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2015 and Beyond

AXL

American Axle & Manufacturing

by Alex Scherer, CFA

page 3

APO

Civeo
page 8

DCOM

page 15

page 22

page 26

Stamps.com
page 29

VEEV

by Rich Greifner

page 32

XOOM

Veeva Systems

Xoom
page 35

XPO

by Jason Moser

page 39

Keeping Score

XPO Logistics

2 The Motley Fool

by Charly Travers

STMP

PNC Financial Services

by Brendan Mathews

page 18

Outerwall

PNC

by Simon Erickson

by Joe Tenebruso

OUTR

MSCI

by David Hanson

page 12

Dominos Pizza

MSCI
by Bryan Hinmon, CFA

by Jim Royal

DPZ

Dime Community Bancshares


by Anand Chokkavelu

page 5

CVEO

Apollo Global Management


by Michael Olsen, CFA

by Sara Hov

Stocks 2003 to Stocks 2014


page 43

Stocks

page 46

2015 and Beyond


Alex Scherer, CFA
TMFEnochRoot
Stock Advisor associate advisor

Well admit to a certain bias here at The Motley Fool: We like stocks.
A lot. If we sound repetitive, its because our success has been equally
so: Every year for the past 12 years, in this very report, weve picked
12 stocks to help your portfolio flourish.
Did they? Not always. But in seven out of those years, weve beaten
the S&P 500. More relevant to you is the magnitude by which weve
outperformed overall:
Average Return for Each Years Report
our
picks

S&P
500

191%
177%

68%
134%

163%
106%

99%
88%

35%
68%

142%
60%

518%
135%

80%
97%

103%
75%

24%
72%

58%
43%

1%
14%

Stocks 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

See how all 139 picks have performed from Netflixs 1,832% gain
to R.H. Donnelleys 100% loss in our Keeping Score section on page 46.

Stocks

The Motley Fool 3

S
15

and Beyond
This year, were back with more
for you. Predictably from a group
of Fools these stocks represent
Foolish businesses. Predictably,
they represent shareholder-friendly
companies with sustainable edges
that scale. And predictably, they
have considerable upside.
This report isnt about stocks.
Its about specific stocks. Buy them
all, or pick and choose. Its your
choice, and most investors will
opt for the latter. Thats why weve
jam-packed this report with a
buffet varied enough to satisfy the
hungriest truckers (or at least their
portfolios).

A Stock for any Fool


If youre hungry for growth, check
out Outerwall, the parent of ubiquitous movie rental kiosk Redbox.
Want to invest in man camps
(assuming you even know what
they are)? Read about spinoff
Civeo, whose possible conversion
to a real estate investment trust

4 The Motley Fool

stands to delight dividend investors regardless of chromosome.


If you prefer to go against
the grain, get a feel for Dime
Community Bancshares, which
was solidly profitable while many
banks were busy taking bailout
loans. Its no Bank of America
thankfully. Hanker for more speed?
Theres money transfer service
Xoom, whose global market opportunity is only as big as the Internet.
Ride the trend of passive
investing with index leader MSCI,
which Bryan Hinmon picks as the
very best company he could find
whose strong business prospects
ensure continued growth. Hit the
other end of the taste spectrum
with Dominos Pizza, the pizza
giant whose turnaround is under
way and completely devoid of
the cardboard pizza taste of yore.
If youre a stars-and-stripes
type itching to support domestic
industry, weve got you covered.
American Axle & Manufacturing is an all-American company

Stocks

whose drivetrains can be found in


some of the countrys top-rated,
fastest-selling SUVs.
And then theres Stamps.com,
the youd-think-itd-be-doomed
company thats flouted email and
Facebook to carve itself a niche
among small-business owners who
prefer to print postage themselves.
(No word on whether these same
owners stay at man camps, too.)
As you can see, theres something here for everyone. That
means you.
But as you read through these
virtual pages, remember this:
Youre a Fool. Youre not looking
for tickers or the next hot stock
tip. Youre investing in real
companies, real management
teams, and real research. Heres
to making this next year no,
this next decade an entirely
predictable success. S 15
Fool on!
For disclosures, see page 50

American Axle & Manufacturing


Detroits innovative drivetrain manufacturer is
gunning for big growth in the next few years

Sara Hov
TMFTycoon
Stock Advisor analyst

Why Buy
AXL?

1 The stock is priced like a lemon, but the companys


earnings are primed for Mustang power.
2 American Axle is diversifying into rapidly growing
international markets such as China and Mexico.
3 A commitment to world-class quality and innovation
creates value for customers and shareholders alike.

You cant have a car without a drivetrain, and you cant have some of
the countrys top-rated, fastest-selling SUVs and light trucks without American Axle & Manufacturing (AXL).
Since 1994, General Motors (GM) has relied primarily on AAM
for its light truck and SUV drivetrains. But dont let the mention of
GM turn you away from this limited-time opportunity. While the
beleaguered automobile manufacturer represents about two-thirds
of American Axles sales, AAM is quickly diversifying away from
GM, with a growing part of its revenue coming from Chrysler, Jeep,
and international automakers. And despite GMs widely broadcast
troubles, Americans are snapping up its vehicles especially the
SUVs and light trucks that make up the brunt of AAMs business.
Meanwhile, the market has priced AAMs stock as if its a lemon,
which means its a good time for investors who can tolerate a little
higher risk to start a position.

Stocks

The Motley Fool 5

American Axle & Manufacturing



NYSE AXL
CAPS Rating 4
glassdoor
3.1

9 ceo approval 70%

The Company
Car sales have been one of the first
areas of the economy to bounce
back since the Great Recession.
Industrywide revenue is expected
to increase around 3% in 2014, but
AAM projects 18% top-line growth
this year, to go with a compound
annual growth rate of about 13%
since 2010.
Based in Detroit, AAM has
delivered outstanding quality,
averaging fewer than 10 discrepant
parts per million since 2003, which
has translated to a 15% annual
improvement of customer incidents
per 1,000 vehicles since 2006.
With fewer incidents, the car
manufacturers who use AAMs
axles and driveshafts have better
safety claims and lower warranty
expenses. This value is one way
that AAM stays competitive in
its cutthroat market. Its focus on
drivetrains also allows it to stay
nimble, compared with competitors
like Dana Holdings and Magna
International, whose drivetrain
programs are only part of their
overall business.
AAMs specialization also
works to its advantage when it
comes to innovation. Among the
companys 28 successful product
launches in 2013 was its EcoTrac
Disconnecting AWD system that
disengages when not needed to
improve fuel efficiency and reduce
carbon dioxide emissions. As

6 The Motley Fool

market cap $1.3 billion


cash $129 million
debt $1.5 billion
yield 0

recent price $17.60


buy guidance $20 or less

data as of 8/12/14

American Axles Shifting Sales Mix

3%

16%

20%

25%

50%

non-GM sales
97%

84%

80%

75%

50%

est.

GM sales

data from American Axle & Manufacturing

stricter environmental standards


kick in such as fuel-efficiency
standards of 54.5 miles to the
gallon for cars and light trucks by
2025 and as consumers demand
more economical vehicles that can
still haul everything they need,
AAM is staying ahead of the game
with such improvements.

The Opportunity
In 2013, Americans drove 15.6
million shiny new vehicles off the
lot, 8% more than the previous
year and a trend analysts expect to
accelerate. With the momentum
in housing construction, many of
those vehicles are light trucks and
SUVs, which are AAMs specialty.
The market is spooked that AAM
relies on GM for 63% of its drivetrain sales, but despite the recall

Stocks

issues, GMs U.S. sales have gone


up this year, not down May sales
were their best since 2008 (up 13%),
and April sales were up 7%, well
above the industry average of 2%.
The company has more than
$900 million in backlog for 2014
through 2016, and about 70% of
that new and incremental business comes from customers other
than GM. Im especially keen on
AAMs operations in Asia and
Mexico, where growth engines are
revving sales in Asia (AAMs
operations are centered in China
and Thailand) have grown at a
138% annualized rate since 2010.
And more efficient operations at
the companys factory in Brazil
have fattened margins. If these
trends continue, AAM should
cruise to even higher profitability
over the next several years.

American Axle & Manufacturing


Financials and Valuation
AAMs compound annual growth
rate has exceeded the industrys
growth rate for the past three
years, and the company is targeting a 10% CAGR through 2016
more than double expectations for
the industry. Heavy restructuring
and refinancing in 2012 and 2013
have set AAM up to increase its
margins and streamline production. Planned implementation
of enterprise resource planning
systems in the second half of 2014
should also boost cost savings.
AAM has $900 million in
backlog ($400 million for 2014,
$300 million for 2015, and $200
million for 2016) and is bidding on
an additional $1 billion worth of
business. Management is targeting an 18% increase in revenue
this year, with $100 million in
free cash flow; in 2015, management expects $4 billion in sales
and $175 million to $200 million
in free cash flow. Combined with
much lower interest expense and
lower capital expenditures, this
means earnings per share could
increase by nearly 70% in the next
two years alone.
Several items on AAMs financial statements loom as potential
roadblocks, however. First, the
company has $1.5 billion in longterm debt. Interest expense in
2013 was $115 million, but management invested in refinancing
that debt to lower costs. This level
of debt is tied to AAMs long-term
delivery contracts with GM and
other customers, and the company
has about $154 million in cash as
well as a revolving credit facility.

It generated $240 million in operating income in 2013, or 2 times its


interest expense.

S
15

and watching where AAM takes


us. Start your engines, Fools. S 15

Risks and When to Sell


This opportunity is based on the
companys outlook through 2016.
AAM is a cyclical business, and
although it is quickly diversifying
away from GM, its performance
still follows Detroits relatively
closely. Should the economy blow
a head gasket or even just a tire,
AAMs share price will likely
deflate, too. And with so much debt
on the books, the company doesnt
have a lot of flexibility before it gets
into trouble. If AAMs debt ratios
change significantly, that would be
a red light for this investment.
Fools who are used to our typical three- to five-year investing
horizon should keep in mind that
AAM is a relatively short-term
play investors in AAM should
plan to reap the rewards of the
next couple of years of high growth
and streamlined efficiencies and
then sell before the industry cycles
down. If the market catches on to
the discrepancy between GMs
flourishing sales and AAMs lagging stock price sooner than that,
it would be a good time to sell.

The Foolish Bottom Line


I believe in this all-American
companys commitment to quality,
international expansion, and innovation. But with AAMs close ties
to GM and the tenuous resurgence
of the economy, investors need to
wear a seat belt. We recommend
taking a compact position for now
Stocks

The Motley Fool 7

Apollo Global Management


This alternative asset manager follows
an unconventional path to success

Michael Olsen, CFA


TMFAgewone
Special Ops analyst

Why Buy
APO?

1 Led by an accomplished value investor, Apollo is one of


the worlds premier asset management franchises.
2 Apollos partnership with Athene could unlock access to
permanent capital, higher management fees, and more
free cash generation.
3 Investors dont appreciate Apollos profit-generating
model, offering us an attractive entry price.

Leon Black has lived a life less ordinary. Hes the co-founder and
driving personality behind Apollo Global Management (APO)
one of the worlds largest alternative asset managers, with $159
billion under management. Black is a relentlessly competitive,
driven sort with seemingly stereotypical Wall Street trappings
a stint at investment bank and junk bond magnate Drexel Warner
Lambert and a Harvard Business School education yet his
worldview borrows a Foolish, less prototypical slant: Most of what
I learned about how to do business I learned from Shakespeare, not
Harvard Business School.
His unconventional experiences shaped a contrary mindset and
set the stage for our investment opportunity.

8 The Motley Fool

Stocks

Apollo Global Management



NYSE APO
CAPS Rating 4
glassdoor
3.1

9 ceo approval 74%

Id like to believe Black would


agree with my thesis: Despite being
one of the worlds premier asset
managers, Apollos business is serially misunderstood and its stock
undervalued by Wall Street.
Several factors are converging:
a partnership with annuity provider Athene that bears parallels
to Berkshire Hathaways (BRK-B)
early, transformative forays into
insurance; an overlooked profit
model; and huge growth potential
in credit investments. That gives
us the opportunity to buy a firstclass franchise at just 9 times my
estimate of its free cash generation
at a critical point in its history.

The Company
Apollo was born in 1990, when
Black and co-founders Joshua
Harris and Marc Rowan founded
a predominantly private-equity
firm. The trio capitalized on what
they knew: leveraged buyouts
(private-equity investments
financed by a lot of debt), credit
and business analysis, and a nose
for distressed but good businesses.
The business has prospered and
grown. Its private-equity funds
averaged 39% annualized returns
before fees, and Apollos assets
under management have grown to
$159 billion with $48 billion in its
signature private-equity franchise,
$101 billion allocated to credit
investments, and nearly $9 billion
in real estate investments.

market cap $9.6 billion


cash $1.1 billion
debt $999 million
yield 14.2%

recent price $24.07


buy guidance $29

Assets Under Management

data as of 8/12/14

$9b

real estate

$101b

credit
includes
Athene

$48b

private equity

$8b
2002

2004

2006

2008

2010

Q1 2011
IPO

2012

Q1 2014

data from Apollo Global Management

Enduring asset management


It also offers an additional advanfranchises possess two advantages: tage: time. The majority of Apollos
an institutionally ingrained, battle- funds require investors to commit
tested, and unique investment
capital for seven years or longer.
strategy married to a strong
The typical fund raises money,
distribution platform. Apollo
invests it, harvests profits, and
checks these boxes. Borrowing
returns capital and a share of the
from its principals background,
profits to investors.
Apollos strategy couples a value
That enables Apollo to focus
investors orientation to deep
where others cant wholesale
credit analysis. Teams work on a
buyouts, corporate carve-outs, and
cross-disciplinary basis: Credit
illiquid, distressed, or complex
teams may source private-equity
deals where locked-up capital
investments and vice versa.
and a long time horizon benefit
Investing across the capital strucinvestors. Because of its return
ture enables a depth of perspective profile, Apollo has built an ecoand range of opportunity that
nomic model vastly superior to its
singularly focused managers lack.
mutual fund counterparts. While
Apollos impressive track record traditional asset managers earn
and unique process have made its
a 1% to 2% fee on assets under
success self-fulfilling. A strong
management, Apollo charges a
reputation and solid returns
0.5% to 1% management fee, and
attract capital to Apollos funds,
once it crosses a threshold return
allowing it to effectively scale
typically 8% it takes 20% of the
distribution and personnel costs
profits in many of its funds.
where smaller operations struggle.
For much of its history, Apollos
Stocks

The Motley Fool 9

S
15

Apollo Global Management


business resembled a standard
mature, I expect Athenes float to
alternative asset manager, but
keep growing through opportunisthe future looks much different
tic acquisition of other insurers. A
equal parts Berkshire and altercase in point comes in Athenes
native asset manager. In 2009, the 2013 purchase of Aviva, an annuity
company backed the founding of
provider with $44 billion of AUM,
an annuity provider, called Athene, which nearly quadrupled its AUM.
via one of its investment vehicles,
With time, Apollos fee-generatAP Alternative Assets (APLVF).
ing potential from Athenes assets
Apollo only owns a sliver of the
could markedly increase. Before
insurers equity, but for all intents
the Aviva deal, 42% of Athenes
and purposes, theyre brothers
AUM was directly invested in
in arms. Apollo advises Athenes
Apollo funds; today the number
$59 billion investment portfolio,
sits at 17%. Theres an important
near 40% of Apollos assets under
distinction here: For the Athene
management, in exchange for a fee. AUM that Apollo manages but
Looking ahead, this relationship
arent invested in Apollo funds, it
could be transformational, holdearns a 0.4% fee. For those directly
ing opportunity in two flavors: a
allocated to Apollo funds, it earns
source of permanent capital and
the usual 0.5% to 1% management
higher management fees.
fee and 20% share of fund-level
profits, provided they meet perThe Opportunity
formance objectives. Over time, I
expect that to move past previous
I think Apollos stock is cheap for
thresholds, representing a potential
three reasons: the potential in the
boon in much higher fee generaAthene partnership, still-strong
tion for Apollos free cash flow.
growth prospects, and a business
model that remains misunderstood. 2. Credit Where Its Due
1. Athenes Wisdom
Though Apollo doesnt own
Athene outright, its laid the
groundwork for a Berkshire-esque
transformation via its partnership.
Notably, it gives Apollo access
to permanent capital as Berkshire does with its ownership of
insurance companies opening
a previously unavailable class of
investments. Instead of taking
long-term investments through
its funds, Apollo could conceivably
own entire companies via Athene.
Although the annuity business is

10 The Motley Fool

Perhaps unsurprisingly, Apollos


funds made a tidy bounty during
the credit crisis raising huge
funds and logging enormous profits.
Today, most of its credit crisis-era
funds are fully invested or in liquidation. With those past opportunities unlikely to recur, investors
may wonder: Will Apollos AUM
continue to grow? The answer is an
emphatic yes, and it comes in two
markets: banking and energy.
In banking, a generational shift
is afoot. Stung by the credit crisis
and forced by regulations, particularly Dodd-Frank and Basel III,
Stocks

banks are retrenching from traditional lending markets and selling


complex, illiquid assets. The
prospective void is many tunnels
wide. Of more than $6 trillion in
eurozone banks loans and bonds
outstanding, 77% were bankfinanced, compared with 48% in
the United States. Apollo is filling
the space and scooping up these
assets. Likewise, the opportunity
in emerging markets is vast and
growing: Bond issuance sat at just
$300 billion last year, compared
with $4 trillion worldwide.
Then theres energy. As the past
few years have borne out, the Shale
Revolution awakened ambitions
bigger than many energy companies balance sheets. Theres
a need in two forms: additional
financing and selling assets outright. Witness Apollo investment
vehicle Jupiter Resources recent
$2 billion acquisition of Encanas
(ECA) Bighorn assets in Alberta.
3. The Cash Conversion Cycle
The last source of opportunity
comes from to the uniqueness
of Apollos revenue model, which
lends itself to short-term cyclicality despite relatively solid longterm value creation. As above, the
majority of its revenue is derived
from recurring management fees
(typically 0.5% to 1% of assets) and
carried interest (20% of fundlevel profits). Because its funds
have a lifecycle raising money,
investing it, harvesting profits, and
liquidation and the actual rate
of return cant be predicted, the
timing and magnitude of carried
interest income are lumpy, variable,

Apollo Global Management


and somewhat uncertain. Some
years, as recently, its huge. Others,
its virtually nonexistent.
In recent years, Apollo has realized a windfall in carried interest
from its credit crisis-vintage funds,
capitalizing on bargain-priced
assets from 2008 to 2010. Today,
markets have run skyward, values
and distress are scarce, and Apollo
has harvested profits from a few
huge winners like short-term
carried interest income. In turn,
the market has soured on Apollos
prospects, wondering whether its
previous successes can be replicated. This fundamentally misunderstands Apollos profit model, which
mirrors its funds lifecycle. While I
dont expect recent years outsized
profits to recur, cycles happen.
When ebullience gives way to
pessimism, Apollo will again find
distressed, value-priced, or otherwise-compelling investments.
That gets to the broader point.
Carried interest income is unpredictable in the short run, but provided Apollos investment chops
remain, its relatively reliable in
the long run. Investors, in their
short-term view, have unduly discounted the probability and magnitude of future carried interest
income. For investors with a long
view, thats created opportunity.

financials and valuation


Despite a seemingly Greek godsized market opportunity for
Apollo, my valuation assumptions
arent particularly heroic. Acknowledging that previous years investment opportunities are unlikely to
recur, I expect private equity AUM

S
15

to marginally decline 15% over the


Also, Apollos ability to charge large
next four years, then grow at a 3%
fees, lock up capital, and raise large
annualized rate. In credit, I expect
sums depends on its track record.
AUM to increase at a 4% rate, on
If Athene terminated its manaccount of the opportunity set in
agement agreement with Apollo,
banking and energy, and for the
that would be bad. Acknowledging
percentage of Athene assets
the institutional disruption,
invested in Apollo funds to grow
switching costs, and confusion
from 17% to 50% over 10 years.
associated with transferring a
Balancing Apollos superlative
near $60 billion pool to another
track record against a larger asset
party, I think thats unlikely.
base, my base case valuation
Because Apollo uses leverage
assumes 13% annualized returns
in many of its funds, a lock-up in
in private equity (versus 39%
credit markets could prove tempohistorically) and 9.5% in credit
rarily or perhaps permanently
funds (versus 18% annualized).
disruptive. But I dont worry too
Currently, Apollos carried interest much. Apollo weathered the credit
revenue streams are taxed at the
crisis admirably and managed to
capital gains rate, and its manage- raise large funds throughout.
ment fee-related income subject
Finally, Apollo is treated as a
to negligible taxes, because it is
partnership for tax purposes, so
structured as a partnership. Over
if youre unwilling to deal with a
time, I anticipate that Apollos
Form K-1, steer clear. Likewise, if
earnings streams will be taxed at
Apollo were taxed as a C corp, it
the ordinary federal income tax
would have to pay much higher
rate and have accounted for that
taxes. My valuation assumes that
in my valuation. Finally, Apollo
all of Apollos income streams are
has several balance sheet assets,
eventually taxed at the ordinary
which I peg at roughly $4.50 per
federal income tax rate so I dont
share after accounting for taxes
worry too much in the long run.
and a slight discount for uncerEven so, if legislation mandated a
tainty. Add it all up, and I see the
change in Apollos tax treatment,
stocks fair value at $42.
expect the stock to take a drubbing.

Risks and when to sell

The Foolish Bottom Line

Atop the list of risks is the departure or death of co-founders Black,


Harris, and Rowan. Harris and
Rowan are young, and based on
their tenure and substantial equity
investment, I doubt either will leave
soon. Since the investment business principle asset is human capital, mass departures of high-level
employees would be worrisome.

A business with wonderful economics, a potentially transformative partnership, still-strong prospects, and a stock priced at a mere
9 times normalized free cash flow?
Thats the stuff unconventional
even Foolish investment stories
are made of. S 15

Stocks

for disclosures, see page 50

The Motley Fool 11

Civeo
Man camps are all the rage where energy production
is booming, and this recent spinoff stands to profit

Jim Royal
TMFRoyal
Special Ops analyst

Why Buy
CVEO?

1 Natural resources remain a key driver of global growth,


and theyre increasingly found in more remote areas,
requiring Civeos housing services.
2 The stock is currently undervalued, and the proposed
conversion to a REIT would drive upside even higher.
3 With the REIT conversion would come a substantially
higher dividend.

Remember the old saw that the only people who profited from the
gold rush were those who sold picks and shovels? Whether that
was ever true, today Civeo (CVEO) makes money on our need for
natural resources by supplying the man camps that shelter workers in far-flung drilling or mining locations. Combine that pressing
need with activist investors pushing for value aiming to convert
the company to a real estate investment trust and you have good
upside on a thriving business.

The Company
Civeo provides short- and long-term accommodations to workers
in resource-extraction industries. It acquires the land, develops the
property, and installs full-service housing facilities. Civeo allows
resource companies to run their operations more efficiently, since
12 The Motley Fool

Stocks

Civeo

NYSE CVEO
CAPS Rating 5
glassdoor
3.0

9 ceo approval n/a

employees can find housing


quickly and those companies dont
have to invest in infrastructure,
with all the hassles that entails.
Civeo deals largely with blue-chip
clients in resource areas that have
30 to 40 years of production,
offering stability.
Civeo provides nearly 23,000
rooms in what it calls lodges
or villages in three countries:
Canada, Australia, and the U.S. It
also manages short-term, rapidly
deployed mobile facilities for drilling crews. In 2013, 77% of revenue
came from long-term lodges or
villages, with the remainder from
short-term facilities. Operations
are heavily focused on the met
coal-rich regions of Queensland,
Australia, and the oil sands
regions of Alberta, Canada.
Civeo uses several strategies
to compete effectively. First,
the company engages in landbanking, buying land in strategically located regions, helping it to

market cap $2.7 billion


cash $265 million
debt $323 million
yield 2.0%

move quickly as those areas


develop. Second, it designs and
manufactures its own facilities,
helping it to satisfy needs quickly. Third, it operates full-service
locations including catering,
housekeeping, and maintenance
making it a turnkey solution.
Its 5,200-room Wapasu Lodge
in Canada is the second-largest
housing facility in North America,
trailing Las Vegas MGM Grand. It
also charges hotel-like prices, at
more than $130 per available room
in Canada last year. But unlike a
hotel, its lodges feature take-orpay contracts, usually from two to
five years in length, and contracts
have annual rent escalators.

The Opportunity
Civeo operated as part of Oil
States International until mid2014, when the parent spun off
Civeo under pressure from wellrespected activist investors JANA

Where the Work Is (2013)


Revenue

68%
Canada

25
Australia

7
US

EBITDA

63%
Canada

33 4
Australia US
Data from Civeo

Stocks

recent price $25.07


buy guidance $32

data as of 8/12/14

Partners and Greenlight Capital.


The spinoff is key to the stocks
real upside, tilting the reward-forrisk strongly in our favor.
Spinoffs are a great place to troll
for cheap stocks, because theres
an information lag. Few investors
know of the spinoffs, and it takes
time for investment banks to begin
to provide research coverage of
them. Nimble investors have an
advantage before the merits of the
stock are known far and wide.
Thats not the only event working in our favor. Greenlight and
JANA pushed for Civeo to be spun
off with the understanding that
management would attempt to
convert the company into a real
estate investment trust. Execs are
making that valuable move now
for a few reasons. First, REITs pay
no taxes. Second, in exchange for
this privilege, they pay out a huge
portion of funds from operations,
meaning they have high dividend
yields. Third, because of these
advantages, REITs trade at high
valuations. Buy a stock before
conversion and watch as other
investors push it up.
All of this presumes that Civeos
core business is stable, which it has
been, though there was a blip in
2013, with revenue down 6%
because of low met coal prices.
Still, the world will keep needing natural resources, and those
resources will increasingly be
found in out-of-the-way places.
For example, investment in the oil
The Motley Fool 13

S
15

Civeo
sands the key driver for Civeos
Canadian operations is expected
to grow steadily from about $27
billion last year to $33 billion by
2020. Resource companies want
to focus on what they do best and
outsource the mundane function of
housing to an experienced operator.
While the U.S. is just a small
part of Civeo now, only 7% of 2013
revenue, it could become much
larger soon. High oil prices have
revitalized Americas oil industry,
and the U.S. is expected to become
the worlds largest oil producer in
late 2016.

Financials and Valuation


Pre-conversion, Civeo trades at a
reasonably cheap price, but the real
reward comes if the IRS allows
it to become a REIT. At todays
price, its enterprise value comes to
about 8 times trailing EBITDA of
$429 million, while its market cap
is priced at less than 9 times my
estimate of funds from operations.
The latter price implies almost no
growth priced into the stock just
what we want to see.
So how much could Civeo
be worth if it becomes a REIT?
Plenty. A sample of lodging REITs
I examined typically traded at 17.7
times EBITDA. At just 15 times,
Civeos stock would trade at $55. In
terms of FFO, the average REIT
trades at 17.7 times, higher than the
long-term average of 15.7 times. At
multiples of 15 and 17, Civeos stock
price would be $47 and $54. Even if
these numbers are off, the implied
margin of safety is huge. And you
get a 2% yield today while waiting
for a much bigger yield tomorrow.
14 The Motley Fool

could implode, meaning infrastructure projects huge consumPrice to Funds From Operations
ers of steel made with met coal
current historical
Civeo
would be quickly cut. A Chinese
crash could really hurt Australia,
17.7
which hasnt had a recession in
15.7
more than 20 years because of
Chinas rapid industrialization.
Plus, a slowing China could hurt
9.0
oil prices. Civeos best defenses are
long-term contracts, extending
beyond what would likely be only
temporary downturns. However,
a prolonged Chinese recession or
data from Civeo even depression could really strain
Civeo, making it a sell.
Risks and When to Sell
Finally, much of the upside in
Civeo rests in its achieving REIT
The global economy will continue
status, with all the benefits that
to demand resources over the long
confers. That process can be
term, but commodities prices can
time-consuming, and a conversion
be volatile over shorter periods.
may not happen for as long as two
Declining energy prices, for
years. The IRS has been scrutinizinstance, could make Canadian oil ing non-traditional REITs more
sands profitable above roughly
closely recently, too. If Civeo fails
$65 per barrel of oil less attracto convert, the potential reward for
tive to exploration companies.
the risk is not nearly as attractive.
Civeos revenue from Canada
That would be an immediate sell.
comprises 68% of its total,
meaning its heavily exposed. Yes,
The Foolish Bottom Line
it signs longer-term contracts,
and exploration companies think
At a price in the mid-$20s, Civeo
longer out, too, mitigating the
makes a compelling buy with
risk. Stable to slightly growing oil
a huge catalyst in the form of a
prices around $100 per barrel keep REIT conversion and a much
everyone consumers, companies, larger dividend. With big-name
and Civeo content. If oil falls
activist investors pushing for the
with no possibility of rising again,
conversion and a still-cheap price,
then it could be time to sell, but I
Civeo offers significant upside
dont foresee this outcome.
with modest downside. Buy up to
The second major risk is China, $32. S 15
because of its outsize influence
on Australia, where Civeo derives
25% of revenue, largely from met
coal miners. Many reports from
China suggest that the economy
REIT Average Multiples

Stocks

Dime Community Bancshares


The regional bank is a solid performer
that doesnt cost a pretty penny

Anand Chokkavelu
TMFBomb
Fool.com editorial director

Why Buy
DCOM?

1 Dime has a track record of savvy lending that compares


favorably to just about any bank out there.
2 Its metrics are understated in bull markets.
3 Todays price offers a good deal and strong dividend
yield.

Founded a year before the end of the Civil War, Dime Community
Bancshares (DCOM) has served the New York City area longer than
its home borough of Brooklyn has been a part of New York City.
Today, its 25 branches span every borough except Manhattan, plus
parts of Long Island. Like Brooklyn a decade ago, it flies under the
radar. But as you may expect for a bank thats been around for 150
years, Dime is built to last.

The Company
Lets start on a down note: Fans of flashy growth should probably
move on to the next Stocks 2015 pick.
Its true that Dime is projecting 8% to 10% asset growth for 2014,
but over the past decade, its assets have grown by only 3% a year, and
its earnings per share have shrunk slightly. That said, in banking,
huge growth can be as much a danger as an opportunity; banks that

Stocks

The Motley Fool 15

Dime Community Bancshares



NASDAQ DCOM
CAPS Rating
2
glassdoor
3.4

9 ceo approval n/a

grow via bad loans get accolades


now, only to pay the piper a few
years later.
Fortunately, Dime is the
opposite. Its performance is
more impressive than it appears
because its conservatism dims
its results during good times, yet
makes them shine through in bad
times. For example, as so many
banks (good and bad) took bailout
loans, Dime didnt extend its hand
and was solidly profitable the
entire time.

market cap $555 million


cash n/a for a bank
debt n/a for a bank
yield 3.7%

data as of 8/12/14

of loans outstanding. The 203%


means the rental income generated
by the properties is more than double the ding of the loan payments.
Meanwhile, two-thirds of its
loans are shorter-term adjustablerate loans (five to seven years). The
result is that more than half of its
loan book will reach maturity or be
up for an interest rate reset within
five years. If interest rates rise,
Dime should be able to replace
those loans on more favorable
terms.
Where Dime isnt strong is in
The Opportunity
how it funds its loans and other
assets. Deposits comprise the
Strong loans are Dimes calling
cheapest funding source for banks,
card. Even among conservative
but Dimes only support about 60%
peers, it stands out. Check out its
of its assets and about a third of
bad loan percentage versus that of
those deposits are via higherbanks Warren Buffetts Berkshire
priced CDs. Its had to make up the
Hathaway holds in its portfolio
difference largely through borrowspecifically because of their
ings from the Federal Home Loan
conservative lending:
Bank of New York. This is a normal but costly practice in banking.
Nonperforming Loans
To give you a feel for the land3.7
scape, Dime has been able to make
loans at interest rates averaging
4% to 5%. Meanwhile, its funding
current
2.6
2.6
sources average less than 1% for
worst in
deposits, less than 2% for CDs, and
past 10 years
1.8
between 2% and 3% for FHLBNY
1.4
loans.
Having to use an increasing per0.8%
0.7
centage of those costly FHLBNY
0.3%
loans has caused its net interest
margin to clock in slightly below
U.S. Bank
M&T Bank
Wells Fargo
Dime
its well-run peers.
dcom
usb
mtb
wf
Dime compensates for that
data from Standard & Poors Capital IQ. funding disadvantage not only by

16 The Motley Fool

When you dive into Dimes loan


portfolio, you see that Dime specializes in lending for apartment
buildings. To use industry parlance, about 80% of its loan portfolio is in multi-family residential
lending. Most of the rest is in
commercial real estate lending.
These loans are generally riskier
than regular old home loans, but
Dime mitigates this risk by using
stringent lending standards to lessen the chance of default and issuing
shorter-term adjustable-rate loans
to decrease the interest rate risk.
For example, on the multifamily side, its maximum loan-tovalue ratio is 75%, and it requires
120% coverage of the loan payments. Its weighted averages for
these two metrics as of its latest
annual report are 56% and 203%.
The 56% means the value of Dimes
collateral (e.g., the apartment
buildings) is almost twice the size

recent price $15.05


buy guidance $16

Stocks

Dime Community Bancshares


having fewer of its loans sour but
also by running wickedly efficient
operations. Since it doesnt have
to run so many branches to collect
those low-cost deposits, its able to
spend a lot less money than most
other banks do on its operations.
An efficiency ratio below 60 is
generally pretty darn good. Dimes
latest reading was 48.5.
Dime is a very conservative
lender with a focus on financing
apartments and businesses. Using
business textbook-speak, its juicing its low fixed-cost operations
with high-variable-cost FHLBNY
loans to take advantage of lending
opportunities at the margin.
To lend some perspective, lets
see how Dimes doing on the bottom line and what all this is going
to cost us.

Financials and Valuation


We can see that there are some
puts and takes to Dimes business
model. Distilling the model down
to numbers, Dime is throwing off a
return on assets of 1% and a return
on equity of just over 10%. Those
are solid returns and, more importantly, its been consistently making those kinds of solid returns for
the past decade and a half.
Pricewise, Dime is selling for
reasonable multiples: 1.5 times
tangible book value and 13 times
earnings. Thats not dirt cheap, but
its a good price for a good bank.
Further, Dimes showing love to
its shareholders by paying out
almost half of its per-share earnings as dividends, resulting in a
3.6% dividend yield.

S
15

Risks and When to Sell


The investing thesis on Dime rests
squarely on its ability to maintain
its discipline in continuing to find
favorable lending opportunities.
Its business model cant withstand
too many lending errors.
First, a lack of a strong deposit base (in relation to its assets)
means that funding is inherently
costlier and riskier than it otherwise would be. In addition, unlike
banks that originate tons of individual home loans, Dimes apartment and business lending means
larger loans and larger loans
mean more eggs in fewer baskets.
On the other hand, if Dime plays
it too safe, the danger is chronic
underperformance. Over the past
decade and a half, its done a great
job of balancing its conservative
lending with its riskier business
model. CEO Vincent Palagiano
has been at the helm throughout
that span, which bodes well. That
said, we should be vigilant for any
signs of increased risk-taking.

The Foolish Bottom Line


Dime Community Bancshares
does a great job of identifying
loans that dont sour. At todays
price, its stock appears to be offering that same quality to investors.
S 15

for disclosures, see page 50

Stocks

The Motley Fool 17

Dominos Pizza
The world leader in pizza delivery should bring home
sizzling returns as it grows around the globe

Joe Tenebruso
TMFGuardian
Fool.com writer

Why Buy
DPZ?

1 The turnaround in Dominos business may be well


under way, but strong stock gains still lie ahead.
2 Dominos continues to take a bigger slice of the
massive and growing pizza market.
3 Tremendous international expansion opportunities
should fuel years of profitable growth.

Want pizza delivery for dinner tonight? Why not choose from a
savory selection of chicken and bacon carbonara, Tuscan salami
and roasted veggies, and Italian sausage and pepper artisan pizzas?
Or maybe you prefer a delicious dish of penne pasta or a perfectly
made sandwich. No, Im not talking about ordering from some fancy
upscale Italian restaurant. Im referring to the new menu youll find
at your local Dominos Pizza (DPZ).
Millions of people worldwide are turning to Dominos for a fast
and surprisingly tasty meal. While you could have mistaken a slice
of Dominos pizza for a piece of cardboard dipped in ketchup in the
past, the company has owned up to its mistakes, revamped its menu
and brand image, and even earned a reputation for innovative new
technologies. Its stock has followed suit, but while the companys
turnaround is well under way, I believe its stock price appreciation is
far from overbaked.

18 The Motley Fool

Stocks

Dominos Pizza

NYSE DPZ
CAPS Rating
3
glassdoor
3.4

9 ceo approval 82%

The Company
Founded in 1960, Dominos Pizza is
the world leader in pizza delivery.
Its mostly franchise-owned shops
delivered more than 400 million
pizzas last year, baked in 11,000
stores in the U.S. and more than 70
international markets. With global
retail sales of more than $8 billion
in 2013, comprised of nearly $3.8
billion in the U.S. and more than
$4.2 billion internationally,
Dominos ranks among the worlds
top public restaurant brands.

The Opportunity
The pizza business is huge and
growing larger; research firm CHD
Expert expects the U.S. pizza business to exceed $43 billion within
the next decade. Yet its a market
that remains highly fragmented,
with major chains only having
about 40% market share. Among
those chains, Dominos has significantly outgrown its competition,
with its 200912 U.S. same-store
sales rising 17%, compared with
7% for Papa Johns (PZZA) and
only 2% for Pizza Hut. Dominos
is also growing its share of the
delivery market, from less than
19% in 2008 to more than 23% in
2013. But where Dominos excels
is in the digital pizza sales arena,
where it earns more than 30% of
U.S. consumer online and mobile
app order spending.
The companys innovative

market cap $4.1 billion


cash $15 million
debt $1.5 billion
yield 1.4%

culture has led to technological


improvements that are increasing
profitability and customer loyalty.
Dominos new online ordering
system reduces the number of
workers needed to process an
order, thereby increasing accuracy
and costs. In addition, its recently
released iPad app allows users to
build their pizzas with highdefinition 3-D graphics and place
orders by speaking to a computergenerated voice called Dom.
Another recent creation, customer profiles, allows consumers
to reorder quickly by storing their
pizza orders and credit card information. During the first quarter,
2 million profiles were added,
bringing the total to 9 million, and
about half of Dominos mobile app
sales were made using established
profiles. All told, Dominos focus
on technology has helped it earn
45% of sales (up to 50% in recent
weeks) via digital channels. With
the world becoming more connected and mobile by the minute, thats
a powerful competitive advantage
that should serve Dominos well in
the years ahead.
Dominos is also a winner in the
social media arena, with more than
9 million fans on Facebook and
double the followers (538,000+) on
Twitter and three times as many
tweets (60,000+) as its closest
competitor. Research firm Brand
Keys recently named it the pizza
brand with the most customer
loyalty, an achievement no doubt
Stocks

recent price $73.70


buy guidance $75

data as of 8/12/14

aided by a commitment to reaching


its customers via social media.
Within the U.S., it believes
its largest opportunity lies in
improving existing stores by
focusing on customer comfort and
family-friendliness. Dominos is
working to revitalize its outdated
image with more modern designs
and has mandated a reimagining
program across its store base. It
also re-created its 50-year-old
pizza recipe from the crust up,
the new recipe has nabbed
significantly higher ratings on
customer taste tests. In fact, more
than 85% of its current menu is
new. Dominos is also not afraid to
take marketing risks. After focus
groups intimated how poorly they
thought of Dominos pizza, the
company unleashed a multiyear
campaign publicly admitting previous failures. But it also vowed to
fix the problem a promise it kept.
Dominos and its shareholders
have been rewarded for it.
An even larger opportunity
awaits Dominos in international
markets. It estimates that pizza
outside the U.S. is a $90 billion
market thats growing at about
3% to 5%. Emerging markets such
as India, Turkey, and Malaysia
are really taking off for Dominos,
but theyre also still growing at
very healthy rates in more mature
markets like the United Kingdom,
Japan, Australia, South Korea,
and Canada. Dominos has been
growing its share (at roughly three
The Motley Fool 19

S
15

Dominos Pizza
Same-Store Sales Growth
10%

international

5%

20 positive years
5.6% average

2.6% average
16 positive years

United States
-5%
1994

1998

2002

2006

2010

2013
data from Dominos Pizza

times the rate of market growth) of


what is still a far more fragmented
category within the restaurant
industry than any other category
(e.g., hamburgers, sandwiches,
Mexican food). Longer term,
management believes it can
increase its global stores 4% to 6%
annually with most of that coming
out of the international markets.
With international division samestore sales surging 7.4% in the first
quarter its 81st consecutive
quarter of uninterrupted quarterly
international same-store sales
growth (thats more than 20 years)
and with most of that primarily
driven by order count, I believe
managements goals are entirely
attainable.

Financials and Valuation


Dominos growing store base has
led to steadily expanding gross,
operating, and net margins in
recent years. Its mostly franchisebased model results in high
returns on invested capital of more
than 80%. These strong returns
20 The Motley Fool

allow Dominos to generate


significant free cash flow, which
its been returning to shareholders
in the form of share repurchases
and rising dividend payments.
From a valuation perspective,
some investors may look at
Dominos $73 stock price, see a
pizza retailer trading at nearly
30 times earnings, and conclude
that the stock is overpriced. But
as Ive explained, Dominos is
much more than just your average
pizza shop: Powerful brands with
strong competitive advantages
deserve to trade at a premium. At
about 22 times analysts expectations for 2015 earnings and with a
long-term expected growth rate of
about 15%, Dominos stock may not
scream bargain, but Im willing to
pay for quality. I peg $50 per share
as a low-probability downside for
the stock, and if Dominos continues to deliver the goods which I
consider a likelier outcome I
can easily see its stock approaching $100 per share. Thats a
risk-reward scenario that I find
attractive.
Stocks

Risks and When to Sell


Still, risks remain. Dominos
has been facing higher prices for
commodities such as pork and
dairy products, which have been
a drag on earnings. But while
commodity prices can be volatile,
Dominos has years of experience
in managing its supply chain, and
its scale advantages and mostly
franchise-based model should help
to better insulate it from these
price swings than the majority of
its competitors.
I would consider selling Dominos if it expands too quickly and
loses its focus on the quality of its
food and its store experience. Id
be very surprised, though, if CEO
Patrick Doyle, whos spearheaded
turnaround efforts, lets that happen again.
Finally, there has been controversy surrounding Dominos
executive compensation. While
I would like to see more transparency in the metrics used to
determine performance pay for
Dominos executives, I take no

Dominos Pizza

S
15

issue with a well-paid management team that delivers strong


business performance. In a recent
CNBC interview, Doyle said that
Dominos executive pay is aligned
with shareholders returns, and
that if shareholders suffer, so will
the formers pay. Ill take Doyle at
his word, but if he gives me reason
to lose that trust, I will be forced
to reconsider my bullish view on
Dominos as an investment.

The Foolish Bottom Line


Dominos is a pizza powerhouse
with an innovative culture that
should allow it to profit from the
tremendous international growth
opportunities that lie before it. I
fully expect sizzling returns for its
investors in the years ahead as it
continues to take share in the
massive global pizza market. S 15
for disclosures, see page 50

Stocks

The Motley Fool 21

MSCI
The company behind the pros data and analysis
is itself a compelling investment

Bryan Hinmon, CFA


TMF42
Motley Fool Pro senior analyst

Why Buy
MSCI?

1 MSCI is a great business with strong competitive


advantages and long-term tailwinds that should sustain
prolonged earnings and cash flow growth.
2 Temporary issues like heightened investment spending
and the loss of a key customer are leading some
investors to underestimate future growth and margins.
3 The sale of a non-core business and the presence of an
activist investor are positive catalysts that should keep
the investing thesis on track.

How you doin? That question may be easy enough for you or me to
answer, but ask an asset manager and the answer gets complicated.
In the investing world, the key is outperformance doing better than
an appropriate benchmark. But even doing better gets complicated;
it could mean higher performance, lower risk, minimizing tracking
error, or something else entirely. For 40-plus years, MSCI (MSCI) has
been providing tools to help us number-crunching investor types
easily answer this question and make our answer credible and transparent to regulators and other investors who demand it.

22 The Motley Fool

Stocks

MSCI

NYSE MSCI
CAPS Rating 4
glassdoor
3.1

9 ceo approval 66%

The Company
Once upon a time, the company
was a teensy, non-core, basement
operation of Morgan Stanley (the
MS in MSCI). It was spun off in
2007 , and is a leading provider of
benchmark indexes and portfolio
risk management products today.
If youve invested in international stocks, youve heard of
MSCI. Its international equity
indexes are the benchmarks
against which funds of all international stripes are measured,
and MSCI has a whopping 90%
market share. But international
stock indexes are only the beginning. More than 30% of all equity
fund assets (a cool $8 trillion) are
benchmarked to an MSCI index.
The company has created, and now
calculates on a daily basis, 160,000
indexes that span geographies,
asset classes, and investing styles.
Overall, MSCI is the top dog in the
index provider world, commanding
27% of industry revenue.
MSCI also provides portfolio
analytics software to the same client base that relies on its indexes.
It offers a comprehensive suite of
apps that focus on multi-asset class
risk reporting, performance tracking, and portfolio management.
It sounds boring, but these things
are critical business operations,
demand serious data and computing power (MSCI makes more than
400 billion computations per day!),
and are in many cases required by

market cap $5.2 billion


cash $682 million
debt $798 million
yield 0

regulatory, watchdog, and investor


stakeholders. MSCI has continuously improved its offerings by
investing in people and acquiring
capabilities despite the competitive
market.
The beauty of MSCIs business
model is that 83% of its $1 billion
in revenue comes from subscription fees theyre paid up front
and have historical renewal rates
of around 90%, which provides
excellent visibility on revenue and
cash flow.
Renewal Rate
91%

85%

2009

2010

2011

2012

2013

data from MSCI filings

The remainder of revenue


comes from licensing fees, whereby companies pay to use MSCI
indexes to manage financial
products (like exchange-traded
funds). The level of fees MSCI
earns is tied to the assets under
management of each product, so
while they vary with fund flows
and market performance, theyre
also recurring.

recent price $44.60


buy guidance $50

data as of 8/12/14

The Opportunity
MSCI is the leader at the heart
of two long-term growth trends:
adoption of passive investing
vehicles and heightened regulation of the financial sector. By
2020, passively managed assets
are expected to grow 15% per year,
from $7.3 trillion to $22.7 trillion,
riding on the back of ETFs. And
the definition of passive investing
is changing, with ETFs branching
into hundreds of attribute-specific
strategies. As choices increase,
institutions should begin to accept
ETFs more. The $1.7 trillion ETF
market could grow to surpass the
size of the mutual fund market,
growing to $15.5 trillion in a
decade. MSCI should capture its
share of that gaudy growth.
A Growing Opportunity
Passively Managed
+15% CAGR
$22.7t

ETFs

+23% CAGR
$15.5t

$7.3t

$1.7t
2012

2020

2013

2023

data from Pricewaterhouse Coopers, etf.com

Stocks

The Motley Fool 23

S
15

MSCI
At the same time, fresh wounds
from the financial crisis have
led to thousands of pages of new
regulations and made greater disclosure and transparency a cost of
doing business for asset managers.
Both regulators and investors are
demanding it, and MSCIs index
and analytics provide it.
To participate in these growth
trends, MSCI needs people to
develop products and sell them
across the globe. The impact of
these investments to support
growth look, to the casual observer,
like dramatic expense bloat. In a
typical year, investors may have
expected MSCIs annual operating
expenses to rise by $13 million
to $15 million as it rewards its
employees and hires a few more.
But 2013 and 2014 investment
operating expenses will rise 3.5
times that much. This negatively
affects short-term margins and
earnings, but over the longer term
should support revenue growth
in the low teens. Patient investors
should be rewarded as these
investments ultimately subside
and reveal structurally higher
earnings power in a few years.
Two other elements should
keep an investment in MSCI on
track. At the end of April, MSCI
sold a noncore asset, a provider of
corporate governance solutions
called Institutional Shareholder
Services, for $367 million. The
sale of ISS provides some cash to
repay debt or buy back shares, and
it should make more apparent the
higher margins of MSCIs remaining strong businesses.

24 The Motley Fool

Pretax Profit Margins


rest of MSCI
40%

39%

ISS

12%

10%
2011

2012

2013

data from Standard & Poors Capital IQ

Finally, a respected activist


investor, ValueAct Capital, owns
8% of MSCIs shares outstanding.
ValueAct has an impressive
history of making sure management teams do everything in their
power to create value for shareholders.

Financials and Valuation


Putting aside the current growthcentric investment program,
MSCI is an extremely capital-light
business. It routinely turns
roughly $0.30 of every dollar in
sales to free cash flow. That rate
of sustainable free cash flow
conversion is rare found only in
businesses with durable competitive advantages. MSCIs brand
and switching costs create
meaningful barriers to entry for
competitors and provide it with
the advantage it needs to sustain
the performance its business
model is capable of.
Over time, I expect free cash
flow growth to at least approximate sales growth, and the current
Stocks

run rate subscription growth of


about 8% suggests a fair value of
$47 per share. This suggests there
is plenty of upside to MSCIs stock.
For one, I expect the recent investments to yield higher sales growth
as investments and new products
pay off. It is also possible that the
operating leverage inherent in the
business takes hold or as improvements to the analytics business
translate to increasing market
share. This would likely cause free
cash flow to rise faster than sales
and could propel the stock above
$80. With a manageable debt load,
an advantaged business, strong
growth prospects, and highly predictable revenue and cash flows,
MSCIs stock justifies a premium
valuation multiple.

Risks and When to Sell


The largest risk facing MSCI is
an overestimation of its brand
and switching cost advantages.
In 2012, Vanguard announced it
would drop MSCI as its index
provider on 22 ETFs to save
money, so we know switching
providers isnt impossible. There
is no indication of similar moves
by major asset manager customers, but MSCI needs to manage its
customer relationships and price
increases wisely.
Another risk is the companys
ties to the financial industry.
Almost all of its customers operate
in the same industry, and 15% or so
of its total sales ebb and flow with
the performance of the markets.
This risk assures volatility, but
it probably shouldnt keep MSCI
investors up at night.

MSCI

S
15

Finally, MSCI is probably only


undervalued if it is able to grow.
Potential investors would do well
to monitor the businesss forwardlooking indicators, such as retention trends, run rates, and net new
subscription sales.

The Foolish Bottom Line


No matter the benchmark, MSCI
has been doing well. Since 2008, it
has increased sales by 140% and
profit by 226%. More importantly,
its strong business prospects seem
poised to continue. Long-term
investors should overlook the
temporary heightened spending
and be loyal subjects of the index
king. S 15

Stocks

The Motley Fool 25

Outerwall
Redbox and Coinstar kiosks are doing more than
spitting out DVDs and counting your loose change

Charly Travers
TMFCandyMountain
Guest contributor, Motley Fool Asset Management

Why Buy
OUTR?

1 Outerwalls kiosks are highly profitable and generate


stellar returns on capital.
2 The new ecoATM kiosk is an underappreciated growth
opportunity in selling used mobile devices.
3 The stock is exceptionally cheap.

Outerwall (OUTR) will look familiar to avid readers of our annual


stock reports. My Foolish colleague Rich Greifner recommended
this company in Stocks 2013, when it was known as Coinstar. Richs
investment thesis was that with the stock trading at just 9 times
earnings, the market did not appreciate the earnings power of Coinstars Redbox movie rental kiosks. Nearly two years later, Richs thesis is still on the money. Redbox is the leading provider of paid movie
transactions, and Outerwall is more profitable than ever.
Yet, the market still doesnt give this company the respect it
deserves. Now trading at less than 8 times earnings, the stock is even
more attractive today than it was two years ago. Now, two new wrinkles to the Outerwall story really grab my attention and build off of
Richs 2013 thesis.

26 The Motley Fool

Stocks

Outerwall

NASDAQ OUTR
CAPS Rating
3
glassdoor
2.7

9 ceo approval 39%

First, recognizing that its stock


is cheap, Outerwall executed a tender offer this year that reduced the
outstanding share count by 20%.
Outerwall spent $371 million to
repurchase 5.3 million shares at an
average cost of $70.07. Share buybacks when a stock is cheap create
tremendous value for remaining
shareholders, who see their claim
on future profits rise. I was excited
to see the company buying back its
stock on this scale, and even more
so that you can buy today at a far
lower price than the company did.
Perhaps even more interesting
than shrewd capital allocation is
the rollout of a new kiosk concept,
ecoATM, that allows consumers to
sell old smartphones and tablets.
If its successful, ecoATM will
reduce Outerwalls dependence on
Redbox and drive substantial profit growth over the next five years.
This profit growth could be the
catalyst for a higher stock price.

The Company
Outerwall is the owner of the ubiquitous Redbox and Coinstar kiosks
found at grocery stores, shopping
malls, and convenience stores
around the country. These kiosks
are fully automated machines that
allow DVD movie rentals and conversion of coins into cash. While
the coin-changing Coinstar kiosks
produce $100 million EBITDA a
year, the companys fortunes are
tied to the performance of its

market cap $1.2 billion


cash $233 million
debt $1.0 billion
yield 0

recent price $60.49


buy guidance $65

Kiosk Count

data as of 8/12/14

Redbox

43,600

Coinstar

21,200

18,400
13,700

ecoATM
900
2008

2009

2010

2011

2012

2013

2,000
2014
estimated

data from Outerwall filings

Redbox movie rentals, which


account for more than 80% of the
companys revenue and profit.
Redbox and Coinstar are
mature concepts that have saturated their markets. In order to
grow, Outerwall needs to develop
new kiosks that have attractive
economics and the potential for
a large installed base. Outerwall
may have found its next big thing
with ecoATM.

The Opportunity
When consumers buy new smartphones or tablets, they have a few
options for getting rid of their old
devices. Network operators like
AT&T (T) and Verizon (VZ) offer
trade-in programs where the value
of the old device can be applied to
the purchase of a new one. Alternatively, popular websites like
Stocks

Gazelle will purchase the product


outright.
Outerwalls approach is to
automate this process with a
sophisticated kiosk called
ecoATM. A kiosk has several
advantages over its competitors,
the most important of which is an
immediate cash payment, which is
something that an online shop like
Gazelle cant match.
An ecoATM kiosk has attractive
potential. One kiosk costs $35,000
to build and will generate more
than $100,000 revenue per year.
Outerwall estimates that when
the installed base is at scale, it
will generate an operating margin
higher than 20%, which is comparable to Redbox.
There were 900 ecoATM kiosks
in operation at the end of 2013,
and Outerwall will install 1,000 to
1,200 more this year, bringing the
The Motley Fool 27

S
15

Outerwall
total to around 2,000. Every 1,000
ecoATM kiosks that the company
installs increases Outerwalls annual revenue by $100 million and
its operating profit by $20 million.
Outerwalls management has,
wisely, not commented on its
views of the market potential for
ecoATM. The concept is emerging
from proof of concept into fullscale rollout, and its uncertain
how many kiosks can be built while
retaining the economics. I would
consider ecoATM to be a home
run if Outerwall can install half as
many ecoATM kiosks as Coinstar
machines, or about 10,000 units.
That installed base would generate
$1 billion revenue and $200 million
EBITDA annually. For context,
that would increase Outerwalls
total revenue and operating profit
by nearly 50% from last years
totals.
If ecoATM attains that level of
success, it dramatically increases
Outerwalls revenue and profitability. It also reduces the companys
reliance upon Redbox, which is
timely given the plethora of digital
movie streaming competitors.

Financials and Valuation


Outerwall estimates that it will
produce $200 million to $240
million free cash flow this year.
With a market cap of just $1.1
billion, the stock is exceptionally
cheap compared with the cash the
business generates. The market
is pricing Outerwalls stock for an
annual cash flow decline of 9% a
year for a decade, which drops free
cash flow to $85 million at the end
of the forecast. For this scenario
28 The Motley Fool

to happen, Redbox disappears entirely, ecoATM is a complete bust,


and Coinstar shrinks slightly. To
be fair, all of these things could
happen. But at $54, the stock is
priced as if this is a predetermined
outcome so I find the downside
to the stock to be quite limited.
The most optimistic scenario
that I am comfortable with is for
Redbox and Coinstar to hold
steady for a decade at $400 million
and $100 million EBITDA, while
ecoATM adds $200 million. This
would translate to free cash flow
growth of nearly 4% a year. Under
these conditions, Outerwalls stock
would be worth about $135.

Risks and When to Sell


We live in a world where TV
shows, music, and movies are
available on any of our devices
at any time. Sitting in our living
room and popping a DVD into the
player to watch a film seems quite
old-fashioned. Yet the 200 million
Redbox rentals in the first quarter
of this year suggest that plenty of
consumers would rather pay $1.20
to rent a physical DVD than $4.99
to stream a new-release movie
from Amazon.com (AMZN) or
Vudu. Despite Redboxs persistent
popularity, ever increasing broadband Internet speeds and the sheer
convenience of streaming will
inevitably spell the end of the Redbox kiosk. It hasnt yet happened,
but shareholders need to watch for
a precipitous decline in Redbox
rentals as an indicator that this
cash cow is cooked.
Another red flag would be if
ecoATM fails to get traction. ConStocks

sumers may find that competing


resale channels, including cellular
network providers, Apple (AAPL),
Amazon, and Gazelle are either
more convenient or more lucrative.
Shareholders should look for an
accelerating pace of ecoATM kiosk
installations and rapidly improving profitability of this business. If
these two things are not happening by the end of 2015, ecoATM is
not likely to be as successful as the
Redbox and Coinstar kiosks.
The best-case scenario is that
ecoATM is a home run, Redbox
and Coinstar remain cash-cow
businesses, and the market falls
in love with Outerwalls stock.
A growing profit along with an
increasing earnings multiple
is a powerful combination that
could lead to multibagger returns.
I would considering selling the
stock at $100, or approximately 15
times earnings, barring something
unexpectedly wonderful materializing, like a new kiosk concept.

The Foolish Bottom Line


Outerwall is a thoughtfully managed business with great care given to the allocation of shareholder
capital. The company is striking
the right balance between investing in new product development
and returning significant cash
to shareholders. I expect patient
shareholders will find this to be a
rewarding combination. S 15
for disclosures, see page 50

PNC Financial Services


The regional lender is poised to gobble up market share
on the strength of superior technology and leadership

David Hanson
TMFHurricane
Fool.com financial services bureau chief

Why Buy
PNC?

1 PNC is a hidden gem in an industry investors still love


to hate.
2 PNC is overhauling branches and integrating technology
to become a next-generation bank.
3 Investors are ignoring PNCs expanded footprint and
ability to win new business.

Since the financial crisis, being a too-big-to-fail bank has been a


double-edged sword. Behemoths like JPMorgan Chase used their
scale to gobble up rivals and expand their national footprints. The
regulatory scrutiny that followed, though, zeroed in on these
megabanks and put a serious damper on the party.
However, PNC Financial Services (PNC) finds itself in a
Goldilocks position large enough to muscle out competitors and
wring efficiencies but small enough to grow its business and avoid
the ire of Washington regulators.

The Company
Without a doubt, PNC is a massive financial institution. Its roughly
$320 billion asset base makes it the sixth-largest bank in the United
States, which, believe it or not, is just one-fifth the size of Wells Fargo
and slightly more than one-tenth that of JPMorgan.

Stocks

The Motley Fool 29

PNC Financial Services Group



NYSE PNC
CAPS Rating
3
glassdoor
3.2

9 ceo approval 76%

Today, the banking industry is


more top-heavy than ever. The
recession exposed two types of
banks: good banks and bad
banks. When times are good, its
easy for every bank to look like a
good bank leverage is easy to
come by, loans are being paid back,
and shareholders are happy. But
as Warren Buffett has said, Only
when the tide goes out do you
discover whos been swimming
naked.
Not only were the good banks
clothed, but they were poised to
help out the bad banks at a hefty
price. PNC fell into the former
category. In late 2008, as banks
went on fire sale, PNC, then strictly a Northeastern bank, acquired
Ohio-based National City doubling the banks size, expanding
its footprint in the Midwest, and
strengthening its market position
in existing markets in the process.
Despite doubling its size, PNC
wasnt finished. In 2011, it agreed
to acquire RBC Banks U.S. retail
operations. RBC focused on the
Southeastern part of the U.S., to
which PNC had almost no expoMore From Millennials

33%

believe they wont


need a bank at all

market cap $44.2 billion


cash n/a for a bank
debt n/a for a bank
yield 2.4%

sure. The deal resulted in PNCs


having a presence across nearly
half of the countrys population. In
just three years, it had gone from
well-run regional bank to national
powerhouse.
And PNC doesnt lack the business operations to thrive in its new,
larger form. The banks revenue
sources are much like highly
regarded Wells Fargos. Both rely
on traditional net interest income
(interest from loans and investments minus interest paid on debt
and deposits) for slightly more
than half of their revenue while
the rest is composed of mortgage
banking, customer fees, and providing services to medium-sized
to large companies.

The Opportunity
Youre excused if PNCs success
story eluded you over the past few
years. The media, well-known
investors, and your neighbor Bob
mistakenly still curse the banking
sector and lump all banks into the
same pile the too hard pile.
After all, some of the best share-

53%

dont think their bank


offers anything different
than other banks do

73%

recent price $81.80


buy guidance $100

data as of 8/12/14

holder returns have come from


well-run banks. Over the past 20
years, banks like Wells Fargo, U.S.
Bancorp, and M&T Bank have all
delivered total returns to shareholders price appreciation plus
dividends in excess of 1,000%,
while the S&P 500 is up 500%.
Put a bank in the hands of a conservative leader who understands
the banks strengths, and youve
got a recipe for success. I believe
PNC has that in CEO Bill Demchak, who has only been in the role
since April 2013 but has served
the bank for over a decade as the
head of its corporate and institutional banking group as well as
CFO and president.
Demchak has a vision for a new,
technologically focused banking
experience. PNC understands
that banking is a commoditized
business, and as technology improves, old-school banks will be
left in the dust. A recent survey of
Millennials (those born between
1981 and 2000) showed that 68%
believe that the way we access our
money will be totally different in
five years.

would be more excited by


a new service from Google,
Amazon, Apple, PayPal,
or Square than from their
current bank

1 in 3

are open to switching


banks in the next 90 days

data from Viacom Media Networks

30 The Motley Fool

Stocks

PNC Financial Services


In late 2013, Demchak said, We
are in the first inning at best of the
transformation of retail. He went
on to say the bank is focused on a
seamless delivery through digital
and physical space.
To accomplish this, PNC is
overhauling its branch network
(the fifth-largest in the country) to
bring the latest technology into
existing branches and develop
what it calls micro branches. The
move will help attract and retain
customers, but it will also reduce
expenses.
However, Demchak and team
are not only focused on costcutting; they also have plenty of
initiatives to boost top-line revenue as well. Expanding the banks
mortgage banking operations with
its existing customers and bringing more wealth management assets under the companys umbrella
are the main focus. Until Demchak
took over, PNC was not intensely
focused on the high-margin
wealth management business. The
new branch layout aims to focus
on these high-margin and relationship-building businesses.

Financials and Valuation


Demchaks ambitions are lofty, and
they could pay off big for shareholders. However, PNCs financial
performance is impressive before
you even consider the banks latest
initiatives. In 2013, PNCs return
on assets was 1.35% while the rest
of the industry sat at around 1%.
Despite earning superior returns,
PNC trades at just a 20% premium
to its book value. Meanwhile, other
banks with similar returns are

trading at 60% premiums to their


book values.
I believe this is mainly due to
PNCs size and investors fear
of future regulation. But Im not
sure all those fears are justified:
Yes, PNC is a large bank and will
be subject to the Federal Reserve
stress tests, like any other bank
tests, incidentally, that PNC has
breezed through each year. But
while regulations such as the
Volcker Rule, aimed at curbing
banks ability to make risky trades,
have kneecapped the stock prices
of big Wall Street banks (for which
risky trading was once a profit
center), plain-Jane PNC has
always stuck closer to its banking
knitting, making fears about trading regulations largely unfounded.
If interest rates begin to tick up,
branches become more costefficient, and fee income continues
to grow, I think a return on assets
figure above 1.5% is very attainable
for PNC. Its use of leverage is at a
very conservative level, with assets leveraged at 7 times equity. If
management increases leverage by
a modest amount, return on equity
could easily exceed 15%. Throw in
todays 2.2% dividend yield, and
investors can buy this bank with a
large margin of safety.

S
15

more capital a bank is required


to hold, the lower returns on that
equity may be.
The other question potential
shareholders need to ask is how
this PNC will operate through the
next credit crunch. Recessions
and downturns are cyclical and inevitable, and PNC has performed
well in the past. However, todays
PNC is significantly larger, and its
long history of conservative loan
underwriting could fade.

The Foolish Bottom Line


PNC is unfairly being priced as if
the market doesnt trust it to do
anything right when in fact it
has done almost everything right.
It is big enough to compete against
the mammoth banks of the world
but small enough to be agile in
the face of change. Dont let the
talking heads scare you: Successful banking is not dead. Just look
at PNC. S 15
for disclosures, see page 50

Risks and When to Sell


While PNC wont be bogged down
by all regulations, the threat of
even more of them is real. The
most worrisome for equity investors is the potential for regulators
to require banks to hold significantly more capital to protect
against losses in a downturn the
Stocks

The Motley Fool 31

Stamps.com
Small businesses count on on Stamps.com as
the go-to provider of online postage solutions

Rich Greifner
TMFTenacious
Million Dollar Portfolio analyst

Why Buy
STMP?

1 Stamps.com generates high-margin, recurring revenue


with minimal reinvestment needs.
2 The company has a pristine balance sheet and benefits
from significant barriers to entry.
3 Exciting growth opportunities in e-commerce and
high-volume shipping will help boost margins.

Suppose you could create the perfect business from scratch. What
characteristics would it have?
My perfect business would provide a valuable, differentiated
service, for which it would charge customers a recurring fee. The
business would boast a strong balance sheet, as well as sustainable
advantages to deter potential competitors. It would enjoy attractive
growth prospects, which would lead to high margins thanks to a
scalable infrastructure. And finally, the perfect business would have
minimal reinvestment needs, so that its experienced management
team could deploy excess cash in a shareholder-friendly manner.
In other words, my perfect business would look a lot like
Stamps.com (STMP).

32 The Motley Fool

Stocks

Stamps.com

Nasdaq STMP
CAPS Rating
3
glassdoor 3.6

9 ceo approval 91%

The Company

market cap $511 million


cash $53 million
debt $0
yield 0

software can automatically populate shipping information, validate


addresses, calculate the most
efficient mail class, and generate
status notifications.

Founded in 1996, Stamps.com


is the leading provider of online
postage in the U.S., serving nearly
500,000 users. For a monthly fee
plus the cost of postage, customers use the companys software to
print postage directly onto labels
or envelopes no trip to the post
office required. Users receive a
variety of discounts (up to 54%) for
different mail services (priority,
express, international, and so on)
depending on how much they ship.
Stamps core customer base is
comprised of small-business
owners who appreciate the time
savings and convenience of being
able to print their own postage at
any time. But in recent years, it has
added new features that appeal to
a new and more lucrative audience. For enterprise customers,
it offers enhanced controls and
reporting capabilities to help monitor postage spending. And Stamps
can integrate with the back-office
operations of e-commerce merchants and high-volume shippers,
making the order fulfillment
process far more efficient. Stamps

The Opportunity
Stamps business model is a thing
of beauty. The company collects a
predictable, recurring monthly fee
from its members as well as
usage-based revenue for such
things as labels and shipping
insurance. Meanwhile, Stamps
cost structure is low and largely
fixed. Once a customer is on board,
there are very few incremental
expenses required to service that
account meaning that a small
increase in user spending translates into a massive margin boost,
as you can see below.
The recent ramp-up in monthly
revenue per user is largely attributable to Stamps new enterprise,
e-commerce, and high-volume
customers. These customers tend
to stick around longer and spend
more than Stamps traditional
small-business clientele. This
represents a potentially significant

recent price $32.21


buy guidance $36

data as of 8/12/14

growth opportunity for Stamps as


e-commerce adoption accelerates.
Its recent acquisition of Ship
Station will enable customers to
use non-USPS carriers, including
UPS (UPS), FedEx (FDX), DHL,
and others. This should greatly
enhance the value of a Stamps
membership for thousands of these
merchants, driving those juicy
operating margins even higher.
And dont worry about Stamps
high margins attracting additional
competition. USPS certification
requires a 10-step approval process that takes years to complete.
Stamps is one of only three
approved PC postage vendors (it
competes with Pitney Bowes
(PBI) and Endicia, part of Newell
Rubbermaids (NWL) office products division), and easily serves the
most customers. Management pegs
Stamps market share at 80%.

Financials and Valuation


Stamps boasts a clean balance
sheet. Buying ShipStation will
consume just $50 million of the
companys $90 million in cash, and
it carries no debt. And thanks to

Delivering for Shareholders

-year
change

Users

340,300

384,900

434,500

467,600

+37%

Average Monthly Revenue Per User

$18.25

$20.20

$21.18

$21.21

+16%

Operating Margin

7.8%

17.0%

20.9%

26.7%

+242%

data from Stamps.com filings

Stocks

The Motley Fool 33

SS
15

Stamps.com
losses incurred last decade, it has a
sizable deferred tax asset that can
be used to offset taxable income
for years to come. But heres the
rub with Stamps: Under generally
accepted accounting principles,
advertising costs are expensed
immediately on a companys
income statement. Companies like
Stamps, however, often reap many
years of benefit from an advertising
campaign as the newly acquired
members stick around and pay
monthly dues. In other words, even
though advertising costs must
be expensed immediately (often
making a companys short-term
profits appear low), their benefit
accrues over time. In Stamps case,
I estimate that the lifetime value of
each new customer is 3 times the
promotional cost to acquire him
or her, meaning that Stamps is
a long-term money machine in
disguise.
Spending to attract new members is clearly a prudent use of
capital, but as Stamps spends
more to bring in those customers,
its current period margins contract. This accounting treatment
dramatically understates its true
earnings power.
I estimate that Stamps can
grow its user base from the current 492,000 to 810,000 in 2022.
Forecasting a 2% annual increase
in revenue per user as Stamps adds
more e-commerce customers, I
arrive at 2022 revenue of $250
million. Thanks to the leverage in
its lean cost structure, I believe the
company is capable of posting a
36% operating margin in 2022, up
from 26.7% in 2013. Factoring in
its cash balance and deferred tax

34 The Motley Fool

A Great Value

Customer Lifetime Value


$483

$347

3.3
Customer Acquisition Cost
$146

$145

2010

2011

2012

2013

2014

data from Stamps.com filings and analyst estimates

asset, I arrive at a fair value of $45


per share. I recommend buying at
$36 or below to achieve a healthy
margin of safety.

Risks and When to Sell


Its no secret that the U.S. Postal
Service is struggling. Postal reform
talks have consistently stalled out
in Congress, and this remains a
risk factor to monitor. Proposed
reforms to phase out Saturday mail
delivery could diminish the value of
a Stamps membership.
Stamps no-risk trial offer
seems to have angered a considerable segment of the Internet.
Apparently, many customers did
not realize they agreed to pay a
monthly fee at signup, and others
have complained of difficulty
canceling their subscriptions.
While I feel the terms of service
are clearly outlined during the
registration process, even more
transparent billing practices could
only help Stamps.
Finally, Stamps core smallStocks

business customer base is especially sensitive to economic downturns. A poor economy could cause
many businesses to cut back on
mailings or cancel their accounts.

The Foolish Bottom Line


While you and I might not send as
many letters as we used to thanks
to texting, email, and Facebook,
the U.S. mail is still the lifeblood
of many small businesses and
e-commerce merchants. Stamps
software saves these users time
and money, while providing additional functionality to help their
businesses run more smoothly.
This company has significant
competitive advantages, a sound
balance sheet, a beautiful financial model, and attractive growth
prospects as e-commerce adoption
accelerates. Buy shares of Stamps.
com and let the company deliver
for your portfolio. S 15
for disclosures, see page 50

Veeva Systems
By bringing life sciences to the cloud,
Veeva is prescribing years of growth

Simon Erickson
TMFInnovator
Rule Breakers analyst

Why Buy
VEEV?

1 Veeva presents a strong value proposition in a new


market.
2 Its proving adept at scaling its business in a lucrative
niche.
3 Excellent management tenure and ownership bode well
for this pharmaceutical company.

Lets be honest: Making drugs isnt for the faint of heart.


Pharmaceutical companies spend five to 10 years and more than
$1 billion for each new drug that gets approved. The process involves
coordinating work across multiple continents, navigating the
complexities of Food and Drug Administration regulations, and then
marketing the heck out of the winners so they can make as much
money as possible while still under patent.
Companies have done their best to manage this workflow by
setting up systems and databases to handle the documentation.
However, as companies get larger, so do the challenges. Updating
software for regulatory changes, adding new users, or deploying
internationally just add new headaches. It seems the whole industry
is in need of an answer to a bureaucratic nightmare.

Stocks

The Motley Fool 35

Veeva

NYSE VEEV
CAPS Rating
2
glassdoor 4.0

9 ceo approval 86%

Fortunately, Veeva Systems


(VEEV) has a better solution. Its
cloud-based software is tailored
specifically to pharmaceutical
companies. This addresses a
crucial pain point for customers while also giving investors a
chance to profit from a new and
fast-growing market.

The Company
Veeva is an early leader in a very
lucrative niche. The companys
software solutions help make
companies in the $1.6 trillion
life sciences industry more efficient and analytical. Veeva offers
three product lines: Veeva CRM
optimizes sales and marketing
functions, Veeva Vault ensures
FDA trial compliance and content
management, and Veeva Network
compiles customer data into a
master database. Since all of the
software is hosted in the cloud,
it can be easily accessed by sales
reps on mobile devices, updated
universally, and made available
quickly for new users.

The Opportunity
The use of cloud-based IT is still
relatively new to Big Pharma, but
Veeva has taken an early lead in
what could be a winner-take-all
industry. Last year, it had signed

36 The Motley Fool

market cap $2.9 billion


cash $346 million
debt $0
yield 0

33 of the 50 largest pharmaceutical companies, including industry


juggernauts Bayer, Eli Lilly, Gilead,
Merck, and Novartis.
Though already signing the
biggest names might seem to limit
Veevas upside growth potential,
the opposite is true: Rather than
jump head-first into a new solution,
companies typically start small to
validate their new software. Then,
once they become more comfortable, they scale it internally and
bring in more users. Teva Pharmaceutical provided an example of
this earlier in 2014, when it
announced it would replace all of its
global legacy systems with Veevas
CRM solution after excellent initial
results. With that, Teva brought
4,500 new users across 45 markets
online. Another success story came
a quarter before, with another
customer deploying CRM to 7,000
internal users across 30 countries.
Massive deployments like these
are great to see. They contribute
quickly to both the top and bottom
lines and block would-be
competitors. After all, how many
cloud-based solution providers do
you really need? CRM has been the
companys workhorse, but Vault
and Network are gaining traction
as value-added services. Scaling
customers both by adding
additional users and introducing
new products is a crucial part of

Stocks

recent price $22.84


buy guidance $33

data as of 8/12/14

my investment thesis, and Veeva


seems to be doing it very well.
Lastly, management has an
excellent track record and tenure.
CEO Peter Gassner was previously
senior VP of technology at Salesforce.com, where he was directly
responsible for building out its
platform. Not surprisingly, Veeva
has leveraged this relationship,
working exclusively with Salesforce to build out and maintain
Veevas own platform.
Two other key insiders also
worked previously with Gassner
and followed him to Veeva. Insiders own 44% of the outstanding
shares, an excellent sign of their
confidence in the company.

Financials and Valuation


Veeva is a subscription-driven
business. Its valuation depends on
how many new customers it can
sign up, the scalability of existing
customers, and retention rates.
Veeva tracks an important
metric called subscription services
revenue retention rate
essentially, same-store-sales,
or the year-over-year change in
subscription revenue from existing
customers. Keep in mind that as
relationships mature, customers
cost less to serve but bring more to
the table. Veevas SSRR has been
consistently strong.

Veeva Systems

S
15

Scalability of the Business


Subscription Revenue

Customers

+350%

Subscription Revenue
Per Customer

+108%

2011

2012

2013

2011

$0.34
2012

2013

+789%

$42m

$0.74

198

95

Cash From Operations

+4%

+118%

$147m

$33m

SSRR

2011

2012 2013

166%

159%
2011

$5m
2012

2013

2011

2012

2013

data from Veeva Systems filings

According to IDC, the global


market for public IT cloud services
is expected to grow 22% annually
for the next five years. Even though
Veeva increased its total number
of customers by 48% last year, by
my calculations, the customer
count should grow by 22% per year,
and SSRR should modestly
decrease from 166% to 127%
during the next five years. Mixing
in a bit from professional service
fees (obtained from implementation and training), my model
results in 535 Veeva customers
and $1.3 billion of revenue by the
end of 2018. Operationally, I think
this is very achievable.
Revenue Breakdown
subscriptions
$147m
service fees
$64m

$33m
$29m
2011

2012

2013

The market typically values


subscription-based companies like
Veeva (which heavily defer their
revenue and profit) using a priceto-sales multiple. Salesforce is a
peer in the CRM space that is
valued today at 7.3 times trailing
sales ($32 billion market cap
divided by $4.4 billion of trailing12-month revenue). Veeva is growing much faster than Salesforce.
However, if it were to conservatively fetch the same multiple,
Veeva would be valued at $9.5
billion $74 per share by 2018.
Thats nearly a triple from todays
$2.9 billion market cap, which
would be good for an annualized
return of 34% per year.
Veeva is a riskier-than-normal
company in a still-developing
industry, so we want to have plenty
of upside available and demand
higher returns for our hard-earned
investment dollars. Im setting the
buy guidance at $33, which would
provide a 22% annualized return
as long as the scenario above plays
out.

Risks and When to Sell


Even with the upside potential, a
lot of at-risk growth is priced into
Veevas current valuation. Last
October, Merck announced the
layoff of 8,500 research and
development employees as part
of a corporate downsizing. This
was bad news for Veeva because
Big Pharma companies have the
largest user base and offer the
most scale potential. Any extended
trend of R&D staff layoffs by large
drugmakers would put a crimp on
Veevas total addressable market
and might signal another look at
our investment.
Additionally, Veevas partnership with Salesforce.com which
was recently extended through at
least 2025 is extremely important. But since it depends on Salesforce to keep everything running
behind the scenes, its stock price
could suffer if the relationship
sours.

data from Veeva Systems filings

Stocks

The Motley Fool 37

S
15

Veeva Systems
The Foolish Bottom Line
Without a doubt, Veeva is a customer-focused company. Its goal
to create a single, international
customer master solution does not
yet exist in the pharmaceutical
industry. So as an early mover in a
new market, Veeva has the
opportunity to establish long-term
relationships that could provide
recurring revenue for decades.
Watch for customer count to
keep increasing and for cash flow
margins to swell as the business
scales. If it builds a platform that
becomes the industry standard,
Veevas stock just might be the
next blockbuster. S 15
for disclosures, see page 50

38 The Motley Fool

Stocks

Xoom
This global provider connects consumers and
hopes to revolutionize online money transfers

Jason Moser
TMFJMo
Motley Fool One analyst

Why Buy
XOOM?

1 Money transfers are a huge global market opportunity.


2 A
dvances in technology are changing the way we move
money around the globe.
3 A
digital platform, capital-light business, risk
management system, and massive opportunity make
for a compelling investment.

When we consider the greatest disrupting forces over the past


century, the Internet should certainly be at the top of the list. Its
changed virtually everything we do, from communications to content
consumption and everything in between. Take money, for example.
Today, we can transfer money across the globe at the touch of a button
thanks to technology. And Xoom (XOOM) is one company helping to
redefine this fast-changing space.

The Company
Founded in 2001 and headquartered in San Francisco, Xoom provides consumer-to-consumer online money-transfer services from
the U.S. to family and friends in 31 countries. As the company puts it,

typical customers left their home countries and moved to


Our
the United States to seek better employment opportunities and
to support their family and friends back home.

Stocks

The Motley Fool 39

Xoom

Nasdaq XOOM
CAPS Rating
2
glassdoor
2.9

9 ceo approval 64%

Heres how it works:


Origination: All transfers
originate online or with a
mobile device, so there are no
physical locations to deal with.
Funding: Transfers come from
a U.S. bank account, credit card,
or debit card. Without originating agents who accept cash,
Xoom doesnt incur the costs or
commissions associated with
physical agent-based origination and funding.
Disbursement: Customers
accept the money as they
choose (direct deposit in all
countries, cash pickup in most
countries, home delivery in the
Dominican Republic and the
Philippines).
Transaction processing: With
its proprietary risk-management model, Xoom can provide
instant fund availability while
minimizing loss risk.
Xoom makes money primarily
by transaction fees charged to
customers. These service fees vary
by country, type of funding source,
disbursement currency, and send
amount. The company also generates modest revenue from foreign
exchange spreads on transactions
where the payout currency is other
than U.S. dollars. While spreads
vary by country, they typically
range from 1% to 3% of a transactions principal amount.

40 The Motley Fool

market cap $848 million


cash $206 million
debt $0
yield 0

The Opportunity
Money-transfer services represent a tremendous global market
opportunity, and advancements in
technology are changing the way
money is moved around the globe.
According to the latest World Bank
numbers, about $414 billion in
remittances are sent by migrants
to developing countries annually,
and that number is expected to
keep growing.
To be clear, this isnt Xooms
total market opportunity at
least not yet. Its target market
today is comprised of migrant
workers here in the U.S. who
regularly send money back home.
Today, the U.S. has around 40
million immigrants, who make up
approximately 13% of the population. For context, in 2000, that
number was closer to 11%. With an
estimated $123 billion in outbound
remittances in 2012, the U.S.
continues to be the top sending
country in the world, and $81 billion of that went to countries that
Xoom serves.
Yesterdays remittance model
capitalized on a vast physical
network of locations where
customers could get their business
done. And while Western Union
(WU) has historically owned this
market thanks to its huge footprint,
those days are now numbered.
Technology is the ultimate disrupter, and Xooms digital platform,
capital-light business model, risk
Stocks

recent price $22.20


buy guidance $22

data as of 8/12/14

Watching the Trends


Gross Sending Volume
$1.6b

+51%

$1.1b
Q1
2013

Q2

Q3

Q4

Q1
2014

New Customers

117k
+6%

110k
Q1
2013

Q2

Q3

Q4

Q1
2014

Active Customers
1.1m

+34%
842k
Q1
2013

Q2

Q3

Q4

Q1
2014

data from Xoom filings

Xoom
management system, and massive
market opportunity make it a compelling investment today.
Thanks to its virtual nature,
Xoom customers dont pay any
originating agent commissions,
which cuts the customers costs
down significantly. The majority
of Xooms transfers are funded
directly from bank accounts,
which also helps lower the cost
of sales, and the fact that Xoom
isnt weighed down by the costs
of maintaining a vast physical
infrastructure gives it a distinct
advantage over its cost-heavy
competitors. Just take a look
at Xooms gross margin versus
Western Unions since 2009 the
difference is stark:

Perhaps the most compelling


dynamic of Xoom, at least for
investors, is the part customers
dont even see: its risk-management model. Its the reason why
Xoom is able to fund its transfers
in most cases almost immediately.
Approximately 90% of Xooms
gross sending volume is funded
by bank accounts through the
Automated Clearing House system,
and Xoom processes 95% of these
transactions instantly in order to
expedite disbursement by its partners. Xoom refers to this as instant
ACH, and it means that the recipients get their money immediately
after its transferred.
But customers dont see that
the transfer actually remains on

Gross Margin

Xoom
Western
Union 63

69

67

64

51%
43%

2009

43

2010

44

2011

44

2012

42

2013
data from Xoom filings

Stocks

S
15

Xooms books for up four days as


it clears the ACH process, meaning Xoom is exposed to the risk
of reversals. In simplest terms, if
the customer has already received
her money and a reversal happens
post-disbursement, Xoom has to
absorb that loss. Reasons for
reversals can include bounced
checks, invalid accounts, and fraud.
Xooms risk management technology helps it to minimize potential
losses. In fact, annual loss rates
have been 0.35% or lower of the
gross sending volume since 2010.

Financials and Valuation


At nearly 7 times sales, Xooms
stock isnt cheap by traditional
metrics, and the company is still
booking occasional losses (on a
GAAP basis, at least) as many new
tech IPOs tend to do. But
investors must understand that
this is a growth story, plain and
simple. An investment in Xoom
today is really about where you
think this business will be in five
to 10 years. Rather than focus on
predicting what the stock price
might look like in the years ahead,
look at the company as a whole and
assess its competitive position.
Xoom is projected to increase
sales 15% annually over the next
five years, which pegs revenue in
2018 at about $250 million.
Keeping its capital-light nature in
mind, managements gross margin
target of 65% to 70% seems quite
achievable, and I can easily see
the stock doubling in five years,
offering investors 15% annualized
returns, if not more. Xooms
balance sheet is also in great shape,
The Motley Fool 41

S
15

Xoom
with more than $200 million in
cash and no debt.

Risks and When to Sell


Instant ACH is a key differentiator,
as it allows the company to fund
transfers immediately. However,
it doesnt come without risks, and
any flaws in risk management
could certainly ding profitability,
at least in the short run. In 2013,
60% of the companys revenue
was tied to transfers to India and
the Philippines. Over time, this
number should decrease as the
company serves more countries,
but these are critical markets
nonetheless.
Security breaches are a
constant risk for tech companies.
Because people tend to put the
highest priority on their money,
trust that their transfers are secure is paramount. Its also worth
noting that the World Bank is
spearheading a movement called
Project Greenback 2.0, which is
focused on bringing the costs of
remittance down for consumers.
This, however, is not a Xoom-specific risk; it pertains to the entire
market, and given Xooms
customer-centric focus and lower
cost structure, I think this benefits
the company in the long run.

thats about to change, given the


market opportunity that awaits
and the progress its made. Xoom
is an exciting new company in
an important space, and if youre
looking to give your portfolio a
boost, you want this name at the
top of your list. S 15

The Foolish Bottom Line


Its a wonderful time to be an
investor as the Internet and technology continue to shape our world
and present opportunities. Xoom
has done a good job of flying under
the radar for the most part since
its January 2013 IPO, but I think
42 The Motley Fool

Stocks

XPO Logistics
This large transportation provider aims to
swallow up smaller rivals en route to rapid growth

Brendan Mathews
TMFWillSommers
Stock Advisor analyst

Why Buy
XPO?

1 XPO brings scale and technology to the fragmented


shipping industry.
2 Rapid expansion, both organically and by acquisition of
smaller providers, holds promise.
3 Its led by an experienced team, including a serial
entrepreneur as CEO.

XPO Logistics (XPO) is an exciting story in a boring industry. This


small, recently formed company aims to generate significant growth
and shareholder returns by applying scale and technology to the
trucking industry, or at least the brokerage aspect of it. It is led by its
founder, a serial entrepreneur who has assembled a team of transportation veterans. In just a few short years, XPO has rapidly grown
into a top player in a fragmented industry and it has plenty of room
to keep doing so.

Stocks

The Motley Fool 43

XPO Logistics

NYSE XPO
CAPS Rating 5
glassdoor
3.1

9 ceo approval 76%

The Company
Founded in 2011, XPO is a nonasset, third-party logistics
provider. It is essentially a
middleman between shippers and
transportation vendors: Shippers
contact XPO with loads to move,
and it arranges to have the loads
moved by shipping vendors.
XPO keeps the spread between
what it charges shippers and what
it pays transportation vendors.
It facilitates more than 25,000
deliveries per day, mostly by truck,
making it the fourth-largest truck
broker in the country.
The freight and shipping market
is highly fragmented, with the
largest player, C.H. Robinson
(CHRW), holding a 22% market
share, but there are few other large
players. The rest of the market is
shared by small operators: There
are more than 10,000 licensed
truck brokers in the United States,
but only 25 generate more than
$200 million in revenue. XPOs
strategy is to grow rapidly and
consolidate smaller competitors.
XPO believes that size can
convey a significant advantage in
the market that is, a larger
company can be more efficient
than smaller competitors.
For those reasons, XPO is in
the midst of a rapid growth strategy, often referred to as a roll-up
strategy. Typically, growth by
acquisition and attempts to
consolidate an industry fail, but
44 The Motley Fool

market cap $1.6 billion


cash $112 million
debt $103 million
yield 0

there are several reasons to think


that XPO could succeed.

The Opportunity
XPO, in its brief history, has made
huge strides toward its growth
goals via both acquisitions and
organic expansion. It is also led by
a strong management team with a
track record of success and plenty
of its own money on the line.
Since 2011, XPO has grown
rapidly. Revenue was just $177
million in 2011, and the current
revenue run rate based on last
quarter is $2 billion. The company
isnt taking its foot off the accelerator. It aims to generate $7.5 billion
in revenue and $425 million in
EBITDA in 2017. Thats a huge step
up from revenue of $702 million
and an EBITDA loss of $28 million
in 2013.

recent price $30.62


buy guidance $32

data as of 8/12/14

To meet those goals, XPO is


opening new offices and hiring
sales talent, which it calls cold
starts. Start-up requires very
little capital. Thus far, its opened
24 new offices, though the bulk of
its growth will likely come from
acquisitions. In the past two years,
it has made 11 acquisitions, including the $355 million purchase of
Pacer.
CEO Bradley Jacobs has a
strong track record of building
businesses. Prior to XPO, he
built four billion-dollar enterprises from scratch. Early in his
career, he established a large oil
brokerage and oil trading companies Amerex Oil Associates
and Hamilton Resources. After
that, he helped grow United Waste
Systems into the fifth-largest
solid-waste management company
in North America before selling

Revenue Trends and Targets


$7.5b
$282m

$2.0b

$44m

$702m
$279m

2011 2012
Q4 Q1

2013
Q1

2014
Q1

2012

2013

2014 2017
run rate goal

data from XPO Logistics filings

Stocks

XPO Logistics
it to Waste Management for $2.5
billion. Subsequently, he launched
United Rentals, which he grew
into the largest construction
equipment rental company in the
world. During his tenure at United
Waste and United Rentals, the
companies stocks outperformed
the S&P 500 by 5.6 and 2.2 times.
Jacobs has built a strong team
at XPO, including trusted lieutenants, financial types, and transportation industry veterans. The
chief operating officer worked
with Jacobs at United Rentals and
United Waste. The chief financial
officer and chief strategy officer
are Wall Street veterans focused
on the transportation industry,
which will be particularly helpful
in raising capital. Leading strategic accounts and technology are
veterans from competitors Knight
and Echo Logistics. And these
managers should be highly motivated: Insiders own more than
29% of the shares outstanding.

Financials and Valuation


XPO has $2.2 billion market cap,
along with $144 million in cash
and $102 million in debt. With
only $871 million in revenue and
losses over the past year, the stock
looks expensive. For this company,
however, trailing financials are
not particularly indicative of the
future it is growing so quickly
that its more useful to look
forward.
The current run rate is $2
billion in revenue per year, and the
companys goal is to hit $7.5 billion
by 2017. Assuming it can generate an operating margin of 5%, it

would be reasonable to expect it


to trade around 0.75 times sales,
which would be in line with C.H.
Robinsons multiple. That puts
XPOs market cap at $5.6 billion
155% higher than today. Of course,
the share count will likely also be
higher as the company uses shares
or raises equity to pay for acquisitions, but even after reasonable
estimates for dilutions, I believe it
can generate 15% annual returns
over the next three to five years,
which should significantly beat
the market.

S
15

up and consolidate to become a


major player, investors will be well
rewarded for taking the ride. S 15
for disclosures, see page 50

Risks and When to Sell


XPOs strategy and growth rely
heavily on future acquisitions.
This presents three major risks:
integration, purchase price, and
financing. If XPO is unable to successfully combine newly acquired
operations with its own, returns
could be disappointing. And if the
company overpays for acquisitions
or is unable to raise financing to
fund acquisitions, then the strategy may well fall apart.
A major reason for investing in
this company is its management
team. An executive shake-up,
particularly the exit of Jacobs,
would therefore likely render this
investment much less attractive.

The Foolish Bottom Line


XPO has set an ambitious schedule
for itself. Theres no guarantee it
will deliver the goods, but given
the companys progress so far and
Bradley Jacobs record, there is
reason to be optimistic. And if the
company does successfully scale
Stocks

The Motley Fool 45

S
15

Keeping Score
Stocks 2014

Stocks 2013

Company

Ticker

Return

Palo Alto Networks

PANW

Company

89 %

U.S. Silica Holdings

Ticker

Return

SLCA

295 %

Colfax

CFX

20

Facebook

FB

145

Capital One Financial

COF

20

Core Laboratories

CLB

57

Express Scripts

ESRX

Starbucks

SBUX

50

Yelp

YELP

ProShares UltraShort Yen ETF

YCS

41

Northfield Bancorp

NFBK

Luxottica Group

LUX

41

Winmark

WINA

Plains All American Pipeline

PAA

37

Lincoln Electric

LECO

Xinyuan Real Estate

XIN

23

Kohls

KSS

LUK

15

CalAmp

CAMP

23

Leucadia National
Coinstar

CSTR

Weight Watchers International

WTW

41

Jamba

JMBA

Geospace Technologies

GEOS

55

Boardwalk Pipeline Partners

BWP

Stocks 2014 average

1 %

S&P 500

14 %

18

Stocks 2013 average

58 %

S&P 500

43 %

Returns from 11/1/13 to 7/18/14

Stocks 2012

Returns from 12/11/12 to 7/18/14


1 trades as Outerwall (OUTR) since 7/2/13

Stocks 2011

Company

Ticker

Return

Cracker Barrel Old Country Store

CBRL

VCA Antech

WOOF

Johnson Controls

JCI

153 %

Company

Ticker

Return

Red Robin Gourmet Burgers

RRGB

251 %

91

Arris Group

ARRS

223

SYNA

185

68

Synaptics

Heineken

HINKY

61

Lorillard

Innophos Holdings

IPHS

38

The Buckle

BKE

PriceSmart

LO

150

Diamond Hill Investment Group

DHIL

134

18

Apple

AAPL

117

PSMT

15

Gap

GPS

107

Solazyme

SYZM

Wal-Mart

WMT

54

Casella Waste Systems


Teavana Holdings

CWST

17

CIT Group

CIT

TEA

33

Expeditors International of Washington

EXPD

K12

LRN

35

Li Ning

LNNGF

79

Cliffs Natural Resources

CLF

74

Stocks 2012 average

24 %

S&P 500

72 %

Stocks 2011 average

103 %

S&P 500

75 %

Returns from 11/18/10 to 7/18/14

Returns from 11/1/11 to 7/18/14


1 acquired by Starbucks (SBUX) on 1/2/13

46 The Motley Fool

Stocks

Keeping Score
Stocks 2010

Stocks 2009

Company

Ticker

Return

Company

Ticker

Return

Nike

NKE

151 %

Netflix

NFLX

1,832 %

Yum Brands

YUM

137

Dominos Pizza

DPZ

1,429

Take-Two Interactive

TTWO

95

Colfax

CFX

678

Hillenbrand

HI

84

Parker Hannifin

Olin

OLN

83

Rydex S&P Equal-Weight Materials ETF

PH

258

RTM

167

Becton, Dickinson and Co.


Somanetics

BDX

79

Tenaris

TS

139

SMTS

67

Guess

GES

75

Compass Minerals

CMP

62

DLB

66

CHL

29

Dolby Laboratories
XTO Energy

China Mobile

XTO

17

Devon Energy

DVN

15

Stocks 2009 average

518 %

Stocks 2010 average

80 %

S&P 500

135 %

S&P 500

97 %

Returns from 11/5/08 to 7/18/14


1 a subsidiary of ExxonMobil (xom) since 6/25/10

Returns from 11/16/09 to 7/18/14


1 a subsidiary of Covidien (cov) since 7/27/10

Stocks 2008
Company

Stocks 2007
Ticker

Return

Company

Ticker

Return

Portfolio Recovery Associates

PRAA

373 %

Centene

CNC

202 %

Starbucks

SBUX

267

First Cash Financial Services

FCFS

174

Fomento Econmico Mexicano

FMX

249

IBM

IBM

141

Intuit

INTU

190

Oakmark Select Fund

OAKLX

86

Brinker International

EAT

135

Urban Outfitters

URBN

53

Spectra Energy

SE

131

Paychex

PAYX

43

CVH

BAK

Marvel Enterprises

MVL

96

Coventry Health Care

Thor Industries

THO

87

Braskem

Faro Technologies

FARO

79

Marchex

CM

49

Chicos

CHS

23

JSVAX

30

Abercrombie & Fitch

ANF

33

chic

16

Pulte Homes

PHM

34

Stocks 2008 average

142 %

LOGI

61

S&P 500

60 %

Logitech International
Sprint Nextel

63

Canadian Imperial Bank of Commerce


Janus Contrarian Fund
Charlotte Russe

Returns from 11/27/07 to 7/18/14


1 a subsidiary of Walt Disney (DIS) since 12/31/09
2 private since 10/13/09

S
15

Stocks

MCHX

Stocks 2007 average

35 %

S&P 500

68 %

Returns from 11/28/06 to 7/18/14


1 acquired by Aetna (aet) on 5/7/13
2 merged with Softbank on 7/10/13

The Motley Fool 47

S
15

Keeping Score
Stocks 2006

Stocks 2005

Company

Ticker

BioMarin Pharmaceutical
Pixar

BMRN
PIXR

United Natural Foods


Brookfield Asset Management
Markel
Bridgeway Large-Cap Growth Fund
Harley-Davidson

Return

Company

Ticker

483 %

BioMarin Pharmaceutical

bmrn 1,170 %

302

Deckers Outdoor

deck

503

UNFI

117

Walt Disney

dis

259

BAM

110

Shimano

shmdf

155

MKL

102

BRLGX

78

iShares Russell 1000 Growth ETF


Par Pharmaceuticals

117

21

LEIX

20

crdn

PalmOne

pLMO

44

Ultralife Batteries

ulBI

75

Deswell Industries
R.H. Donnelley

dswl

75

46

Patterson-UTI Energy

PTEN

21

Urban Outfitters

URBN

Headwaters

American Eagle Outfitters

iwf
prx

Lowrance Electronics
Ceradyne

Hdi

Outback Steakhouse

Return

OSI

AEOs

12

HW

64

RHD

100

Stocks 2006 average

99 %

Stocks 2005 average

163 %

S&P 500

88 %

S&P 500

106 %

Returns from 11/22/05 to 7/18/14


1 acquired by Walt Disney (DIS) on 5/5/06
2 private since 6/14/07

48 The Motley Fool

Returns from 11/23/04 to 7/18/14


1 private since 10/1/02
2 acquired by Navico Holding on 3/8/06
3 acquired by 3M (MMm) on 11/29/12
4 a subsidiary of Hewlett-Packard (HPQ) since 7/1/10
5 bankrupt since 5/29/09

Stocks

Keeping Score
Stocks 2004
Company
Oxford Health Plans

Stocks 2003
Ticker
ohp

Return

Ticker

Return

247 %

Activision Blizzard

ATVI

978 %

QSII

586

GRMN

179

Quality Systems

Alderwoods Group

awgi

139

WPP

WPPGY

253

COGN

158

se

132

Cognos

Guangshen Railway
Cephalon

GSH

108

Cheesecake Factory

CAKE

101

CEPH

73

Ligand Pharmaceuticals

LGND

91

Bandag

bdg

40

Cemex

CX

75

Lone Star Steakhouse & Saloon

star

31

Alliance Capital

AC

71

Chicos

CHS

62

DHB

97

Noven Pharmaceuticals
Expedia

NOVN

DHB Industries

expe

49

98

Hollywood Entertainment

HLYW

31

W.P. Stewart & Co.

WPl

FindWhat

FWHT

Stocks 2004 average

68 %

S&P 500

134 %

Returns from 11/24/03 to 7/18/14


1 acquired by UnitedHealth Group on 7/29/04
2 acquired by Service Corporation International on 11/28/06
3 a subsidiary of Seven & I since 11/8/05
4 a subsidiary of Teva Pharmaceuticals (TEVA) since 10/14/11
5 private since 6/30/07
6 private since 12/13/06
7 bankrupt since 4/14/10
8 acquired by Inuvo (INUV) on 3/1/12

Company

Garmin
7-Eleven

S
15

Stocks

100

Stocks 2003 average

191 %

S&P 500

177 %

Returns from 12/10/02 to 7/18/14


1 acquired by IBM (IBM) on 1/31/08
2 a subsidiary of Hisamitsu Pharmaceutical since 8/26/09
3 acquired by IAC/Interactive (IACI) on 8/8/03
4 acquired by Movie Gallery on 4/27/05
for disclosures, see page 50

The Motley Fool 49

S
15

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50 The Motley Fool

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S
15

Published by
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