Motley Fool Money - Motley Fool Money: 01.28.2011

Episode Date: January 28, 2011

Microsoft’s latest quarterly earnings were a mixed bag but we’ll tell you why the stock is poised for success.  Plus, the latest earnings analysis on Amazon, Ford, McDonald’s, Netflix and more.  All that (and more) and we’ll talk emerging markets, global trends, and the future of Lady Gaga with economist Daniel Altman, author of the new book Outrageous Fortunes: The Twelve Surprising Trends That Will Reshape the Global Economy.   Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Motley Fool Money. Thanks for being here. I'm your host Chris Hill. I'm joined by Motley Fool Senior Analyst, Charlie Travers, James Early, and Ron Gross. Guys, good to see you. Good to see you, Chris. All right, lots of companies reporting earnings this week.

We'll dig into the latest numbers from Ford, Microsoft, McDonald's, and more. We'll look at a couple of IPOs, plus, as always, give an inside look at the stocks on our radar. But we begin this week with the big macro. The government said on Friday that the economy grew at an annual rate of 3.2% in the last three months of the year. Consumer spending was up sharply, but Ron Gross, the business inventories and the construction activity numbers were not exactly pretty. Break it down for us. So 3.2% is pretty strong in general. It's lower than expectations and the market trades on expectations, obviously.

But let's move aside from that for a moment. As you said, consumer spending and exports look really good. What wasn't as strong is actually what has been driving the growth in prior quarters, which was inventory. Companies have been building their inventories back up once the recession kind of went away, and we've been slowly getting back up to speed. They did that at a slower rate in the fourth quarter. They did not need to continue to purchase goods to sell to the public. Plenty of items already on the shelf and the warehouse.

And the demand for goods based on what they see. They did not keep up that same rate of purchasing, and that dragged the numbers down to 3.2. It probably would have been higher than 7% if those inventory rates had kept going at similar rates to prior quarters. But 3.2% is still pretty good. James Early on Tuesday, President Obama had his State of the Union address. In the speech, he proposed a reduction in corporate tax rates. Is that a good idea? And is that the kind of thing that's going to be good for GDP growth? It actually is, Chris. And innovation is really our meal ticket, I think, for this country.

We've become a nation of entertainers, so to speak. We're very cool, but we don't focus a lot on the hard sciences, excuse me, and on business. And Obama's speech actually hit both these nails on the head. I mean, it wasn't riveting, but I think he really got to the crux the matter. We have had one of the highest corporate tax rates in the world for a long time now. and that frankly is encouraging U.S. companies to expatriate business, to do business overbroad, to hire overseas people, and simply put, a lower tax rate is going to help that. They're going to help bring that money back home. But we've talked in this room before about how companies are sitting on a record amount of cash. They're clearly not doing tons of hiring or not enough hiring to really spur economic growth

and to drive down unemployment in the way that I think everyone would like to see. Is there some guarantee that if the corporate tax rate gets cut, that that's actually going to drive hiring, Charlie? You would hope so, and because we've had persistently high unemployment for the last three years, anything that could spur companies to hire more employees would be a good thing. Along with the tax factor, companies have to see the end-user demand, and with what we're on us talking about, the GDP growth, maybe we'll get both pieces of the puzzle in place. Ron? I've been wary for quite a while about the economy being able to continue to grow on its own,

once our stimulus packages are removed and taken away from us, lowering a corporate tax rate would be another form of stimulus, which could actually replace some of the other stuff down the road and would be maybe a way for us to do this on our own once the government pulls back. Days of anti-government protests in Egypt have also had an effect on Egypt's stock market. Charlie Travers, in 2010, this was the region's second best performing stock market. it's now fallen more than 20% in the past two weeks. This is a business show. So what does this situation mean for investors here in the U.S.?

Sure, this is a very volatile situation that appears to be deteriorating by the day. It's a great example of what can happen in countries when you have massive unemployment and people under the age of 30. You get this buildup of unrest. And the key part for investors either in the United States and Europe is that Egypt controls the Suez Canal through the Suez Canal. authority, which it nationalized decades ago. The Suez Canal, to put it into context of how important this is, is that 4 million barrels of oil a day, which is 5% of global output, travel

from the Middle East primarily over to Europe. Every day? Every single day. And it's also, on top of that is 7.5% of all sea trade in the world goes through this almost 200-kilometer stretch of a canal. So if you're an optimist, you would say that 95% of the world's oil is fine, then. It's not a big problem. You'd have to be one hell of an optimist. Well, here's the interesting wrinkle to this is that to take oil from the Red Sea to the Mediterranean only takes about 12 hours. Now, if these tankers had to go all the way around the bottom of Africa, what happens is that it just soaks up all the supply and capacity in the tankers, and then that's just going to cause oil prices to go up for everyone, and then you're getting to something that we actually care about over here.

You probably have to burn up half that oil to simply make the trip. Right, right. All right. Sticking with oil, or certainly a company that depends on oil, Ford reported its largest annual profit in 11 years. The company cited cost cutting, better vehicles, and a better economy. And despite all that good news, the stock was down sharply on Friday. James Early, why isn't Ford getting any love from Wall Street? Chris, what have you done for me lately? And I mean that as a metaphor, but I'll feel free to answer if you've done something nice. The key thing here, Chris, is to separate the year from the quarter. It was actually a good year overall. despite a very bad quarter, so bad, in fact, that the stock was down like 15% the last time I checked. So there's really two lessons here. First of all, the run-up was fairly shallow, or there's a lot of speculative money in this company. And once that money saw a little bit worse operations, it saw special charges of like $960 million for a debt extinguishment charge. The Ford is trying to bolster its credit rating with that. Some lower-priced products were selling more, which often means lower margins, especially in Europe.

So that's kind of the bad short-term news. But let's step back here. I mean, Ford did make more money than they made since 2000 now for an American auto company. That might not be saying much. But overall, we're still coming back. So I think that this sell-off might be a little bit overdone. James, you said there's a lot of speculative money invested in Ford. And ironically, some of it is here in the studio because our man, Steve Broido, our engineer, is actually a shareholder of Ford.

Boom. Not a great week, huh, Steve? Can't win for losing. I own it as well, I will say. I've won it for years and years and was happy to see it performing better of late, but today we give back a little. You're okay with giving back a little, Steve? Yeah, I mean, I think it's going to, listening to Mulali when he was on our show was very inspiring to me.

So I think the guy seems very, very bright, and I'm sure Ford is going to do well. It's just discouraging. So despite the bad quarter, Alan Malawi, the CEO, is a guy you're sticking with? Yeah, I was very impressed. All right. Coming up, who walks away from $12 million? dollars? Well, not me, but we'll tell you who right after this. Stick around. This is Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in the studio with Charlie Travers,

James Early, and Ron Gross. Hey, if you're listening out there, let us know how we're doing. You can always drop us an email. Radio at Fool.com is the email address. That's Radioat Fool.com. And if you're listening on iTunes, you can just click the rating button. We like the email. We love to hear from you, but we also recognize that you're busy people out there. just click the rating button on iTunes. It's even faster. All right, guys, let's dig back into the earnings. Kind of a mixed bag for Microsoft's latest quarter. Sales of the Connect and Xbox were strong, but Microsoft's Windows Division suffered a 30% drop in revenue. Charlie Travers, I'm a Microsoft shareholder. Please make me feel better about these numbers.

I can do that, Chris. Oh, thank God. Microsoft is one of my favorite blue-chip stock right now, and while I'm not sporting a Steve Balmer-Tamp, tramp stamplet by Jim's colleague and Microsoft Uber Bull, Seth Jason, there's actually a lot to like out of this earnings release. The Windows numbers look worse than they actually were due to some accounting adjustments that occurred in the prior quarter from last year relating to pre-sales and upgrades for Windows 7. And so if you do an apples-to-apples comparison, Windows is actually up low single digits and the rest of the company is absolutely rocking. Do you think that the

connect, you know, when you look at the Windows division and those numbers declining, is Microsoft, do they really have a winner on their hands with Connect? Is this like the thing that internally they're thinking, this is going to be the next big driver for us, or is it more in the, we're hoping stage? No, no, Connect is absolutely a home run. They sold 8 million units over 60 days. And what is interesting is that for a long time, the Xbox first launched in 2001. And this was a money pit for most of the company's history. It was losing money through 2007. And what we've seen over the last three years

is that profits have been steadily increasing out of Microsoft's entertainment division, and the success of the Connect is really putting the company at a profitability inflection point. The operating profit for that division over the last six months has been $1.1 billion, which is a big deal. Ron? Yeah, and purely from a stock perspective,

the stock is priced for very little growth, which is actually one of the reasons we bought it in the million-dollar portfolio service. So this doesn't need to be the Microsoft of 20 years ago where you see them put up really high growth rates that drive the company. If they can just put up a reasonable amount of growth, the stock looks really like a good investment here. I would totally agree with Ron on that. And one of the things that we can take away from the company's persistence with the Xbox and the Connect is to frame what they're doing with Bing search engine and their phones up against that backdrop. that this is a company that takes a very long view towards its future, and with $41 billion in cash and a very determined mindset,

I think they have the staying power to see these other initiatives through where they've been catching a lot of heat. How big, though, are the video games, or the whole that sphere in terms of their total pie? I mean, it's great, but isn't it kind of small compared to Windows, which is not doing that one? Oh, sure. Their cash cows are certainly the windows and the office segments, which are the lion's share. It's almost everything out of their profits. But Office 2010 was their best-selling version of Office of all times.

So it's not just Xbox doing well. They are truly doing well across the board. Amazon reported disappointing earnings well below expectations, and the stock got hammered. Ron Gross, expectations were high because of the holiday. Were they unfairly high? Well, you know, I can't stress this enough that in the long term, stocks should trade on how businesses do. But in the short term on a day-to-day basis, it's all about expectations. and what analysts are saying. And the company did disappoint in that respect. But let's not

be too hard on Amazon. 13 billion dollars in revenue for the quarter. The company is really doing quite well. They sold more e-books with their Kindle application than regular books in the quarter. Expectations were just really very high. The stocks went up 75% from its July low, and it really was priced to perfection. Even at this level, with the stock being weak, we're still at a 65 to a 70%. price to earnings ratio. So it was really priced for just really strong growth. So you're saying trees don't grow to the sky, Ron. They do not. Every now and then, as we saw with Ford, we get a bit of a fullback. So are you a buyer of Amazon now, Ron? As a value investor, I don't think I pay 70 times

for anything, but it is a company that I respect, and as a consumer, I'm glad they're here. You're listening? It's a vague answer, but it's good. Good answer. You're listening to Motley Full Money, Chris Hill, Charlie Travers, James Early, and Ron Gross, as we dig into some of the companies making headlines this week. week. Procter and Gamble's earnings beat expectations despite sales in the U.S. and Western Europe being a bit sluggish. James, one of the headlines was P&G said its commodities bill for the fiscal year is going to end up being more than double what it had expected. That seems like a big miss.

It's pretty interesting, Chris. And we saw a little bit of this with Ford, too. Commodity costs have affected them. For P&G, sales were up a bit, but costs were really the killer. They sold more low price, lower margin products, and then they certainly had a lot of commodity costs eating into those margins. So the thing is for a company like P&G, they have more ability to price in commodity rises than, say, some generic company maker, but not a ton because these are typical lower-priced products and people might switch if the price goes too high. So they just kind of have to take it. Eventually, maybe in two or three years, they can jack their prices up, but for now, this is just kind of the reality. At the Motley Fool, we're first and foremost about stocks,

but it seems like the whole attention that the commodities world has been getting is warranted. Even when you look at things like what's happening in Australia and the way that affects commodity prices, cotton, the Wall Street Journal reported that cotton has hit a 140-year high. That's amazing. You know, there are two stories here, Chris. The first is simply put, the developing world is developing. You've got people in China, people all over the world, making more money, buying more clothes, buying more things, and those things require commodities.

Second, though, is that commodities are kind of the gold for non-gold investors. In other words, these are hard assets that don't have quite the religious following that gold does, but they will rise. In inflation, you've got a lot of people just jumping into commodities based on that, but I wouldn't jump in onto this bandwagon too heavenly because over the long term, commodities have been shown to be a terrible investment. So MC Hammer is not going to be doing commercials for wheat or cotton? You know, MC Hammer has timed it very well. He has timed it very well with gold, but, yeah, long term, I'm betting against Hammer. McDonald's fourth quarter earnings were up 2% thanks to the McRib sandwich and the success of McDonald's coffee lineup.

Ron, I know you're a big fan of the McRib sandwich. Don't forget the fraps, Chris. What did you make of the numbers? So continuing the theme that James was just speaking about, it's about higher food costs here. McDonald sees 2.5% increase in food costs in the U.S., 3.5 to 4.5% in Europe. So that's really the bigger story here. I think they'll see they'll raise prices on their menus in 2011 that will hit the average consumer, the working class. But for those folks that don't think there's inflation out there, I think I would disagree, and we're going to start to see it in the prices that real people pay for food on a daily basis.

Shares of Netflix had an all-time high on Thursday after the company reported fourth quarter profits rose 52%. Netflix topped the 20 million subscriber mark, and the company raised its guidance. Charlie, you're a Netflix subscriber. What did you make of their latest numbers? Yes, so Netflix is just knocking it out of the park, and as you say, I've been a happy subscriber for a very long time. I was actually with them before they hit their one millionth subscriber, which is way back in the day, now that they're over 20 million. I'm kind of a proud consumer. Do you get like a special jacket or T-shirt or something?

Nothing at all. And even a little bit more than. The stock's been on fire. The company has been really hitting it on all cylinders. But what you're looking at right now is a company trading at 85 times free cash flow. And what some of the growing pains we're looking at for Netflix, I'd rather watch this on the sidelines as an investor. So it's a little too richly priced? I would say more than a little too richly priced. CEO Reid Hastings on the conference call, one of the things he said was that Netflix, which has expanded, their services into Canada is now looking to expand internationally. They're going outside of North America. He wouldn't say which country they were going to. But what did you make of that? Because to me, Canada is just like America North. It's not all that different. It would seem like there would be a bigger challenge to go to Europe or Asia or somewhere like that. What did you think? Yes. I mean, we see that a lot with U.S. focus companies where they think they have some success in our 51st state and then that gives them free reign to go overseas.

There go those Canadian radio contracts. Okay. Now, my skepticism aside, I think historically it's been a bad bet to bet against Reed Hastings. The execution for Netflix over the last decade has been flawless. And there are European countries with very strong movie cultures. And there's also very widespread broadband access. And so I think if they are coming out right now saying they're going to do this, we can count on the execution to be solid. And to be clear, Canada is not. It's not actually a state.

Exactly. It's not the 51st state. It's America's hat. All right. Finally, there is a picture for the Kansas City Royals named Gil Mache, and I hope I'm pronouncing his last name correctly, M-E-C-H-E-G, Gil M-Mash. The guy's in the middle of a five-year, $55 million contract. He has one year left on it with $12 million, and he retired. He walked away from it and said he didn't want to get paid for doing nothing. Now, that's certainly very admirable. It's also very surprising, considering the world that we operate in on Wall Street with people getting these outrageous bonuses. So I was just curious if you've ever given back money for something you didn't think you earned or if you've ever gotten paid for doing nothing. Ron?

I'm going to prove to you, Chris, that not all of Wall Street is filled with greed. When you manage a hedge fund or a private equity fund, you can often collect your management fee, typically a one or two percent management fee, not only on the money you manage, but on the money that people have committed to you. And in my first hedge fund, we did that. And very quickly on, we said, this is silly. It doesn't seem fair to collect a management fee on money that we're not actually managing. And so we changed the rules, and we said, just on the money we manage, we'll collect our fee. We won't collect it on the money that you've committed. And it was less money for us, but it seemed fair. It's actually very noble of you, Ron. Thank you very much.

Wow, that goes against your reputation here in the office, which is that you're kind of a cheap guy. All right, coming up, is China really the next economic superpower? We'll find out when we talk with economist Dan Altman. Stay right here. This is Motley Full Money. Welcome back to Motley Full Money. I'm Chris Hill. Daniel Altman teaches economics at NYU's Stern School of Business, and is the author of a new book,

Outrageous Fortunes, The Twelve Surprising Trends that Will Reshape the Global Economy. And he joins me now. Dan, welcome to the show. Thanks so much for having me. Let's talk about a couple of those trends. One is that you say China will get richer and then it will get poorer again. Please explain. Well, I think that China is experiencing very rapid growth now that's driven by a couple of big trends. One of the trends is people moving off the farms and into cities where they can work in factories and big service operations.

And we've seen that kind of rural to urban migration before in the U.S. in the 20th, century and also in Japan. And I also think China is benefiting from another trend that Japan used for its growth, which was to copy technologies and produce them more cheaply and export them. And we know that both of those trends are eventually going to run out of steam. When that happens, and I think it'll probably happen in a couple decades, by which time China may be the biggest economy in the world, China will eventually settle into a long-term steady growth pattern. And at that point, I believe that its growth rate on average will be lower than the growth rate of the U.S. because the U.S. does so much more to encourage innovation and entrepreneurship through its market institutions, its legal framework, and its business culture.

And at that point, I think the U.S. is going to start to catch back up to China, and it'll pass China, and I don't think it's ever going to look back. So China's living standards will start looking relatively poorer and poorer compared to the U.S. Another trend you write about is that Americans will become the world's salesperson. force. I've got to say that that scares me a little bit because I'm terrible at sales. Well, you know, in this country, we have a commercial culture that has developed over a couple of centuries, which started in a nation of immigrants where you had to figure out a way to sell the same thing to just about everybody, no matter where they were from. And we are the best in the world at doing that, and that's exactly the skill that we need to succeed in the global economy

today, selling to people all over the world. Now, it can help us to sell our own stuff, we can be paid to sell other people's stuff, we can even be paid to do it. teach other people how to sell the American way. Now, I'm not just talking about retail jobs when I'm talking about a lot of consulting jobs, marketing jobs, publicity jobs. There are a whole bunch of occupations. And if you look at the Bureau of Labor Statistics predictions for these occupations, logically, they're expecting a lot more jobs to come from here in the future. One other trend you write about, you say the EU will disintegrate as an economic entity. Yeah, I think that the EU economically is heading for a split. I don't necessarily

say that they're going to abandon all the treaties that have brought their economies closer together so far. But some of them, for example, the euro area, look like they're going to be untenable. And the reason is, if you look at the long-term risks and opportunities, they're facing all the European Union countries, they actually split out into four pretty distinct groups. They're just going in very different directions because of the long-term obligations they have to pay pensions and take care of expanding populations or shrinking populations versus the opportunities they have for innovation and entrepreneurship. is the biggest misperception about the global economy?

I think the biggest misperception is that globalization has to have losers because it is axiomatic in economics that opening markets creates more gains for the winners than it does losses for the losers. But what we have to do is figure out how to spread those gains around so that everybody's at least as well off. And we've done a terrible job so far of managing that transition. You're listening to Motley Full Money. We're talking with Dan Altman, author of the new book Outrageous Fortunes, the 12 surprising trends that will reshape the global economy. What do corporations look like in the future? Do you imagine there's going to be more consolidation? Are they going to be bigger, more powerful? Well, we see wave after wave of proliferation and then consolidation.

We see new industries opening up and all of a sudden you get people flooding into this industry trying to take advantage of the profit opportunities that exist there. And then as the industry sort of gets leaner and meaner, we see consolidation. I think we're going to continue to see that. It's a pattern we've seen all throughout sort of modern business history. But I think that corporations are already becoming extremely global, and that's just going to keep happening. I mean, most of our big corporations now that are based in the U.S., big multinationals,

they have more staff outside the U.S. than in. they get more profits outside the U.S. and in. I think that's going to continue. And some of them are actually going to start to change the locations of their headquarters. And at that point, we have to decide, what does it mean to be an American corporation? Do we tax them? Do we have to invest in them to share in their profits? It's something that we really haven't debated publicly very much. And you think that debate is coming in the future? I think it's going to have to because we're going to be looking at a case where

our corporate income tax receipts are going to be falling as these companies find new jurisdictions for their headquarters. Where do you think foundations fit into all of this? Because one of the things we've seen over the last few years is these American entrepreneurs, and I'm thinking specifically of someone like Bill Gates, who's very successful, very wealthy, and has decided to pour much of his time and energy and money into a foundation. Where do you think foundations can affect our global economy? Foundations have the opportunity to take a really entrepreneurial role in pushing forward the drive for higher living standards all around the world. And I think that what the Gates Foundation has done is a great exemplar of this.

Bill Gates is interesting to me because he comes from that private sector experience. And his way of thinking is very different from people who tend to head the multinational agencies like at the UN or the World Bank. They tend to come out of the public sector, and he's coming out of the private sector. He's very results-oriented, and for him, results means reducing deaths and raising living standards around the world. And that's really refreshing. There's no doubt that his perspective is helping to move this world along. You're listening to Motley Fool Money. We're talking with Dan Altman, author of the new book, Outrageous Fortunes, the 12 surprising trends that will

reshape the global economy. Dan, the Motley Fool is focused on the stock market where this is a show for investors. And one of the things increasingly investors have focused on over the last decade or so is looking outside America at emerging markets. India was the big play for a while. China always gets mentioned. When you look around the world, what is an international market that you think is worth a second look in terms of investors and development? Okay, well, I'm going to focus your attention on a couple of Latin American markets because I see something very interesting happening there where you've had, in these countries, one government come in that's sort of pro-business the center right, and it has put in what we would call sort of good housekeeping seal of approval

macroeconomic policies like tight fiscal balances, tight monetary policy with relatively high interest rights and a floating currency. And then you've had a government succeed them, which has usually been center left, which says, hey, these are good policies. We're going to keep them here, and we're going to legitimize them by spreading around some of the benefits from the economic growth that has come as a result. And that's what's happened in Brazil. But that's what's also happening now in Uruguay. It happened in Chile. It's probably about to happen in Peru.

So I think countries like Uruguay and Peru that may not get as much press as Brazil are actually pretty decent opportunities to invest now. And if you look at how they score on things like corruption and economic freedom, some of them are actually better than Brazil. So I would give them a little more notice. What surprised you the most as you were working on your book? One of the things that surprised me the most was how little people seem to be thinking about a long term. I mean, I thought I might be coming out into a crowded field here, but either because

no one wants to take the risk or because no one can think beyond the next quarterly earnings numbers, there's just nobody that I could find who is really looking at 10, 20 years down the road. And yet it's so important for us to do that because we need to make investments now to prepare for that future. I mean, I'm going to echo the president in his state of the union address this week. He said we need investments in infrastructure, basic research, and education so that we have the potential to grow in the future. I actually think he's right about that, but we have to also make the case to credit markets that doing those things will help us to repay our debts in the future, so they should give us the money to do them. You're listening to Motley Fool Money. We're talking with

Dan Alman about his new book, Outrageous Fortunes. All right, Dan, before we let you get away, we're going to wrap up with a round of buy-seller hold. Let's start with the news this week. The General Motors sold more cars and trucks in China last year than it did in the United States. So buy-seller hold the future of GM in China. Well, I've been a buyer of this future for some time after I found out that at the Buick factory that GM has in Shanghai, they're actually making cars to higher tolerances than they are in Detroit just because it's a new factory that has much more automated systems. So I think that those cars are great products. There's no reason why people wouldn't buy them. So I'm going to say buy on that. This is a private company that some are saying

will rival Google, buy-seller hold the future of Facebook? You know, Facebook has a pretty good model right now. They're already making money, but people are having a hard time putting a value on it. There's another question about whether there needs to be an adult in charge. You saw this past week that Eric Schmidt stepped down from Google saying, hey, you know, you don't need an adult here anymore. I've taken the company to a place where it's mature and where its founders can really take over. I'm not sure that's true at Facebook yet.

We'll have to see. So I'm going to say, hold, I guess. And finally, you're teaching economics at NYU's School of Business. This person is an NYU grad and also the owner of a global brand of her own. Buy seller hold, Lady Gaga. Definitely sell. When are people going to wake up and realize that Lady Gaga can't sing? All of her lyrics are basically in the same octave.

And even if she's a talented composer and she can write a catchy, tune now and then. I don't think her voice is any good. Give me a Katie Perry or perhaps even Mariah Carey any time. They'll put her to shame. Now, last year I spoke with your colleague at NYU's School of Business, Noriel Rubini, and he was a strong buy on Lady Gaga. Well, I think Lady Gaga is the kind of demographic that Noreal is trying to get into his courses right now. I tend to have people who are looking more at international development, and when she starts to show an interest in that, I'll be happy to change my recommendation to buy. The book is Outrageous Fortunes, the 12 surprising trends that will reshape the global economy. Really interesting stuff. Dan Altman,

thanks so much for being here. Thanks for having me. I appreciate it. Coming up, we'll take a look at a couple of IPOs and give you a look at the stocks on our radar. This is Motley Fool Money. Every time it rains, it rains. As always, people on the program may have interest in the stocks they talk about. Don't buy ourselves stocks based solely on what you hear. I'm Chris Hill, and back in the studio with me, our trio of senior analysts, Ron Gross, Charlie Travers, and James Shirley.

Guys, a couple of IPOs happened this week. I wanted to touch on them before we get to the stocks on our radar. Demand media went public. This is an online content creator. IPO this week, it was up nearly 40% right out of the gate. Charlie, what did you think? I mean, this is a company. Their business model is basically creating cheap content, paying people to create the cheap content, and then selling ads around it. That's right, Chris. And I would say the only thing creative about demand media is the company's accounting. This is the kind of company that produces low-quality articles such as how to belch, the companion article, how to stop belching, and how to buy condoms that fit. So what demand media does, and instead of like every other publisher in the world expensing the payments to its writers for this content immediately, it says these truly, I mean, valuable articles, if you can believe that, are going to generate revenue over the next five years.

And so they spread these expenses out over that length of time. And what that does is it makes the company look more profitable than it actually is. If the writer payments were expensed immediately, their net income would actually. actually be 20% lower than what they reported. So they're paying someone $15, and that's roughly what they're paying people. $15 to write an article, How to Belch, and they're spreading that, they're recognizing that payment over five years? That's right. And as I've been saying lately, it would be a little better if their media were actually in demand, but it's not.

And that's the fundamental problem here is that the idea is sound. They look at search engine stuff and see what people want, and they try to put out articles based on that. But these are low-quality junk articles just designed to exploit the Google. algorithm and Google in fact is trying to tweak their algorithm to sort of sidestep these filler articles that are popping up so this thing could go away too. All right. Another IPO is one that hasn't happened yet, but LinkedIn filed paperwork for an IPO. They're hoping to raise $175 million.

Ron, you're on LinkedIn, aren't you? I am. Can you say internet bubble, Chris? I mean, how many companies do we need to see before we start to recognize that we may be re-inflating that bubble? LinkedIn's a fine company. Everyone I know is on it, but no one I know uses it. It's one of those kinds of things.

They have $160 billion in revenue for the first nine months of 2010. They are profitable, $10 million of net income over that time frame. Valuation is $2, $2.5 billion on $10 million of net income. Sounds about right. It's just, you know, it's not the kind of thing that would interest me in any way. And unlike I said perhaps I would participate in the Facebook, I would go nowhere near the LinkedIn. Well, that's a good comparison because people are on Facebook all the time, but like you,

I'm also on LinkedIn, and the only time I ever think about it is when I get this rogue request out of nowhere to accept somebody into my little network. What do you do? Once you're LinkedIn. So pretend Charlie and I are LinkedIn, like, now what? We already know each other. You use it for networking if you'd like. You hopefully...

Like I would network with Charlie who I know already? Correct. Well, you would network with his network. I see. So I would try to bug him. Hey, Charlie, can introduce me to X. Right. I see.

Wow, this business model just sounds worse and worse coming out of James' mouth. All right, finally, Marriott announced this week it will no longer offer pay-per-view adult videos in any of its new hotels, and it will be phasing out adult videos altogether in the next few years. Ron? Wake up to me. Well, just your experience business. The day and age of laptops and iPads, I think hotel internet adult movies, are a thing of the past.

All right, let's move to the stocks on our radar. We're going to bring Steve Broido in because, you know, frankly, Steve's had a rough week as a Ford shareholder. So Steve will have a question for you about your stock. James Early, we'll start with you. Chris, I'm going to go with Chevron. The ticker here is CVX. This is an income investor recommendation. It's the second largest oil company in the U.S.

They just reported a 72 percent earnings rise. We know that oil companies are doing well, but I like Chevron in particular because it has less refining exposure than most of the oil measures. and refining as sort of this overcapacity, I just made that a verb, overcapacity business that this lower margin is probably going to go more overseas over time, so it's good to have less exposure to that. And they're also very good in deep water oil, and deep water oil way down miles deep. Is really the future of oil, this heavy, nasty sludge getting pumped up from the depths. That's where the future is.

So Chevron is there. Yeah, because what could possibly go wrong with deep drilling? Steve? My question, electric cars, go. Can you phrase that in a question? No, electric cars are changing everything. Everyone's going to be driving a Nissan leave for a Chevy Volt. How's that going to impact?

Oh, well, not for a long time. I mean, oil is still sort of the bastion. I mean, that's more of a novelty. Apparently, everyone will be driving an electric car in the next three or four days. At that point, it'll be the time to sell Chevron, but not quite there. In all seriousness, if you're Chevron, if you're any big oil company, aren't you looking to just crush electric cars? Aren't you looking to just do anything you can to tamp that down?

I have no comment I mean am I correct that you need oil to create electricity by the way isn't there right it is it is actually you go downstream far enough you get oil I mean oil you need you know yeah I just think it's such a non-event I mean it's not even their radar yet they're not worried Charlie yes one stock I'm watching right now is Laura Lard which is the manufacturer of the Newport cigarette which is a menthol cigarette cigarette consumption has been in a multi-decade downward

slide in the United States. However, the menthol category is actually bucking the trend and performing very well. The FDA is reviewing whether or not it wants to follow up its ban of flavored cigarettes in 2009 with a ban of menthols, and that decision will come down in March. I do not think they're going to do it. And with a stock like this that has the top brand in the category with a strong dividend, it's worth a look. And what's the ticker symbol? L.O. Steve, question for Charlie? What makes this company different than any other cigarette manufacturer? It has way tastier cigarettes than the rest of them. Can you say two-d-thru-de?

Passion fruit. Way-tasteier cigarettes? Way-tasteier. Good enough for you, Steve? Slow down right there. All right, Ron Gross, one stock that's on your radar. I'm going to continue the theme of inflation and food prices and commodities and say that I'm looking at the Deer & Company, ticker symbol D.E., which is the John

Deere Company, make agricultural and farm equipment. I think they'll definitely benefit. from this trend that we're seeing in rising food prices. The stock has risen quite a bit recently. I'm not the only one to recognize this trend, but I think if the trend does continue, the stock has plenty of room to run here. 20 times earnings, not necessarily the cheapest company, but I think those earnings are going to grow quickly. Steve? Isn't there a massive delay in terms of agricultural products? You know, a trade, look at a tractor.

How frequently are those things purchased? Is that increased demand, going to move the needle quickly enough to really move the stock price. There's definitely delay. I think a massive delay might be a bit extreme, and the company is recognizing the need and has been, you know, anticipating that. So if it came up just overnight, bang, sure, there'd be a lag, but the company should be anticipating that demand. Ron Gross, Charlie Travers, James Charlie, guys, thanks for being here. Thanks for our special guest this week. Daniel Altman from NYU's Stern School of business? Hey, if you haven't already, please check out Market Foolery. It's our new daily podcast. We do it Monday through Thursday. Every day at 4.30, you can get our take on some of the big

stories of the day. That's Market Foolery. It's on iTunes and online at MarketFoolery. Our engineers are Steve Broido and Gail Año Nuevo. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening, and we'll see you next week.