Motley Fool Money - 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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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 Hanson. Guys, good to see you. Hello, Chris.

Coming up, we'll give you the latest on Apple, Amazon, and we'll tell you why now is the time to buy your thanks. giving Turkey. Washington Post columnist Rob Peggeraro 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 cell.

off and the reason is I'm 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 in valuing companies and commodities that China's 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

spark the sell-off. We don't buy that, though, do we? Cadmium can become too expensive to put in the children's toys? I mean, oh, come on. Cadmium's never too expensive for that. Isn't it more important in China that you know, that you know somebody than you know about the rates, though? I mean, this is, 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, 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 it really caused 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, 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. It's going to raise demand for Chinese currency as well. Seth, Jason? Well, you know, I understand why everyone panicked. Oddly enough, a small Chinese company that we have over a hidden gems finally came back to life when this happens.

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. 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, then 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. It's 4.2 million people staring at this large cell phone that can't make a phone call wondering what the heck to do with it. I did see that Zinga has released a new high-deaf farmville for the iPad. Maybe that's been the catalyst for that. I can't wait to see people driving with that in their lap. James, give you 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 and 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, you know, they were, 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, and 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 seven-inch versus nine-point-something-inch tablet and how, even though... The size of the tablet screen. The seven-inch tablet apparently only has 45% of the screen size is like the 9.7-inch owing to the formula for a area of a rectangle, and he

spent a lot of time on this. Yeah, you 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, I mean, as an observer, tech stocks aren't my specialty, but I'm pretty sure the tech stocks have a great history with large acquisitions, right? I mean, at AOL thing, they're still cruising, yeah. eBay and Skype, that was another good one.

You remember history of the world, and Dom Deloise is the Roman Emperor, and he's laying at 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. 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 dollars 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. I'll close it with the bottom. I'll close it with the stat. I'm looking at an article, Business Week article, mentioning this guy, Tom Saganagi, I'm guessing, is pronounced Sanford-Burnstein analyst, who says about 10 to 15 percent 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 full 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 drop, didn't it? Operating margins, yeah, that's the, 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 the stock is at an all-time high 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 if you look at Amazon's free cash flow, and that's the amount of money that they actually generate in cash, dropped a little bit. 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, you know, 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 and your 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 Motley Fool Money, 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-cass-cass-fus lunch would eat traditional fast foods 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 think people, it's just like a default to what's cheap, quick, and low cost. 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 McAfee 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'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 and college. So you know 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 with a mother and daughter who's 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. 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 Hansen, 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 were 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 they're 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 percent, they're worth a lot more. Well, as of the June quarter, which I have grafted on my nerd computer in front of me, their overall operating margins were already at 15 percent, 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 it 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 America. concept going abroad. The rule is they fail. The rules, they really struggle. I mean, you know that Starbucks is, they don't break out the numbers on a really granular lever, 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. Yeah. 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 denser the denser. 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. We had, I remember some of the UK fools went to lunch there. The weekend it opened. And they were paying, you know, the equivalent of 12, 13 bucks for a single burrito?

For a single burrito? For a burrito. And, you know. 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 it to these. I think there's cultural differences that are tough to overcome. But I think it may be a shorter put 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 food with a purpose, good, high-quality ingredients.

And that should resonate at least a little more with the Western Europeans. That is true. 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 Chipulay 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 Hansen, 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 four. $4 in 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 the Central 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 before, you know. Nobody's trying to buy the corn belt vote. Oh, boy. Do you think ahead of the elections? I'm just nothing. Nobody would do that. That ethanol, I mean, my own, it was such an inane decision, and then the timing of it made it doubly inane, but so it knows.

Making fuel out of ethanol is really indefensible. It's a really bad thing to do. Corn-based ethanol, sorry. It doesn't work. Sugar cane, 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 sugar cane. 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 that 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's been passing price increases along or making their portions smaller. But I mean, you know, four to five-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 upholding themselves to a higher ethical standard, then they may have a little less corn in their feed mix. Now, Steve Brodo, 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, 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, you know, 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 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. Coming up, Washington Post Technology columnist Rob Pegararo 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 Pagoraro, 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, you know, thank the people who worked so hard to make all these great products. But why then trash talk rim for, you know, he disposed of them in about half a minute. And then have this long soliloquy about why Google and Android are doomed to fail in 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 MacOS 10 or a new

iPhone, they don't spend a whole lot of time doing a point-by-point comparison against Windows or, 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. you know, if you're not worried about this company that you think you can beat, stop talking about them. You're listening to Motley Full Money.

We're talking with Rob Pagoraro 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 9-inch screen, and any tablet with a 7-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 2 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 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. 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. review. The Kindle doesn't matter. Nobody reads. Well, in fact, Apple has an e-book store now,

iBooks, prominently featured on the iPad. You're listening to Motley Full Money. We're talking with Rob Pagararo 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. 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. We'll 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 that 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 sacrifice 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... uh... blackberry ask business oriented a set of software where you have you know the sync software they use is just this crudely stitched together bundle of other people's components nothing particularly elegant uh...

you know it's got a better web web web has a better web browser but in a lot of places you tap the menu button and you have ten options that you're never ever going to use i don't think rim that they're still trying to grasp the principle of editing than apple does so well Palm is obviously, they've got to figure things out. HP, their new owners, finally unveiled the next version of the Palm operating system, but they need some new hardware.

Who knows? Palms WebOS might work well on a tablet, but they haven't announced that yet. Netflix reported blowout earnings. CEO Reid 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, for instance, if you want to rent only one or two movies a month, 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 movie watching, TV show watch. watching. You know, they do have the recommendation engine, which is, you know, people seem to like that a lot. I don't know. The whole thing, 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 which 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 disk 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 Full Money. We're talking with Rob Pagoraro, 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-seller hold. So let's start with Buy-Seller Hold, the future of the Blackberry. I think I got to sell that. You know, there are things they can do, but right now Blackberry seems kind of, they seem a little lost at the plate. You know, 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 Paul used to do when it was completely lost and doomed before they successfully reinvented themselves. They have some work to do. Buy seller 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, you 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, 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 an upright. getting the remote controls to work with each other. 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 or your TV. My eyes are already glazing over. Rob Pagoraro from the Washington Post, if you want the latest on consumer technology, follow him on Twitter.

Read his stuff on Washington Post.com. Rob, thanks so much for being here. You're welcome. And now we're joined by Motley Fool Managing Editor, Brian Richard, 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. 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, you know, 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. but so that the fund company can go get more mutual fund shareholders. That article entitled, It's Time to Take Back Your Ten 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 Hanson. You can always drop us an email. Radio at fool.com. And guys, before we get the stocks on our radar,

we actually did get an email recently. Someone said us in Internet? Through the interwebs. Now, before our man, Steve Roido 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 blockbuster?

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 Brotto, could you read it for us, please? Len Reggio 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 EBDA, almost $500 million in free cash flow, and less than $500 million in debt, signed Len Riggio, a 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 Illenfor, he's a lot of it. question. 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 of 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? Three and a half million shares? Well, the strike...

40-something million? The strike price was $2.25. And depending on the day that he sold them, the share price was around 18 in change. So we're talking about 40 million bucks 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 office, options. You do get tax consequences. 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, you know, over the past two previous October's Lynn has also sold shares in the subsequent couple of months,

the stock price has dropped, you know, 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, a 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 Hansen, we'll start with you. The stock on my radar this week is, 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 ran, but bear with me for a second. Okay. So I was reading the Chinese business papers the other day, as I want 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, Taubo is the eBay of China, has been sort of fortressing up because of the rumor that AOLA, in private equity, we're 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 and 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 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. dollars to somebody. So that's the stock on my radar. James Raleigh? It's interesting. It's sort of a non-Yahu guy. You're telling me, Tim, that regular Yahoo isn't even the main value of the company. Is there a whole things in this Chinese? In Alibaba.com. Well, Alibaba.com, Taubow.com, and Alipay, which is the, like the PayPal of China. And two of those companies are still closely held. And the fly in the

argument 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, you know, the other, 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 a 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, uh, you. a company that yields 5.6%, which I like. Dividend is up 2% quarter over quarter, or 5% year over year. MMP, Magellan Misdream Partners. Seth, Jason? Oh, 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. 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 Pagararo 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 Mac Career. I'm Chris Hill.

Thanks for listening. We'll see you next week.