Motley Fool Hidden Gems Investing - Motley Fool Money: 01.29.2010

Episode Date: January 29, 2010

Apple introduces the iPad. Toyota issues a massive recall. And Amazon.com, Microsoft, and Netflix report big earnings. On this week's Motley Fool Money Radio Show, we'll tackle those stories, talk with Washington Post tech columnist Rob Pegoraro and Trade-Off author Kevin Maney, and share three stocks on our radar. Plus, we'll talk about the iPad that Apple isn't telling you about.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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The best things in life are free. But you can give them to the birds and bees. From Fool Global Headquarters, this is Motley Fool Money. Hey, thanks for joining us. I'm your host, Chris Hill. I'm joined by Motley Fool Senior Analysts Seth Jason, James Early, and Shannon Zimmerman. Guys, good to see you. Good to see you, Chris.

Coming up, we'll talk about the iPad Apple doesn't want you to know about, another monster week for earnings, so we'll go through some of those numbers, and we'll give you a look at a few of the stocks that are on our radar. But let's start with the big news of the week, guys. On Wednesday, with seemingly the whole world watching and the vice president sitting nearby, the man of the hour entered the room to thunderous applause. Now I'm not talking about President Obama. I'm talking about Steve Jobs.

with former VP Al Gore sitting in the front row. Jobs took to the stage at the Yerba Buena Center for the Arts in California to unveil Apple's long-awaited tablet computer, the iPad. So guys, obviously so much written about the device itself. Most of which we can't repeat. A lot of which we can't. But from the standpoint of shareholders, Shannon, I'll just start with you. How big a hit does Apple need the iPad to be? Well, I don't think it needs to be an especially big hit. If your question's about whether or not it's going to move the needle on the stock price, I guess that's an open question. We were talking about this a little earlier in the day. To me, there is a battle shaping up. So, Apple and Google, that battle is already underway.

Apple and Amazon. So, to the extent that the iPad can take market share away from Amazon and the Kindle, I think that's an interesting development that ultimately, if Apple wins that battle, could move the stock price. Otherwise, it looks like a cool device, A big iPhone, but to me, beyond that, not too exciting. I don't even think it's cool. And I'm an Apple guy. James loves Apple. James, you're completely in the tank for Apple.

You know what? I figured this out. This is like the El Camino of computing. If you know what El Camino was, it was like the Chevy car truck. It was the station wagon with a pickup bed. It was never popular, and this is why tablet PCs are just tablets that have not caught on. They're kind of neither of either world. If you want an iPhone without the phone or an iMac without the Mac, this is your computer.

This is the thing for you. If not, what does it do? What do you mean? It does all the stuff your iPhone does, except you need a purse to put it in. Usually, as harsh as I am on Apple, and it's fun to be harsh on Apple, usually when they bring out one of these products, there's something that surprises me. There's something there I've never thought of, and I have to eat a little bit of crow, and this was like a Microsoft product release. Every single detail had been pre-leaked to the press.

There was nothing new at all, and so that explains, I think, the reaction of most of the tech world, which is meh at best. If you're Jeff Bezos at Amazon, are you quaking in your boots right now? Like, how scared should they be over there? I don't know if you're quaking in your boots. I am an iPhone owner. I'm very happy with my iPhone. I don't even mind the reading experience on the iPhone.

So I guess I'm not a good candidate for the iPad. But to the extent that, you know, you have battery life that supports, I guess, 10 hours, according to Steve Jobs. We'll see if that's actually true. and a reading experience that's going to be nicer because it's in color, then maybe that is something that I think people that are going to buy the high end of the Kindle, which is priced around $500, they might consider buying the low end of the iPad, which is about $500. I think that this will grab a few people who might be on the fence about a Kindle,

but I think that most people who are actually ponying up for a Kindle are in it for the e-ink screen. And also the lower end Kindle, which is the vastly more popular one, is only going to get cheaper and cheaper. And black and white is really what you need when you're reading. I mean, that's what most books come out in, black and white. So I don't see, I mean, there's definitely going to be a fight here. The thing is that Amazon can just very easily lower some prices, and history has shown that this is a pretty elastic market. So when they do that, they're going to move more people in.

And I think it's between Apple and Amazon. I think the Nook, Barnes & Nobles, I think they're cooked. How very Seussian of you. Yes. But I really don't think that anyone at Amazon is frightened right now. Well, one thing I would add to the mix, too, is that, you know, iPhone, fantastic design, useful device. What really revolutionized it, and I think made it a gigantic hit, was the App Store. And so that may be a dynamic that Apple is hoping to carry over into the iPad. All the apps apparently are going to run on the iPad scaled up.

But who knows? Apple, when they launched the iPhone, certainly wasn't anticipating that it would become a Swiss Army knife kind of device in the way that it has. Who knows what the development community might do around this laptop computer that will be able to run all these very cool apps that you can now run on an iPhone. Or might not if they don't perceive the demand there. Yeah, I think we need to talk about what we're not talking about, too, which is where's the media connection? Where are the magazine subscriptions and the TV? That was sort of talked about a couple of weeks ago, and that just kind of fizzled out. Yeah, but I think they stuck the knife in and twisted it. Because you don't need to buy the New York Times or anything on an app on a nine-inch screen.

If you've got a browser on a nine-inch screen, you just go to the website. Shannon and I talked about this earlier in the week. We think people actually, and I think most of us who are fans of paid journalism and would even pony up for it, but the only way any of us is going to do it is if they sort of all turn to paywall on at the same time because otherwise we're going to go to the free site because we're lazy and we're all cheap. So until that happens, I don't think this changes anything for the old media either. All right. A busy week in Washington, D.C. President Obama delivered his State of the Union address. Congress grilled Tim Geithner over the bailout. Ben Bernanke won Senate approval for another four-year term. And on Friday, the government reported that the economy grew 5.7 percent in the fourth quarter, fastest pace in six years, and let's face it, faster than was expected. Guys, let's just go around the horn here. Seth, what was your headline of the week coming out of Washington, D.C.? I wish we were on the iPad video so you could see me yawning about that GDP number.

The headline for me, though, was new housing sales, new home sales, sort of second lowest on record. What that means is bad things because typically in the past, new home sales have sort of led us out of the recession. Now, maybe we're getting near a bottom. You've got to find a bottom sooner or later when you're only selling 30,000 houses or something in a month. 23,000, actually, in December. Tying a low set in December 1966, according to calculated risk. That's bad. It's as bad things about the economy.

James? Chris, my headline actually does not come out of Washington, D.C. It is a little more international. It's the Greek sovereign debt situation. And here in the U.S., we think of Greek food, maybe, and one of those little triangular things with the spinach. Oh, we think of the Parthenon. And you're a big fan of Greek yogurt, are you not? I do.

Yes, that's right. Well, actually, no. I'm giving up dairy and grains for a month. I'm going to see how I feel. Good luck with that. We're going to need an IV in here. But anyhow. Isn't the iPad apt for that?

Even in the EU, Greece is like 2% or 3% of the total GDP. But the point being, if Greece were to default and require an EU bailout, and there's mixed reports on whether the EU will actually do this, this could seriously undermine the cohesiveness of the whole EU, which could cause some serious currency ramifications. Didn't we have a preview of this with Dubai? Yeah, yeah, but Dubai was a standalone. Greece itself is a tiny country, but the fact that it's connected to so many bigger ones,

because then you could have Spain, then you could have Portugal and whoever else is struggling right now. You have a lot of EU countries with high teens to 20%-ish unemployment and giant budget deficits. If we think it's bad here, yeah, go over there. Shannon? Well, so to me, the big headline news was the State of the Union address, which I thought was interesting and in some ways disheartening. The fact that deficit reduction has become a hot topic again is pure political gimmickry. It's like talking about the foundation of your house when your house is on fire. Come summer, the stimulus spending is going to end.

We still have double-digit unemployment. We're a consumer-driven economy. Why on earth we're talking about reducing deficit spending when, at least in the short run, deficit spending is going to have to continue to prop up the economy is beyond me. So I think that political theater is one thing, but it was dangerous, I think, to introduce that into the mix. Even if the policy initiative is only going to have a marginal impact, expectations for that have been set. All right. Big trouble for Toyota. The company issued a massive recall this week and has suspended production and sales of eight of its models, which make up 57% of Toyota sales in

the U.S. At issue is sudden and unintended acceleration, which is, let's face it, we're all drivers. I had that once. That's never a good thing. GM and Ford are offering incentives to Toyota owners who trade in their cars. So here's the question, guys. Do Toyota's problems create a big opportunity for U.S. automakers? James, we'll start with you.

Chris, I actually drive a Toyota, and I got here in half the time. So the problem is I have a Prius, which was not affected by the recall. But what's interesting is that Toyota did about $230 million a week in revenue this time last year. So maybe they're losing 60% to 70% of that every week this recall goes on. What's funny is that there's no solution yet. So people know they have this problem, but they're powerless to fix it. They're doing the absolute right thing for the long term. This is sort of like the poison Tylenol situation in Johnson & Johnson,

where you have to come out and say, all right, we're just going to stop everything until we get this done. because long-term, if you don't do that and things continue to get bad, then you've killed your brand forever. And if you've done that, you're dead. But, yeah, I'm sure it's a minor opportunity. Ford's got some pretty interesting products out there, and I'm not sure that Toyota is doing anything so compelling that people who want a car within the next month or so wouldn't consider an alternative.

That's right. I mean, Honda and Nissan, interestingly enough, are not capitalizing as part of apparently some sort of Japanese national honor system, but Ford and GM are. They're sinking their teeth right into the wound here. Ford has a $1,000 offer if you trade into Toyota or a Honda, and GM has some sort of extended credit terms, I think. Yeah, it's $2,000 if you walk in with crutches.

Good old rapacious American capitalism. All right, guys, a lot of companies reporting earnings this week. Seth, let's start with Netflix. They had a monster quarter, revenue up 24%, profits up 36%, and the company added 1.2 million net new members. They've now got over 12.3 million subscribers. I mean, if Netflix is Coke, is there a Pepsi out there? Because it doesn't seem like there is.

No, there isn't, and that's pretty good for Netflix and for Netflix stock owners right now. In addition to the numbers you did, just about every number got better this quarter. Churn is better than it was, which means fewer people are leaving, getting out of there. The one number that seems good and that could be a sneak bad number

is the number of people who, like me, watch Netflix, watch downloadable Netflix or streaming Netflix over the internet, and that is a great business. It seems like a really great business. The trouble with that business is the costs don't scale quite as well as when you're mailing DVDs or if you were doing broadcast. So one thing to watch on Netflix is the free cash flow, which was eh this quarter, but also watch the margins

to see that as that gets more popular, the increase in revenue and popularity isn't offset by bad margins. Big quarter for Amazon as well. Fourth quarter earnings up 71% due to strong holiday sales. Now, Amazon doesn't break out Kindle sales, but CEO Jeff Bezos did say, quote, millions of people now own Kindles. Company also announced it will buy back up to $2 billion worth of stock. Amazon is now, their market cap is now one quarter of what Walmart's is. Is Amazon now moving into the territory where they are going to be Walmart's biggest nightmare or certainly their prime competitor?

I think that's the story to follow over the next decade, maybe the next half decade. We saw a little bit of a dust-up on the book price war between Walmart and Amazon. That's the battle writ small, I think. And, yeah, every basis point of market share that Amazon can peel away from Walmart helps their cause over the next five to ten years. And I think that that's a very interesting question. The answer is probably yes. Amazon is positioning itself to be the next Walmart.

Yeah, if you hold the stock, you better hope so. The buyback thing, I'm always suspicious of buybacks anyway. Sometimes that can be a little market theater. Especially with the number of options a company like this has doled out over the years. Exactly, and the valuation isn't especially compelling right now either. Although some stocks never look cheap, and Amazon is sort of in that category for most of its existence. I think Walmart could be the next Walmart. We're trying.

All right, a lot of news about Apple this week, but a little company called Microsoft made news by reporting better-than-expected earnings thanks to strong sales of Windows 7. The stock is trading near its 52-week high. Guys, any thoughts on Microsoft's quarter? Yeah, an amazing quarter. So they did record revenue of $19 billion for the quarter, and earnings were up 57% relative to the year-ago period. Now, we talked last week about how these companies are reporting earnings against very easy comps, but nonetheless, even against easy comps, it's a very impressive figure.

The interesting thing is that it blew past analyst estimates. So the earnings per share were $0.74. were cents. The consensus estimate was for 59 cents. The interesting sort of backstory here is that, you know, Microsoft did not recognize a portion of the Windows 7 revenue because it was on pre-sales. And so they didn't recognize that until the units had actually shifted. If you back out the revenue that they got from that, the pre-sales, the figure comes in pretty close to what the street had estimated. To me, I think some analysts didn't do their job in terms of calculating that. Yeah, although that sounds complex to the people out there. This is really

basic math for Microsoft analysts, so they dropped the ball if they missed that one. Big time. And it's just one more reason that people should be suspicious or take earnings estimates not with a gray, but with a block of salt. As an Apple guy, I just got to say, is that really customers buying Windows 7, or are they just fleeing XP? Or Vista. Yeah, Vista. That's what it is, Vista. It's all about the context.

You are an Apple guy. James Johnson & Johnson reported a 19% decline because of restructuring charges, but sales grew by 9%. Sales of non-prescription drugs like Tylenol were up because of, quote, a strong flu season. That was the quote from Johnson & Johnson's VP of Investor Relations. Too bad about all those people who died. One man's trash, another one's treasure, I guess, right?

Wow, that's pretty ghoulish. They're hoping for a TB comeback. That is pretty ghoulish. Well, yeah, J&J had actually a decent quarter year, was their first in 76 that they had a sales decline of 2.9% overall. But with J&J, and actually with Parker & Gamble as well, which I'll lump in here, both large caps, sort of in the same boat, had decent enough quarters. The key battle for both of these companies has been generics that people went to a little bit

during the recession, in addition to just pulling back. But I think these companies are showing that there is some power in branding. J&J actually had some recalls, but they're doing well enough in spite of that. All right, we want to hear from you. What do you think about the iPad? Are you trading in your Toyota? And are we the only ones who think it's a little weird someone's using the phrase strong flu season? Drop us an email at motleyfoolmoneyatfool.com. Comments about the show, questions for the show, the email again is motleyfoolmoneyatfool.com. And if you missed any part of the show, you can catch it online at motleyfoolmoney.com. Coming up, we'll talk about the iPad that Apple isn't telling you about, and it couldn't be more different from Apple's iPad.

This is Motley Fool Money. You're listening to Motley Fool Money. I'm Chris Hill, and, you know, one of the interesting side stories of Apple's release of the new iPad tablet is the fact that there are actually other products already in existence bearing the iPad name. Sure, there are some technology ones, but the one that caught our attention comes from a Canadian lingerie company. Hilton Caron is the owner and president of Coconut Grove Intimates, which produces the natural line of clothing, including, yes, the iPad. And he joins us from his company's headquarters in Toronto.

Hilton, welcome to Motley Fool Money. Thank you for having me. So when did your line of the iPad begin? We launched in, I looked it up recently, in May of 2007. Could you describe your iPad? Well, iPad, we registered the name for a group of products. Being a specialty lingerie manufacturer, the iPad collection is more than just one pad. And basically what we've done is brought the latest in solutions for ladies for augmentation of their bra cups,

as well as shoulder pads, which just recently have come back into vogue. So through our own manufacturing procedures and our own intellectual property, we have developed our own specific products that we've put into the iPad collection. So any plans to challenge Steve Jobs and Apple over the name? Absolutely not. Has this been good for your business? It's been wonderful. the phone in the last 24 hours has just been ringing off the hook. And shoulder pads, which is an important part of our business, our retailers are sold out. So we're just ramping

up production to support the increased demand, not only from the fashion aspect, but as well as now the publicity that's come out of the iPad tablet. My final question, when unveiling the iPad tablet, Steve Jobs called his product, quote, magical and revolutionary. Would you say the same thing about your iPad? Absolutely. It augments the lady's body, you know, to give them the fit and the look that they're looking for. And I hope wearing our pads, they feel, you know, the same way about it as using the iPad tablet. Hilton Caron, owner and president of Coconut Grove Intimates. Thank you so much for joining us here on Motley Fool Money.

My pleasure. Coming up, Rob Pegoraro of the Washington Post was in California here for the unveiling of the iPad. We'll get his thoughts next. This is Motley Fool Money. You're listening to Motley Fool Money. I'm Chris Hill. So will Apple's new iPad be as big a hit as the iPhone? Rob Pecoraro is a technology columnist for the Washington Post, and he joins us now from California, where he attended the great unveiling. Rob, welcome to Motley Fool money. Thanks for having me. So you were there at the event. You actually held an iPad, spent some time checking out the features. What were your initial impressions? It's interesting because

you look at it, you know, even just looking at it from my seats well back from the stage, your first thought might be, well, this is a very large iPhone or a very big iPod Touch. But Apple is not describing it as that. They're basically trying to carve out a new category of device between the laptop and the smartphone, which is a much more ambitious thing than simply selling somebody a really not-so-portable MP3 player. Well, yeah, Jobs said that. He said that it's so much more intimate than a laptop and so much more capable than a smartphone. But if someone already has a smartphone and a laptop, why would they go out and buy an iPad? Yeah, that's the issue. I've sort of been mulling it over, and I can see, I guess,

two distinct markets here. One is the iPad becomes your third computer. You've got a laptop or a desktop in the house. Maybe you've got a desktop upstairs, laptop downstairs. And this could be the thing you leave on the coffee table or that you take instead of taking the laptop on a trip where you're not expecting to do any work, but you do want to be able to check your email, read a book, watch a movie, whatnot. Now, there's another one I've been mulling over, which Jobs didn't mention at all, but I think there's a possibility here, is that you could also use this as a really simple internet access device. Simple, secure, nothing to configure for people who are intimidated by the difficulty of using a computer and aren't going to be online that much in the first place.

I realize that there were a lot of Apple enthusiasts at this event, but keeping that in mind, what was the general reaction among the people that you talked with? Yeah, the audience, you know, I don't think Apple brought in people who were going to boo, put it this way. They weren't shipping in people from Amazon, from the Kindle division? No, no hecklers that I saw. Yeah, people seem to be pretty impressed with the industrial design, the interface. It is very elegant, the processor, which, interestingly enough, you know, Apple didn't go to Intel for the chip inside this thing.

They designed it themselves. So it's really fast. It certainly made me wish that the netbook I brought to file my stories on were a little bit faster. So as a piece of engineering and interface design, it seems well done. The reaction I'm seeing in reader email and comments is a little more skeptical. People are thinking, well, okay, but wouldn't I be just as happy, you know, not necessarily buying any old netbook, but finding one that's well designed and capable and, you know, lets you do more than you could do on this device,

which, remember, it has a lot of the limits of the iPhone. You can only run one application at a time. You know, there are a lot of programs in the App Store, but, you know, you can't install anything on it unless you're a real hacker type until Apple actually approves it and puts it in the App Store. We're talking with Rob Pegoraro, Washington Post technology columnist. We've talked about the Kindle a little bit, and the phrase Kindle killer is being used a lot in the media,

whether it is or whether it isn't. What do you think? Is the iPad going to kill off Amazon's Kindle? I don't think so. I mean, for one thing, Amazon, they do have a nice little lock-in established where if you buy books at the Kindle store, you can only read them, and the software Amazon ships are the hardware it sells. And among the software Amazon sells is a rather nice little iPhone application,

which they are going to want to rewrite. One of the issues with the iPad that Jobs, I think, glossed over a little bit, while it runs pretty much all the programs released for the iPhone, if you want to run them at full screen, it has to basically enlarge them. And text and images look a little bit fuzzy or blurry, which can be fine for a game, but which would be horribly annoying if you're reading some long book on the screen. Apple has been really good at setting expectations, both in terms of their products and certainly with their earnings as well. Did they play the expectations game right

with this unveiling? Because it seems like they did on the pricing. There were a lot of rumors this thing was going to cost $1,000, and then the price tag comes out, and it's $499 for the baseline version. But when Steve Jobs uses words like magical and revolutionary, that really seems to set the bar high. I did think he might have been laying it on a little thick when he used those words for the fourth or fifth time. Yeah, the price is the interesting thing. I'd really love to talk to the reporter at the Journal who had that story, which he suggested would be a $1,000 price, since either his sources were incorrect or somebody was trying to gain expectations a little bit that way no you think that happens so yeah the 500 price is impressive

although you do want to realize that you know there's a lot of upgrades possible 500 is a version with 16 gigabytes of flash memory which is a decent amount but you know not as much as you'd get uh you'd pay less for that much memory on an iphone these days uh if you want the deluxe model with 3G wireless access, 64 gigs of flash memory, that's $829, which isn't that much less than what you'd pay to get a new MacBook laptop from Apple. How big a hit does Apple need this product to be? Well, if you look at what people were suggesting this thing might accomplish, you know, revolutionizing the publishing industry, then nothing less than, you know, completely upending the computing industry would be counted as a success.

I think, given that Apple is a publicly owned for-profit company, I think if it has the success of, say, the iPod Touch, which is part of the iPod line, then they didn't add until after they'd been in the business for a while. It's a growing chunk of it, but I don't think it's the most popular model of iPod. They'd be doing quite well. You know, I don't think this is going to cannibalize laptop sales, since if you want to type, you know, the iPad's keyboard is nice, but I can't see myself filing stories on that thing.

You need a laptop. What it may do is, you know, it may become another thing that Mac owners get. It could be something that, you know, people buy instead of netbooks, where Apple still doesn't have an item in that category. You wrote that this was the most anticipated launch of a gadget since the introduction of the Segway. And there were certainly some Segway enthusiasts who were a little bit off with their predictions. Yes. That seems like an ominous analogy for the people at Apple. Yes. Yeah, I was, you know, thinking about all the hype and the anticipation.

and I was reminded there was somebody who had said that this device is so great, the Segway, they're going to have to re-architect cities around it. And this fellow was Steve Jobs. And don't get me wrong, the Segway has done reasonably well. You can see them on Pennsylvania Avenue in D.C. People take tours of Washington on those things. But you don't see so many people commuting on them. I haven't seen any public works projects to accommodate Segways on sidewalks or streets.

So it could be that with the iPad, you're not going to have a whole new sort of digital culture growing up around it. But it may be a profitable addition to Apple's device line, which, for most companies, is a success. Given the amount of hype that's spun up around this, despite Apple, you've got to give them credit. They played very well. They let people ramp up the hype. They said nothing about this thing until they sent out this invitation to the press. So you could say it falls short of expectations, but it makes money, which is probably what Apple's shareholders are hoping for.

Rob Pegoraro writes the Fast Forward Technology column in the Washington Post. You can find links to his articles on our website, motleyfullmoney.com. Rob, thanks for joining us. You're welcome. Joining me now is Kevin Maney, a longtime technology columnist and the author of Tradeoff, Why Some Things Catch On and Others Don't. Kevin, welcome to Motley Full Money. Thanks, Chris. I appreciate it.

So is Apple's iPad going to catch on? Well, when I saw the announcement, the product reminded me of a couple of old products that you might remember. I'm not sure if you remember portable televisions in the 1970s. Oh, sure. Like the old school ones. The old school ones, which were neither very portable nor were they very good TVs. And I was also thinking of the Cadillac Cimarron, if you remember that from the 1980s, which was this failed version of a Cadillac that was supposed to be a compact car, but it was too expensive to be a compact car and too small to be a Cadillac, so nobody bought them.

You know, in the press conference, Steve Jobs brought up, you know, is there room for something in the middle? He raised it as a question. And one of the things that I kind of describe in my book, really, is that most of the time there's not. Most of the time something that's stuck in the middle is neither enough of one thing or enough of the other to make it worthwhile, and they often just become niche products. And I have to say that that's sort of the way I'm looking at the iPad right now. Well, yeah, I mean, Jobs did talk about that third category and how, you know, everyone uses a laptop and or a smartphone and the whole notion of the thing in the middle. Is that really the challenge right now for Apple, that they've got something that's, in your eyes, stuck in the middle?

It is. It is. You know, you look at what Apple does really well, and in the language of my book, they create super high-fidelity products, which is stuff that is a great, great experience and better than anything else. And the iPhone was a superb cell phone experience. The Mac is a superb laptop experience. And those are things that we needed and want. The iPod is a superb portable music experience. um and you know the the ipad though is um not uh you know it's not a good mobile device because it's not really mobile um it's not a good laptop because it's not as functional as a laptop it

doesn't do multitasking and and uh you know a lot of other things that a good mac will do um so and if and if it's you know you're looking at some of these other niche sort of uses like like the Kindle, well, it's a more expensive Kindle if you're really buying it to read stuff on it. And even if it looks nicer, it's still twice or more as expensive as a Kindle. I just don't see a reason for the majority of the market to buy this. This is Motley Fool Money, and we're talking with Kevin Maney, the author of Tradeoff, Why Some Things Catch On and Others Don't. How are we going to be able to tell if the iPad is catching on?

Is it simply a sales number? What are you going to look at that will help you determine whether or not this is catching on? That's a good question. I think, you know, first of all, if you see that Apple has sold, you know, two, three, four million iPads,

that's not catching on. I mean, that's a niche product in this universe. Now, it's actually probably maybe a very good product for Apple. It's going to add to the revenue, and that may be what happens. But when you look at selling 250 million iPods over the course of all these years, that would be a drop in the bucket. I think that what I will be looking for is if the iPad actually drives some kind of a new use,

a new experience for people. Maybe some software developer comes up with something that Apple doesn't even think of right now. that gives people a brand new reason for buying this. And I brought up some old products before that have failed because they kind of landed in the middle of something. But I'll bring up one that actually succeeded because it changed the way people think. And that was the minivan,

which came out and was neither a van nor a car. It was something in between that people didn't know they needed until it came out. And suddenly families realized this was a better way to transport or a whole bunch of people and all their luggage or to vacation or whatever they were doing. And so if the iPad really creates a new reason to buy that that has nothing to do with the reason you'd buy an iPhone

or nothing to do with the reason you'd buy a laptop, then you might really consider this a success. Kevin Maney is the author of Trade-Off, Why Some Things Catch On and Others Don't. Kevin, thanks for being here. You're welcome, Chris. Thanks. Coming up, some stocks that are on our radar. This is Motley Fool Money.

Welcome back to Motley Fool Money. As always, people on the program may have interest in the stocks they talk about. Don't buy or sell stocks based solely on what you hear. I'm Chris Hill, and back in the studio with me, our trio of senior analysts, Seth Jason, James Early, and Shannon Zerman. Before we get to the stocks on your radar, got to give a quick shout-out to some new affiliates, WDEL in Wilmington, Delaware, KXL in Portland, Oregon, and KTalk 1150 in Los Angeles, California. They're awesome. We love them one and all.

And as Seth said last week, we welcome all stations. Even the latecomers. Exactly. All right, let's go around the table. Shannon Zimmer, we'll start with you. Give me one stock that's on your radar. Well, I've been spending some quality time with my buddy here, James Early, talking about- Don't get into details.

It's just between us, James. But looking for yield in unlikely places. And this is not an especially unlikely company, but it's one that James knows well. Paychex, a payroll processor with ADP. They're the big players in the space, but they still control just a fraction of the market. Growth opportunity, plenty. These guys have a pristine balance sheet, and all of the metrics are right in terms of return on equity, operating margin. They're just a beautiful company, very well managed. Management is very invested in the company as well. We talk about the financials, rightfully so, but I'll leave you with this.

Over the last 12 months, Paychex stock has returned 22%. The CEO's compensation has gone down 25%. That really gets to the heart of a company that is managed for shareholders' interest. And when management is on your side as a shareholder, you can count on those kinds of things happening. You can also count the number of companies that have done that probably on one or two hands. Exactly. Shannon, Paychex, the ticker is? Oh, P-A-Y-X.

Okay. James Early. Chris, I'm going boring this week with Dominion Resources, which is an electric power company. It serves us here in Virginia, does Ohio, Pennsylvania, some states in the Midwest. A lot of coal power, which is nice and cheap. Constituents love it. Regulators love it because it's cheap. Not as great environmentally, but coal supplies about half our nation's electricity,

so it's not going anywhere. I like that the return on equity has risen from 9.5% in 2005 to 15% on a last 12-month basis. Well, debt ratio has actually declined. The company just raised its dividend 4.6% and yields 4.9%. So all the numbers look good to me on Dominion. Ticker is D. Wow, that's nice and simple. Seth Jason, one stock on your radar.

You know, I'm going to have to go back to the Netflix because this just shows me this is proof, and I think that the stock popped for this reason. This is proof that they really are the runaway leader in this space, not only sending those DVDs by mail, but they really are the leader in the delivery of online TV and online movies. and I think they're going to stay in that spot for quite a while. The only trouble with them is the price, but before we get to that,

let's just look at, you know, I'm looking at my graphs in front of me. You've got five, six, seven years or so of constant improvement in operating margin, which means that the earnings power is just getting better and better, even if top-line growth were to flatten, and the top-line growth trajectory is not very flat. Free cash flow for the year at about $100 million, and the stock is trading at about 30 times that number, So it's not exactly cheap, but I think it's one of those stocks you buy, you put it away, and you say, this is the leader. I've got to have it.

Well, we've talked before about companies that sort of, you know, they need a Pepsi to their Coke. But is this one of those spaces where, no, you actually don't need a Pepsi? In fact, if you're a Netflix shareholder, you just want the margin of victory to get bigger and bigger? Yeah, I don't, I mean, sometimes you need a Pepsi to your Coke because you're worried about regulatory interference. I don't see that here because they're still really battling against cable companies and others. But the cable companies, the content providers who should have the clout and should have the means to compete in this space

really haven't done it in a way that makes any sense, that makes a dent in Netflix business so far. So I think you bet on the winning horse, even if it's not cheap. Netflix, I'm sorry, the ticker is? NF, LX. Sure. I was just going to add that Netflix, some people had some concerns about, oh, what's going to happen whenever DVD, physical storage goes away

and it's going to be about streaming. Well, Netflix has been the leader in terms of technology, much more so than the cable companies. And I think that their product is not even so much the delivery of content. I mean, it is a deliverable for them, but it's the relationship that they have with their customers. They know what you want to watch because they keep track. A fantastic website.

The Cinematch technology, which makes personalized recommendations, has been improved through, you know, the much ballyhooed competition. It's an important company, I think, over the next, again, five to ten years. All right, guys. Next week, more companies reporting earnings, including Comcast, Sony, and one of my personal favorites, Hershey. Gotta love the chocolate. Should we do a road trip to Hershey, Pennsylvania?

I mean, it's just a couple hours. We had our annual meeting there a few years back. It was great. I think we've got to get back there. Maybe, you know, make it a business trip, quote, unquote. Steve, can you bring all this equipment on the road? And how. All right, Seth Jason, James Early, Shannon Zimmerman.

Guys, thanks for being here. Also want to thank our special guest this week, Rob Pegoraro from The Washington Post, Kevin Maney, author of Trade Off, and Hilton Caron, president of Coconut Grove Intimates with their iPad line of lingerie. Thanks to our producers, Steve Broido and Matt Greer. That's it for this edition of Motley Fool Money. If you missed any part of the show, head straight to our website. don't delay, MotleyFoolMoney.com. You can send us an email. You can also get a copy of our free

report, The Motley Fool's Top Stock for 2010. All that and more at www.MotleyFoolMoney, all one word, MotleyFoolMoney.com. Thanks for listening, everyone. I'm Chris Hill. We'll see you next week.