earnings results while expanding its portfolio of travel businesses. Travel planning may slow in the near term, but we suggest booking some PCLN shares into your portfolio. BIIB's pipeline is slowly maturing, and while most of its products are well past their best growth, Tysabri should continue to drive climbing profits. Moreover, this is a great time to be a (relatively) cash-rich biotech company. ARMH continues to dominate mobile phone processors with its intellectual property in handsets from all the top manufacturers. The business is likely to grow slowly over time, but ARMH needs to leverage its dominance more. Investors fear that best-in-class Web optimization software isn't enough, with Google offering a free alternative. But high renewal rates and fast-growing sales, even in a recession, point to a bright future for OMTR. ERTS has warned that fiscal 2009 results will come in far below expectations. But the hit Spore game, a burgeoning Asia online business, and new products for the casual gaming market make today's stock price look even better. ILMN has yet to stumble in its quick ascent to domination of the rapid genotyping market, but a slowing of capital investment in its hardware could have a big impact on this fast-grower so we're a bit cautious. Game downloads are a long-term threat, as are more video-game-focused Best Buy and Wal-Mart. But GME still has plenty of room to run and deals in perhaps the most non-recessionary wares outside of basic necessities. Trading below its book value, you might think NTGR is on the verge of insolvency. We still see opportunity in growing Asian sales and retail channels, and so does the company it's buying back its stock. Well wait to see what happens. WFMI got into a whole lot of trouble in 2008, starting with the costly digestion of Wild Oats. Until the FTC fracas clears up and we get some stability on the operating front, we're looking for opportunities elsewhere. DBTK is finding out what it's like to be a small company in a highly competitive industry where most potential customers got blindsided by the credit crunch. There's just too much uncertainty right now to call this a buy. It's not one of the Big Three, for sure revenue has grown in 2008, although profits have dropped. This is an uncertain period at best for makers of luxury goods, so we recommend holding off on new investments for now. The Indian IT company threw us for a loop with its once-on, now-off decision to invest $1.6 billion in real-estate and construction businesses promoted by the CEOs sons. Its a hold until were sure we can trust SAYs management. The story hasn't changed with VALU, and that's a bad thing. Entrenched, inept management continues to rob the company of potential value. Until there's a positive catalyst current leaders exits being one of them steer clear. Chronically disappointing comparable sales, failed concepts, and flip-flopping management have finally clipped AEO's wings, and its falling from our scorecard. Your portfolio should fly much higher with our Best Buys. Sell. The once-reigning King of GPS has found itself in serious competition, particularly from smartphone manufacturers. Were tired of waiting through launch delays to find out whether GRMNs GPS-centric smartphone is a good move. Sell A poor economy and impending debt repayments are dangerous icebergs for RCL's cruise business. Lower fuel costs should help, but we're not sure how much shareholder value will be created long term. This ship has sailed. Sell.

BUY hoLD seLL

SINA Starbucks eBay Priceline.com Biogen Idec ARM Holdings Omniture Electronics Arts Illumina GameStop Netgear Whole Foods Double-Take Software BMW Satyam Value Line American Eagle Outfitters Garmin Royal Caribbean

David owns shares of Activision Blizzard, Amazon, American Eagle, Apple, Best Buy, Canadian National Railway, Charles Schwab, Disney, eBay, Electronic Arts, FedEx, GameStop, Marvel, Netflix, Nintendo, Priceline.com, SINA, Starbucks, and Whole Foods. Karl owns shares of Apple. Matt owns shares of Whole Foods. The Motley Fool owns shares of American Eagle, Best Buy, and Starbucks.

Motley Fool Stock Advisor

Davids Six-Month Review | January 2009

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Davids six-month Review (continued)

Apples App store, which sells software to make iPhones even more fun, has been a huge success: Its logged more than 10,000 applications and more than 300 million downloads so far. That creates a lot of loyalty, and the argument that, say, Googles (Nasdaq: GOOG) open-source Android platform would foster more robust application development looks weaker now, particularly as the Linux operating system has (unofficially) been ported onto the iPhone. With nearly $25 billion in cash and investments, no debt, an enterprise value thats about 1.6 times estimated fiscal 2009 sales, and a business that threw off nearly $10 per share in free cash flow over the past year, Apple is one of our top picks for your new money now. in an environment where most financial services firms are seeing enormous client outflows. More important, Schwabs operating profits over the first nine months of 2008 are up over last years results. Schwabs success can be chalked up to its evolution from a simple brokerage firm to a full-fledged financial services powerhouse. Diversification lets Schwab offset declines in its traditional brokerage business with gains in other areas, such as asset management. Moreover, Schwabs conservatively run mortgage business, devoid of subprime and negative amortization loans, hasnt seen many delinquencies. Founder, chairman, and 18% owner Charles Schwab clearly believes in leading a strong company. While many Wall Street brokers and banks ran themselves into the ground, Schwab built a business that could not only withstand the mother of all credit crunches, but thrive. Just imagine what Schwab will do once the market turns around.

Activision Blizzard
Recent Price 52-Week Range Action

$9.56

$8.99-$19.28

BUY

Activisions merger with Vivendi Games was a match made in gamer heaven. The new Activision Blizzard (Nasdaq: ATVI) knits together Activisions arsenal of blockbuster games including Guitar Hero and Call of Duty with Vivendis mighty World of Warcraft franchise and enormous online delivery capabilities. And it all comes together in a neat, debt-free package that is fully capable of generating more than $1 billion a year in free cash flow. But Activisions stellar growth (sales have grown nearly 30% per year over the past five years) still hinges on its ability to develop new games that people want to play. Fortunately, CEO Bobby Kotick, who bought the company with a business partner for less than $500,000 in 1990, has shown a knack for doing just that. Whether steering Activisions in-house creative teams to develop products for the fastgrowing casual gaming market or acquiring other studios to expand the companys portfolio of games, Kotick continues to find ways to add tremendous value to the business and for shareholders, who have enjoyed multibagger returns on their investment dollars. With the latest installments of Guitar Hero and World of Warcraft flying off the shelves, new versions of Diablo and Starcraft slated for 2009, and a $1 billion share buyback on the table, expect continued greatness from Activision.

nintendo
Recent Price 52-Week Range Action

$50.15

$32-$74.90

BUY

Kids today are just plain lucky. They dont have to struggle with 8-bit graphics, clunky sound effects, and awkward controllers like their parents did. No, todays kids get full immersion: They can swing a tennis racket, jump around in an aerobics class, steer a wheel in a car race, and interact in a world filled with mind-blowing graphics and sound. All this is courtesy of Nintendo (Other: NTDOY. PK), a company that is consistently on the cutting edge of entertainment technology. Lately though, Nintendos stock price has teetered on the cutting edge of its 52-week low. That just doesnt seem right considering sales in the most recent quarter were up 26% and operating profits surged 47% over the same quarter last year. Free cash flow over the past 12 months was a sensational $3.4 billion. Just try to find a Wii at your local Best Buy right now we dare you! At these prices, the best holiday find just may be Nintendos stock.

netflix
Recent Price 52-Week Range Action

Charles schwab
Recent Price 52-Week Range Action

$28.65

$17.90-$40.90

BUY

$16.68

$14.28-$26.20

BUY

Investors who arent opting for their mattress as their savings device of choice in this years historically bad stock market are increasingly finding their way to Charles Schwab (Nasdaq: SCHW). You can see it in Schwabs client assets, which held relatively steady at $1.3 trillion this year
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Yes, Americans will spend $10 to see the latest Marvel feature, even (especially?) in a rotten economy. And they will certainly spend as little as $4.99 a month for access to Netflixs (Nasdaq: NFLX) library of more than 100,000 DVD titles delivered straight to their home. An increasing number will even stream movies directly, taking advantage of the very technology that bears once said would kill Netflix. To that end, its made great progress getting its streaming
Motley Fool Stock Advisor 5

January 2009

Davids six-month Review (continued)

content installed into Blu-ray players a real Trojan horse for the company as these players become more popular. It is also developing new player software to let people effortlessly watch movies on their computer. We dont think anyone else makes as compelling a case to be the single go-to source for movies (and perhaps other digital media) delivered online. Netflix ended the third quarter with 8.7 million subscribers. Its rate of subscriber growth slowed from the prior year, and CEO Reed Hastings recently told investors that he expects growth to continue through the recession, albeit at a slower rate than in prior quarters. We can live with that. Netflix stock is about flat for 2008, which makes it compare favorably to most other companies out there, but that certainly doesnt give credit to its rising profits, excellent return on equity, or strong competitive position. which was allegedly selling wireless handsets that use InterDigitals technology without a license in favor of a settlement. While financial details arent yet known, there is one thing we can be certain of: InterDigitals $188 million cash hoard is about to get a whole lot bigger. Yet the companys new licensing deal with Samsung means much more than a fat new stream of royalty payments. It reinforces the strength of InterDigitals patents and vastly improves the companys chances of gaining new licenses and favorably resolving disputes with other mobile phone developers like Nokia. Now more than ever, InterDigital is able to ride the rapid growth in global sales of wireless handsets, a fact that bodes extremely well for its business and stock price.

Axsys Technologies
Recent Price 52-Week Range Action Recent Price

Disney
52-Week Range Action

$54.49

$34.02-$79.69

BUY

$23.78

$18.60-$35.02

BUY

Axsys Technologies (Nasdaq: AXYS) has successfully fought a good fight this year, rising about 5% since our May 2008 recommendation while the S&P 500 fell 35%. The majority of orders for its special cameras and imaging systems come from government agencies rather than economically sensitive businesses or consumers, which certainly doesnt hurt. And that demand has been even greater than we expected: In the two quarters since we singled it out, earnings per share have come in at an average 20% above analyst estimates. Yet thanks to barely a nudge in the stock price, Axsys trailing P/E ratio is lower now than when the company was recommended which is another way of saying the company has gotten little or no credit for the rising demand for infrared and other surveillance systems, improving margins, or a record backlog of $185 million, which the company will be able to address more quickly because of its recently expanded production capacity. Axsys has conservatively guided for about 15% revenue growth in 2009, but we believe ongoing government and private-sector demand for security, surveillance, and imaging will keep this company on the rise.

When it comes to entertainment media, youd be hardpressed to find a more lucrative or hard-to-replicate set of assets than Disneys (NYSE: DIS). Look no further than the companys highly successful Pixar studio as just one example. Animation guru John Lasseter was at it again with Wall-E, which has grossed nearly $500 million in worldwide box office receipts so far. And then there are the theme parks; hotels and resorts; the massively valuable ESPN brand; and, of course, Disneys vast and growing library of films and TV shows and all of the products that go along with them. Fortunately, those valuable properties are on sale right now thanks to the current economic downturn. CEO Bob Iger has done a tremendous job since taking the reins in 2005. Under his leadership, Disney should continue to produce substantial free cash flow and greatly reward patient shareholders. Take this rare opportunity to pick up shares of this company on the cheap. As ESPNs Chris Boomer Berman would say, It. Could. Go. All. The. Way.

optionsxpress holdings
Recent Price 52-Week Range Action

interDigital Communications
Recent Price 52-Week Range Action

$12.42

$10.50-$34.95

BUY

$24.95

$16.20-$28.98

BUY

Intellectual property licensor InterDigital Communications (Nasdaq: IDCC) knows that having the worlds best patents is only valuable if they come complete with the worlds best lawyers. Fortunately, the company avoided a legal resolution of its long-running dispute with Samsung
6 Motley Fool Stock Advisor

Options strategies can be used in any kind of market, but the sort of volatility weve seen over the past few months has convinced more than a few investors that options may offer that extra piece of insurance they need. Others are looking for ways to leverage their portfolios while they wait for better days. Either way, a bear market isnt necessarily bad for a company dedicated to options traders, and a back-and-forth market is actually a positive here.
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January 2009

Davids six-month Review (continued)

Unfortunately, investors havent seen it that way. Despite meeting or beating its guidance every quarter this year, optionsXpress (Nasdaq: OXPS) has been cut in half from where we first recommended it and currently trades with a P/E under 8 very cheap, considering the companys high margins and solid long-term growth prospects. Admittedly, low interest rates are hurting the company right now, since interest income on customer accounts represents about a fifth of overall revenue, but optionsXpress ability to grow despite that challenge is impressive. Were enthusiastic about the companys expansion into futures trading through the acquisition earlier this year of Open E Cry. OptionsXpress is a top 10 buy at these levels. well be lucky to see sales up 15% a pretty swift drop-off in growth. You could argue that Garmin has been punished out of proportion to its crimes: The stock is down more than 80% over the past 12 months drastic for a company that has, after all, continued to grow sales.

But its the future that has us worried. Garmin isnt losing ground to any one competitor archrival TomTom is actually down even further this year, with slower sales growth. Rather, the company seems to be dying from a thousand cuts. The GPS applications on the iPhone and other smartphones may not be as sophisticated as dedicated units from Garmin (at least until better software comes along), but the difference may not be all that critical to many users who might once have considered shopping for a Garmin device. GPS sell Recommendation: American eagle outfitters has become a commodity to many consumers, and Garmin has pretty much acknowledged this by putting its emphasis Recent Price 52-Week Range Action on the (much-delayed) nuvifone. The company is looking to $9.96 $6.98-$23.84 SELL add value around basic GPS, but were dubious about the The Eagle has landed and it was a bumpy ride. Once chances of success for yet another smartphone, particularly a high-flyer on our scorecard, American Eagles (NYSE: when its from a newcomer to the space. AEO) soaring growth crash-landed in recent years thanks Garmin may prove to be a decent value investment for the in part to new retail concepts like aerie and Martin + Osa patient and risk tolerant, but we like other opportunities more that have underperformed expectations and failed to offset and dont have strong faith that this company will outperform declining sales at the companys saturated namesake stores. the S&P 500. Its time to sell. But why sell now, after a 50%-plus drop and with shares at their cheapest level in more than four years? While we think American Eagles shares are a better alternative than cash right now, we just dont see the company being a marketbeater, even from these beaten-down levels. The companys failed concepts and chronic same-store sales declines have exposed weakness in the companys brand appeal. Meanwhile, American Eagles management seems to be uncertain about where to allocate the companys investment capital. Finally, intense competition from the likes of Abercrombie & Fitch, Aeropostale, and a resurgent Gap, as well as shifting loyalties among young consumers, will continue to severely limit any excess returns in the retail apparel industry. If youre uncertain about where to invest right now and arent interested in any of our buy recommendations in this issue, then by all means hold your shares. But we want you invested in our best ideas, and were fairly confident that we have at least 40 better ones than American Eagle right now.

sell Recommendation: Royal Caribbean

Recent Price 52-Week Range Action

$10.72

$5.97-$43.96

SELL

These days, were less worried about Somali pirates than we are about Royal Caribbean (NYSE: RCL) righting its ship. The turbulent economic seas of the past year will likely continue for some time, meaning shareholder value could take an indefinite back seat. We originally were keen on managements strategy of building larger ships, which could significantly boost profitability. But with frozen credit markets, it looks like they wont be built for quite some time. Were worried about Royals upcoming $2 billion debt repayment, given the companys chronically poor cash flow metrics and potential for low travel bookings next year. The threat of a prolonged recession only heightens our concern. While Royal ultimately may avoid a shipwreck, were just not sure it can be a market-beating investment from here. Returns on capital lag stubbornly behind the companys costs, even in good times. Its time to say bon voyage to the companys shares.

sell Recommendation: Garmin

Recent Price 52-Week Range Action

$20.57

$14.40-$112.68

SELL

Last year, a GPS device from Garmin (Nasdaq: GRMN) David owns shares of Activision Blizzard, American was just about the hottest gift you could put under the Eagle, Apple, Charles Schwab, Disney, Marvel, Netflix, and Christmas tree. Sales in 2007 shot up almost 80%, with strong Nintendo. Karl owns shares of Apple. The Motley Fool owns performances across all areas of the business. This year, shares of American Eagle and Best Buy.
stockadvisor .fool .com January 2009 Motley Fool Stock Advisor 7

sCoReCARD
Details on all recommendations available at stockadvisor.fool.com
AveRAGe ReTURns mosT ReCenT ReCommenDATions
DaVIDS
Davids Returns 14.1%
Issue Company Ticker

TOmS
Company Ticker

1/09

marvel

mVL STRa SCHW aTVI TIE ILmN

& & & & & &

Cintas msC industrial natl instruments natl oilwell varco Precision Castparts Linear Technology

CTaS mSm NaTI NOV PCP LLTC

12/08 strayer education Toms Returns 0.0% 11/08 Charles schwab 10/08 Activision Blizzard S&P 500 -21.1% 0% 6% 12% 18% 9/08 8/08

Titanium metals illumina

-30% -24% -18% -12% -6% Since inception, includes sold positions.

BAGGeRs & LAGGeRs

TOP 5 PERFORmERS BOTTOm 5 PERFORmERS

BEST BuyS NOW

DaVIDS
Company Ticker Recent Share Price

756.5% 701.6% 435.2%

Issue 7/02 David

marvel (mvL)*

(92.7%) (86.4%) (83.1%) (78.1%) (76.5%)

1. Apple* 2. Activision Blizzard* 3. Charles schwab* 4. nintendo* 5. netflix*

aaPL aTVI SCHW NTDOy.PK NFLX

$95.43 $9.56 $16.68 $50.15 $28.65

Pacific sunwear (PsUn)

Issue 1/06 Tom

Quality systems (Qsii)*

Issue 4/03 Tom

CompuCredit (CCRT)
Issue 2/07 Tom

Activision Blizzard (ATvi)*

Issue 3/03 David

whole Foods (wFmi)*

Issue 9/05 David

TOmS
Company Ticker Recent Share Price

243.8% 215.0%

1. Dolby 2. Unit Corp. 3. national instruments 4. staples 5. morningstar**

DLB uNT NaTI SPLS mORN

$30.43 $26.43 $24.09 $18.35 $31.37

Amazon.com (AmZn)
Issue 10/02 David

healthways (hwAY)*
Issue 9/05 Tom

Gamestop (Gme)*
Issue 10/04 David

satyam (sAY)

Issue 6/07 David

Excluding sold positions. *QSII was also recommended in the 3/03 and the 12/05 issues; GME was also recommended in the 1/06 issue; MVL was also recommended in the 12/02, 9/04, and 1/09 issues; ATVI was also recommended in the 9/02 and 10/08 issues; WFMI was also recommended in the 3/08 issue; HWAY was also recommended in the 4/05 issue. This is not an endorsement to buy any of these stocks. It is simply a snapshot of our companies performance to date. .

The recommendations in our current issue represent our two best investment ideas this month. But to give you a broader range of options, weve also ranked the best opportunities for new money from among all our past selections. * David owns shares. ** The Motley Fool owns shares.

lagging

49%
61 lagging the market

beating

58 beating the market

David is saying farewell to three stocks today: American eagle, Garmin, and Royal Caribbean . To find out why, turn to page 7 . For buy and hold guidance on the rest of Davids stocks including his marvelous top stock recommendation for new money now dont miss the SA Takeaway, our nifty, removable report card at the center of this issue . If you missed Toms review last month, you can read it online visit stockadvisor .fool .com, click the Newsletters tab, and grab the December 2008 issue . Enjoy!

Printed on Rolland Enviro100 .

100%

ReCommenDATion RePoRT CARD

six-monTh Review ReminDeRs

51%
Excludes sold positions.

All scorecard data as of market close 12/16/08

8 Motley Fool Stock Advisor January 2009 stockadvisor .fool .com