Motley Fool Hidden Gems Investing - Motley Fool Money: 10 22 2010

Episode Date: October 22, 2010

China raises interest rates. Steve Jobs raises the stakes. And Chipotle serves up yummy earnings. On this week's show, we'll talk about those stories, talk tech with Washington Post columnist Rob Pegoraro, and share some stocks on our radar. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+. everybody needs money that's why they call it money from fool global headquarters this is motley fool money welcome to the show thanks for being here i'm your host chris hill and i'm joined by motley fool senior analyst seth jason james early and tim Hansen. Guys, good to see you. Coming up, we'll give you the latest on Apple, Amazon, and we'll tell you why now is the time to buy your Thanksgiving turkey. Washington Post columnist

Rob Pegoraro will share his thoughts on the latest from the world of consumer technology. Plus, we'll give you an inside look at the stocks on our radar. But we begin with the big macro. For the first time in nearly three years, China raised its interest rate by a quarter percent. And Tim Hansen, it was the rate hike that shook the world. What happened? Well, yeah, a quarter point doesn't sound like a whole lot. But that wasn't the case if you were an investor on Monday. Stocks were down pretty significantly in the sell-off.

And the reason is, generally speaking, when it comes to economics, when you're raising rates, you're making money more expensive to borrow. And when money is more expensive to borrow, growth slows down. And the way the world is working now is that everybody is assuming and valuing companies and commodities that China is going to be growing really aggressively, forcing up the price of oil, other commodities, food, and also for industrial stocks and anybody selling something into China. So if China's growth is going to slow as rates rise, everybody had to reevaluate their expectations for these things, and that's what sparked the sell-off. So this means that cadmium could become too expensive to put in the children's toys? I mean, cadmium is never too expensive for that. Isn't it more important in China that you know somebody than you know about the rates, though? I mean, this is like, this is, are people more scared that this is a token small economic measure

that the government in China is saying, hey, don't overheat the economy, rather than the fallout from this particular actual move? Right, I don't think a quarter rate hike is not going to send the Chinese economy down and really cause the world to reassess what's happening. But China's government, a lot like the U.S. government, is famous for the good old trial balloon. Sure. Where you float a little something, you see the reaction, and then you proceed. So I think they were testing a very small rate hike.

And what I think people are worried about is that there could be a larger rate hike down the line because China's, the government, is very concerned about some of the hot money in the economy, particularly in real estate. Well, speaking of hot money, China has a long history of wanting to have its cake and eat it too in certain respects. And ironically, higher rates are going to make people, outside investors, want to buy more Chinese debt, which China hates. And it's going to raise demand for Chinese currency as well. So, Jason?

Well, you know, I understand why everyone panicked. Oddly enough, a small Chinese company that we have over at Hidden Gems finally came back to life when this happened. So you never know which way things are going to go. All right. Apple reported earnings on Monday, and the latest quarter had record revenue and net income, but expectations on Wall Street were higher,

and the stock dropped on the results. James Early, is the bar just way too high for Apple? Are they a victim of their own success? Chris, they are in a way, And I will take this opportunity to say that I was wrong about the iPad. I thought this thing was the, what is it, the El Camino, you know, the car truck of computing, kind of neither car, part truck, neither of either world, and going to flop it. But it hasn't. We're talking about 4.2 million iPad sales versus expected 5 million sales.

I mean, these are phenomenal numbers any which way you cut it. So, yeah, it's still very good for Apple. That is. It's 4.2 million people staring at this large cell phone that can't make a phone call wondering what in the heck to do with it. I did see that Zynga has released a new high-def FarmVille for the iPads. Maybe that's been the catalyst for that. I can't wait to see people driving with that in their lap. That's like the, James, give me an analogy here.

That's like the, no, never mind. Well, you know, there are a couple of stories out of the Apple earnings. One was obviously the earnings themselves. That's not the real story. Yeah, the real story is for the first time in two years, CEO Steve Jobs showed up on the conference call and made news in a couple of ways. He had a bag full of crazy with him.

Well, you know, he spent a good chunk of his time kind of going off on Google and the Android platform and really going off on research in motion too. I mean, were you guys surprised by this? I don't know how anyone could be surprised by anything Mr. Jobs does. He sort of does whatever he wants. What was odd to me is that he usually keeps his whoppers sort of to a minimum and he threw out a few that were sort of funny talking about. He tried to imply that developing for Android was such a nightmare

that small companies wouldn't be able to do it. Now, I've said in the past I thought Android had a problem with too many versions, but he made a reference to TweetDeck, and I think he even got the name wrong, saying that it was a nightmare, it was going to have to be 100 different versions, or that they were having a nightmare, and then apparently the guys from TweetDeck immediately tweeted that this actually wasn't a problem for them at all, that there's only a couple of them and it was no big deal. James?

He's obviously running a bit scared now that Android is passing them in market share, but I don't think Apple should be that worried. But to Steve, apparently size matters a lot. He went on a lot about this 7-inch versus 9-point-something-inch tablet and how even though— Yeah, the size of the tablet screen. The 7-inch tablet apparently only has 45% of the screen size. It's like the 9.7-inch owing to the formula for area of a rectangle. And he spent a lot of time on this.

Yeah, he really did seem focused on that. But he also made news by talking about the cash that they have and specifically talking about, you know, Apple is sitting on somewhere in the neighborhood of $50 billion when it comes to cash and their investments. And so he talked about how they're looking at strategic opportunities. Oh, please. Who believes that? Well, you know, as an observer, tech stocks aren't my specialty,

but I'm pretty sure that tech stocks have a great history with large acquisitions, right? I mean, that AOL thing is still cruising, yeah. eBay and Skype, that was another good one. You remember history of the world, and Dom DeLuise is the Roman emperor, and he's laying in that tub taking a treasure bath. This is Steve Jobs with that pile of money, I think. There's no reason for them not to pay out a significant chunk of that to the shareholders who actually own it.

Well, but imagine how stressed out he'd be and how much crazy he'd bring to the conference call if he didn't have $50 billion keeping him company at night. Yeah, they do need to worry about Android. because what Android success is showing is that people are willing to buy cool phones that aren't just iPhones. James, you're the Apple fanboy.

Dividend guy, fanboy. I'll close it with a stat. I'm looking at an article, Businessweek article, mentioning this guy, Tom Saganagi, I'm guessing. It's pronounced Sanford Bernstein analyst, who says about 10% to 15% of the investors he speaks with avoid Apple because it doesn't pay a dividend. All right.

Mr. Jobs, who we know, listens every week to Motley Fool money. Some pearls of wisdom there. Amazon stock hit an all-time high this week as the company's third quarter earnings were up 16%. Seth, Jason, how strong is Amazon looking as they head into the holiday retail season? Amazon is sort of like a big old Amazon walking around squashing everybody else. I mean, you're looking at top-line growth in the 39% range. It's different based on various categories. Operating margin dropped, didn't it?

operating margins yeah that's the that and that was why after hours when this news came out the stock was down a little bit then the next day it was up a little bit that is the point i want to get to with amazon is it the stock is at an all-time high or or it's near an all-time high because people are really attracted to companies that are growing sales from huge bases at you know a near 40 clip but uh if you look at amazon's free cash flow and that's the amount of money that they actually generate in cash uh dropped a little bit they still are once again they're spending a lot of money on tech and on investment in that. And so you have to be careful with this because they need to get some leverage and actually generate more cash with this top line

motion they have, and they're not doing it right now. Are you getting a new Kindle for your wife for Christmas? No. The thing about the Kindle is we have the clunky first version, and the hardware disappears when you're reading. So it's not necessary. As an Amazon shareholder, I recommend that you buy your wife a new Kindle. Well, they just brought a TV to my door. We're two, we're three. The TV was worth more than Kindles. Coming up, what is a Dutch sandwich and why is it so popular with the executives at Google?

We'll try and keep a straight face as we explain right after this. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. You can follow the show on Twitter at MotleyFoolMoney, all one word. And drop us an email, radio at fool.com. Chris Hill here in the studio with Seth Jason, James Early, and Tim Hanson as we dig into some more earnings news from the week. McDonald's third quarter profits were up 10%. James Early, people just can't get enough of that delicious, organic, healthy menu, can they?

You know, Chris, to be honest, I have wondered in the past if McDonald's hitting a 52-week high would be a sign of the end times. But I've got to give credit where credit is due. I mean, they're talking about 5% to 6% revenue comps in October predicted, which is fantastic. And for perspective, just a few years ago, let's remember that people were predicting that fast casual would eat traditional fast food as lunch. Get that? But that has not happened, or at least not with McDonald's. Some of the rivals like Burger King are not doing as strong, but people are defaulting to McDonald's, and it's a good stock. So is it one of those things where, overall, the race field is not that fast, but McDonald's is the fastest one in the race?

Yeah, I mean, I think people, it's just like a default to what's cheap, quick, and low cost, you know, and some of the other, McDonald's has really hammered the value menu versus, like, you know, the really high-fat, high-cholesterol gourmet fast food options. I mean, it's still McDonald's, but, you know, and they've got the McCafe and things like that, so that's helped. Bloomberg reported this week that Google has cut its taxes by more than $3 billion over the last three years using a technique that involves moving most of its foreign profits through the Netherlands to Bermuda. This income-shifting strategy is known to lawyers as the Dutch sandwich. So, guys, let's just pause for a couple seconds and let the listeners make up their own joke. Okay, Seth, Jason? I lived in the Netherlands for three, four months.

my senior year in college. So you know all about the Dutch sandwich. That is not my understanding of a Dutch sandwich. I don't want to read this from the web, do I? The actual definition, according to Urban Dictionary, the act of having a s*** with a mother and daughter whose combined weight is over 400 pounds. Wow.

How can any lawyers use this term with a straight face? That's absolutely horrible. It's almost hard to believe that lawyers would come up with a term like that. I hope our bleep thing can last long enough for that. I wonder how they found it in the first place, you know? Ah, apparently legal community. My only comment on this is, don't be evil. Uh-huh.

Okay. That's real patriotic right there, not paying your taxes. Chipotle's third quarter revenue was up 23%, better than expectations, and the stock popped on the news. Tim Hanson, the stock is up more than 300% over the last two years. Are they going to keep this up? Well, this has been an example of a great stock and great performance, but Chipotle is starting to get to the end of its leash.

I mean, the results are unbelievable. You heard James talk earlier about McDonald's saying 5%, 6% comps were fabulous. Chipotle put up more than 11% comps. That's a great number, and their operating margin improved to better than 27%. The flip side of that is that

my analysis sort of estimates that in order for Chipotle to justify its current stock price, not only does it need to sustain those levels, which would be unbelievable, but they also need to open a ton of stores in the United States and outside the United States, which is where I think it's going to start getting pretty tricky for Chipotle. Chipotle is, I've gotten very lucky with Chipotle.

I bought my first steak when it was 30-something. I sold half when it was 100-something. The walls came all down, the financial crisis. Bought some more at 50. Now it's 200. I got very lucky. I've always believed in the company. Okay, so you're buying drinks tonight.

I'd have to sell it, and I'm not allowed to. But, Tim, I think you were talking about operating margins. That was restaurant-level operating margins, I believe. the story with Chipotle is that they keep getting really good leverage, operational leverage on these revenue gains. So I remember when I first looked at this company several years ago, I just kind of eyeballed it and I said, wow, if they can only get their overall operating margins to creep up to 12 to 13%, they're worth a lot more. Well, as of the June quarter, which I have graphed on my nerd computer in front of me, their overall operating margins were already at 15% and they're

going to be much higher. So it all depends on what kind of leverage they can get. But I think Tim is right that this is a pretty richly valued stock right now. Well, what about a restaurant like KFC, which certainly has success here in America, but also has huge success overseas in China? I mean, they've been able to expand. KFC is really the exception to the rule in the case of American concepts going abroad. The rule is they fail. The rule is they really struggle. I mean, you know that Starbucks, They don't break out the numbers on a really granular level,

but the anecdotes about Starbucks internationally is that it's maybe break-even at best. You know, McDonald's has struggled abroad. And then KFC really succeeded in China because it really changed its menu and tailored it to the local cultures and got there really early on. Chipotle going abroad, its prospects might be a little more grim. I mean, you think about it, Chipotle probably can't go south of Texas, right, because they've got that burrito covered down there. So that eliminates a large population center.

Africa is not really a candidate for fast, casual restaurants at this point. Australia is a reasonable market. I'm sure Chipotle will get there, but it's a small market, so it's not really a game changer. Europe? What can they do in Europe? Welcome to Europe, right? And so how well can Chipotle do in Europe? Starbucks has struggled in Europe.

McDonald's has struggled in Europe. Chipotle could go to Europe, but our analysis suggests that the density that they can open stores in Europe is a lot lower than what you would get in the United States. and they do have a store in London now. That's their flagship store and the evidence we have from that is that it's not doing that well so far. Really?

They need to deep fry the burrito after they're done with it. I remember some of the UK fools went to lunch there the weekend it opened and they were paying the equivalent of $12, $13 for a burrito. That's the weird thing though because McDonald's struggled for quite a while in Europe

and now does very, very well there. And so I generally am pretty bearish on the idea that they can expand into these. I think there's cultural differences that are tough to overcome. But I think it may be a shorter putt for Chipotle to be successful if they can keep the prices under wraps. Because at least they have an ethic and are known for having an ethic about, you know, food with a purpose, good, high-quality ingredients. And that should resonate at least a little more with the Western Europeans. That is true. The Whole Foods went to London, and they've struggled fantastically there, too, for whatever reason.

So, you know, time will tell. It's not impossible. But if you're buying Chipotle today, you're banking on some growth in Europe, probably. And finally, Thanksgiving may be a month away, but you better buy your turkey now and stick it in the freezer. The cost of meat is on the rise because the cost of corn is on the rise. Tim Hanson, you are the culinary expert in the room. So what's going on here? Well, I just had my investing thesis in a Mexican chicken company blown up by this.

But corn prices over the past two months have gone from about $4 and change per bushel to now $5.70 per bushel. And the reason for that is that it's going to be poorer than expected harvest in Iowa and essentially United States this year, which actually, interestingly, some hedge funds that use satellite technology were predicting not too long ago. So they've done pretty well. But also the EPA just raised the amount of ethanol that you can blend into gasoline. And you put those two things together and corn prices are going crazy. and that's going to flow through to all corn-based foods, which is, at this point, a lot of stuff.

Hey, I don't smell any kind of politics. Nobody's trying to buy the Corn Belt vote, are they? Do you think ahead of the elections? I'm just, no, nobody would do that. That ethanol, I mean, it was such an inane decision, and then the timing of it made it doubly inane, but so it goes. Making fuel out of ethanol is really indefensible. It's a really bad thing to do.

Corn-based ethanol. Yeah, corn-based ethanol, sorry. It doesn't work. Sugarcane, you know, down in Brazil, that actually works out. Actually, biofuel out of beans a little bit, corn-based ethanol. We have an absurd import tariff on sugarcane. Well, that's one reason why Brazil makes all their ethanol out of that is because they can't ship it north because, surprise, surprise, people like the votes of the sugar industry in Florida, too. So going back to Chipotle for a second, I mean, is the price of corn, is that just going to have a ripple effect across companies like Chipotle and other food producers?

If it remains high, you would expect that their profit margin will decline. And the reason for that is that they have to pass those increases along to their customers. And Chipotle has been passing price increases along or making their portions smaller. But, I mean, you know, $4 to $5.60 in a matter of six weeks or so, you can't pass that along that fast. And it'll depend on what kind of feed that Chipotle's suppliers give their animals. As they're already sort of holding themselves to a higher ethical standard, they may have a little less corn in their feed mix. Now, Steve Broido, how much corn do you have in your feed mix?

I have to admit there is currently no corn in my feed mix. But is it something you're considering? Definitely. I'm from Illinois, so there's always more corn on the horizon. Now, you're a Chipotle shareholder, aren't you? Yes, I am. A very happy one at that. I would think so with the stock at all-time high levels. Absolutely, yes. It's been a huge winner for me. Do you have a go-to order?

Normally I go for a burrito with some sour cream, some lettuce, some cheese. It's delicious. Sounds very healthy. All right, the guys will be back later in the show to talk about the stocks that are on their radar, but we want to hear from you. Do you think Chipotle will be a hit overseas? Is Steve Jobs scared of Android? Drop us an email, radio at fool.com. She's got one for the money, two for the show.

Coming up, Washington Post technology columnist Rob Pegoraro shares his thoughts on the latest from Apple, Microsoft, and Netflix. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Apple reported earnings earlier this week, and for the first time in two years, Steve Jobs participated in the quarterly conference call. Here to help us make sense of what Steve Jobs said is Rob Pegoraro, consumer technology columnist for The Washington Post. Rob, welcome back. Thanks for having me. Now, Steve Jobs used the opportunity during the earnings conference

call to kind of go on a little bit of a rant about Google and research in motion, among others. Apple reported big earnings this quarter. What's he so upset about? Yeah, that's what I didn't get. Why the long face? You had a great quarter. Celebrate. Thank the people who worked so hard to make all these great products. But why then trash talk RIM for he disposed of them in about half a minute?

And then have this long soliloquy about why Google and Android are doomed to fail on the mobile market. I didn't quite get it. Do you think he's worried about them? I mean, this kind of seemed out of character for him because he's pretty good about really not mentioning the competition, and he seemed pretty focused on Google and Android. Yeah, yeah. It's not like, you know, when they're introducing a new version of Mac OS X or a new iPhone, they don't spend a whole lot of time doing a point-by-point comparison against Windows or, you know,

I guess it would have been Windows Mobile when the iPhone was launched. That was the hot operating system back then. I'm no psychologist, so I'm not going to talk about what's in his head, but it's kind of hard not to draw that conclusion. If you're not worried about this company that you think you can beat, stop talking about them. You're listening to Motley Fool Money. We're talking with Rob Pegoraro from The Washington Post. Steve Jobs, one of the other things he said on the conference call,

he got very focused on the size of tablet screens. He said that any tablet that tries to compete with the iPad is going to be dead on arrival and focused on the fact that the iPad has a nine inch screen and any tablet with a seven inch screen is useless. And he said, and I quote, unless you include sandpaper so users can sand their fingers down to a quarter of their size. Now, I'm not someone who has an iPad or any other kind of tablet. How big a deal is the screen size? I mean, is two inches that big a deal? yeah i didn't quite get where it was coming from with that the two reactions i have number one i mean obviously the iphone functions quite fine with a small screen it all depends on the

interface you craft with it so i i don't buy the thought that there's something magical about the ipad's existing screen size and the iphone's existing screen size that doesn't allow a middle ground um but the other hand you know apple has a history of saying nobody wants this nobody can do this. It's not worth doing. And then they go around and do it. I think it was only two years ago, Steve Jobs was quoted as saying, and maybe for him, it was just a throwaway line in an interview. The Kindle doesn't matter. Nobody reads. Well, in fact, Apple has an e-bookstore now, iBooks, prominently featured on the iPad. You're listening to Motley Fool Money. We're talking with Rob Pegoraro from the Washington Post. The tech blog Gizmodo, which I'm sure

you're familiar with, reviewed a mobile product and characterized it as, quote, elegant and joyful. Would you care to hazard a guess as to what product they called elegant and joyful? It could perhaps be the new MacBook Air laptop Apple introduced the other day. No, it was referring to the Windows Phone 7 software. Ah, that was my second guess. I mean, as a Microsoft shareholder, I'm kind of surprised and very pleased with this review. But, I mean, has Microsoft finally got a product that can compete with Apple and Google in the mobile market?

Can compete, yes. Will compete, we'll have to see. With Windows Phone 7, Microsoft did a very un-Microsoft thing, which was to admit that it had gotten completely lost, completely in the weeds, and had to start from scratch. So there's no part of Windows Phone 7 that should look even vaguely familiar to somebody who used Windows Mobile 6.5 or any of the other look-alike releases that preceded that. You know, they sacrificed any notion of backwards compatibility, which Microsoft never, ever does.

And, yeah, when I've tried it, it is nice. It's elegant. It's lightweight. You don't feel... I don't even know why they have Windows in the name because it doesn't look like any version of Windows I've used. Who do you think is the most threatened by this? Is it either Apple or Google, or is it RIM? I think RIM is in the worst trouble right now.

You know, they have yet to do that reinvention of the operating system. They have the new OS they debuted on the BlackBerry Torch, which is nicer in some ways. But in others, it's a very BlackBerry-esque, business-oriented set of software where you have, you know, the sync software they use. It's just this crudely stitched together bundle of other people's components, nothing particularly elegant. And, you know, it's got a better web, it has a better web browser. But in a lot of places, you tap the menu button and you have 10 options that you're never, ever going to use. I don't think RIM, they're still trying to grasp the principle of editing that Apple does so well. Palm is obviously, they've got to figure things out.

HP, their new owner, has finally unveiled the next version of the Palm operating system. But they need some new hardware. Who knows? Palm's webOS might work well on a tablet, but they haven't announced that yet. Netflix reported blowout earnings. CEO Reed Hastings said that by every measure, Netflix is now primarily a streaming company that also offers DVD by mail. Do you think Netflix will be able to maintain its competitive advantage

as it gets more and more into streaming, or does that actually become a double-edged sword for them? well yeah it's easier for other people to get into that i mean if you for instance if you want to rent only one or two movies a month uh it may very well be cheaper to do that through apple's itunes or amazon's video on demand service you know with netflix you have to assume a certain level of uh movie watching tv show watching you know they do have the the recommendation engine which is you know people seem to like that a lot i don't know the whole thing that at some point the movie industry has to deal with this. The fact that you have such an enormous gap between what

you can watch on a disc and what you can watch over the internet. I did a little survey last year. I looked at, I think it was the 25 of maybe the top 10 movies that the post critics had recommended. And all of these were available on disc through Netflix and only minority were available streaming through any of the services I tried, iTunes, Amazon VOD, or Netflix. That's just, what kind of market is that? You're listening to Motley Fool Money. We're talking with Rob Pegoraro, consumer technology columnist for the Washington Post. All right, Rob, before we get away, we've got to wrap up with a round of buy, sell, or hold. So let's start with buy, sell, or hold the future of the BlackBerry. I think I got to sell that. There are things they can do,

but right now BlackBerry seems kind of, they seem a little lost at the plate. They, speaking of tablets, they have one called the Playbook coming out. That's running on an entirely new operating system that is incompatible with the new operating system on the Torch. That doesn't seem like very good planning. No, no. That's like the sort of thing Palm used to do when it was completely lost and doomed before they successfully reinvented themselves. They have some work to do. Buy, sell, or hold the likelihood that Google TV will be more successful than Apple TV. I'm going to hold on that. The big uncertainty with this,

you know apple tv just plug it into your tv and it works and one reason it works is because it doesn't have to connect to your cable box google tv um you know it's supposed to wrap around the cable or satellite service you already subscribe to which means the user has to figure out setting it upright getting it the remote controls to work with each other um you know in my experience when you start talking about things like ir extenders and please identify the make and model of your cable box of your TV. My eyes are already glazing over. Rob Pegoraro from the Washington Post. If you want the latest on consumer technology, follow him on Twitter. Read his stuff on WashingtonPost.com. Rob, thanks so much for being here. You're welcome.

Now we're joined by Motley Fool managing editor Brian Richards, who joins us to talk about some of the stories generating buzz on Fool.com. Brian, welcome. Chris, thanks for having me. All right, let's talk Warren Buffett. He's always a fan favorite here at The Motley Fool. He recently said that wealthy Americans like himself and his good buddy Bill Gates should be paying higher taxes. A lot of our readers reacted to that by saying, hey, you go right ahead, cut your own check. Yeah, and Morgan Housel in an article entitled Why Warren Buffett Can't Solve Our Tax Problem debunks the idea that Buffett could actually make a difference for two reasons, really. One, Buffett donating his entire $50 billion fortune still wouldn't make one iota

of difference in the pond of deficit that we have. And two, really, you'd have to be certifiably irrational to voluntarily pay a higher tax bill than you're charged, even if you could, like Buffett can. He could pay mine, though. Yeah. But let's be honest, though. Buffett is not certifiably irrational. He's not going to pay yours. He's not going to pay more than his than his bill is. And all that said, what Buffett's done is important. He's noted that our tax system is kind of wacky. All right. Mutual funds, a lot of us own them, which means that a lot of us are paying 12B1 fees, which are kind of like the bedbugs of the mutual fund world. Exactly. A 12B1 fee is a type of sales charge that is levied to all owners of

a mutual fund. Now, not every mutual fund has a 12B1 fee, but for funds that do, every owner of that fund has to pay the 12B1 fee. And we oppose them because 12B1 fees are insufficiently transparent to shareholders and because they don't create any value for existing shareholders. So if you have bought a fund in 1980 and it has a 12B1 fee associated with it, you're still paying that 12B1 fee. So even though you've owned the fund for 30 years, you're paying that fund not to make better investments and to pay the managers to do better research so that the fund company can go get more mutual fund shareholders. That article entitled, It's Time to Take Back Your $10 Billion. And finally, I love this headline, two words that will crush Wall Street over the next

20 years. Exactly. And I won't keep you in suspense. Thank you. The two words are time arbitrage. Okay. So arbitrage is the practice of buying something in one market and selling it in another market to make a profit. Time arbitrage is when you buy a stock from someone who has a short-term view, and you hold a long-term view, and you can basically arbitrage the reasons that they're selling the stock for. So if a Wall Street analyst doesn't like the stock because it missed earnings per share estimates by a penny in the most recent quarter, and you see a company that has great prospects, a healthy balance sheet, and a lot of market opportunity. And you can say, you know what, I don't care about the penny a share miss. I'm going to own this stock for 5,

10, or 20 years and make my money over that time frame. Okay, those stories again. Why Warren Buffett can't solve our tax problem. It's time to take back your $10 billion and two words that will crush Wall Street over the next 20 years. Brian Richards, thanks for being here. Chris, thank you for having me. You can find those stories and more investing commentary each day throughout the week at fool.com. Coming up, we'll share some stocks on our radar and tell you why the founder of GameStop has a bone to pick with us. You're listening 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 Tim Hansen. You can always drop us an email, radio at fool.com. And guys, before we get to stocks on our radar, we actually did get an email recently. Someone sent us an internet? Through the interwebs. Now, before our man Steve Roito reads it, this requires a little bit of setup. A few weeks ago, we were talking about Blockbuster going bankrupt. And one of the questions I put to you, Seth, was, what's the next Blockbuster? Is there another bricks-and-mortar retailer out there that is possibly a candidate to go bankrupt? And you suggested poor GameStop. I said GameStop.

Is GameStop the next blog post? And I defended them. I said, no, they're not. I should have said that they might be the next Netscape because their balance sheet's good, but they might become irrelevant anyway. And I got an email. And Steve Brodo, could you read it for us, please? Len Riggio sent us an email. Chris, before you throw an ill-informed question out there, such as, is GameStop next,

you should look at our balance sheet and financials. We have close to $900 million in EBITDA, almost $500 million in free cash flow, and less than $500 million in debt. Signed, Len Riggio, GameStop founder. So there you go. The founder of GameStop, he's on their board of directors. He's also the chairman of Barnes & Noble. It's a strong defense.

I just want to say to Mr. Riggio, if it weren't for ill-informed questions, we wouldn't have much of a show. Come on. I mean, have you listened to the show before? Got some slack here. I mean, that's clearly not the first ill-informed question I've thrown out there. But we did look at the financials at GameStop, and one of the things we found was Len Riggio's stock transactions. He's been buying like crazy, I'll bet. Well, you know, he is on the board, so it's public information.

And what we found is that over the past two weeks, on four separate occasions, Len Riggio has exercised options and sold roughly 3.5 million shares of GameStop. What's that worth, 3.5 million shares of GameStop? Well, the strike price was $2.25. And depending on the day that he sold them, the share price was around $18 and change. So we're talking about $40 million or so net. That's a nice chunk of money. What do we think of this?

Good for him. Well, you know, when you exercise options, you do get tax consequences. Sure. So there is a reason to sell to cover those. But, I mean, there are a lot of good reasons to sell shares of a company. But I will say one reason that you generally don't have for selling shares of the company is that you think the stock is about to, you know, I don't know, double or triple. So there's that. So it is curious.

It's curious. Yes. And just as someone who doesn't necessarily have a dog in a fight here, I noticed that over the past two previous Octobers, Len has also sold shares. And in the subsequent couple of months, the stock price has dropped double digits, typically 20% plus. So it's sort of a bad omen. And obviously, the stock price has been sliding

over the last couple of years, big picture as well. And we don't know. We don't know what he's doing with the money. Maybe he's donating it to charity. Maybe he's, I don't know. It's tough having that much money. You've got to figure out what to do with it. All right. Let's move on to the stocks that are on our radar. And Tim Hanson, we'll start with you.

The stock on my radar this week is Yahoo, which… Really? Really. I mean, maybe I'm a glutton for punishment. And because Yahoo is generally considered sort of a tech also brand, but bear with me for a second. Okay. So I was reading the Chinese business papers the other day, as I am wont to do, And I discovered that this man, Jack Ma, who is the CEO of a group called Alibaba in China, which runs a bunch of e-commerce websites in China, like the eBay, Taobao is the eBay of China, has been sort of fortressing up because of the rumor that AOL and Private Equity were going to try to buy out Yahoo.

And he's worried because he thinks they're trying to get him, because Yahoo owns 40% of Alibaba, that if they take over Yahoo, they're going to try to force him to take two of his companies that aren't public yet, public. So now if you get this all back to Yahoo, what you find is that Yahoo has a $21 billion market cap. They have $3 billion in cash.

They have an $18 billion enterprise value. And the Alibaba group, Yahoo's stake in that, is generally considered to be worth about $10 to $14 billion. So let's call it midpoint and say $12 billion. So assuming there's an event here, a liquidity event here coming for Yahoo, that means that you can buy Yahoo's U.S. business for approximately $6 billion, which would be less than one times Yahoo's sales and five times Yahoo's current EBITDA, which for a tech also ran, isn't actually that bad

because if you've seen what tech startups have been going for in terms of just traffic, I mean, people are willing to pay two, three billion dollars for Facebook. Yahoo's traffic is probably worth more than $5 billion, $6 billion to somebody. So that's the stock on my radar. James, really? It's interesting. It's sort of a non-Yahoo guy. You're telling me, Tim, that regular Yahoo isn't even the main value of the company.

Is there holdings in this Chinese? In Alibaba.com. Well, Alibaba.com, Taobao.com, and Alipay, which is like the PayPal of China. And two of those companies are still closely held. And the fly in the ointment here is that you could make the argument that Alibaba is being overvalued right now because people are wild about China. But it's just, like I said, on my radar, a very interesting situation. I thought the fly in the ointment was the other part of Yahoo's business.

Well, the sooner they can get Carol Bartz out of there, the better, too. But maybe private equity can take care of that as well. She is one of my favorite CEOs. Don't you dare say that about her. James Early. Chris, I like hard assets, and I'm going with one today. Magellan Midstream Partners, MMP is the ticker. This is a pipeline partnership.

I would say company, but it's a master-limited partnership. It's not a company. It transports typically refined petroleum and some other things along its pipelines. And this is a company that yields 5.6%, which I like. Dividend is up 2% quarter over quarter, or 5% year over year. MMP, Magellan Midstream Partners. Seth Jason? Ah, God, these guys don't shut up.

That took forever. Luckily, my thesis is short. Speaking of lousy companies, this is super value. You know this grocery chain. And Cub Foods, actually considered one of the worst of breed grocery chains out there, has a lot of work to do, is overly leveraged. Very, I would say, almost a dangerous stock. But right now, so beaten down, so pummeled.

There's nowhere to go but up? That's not true. But I think that if they can actually drag themselves toward good enough, this is the kind of stock that could double or triple or quadruple in a couple of years. If they don't, it's the kind of stock that could conceivably go to zilch. And the ticker symbol? SVU. All right.

Seth Jason, James Early, Tim Hanson. Guys, thanks for being here. Thank you, Chris. Thanks to our special guest this week, Rob Pegoraro from The Washington Post and Brian Richards, managing editor of Fool.com. For the latest analysis and investing commentary each day throughout the week, go to Fool.com. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill.

Thanks for listening, and we'll see you next week. We'll be right back.