The Motley Fool Take on Thursday, Feb. 7, 2002
Wild, Wild WorldCom

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Yesterday we joked a bit about some of the overwrought and often violent headlines that media outlets come up with to describe the stock market's day. We asked readers if we should get with the program and start writing our own sensational headlines. But Fools are Fools. Eighty percent of respondents said, "Just give us the truth."

That pleases us, even if it disappoints us just a little. We were ready. Today's Motley Fool Take headline was going to be either "Screaming Vikings Ransack FOOL 50, Pull Index Down!" or "Nasdaq Sheds Half a Percent, Fools Prepare for Apocalypse!"

The FOOL 50 did drop about half a percent today, but we're postponing our apocalypse preparation until after the Red Sox win the World Series. See ya then.

In today's Motley Fool Take:

Wild, Wild WorldCom

Shares of WorldCom (Nasdaq: WCOM) bounced off yesterday's seven-year low, gaining about 12% today, despite falling a bit short of fourth-quarter earnings and revenue estimates. The communications provider has lost half its value in the past month, partially on worries about -- you guessed it -- accounting procedures.

Today the company said it has no unusual off-balance sheet financings. In addition, it emphasized that its exposure to the Global Crossing bankruptcy is negligible, totaling about $10 million in receivables (compared to its full-year revenue of  $21.3 billion). There have also been some liquidity concerns swirling about, and WorldCom assured investors that it's in sound financial condition, with $1.4 billion in cash and equivalents in the bank and several times more available in credit lines.

CEO Bernie Ebbers was quite emphatic about his company's viability during today's conference call. "Bankruptcy or a credit default is not a concern," he said. "The veracity of the rumors circulating about WorldCom over the last week has truly been unbelievable. To question WorldCom's viability is utter nonsense."

Quote of Note

"Tobacco companies are great businesses with two exceptions: 1) Their product kills their customers, and 2) They are getting sued for it. I would much rather own the packaged-food companies at a bit higher multiple, with, I believe, better growth opportunities and no legal risk."

     -- Bill Nygren, manager of Oakmark funds.

Warehouse Clubs Bulk Up, Again

When Depeche Mode sang that "everything counts in large amounts" back in the early 1980s, maybe the British synthpop mavens knew a thing or two about the promise that would lie ahead for the wholesale clubs. Stocking oversized portions of foodstuffs and other consumer retail goods in bare-boned warehouse settings, chains like Costco (Nasdaq: COST), BJ's (NYSE: BJ), and Wal-Mart's (NYSE: WMT) Sam's Club have spread like a winter cold at a day care center.

The member-based retailers thrived when the economy was ripe but would they perish when money ran tight? Nope. This morning, all three warehouse club chains reported healthy same-store-sales gains for January. Costco and Sam's led the comp brigade, with their stores ringing up 7% more in sales last month than they had the year before. While BJ's 2.7% showing lagged the two market leaders, it was still a step in the right direction.

Consumers taking to the clubs regardless of cupboard space shouldn't come as much of a surprise. We profiled discount retailers in Industry Focus 2002, assuming that a cost-conscious public would turn to value even if it meant a cover charge and buying in bulk. Will the trend continue as the economy turns the corner? Will those sampling the warehouse club as an alternative to the neighborhood grocery store be smitten for good? Why not? People are people.

Discussion Boards of the Day

Do you belong to a warehouse club? Where do you see the industry going in the years to come? My, aren't those pallets stacked high? All this and more -- in the Costco Discussion Board. Then, after you've packed your fridge, why not check out some more penny-pinching ingenuity from our Living Below Your Means Discussion Board. Only on Fool.com.

Another Brick in the Analyst Wall

Today, the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) announced new rules to keep analysts independent of their firms' investment banking business.

The problem: Over the past couple of years, analysts continued to issue strong buy recommendations on stocks -- especially high-flying technology issues, as well as Enron -- as share prices plummeted. The reason: Firms don't want their analysts to alienate potential investment banking clients by talking smack about their stocks. Further, analyst compensation is often linked to the profitability of the firm's investment banking business.

A report released in July by Laura Unger, then acting chair of the Securities and Exchange Commission (SEC), confirmed everyone's suspicions. The study found that 16 of the 57 analysts investigated were treated to cheap, pre-IPO stock in companies that they recommended as buys. Also, three analysts sold or shorted stocks that they recommended as buys. "It has become clear that research analysts are subject to several influences that may affect the integrity and quality of their analysis and recommendations," reported Unger.

To rectify these problems, and restore investor confidence in the public markets, the NASD and NYSE have proposed the following reforms:

  • Analysts would be forbidden from receiving any compensation from investment banking deals.
  • Analysts could not short or sell a stock on which they have issued a "buy" rating, nor could they buy a stock on which they have issued a "sell."
  • Analysts must clearly and loudly disclose whether they own a stock they're covering, as well as whether their firm owns at least 1% of the stock, and whether their firm has received compensation from the covered company in the past year, or anticipates doing so in the subsequent three months.
  • Each research report must provide a chart, indicating stock price and the timing of the firm's recommendations.
  • Bankers can't promise favorable coverage to a client, nor can bankers approve an analyst's recommendation.
  • Analysts and bankers must be at least three stalls away from each other when using the executive washroom. In the corporate dining room, only analysts can have their cake, while only bankers can eat it.

What's next: The SEC still has to approve the guidelines. Before that happens, there will be a period when the public can voice their opinions. Be assured that the Fool will keep you updated as to how you can say your piece about the nefarious conflicts of interest infecting Wall Street.

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Quick Takes

As expected (and leaked by a inadvertent internal email), Cisco (Nasdaq: CSCO) yesterday reported fiscal second-quarter earnings of $0.09 per share, a 24% drop year-over-year. According to CEO John Chambers, the third quarter looks as clear as mud. "We still have limited visibility over the short term,'' said Chambers. "Traditionally the third quarter has been a seasonally challenging one for Cisco." On the plus side, this was the second consecutive quarter of increased sales and profits, and the company's hoard of cash and investments grew from $19.1 billion to $21 billion. Cisco also claims to have gained two to three percentage points of market share.

The initial public offering of online transaction facilitator PayPal, which was supposed to occur today, has been delayed at least 24 hours due to a patent infringement suit brought by rival CertCo. PayPal is still not profitable despite more than doubling its number of accounts over the past year, from 5.5 million to 12.8 million. The company plans to (eventually) offer 5.4 million shares in a range of $12 to $14.

Everyone's feeling the pain of the Enron collapse. Yesterday, insurance and mutual fund company John Hancock (NYSE: JHF) declared that its earnings dropped 55% year-over-year, due in part to write-downs of Enron bonds and other investments. John Hancock isn't the only company left holding the deflating Enron bag. According to Reuters, many mutual funds -- especially sector funds that focused on utilities -- had as much as 8% of their holdings in Enron investments. Then there's the Merrill Lynch Focus Twenty fund, which dropped more than 70% in 2001, 3.3% of which can be attributed to Enron.

Raise a glass to the slumping economy! That's what Anheuser-Busch (NYSE: BUD) says Americans are doing. The company yesterday announced that it earned $0.26 a share, up from $0.23 a year ago. It was the 13th consecutive quarter of double-digit earnings growth for the nation's largest brewer.

As Enron Turns

Enron's former chief financial officer, Andrew S. Fastow, along with three other former Enron execs, pled the Fifth Amendment today while appearing before the U.S. House Energy and Commerce subcommittee on oversight and investigations.

Former Enron CEO Jeff Skilling also testified today, saying he felt "devastated and apologetic about what Enron has come to represent." Here are a few other statements -- our favorites -- that Skilling made while he was still with Enron:

  • During a conference call, Skilling called an analyst a seven-letter naughty word that begins with "A" for questioning Enron's confusing financials.
  • Shortly after taking the CEO role, Skilling explained at a conference how Enron stock, then at record levels, was undervalued.
  • Earlier this year, Skilling told a writer, "There is a very reasonable chance that we will become the biggest corporation in the world."

Also Rep. Billy Tauzin, chairman of the House Energy and Commerce Committee, said yesterday that there is "substantial evidence of illegal activity" on the part of Enron's management. Expect a congressional report out soon that will restate the causes of El Nino (blaming Enron) and will delineate Enron's links to Al Qaeda.

Finally, Lucasfilm Ltd. (as in George Lucas, creator of Star Wars) expressed dismay over the use of character names in the Enron lexicon. JEDI LP, Kenobe Inc., Obi-1 Holdings LLC, and Chewco Investments LP (as in Chewbacca the Wookiee) are among the business entities that were associated with Enron. It was also revealed that Ken Lay is Luke Skywalker's father.

And Finally...

Today on Fool.com: Co-founders Tom and David Gardner have an update on the changes coming to The Motley Fool Community.... Recently, some have said investing in index funds can be "disastrous" to your financial health. Come again?.... What should you look for in financial services companies? Jeff Fischer examines Mellon.

Brian Bauer, Bob Bobala, Robert Brokamp, Jeff Fischer, Tom Jacobs, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Dayana Yochim

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