GAITHERSBURG, MD (December 29, 1999) -- An imminent tragedy looms with the end of the millennium: All of my Y2K jokes are about to go simultaneously stale. As we await the final results of the Olympic Synchronized Blue-Screen competition, I must bid farewell to my "Y2K Complacent" button. And although years ago I did suspect Windows would cause the end of civilization as we know it, I'd like to point out that Bill Gates isn't REALLY going to be dragged screaming into the abyss due to some pact with the forces of evil expiring at midnight. (After all, when has he ever honored a contract after it ceased to be in his best interests?)

My only New Year's resolution this year is to break all of the New Year's resolutions I'm making this year... although I'm still wondering how to go about it. At the very least it should give me something to do for a while.

Speaking of doom and gloom, I'd like to let everyone know of the widespread scorn and derision the geek community has expressed towards the initial public offering (IPO) of LinuxOne Inc., future stock symbol LINX. Despite the name, this company is NOT one of the veteran Linux companies, which have been having multi-billion dollar IPOs recently. It doesn't appear to be a veteran anything, and I have yet to find anyone who knows what they actually DO, other than issue stock. As I've written before, investing in an area you know nothing about just because it's hot is an easy way to lose money. I'm not telling you NOT to invest in LinuxOne, but I'm not telling you never to suck on a loaded gun, either. To help you do your own research (which will remain a good idea even after Y2K), here's a couple of relevant links:

Now that I've given The Fool's lawyers apoplexy twice in one column (which might be fun to watch, since I have NO idea what that actually looks like... One of the disadvantages of telecommuting), I'd like to explain why I gave the thumbs up to Coke for the finally-to-be-announced-today $500 pick when I couldn't get anybody to take my Home Depot recommendation seriously. It's very simple: I don't believe there's really any such thing as countries, governments, or corporations. Just a bunch of people pretending.

When IBM (NYSE: IBM) moved out of Boca Raton, Florida, they were the only game in town. A year later, Boca Raton was a high-tech boom town. Why? Because many of IBM's Boca employees refused to move and leave their friends, homes, and childrens' schools behind. They left their jobs rather than be uprooted, despite the uncertain prospects for employment for techies in a little Florida town without IBM.

These people were IBM. Now, instead of pretending to be IBM, they used their skills to make money for new businesses. When there were no new businesses to join, they founded their own. It's the people that are the real lifeblood of any business. Cash may be the oxygen, but the bone and muscle and sinew is employees who make that money.

How does this relate to Coca-Cola (NYSE: KO)? Coke has been floundering around due to the loss of Robert Goizueta. His replacement, Douglas Ivester, worked his way up through Coke's ranks as a finance guy. Problem: Coke is a marketing company, not a bank. They're the last of the snake-oil salesmen, with a patent elixir that makes us feel good about ourselves (or at least "refreshed"), even if it no longer claims to have medical benefits. It's all salesmanship. Marketing. Brand name. Advertising campaigns that exude warm fuzzies and make those warm fuzzies stick to the idea of drinking Coke.

Coke is it.

The pause that refreshes.

Can't beat the Real Thing.

Things go better with Coke.

Coke's most successful advertising campaigns have always said that Coke is nice, and that drinking it is nicer. They've always been about Coke, the beverage -- period. This is one of the few areas consumers will cut advertisers any slack at all: A company may actually know something about its own products.

Meanwhile, PepsiCo (NYSE: PEP) was addressing the consumer directly with "You're the Pepsi generation," which almost challenges me to say, "No I'm not." The BS filters kick in automatically, as Pepsi knows NOTHING about me personally, and shouldn't pretend that it does. Another weak approach was "Pepsi Stuff," as if I have to be bribed into accepting their product.

But under Ivester, Coke's advertising slacked off and changed. The "Coke Card"? They wanted to copy "Pepsi Stuff"? What happened to the never-ending chant of "Coke is great"? Advertising should be an investment in building your brand name, not a push towards short-term sales.

Meanwhile, Pepsi has apparently figured out why "You've got the right one, baby" worked so well (it still tried to directly address the customer, but accidentally said nice things about the product as well -- what a concept!). And currently, Pepsi has "The Joy of Cola" with the little girl actually ordering, drinking, and preferring Pepsi in the commercials. Not telling other people they should drink it, but that SHE likes it. It took them a while, but Pepsi seems to finally have figured out that selling Pepsi involves convincing people it's worth drinking, not bribing them with "Pepsi Points" or telling them they should belong to some club.

The moral of all this is you don't put a finance guy in charge of a marketing company. THAT is why the latest management shuffle strikes me as a good sign. I was waiting for Ivester to learn marketing, but putting a born marketing dude in the top spot is a better solution.

The people are important, and the health of the business underlies all those numbers in the quarterly financial statements. Attempting to adjust the numbers in the accountants' books to make the company more healthy is to completely and totally miss the point. That's like touching up an X-Ray to cure what ails the patient. It's just so wrong there aren't words to describe it.

Of course they could always blame Y2K. :)

Shifting gears now, let me hand it over to Matt who says our new AmEx brokerage account is finally ready to go with the $500 for our December investment...

Matt here... It may seem a faint memory by now, but earlier this month we laid out several opinions on where the next $500 should be invested. Bill kicked off the voting with a nod to American Express in his report on 12/13. Next, I compared Yahoo! and Coca-Cola on 12/16, and concluded that Coke squeaked out an edge based on its relatively small position in our portfolio. The next day, Rob seconded that opinion for Coke. (And just now, you heard some more of his rationale in favor of Coke.) Finally, on 12/21, Phil made his case for Intel.

As you well know, a company's financials weigh heavily into our decision making. In fact, I think a careful study of the numbers is the surest way to identify companies that are truly kicking butt, taking names, and making rules. As I compare the financial statements of Coke, AmEx, Yahoo!, and Intel, the one company that not only meets all of our Rule Maker financial criteria, but also shows remarkable improvement in all aspects of its business performance over the past year is... Intel.

What follows are the five core financial metrics we look at, based on a year-over-year comparison of Intel's trailing 12 months of operations:

  • Sales grew 14.4%.
  • Gross margins improved by 5 percentage points to 58.7%
  • Net margins improved by 2.5 percentage points to 25.3%.
  • Intel has 11.4 times more cash than debt, a slight improvement.
  • The flow ratio now stands at 0.97, down from 1.19 -- an 18.9% improvement.

Further, an examination of Intel's cash flow reveals even more bullish signals. Over the past year, Intel has generated $8.6 billion in free cash flow (FCF) -- 94% year-over-year growth. That gives Intel a 29.8% FCF margin. That's to say, for every $1.00 of sales, Intel earns 29.8 cents of pure cash profit. Not only is that an outstanding level of cash profitability, but it's also a big jump from the 17.6% FCF margin in the year prior.

There's more... Intel's cash conversion cycle (CCC) has shown consistent improvement over the last 6 quarters, declining from 63.7 days in Q2 '98 to 48.5 days in Q3 of this year. Quite simply, this means Intel is collecting cash faster, and as always, cash now is better than cash later, so this is a very positive development.

Finally, Intel is our second-highest scoring Rule Maker with a top-tier score of 54 points (out of 61). Clearly, Intel is a top-quality company. And interestingly enough, I find Intel's valuation quite reasonable at 34x trailing free cash flow. While business quality is always my (and this portfolio's) first and foremost concern in selecting investments, I don't think it unFoolish to consider valuation as a secondary concern when choosing among high-quality investment alternatives.

In the next five trading days, the Rule Maker Portfolio will add approximately $500 worth of Intel shares in accordance with normal Fool trading guidelines.

Geez, now it's almost time to start making this $500 decision all over again for January! For some interesting thoughts on a more mechanical methodology for selecting among Rule Makers, see this post by markandsusanv.

-Matt Richey and Rob Landley