The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."

But, please, make no mistake -- "Stock Madness 2005" is a GAME!

Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.

Harley-Davidson (NYSE:HDI)
Milwaukee , Wis.
52-week high-low: $49.68-$63.75
$17.78 billion market cap

By Stephen D. Simpson, CFA

Hogs are hot. Not the four-legged kind -- though companies dealing with those are looking pretty sweet these days, too -- but the two-wheeled motorcycle kind.

Heck, it's hard to watch Discovery Channel in the evenings and not stumble on at least one show devoted to grown men banging on pieces of metal and talking about how "sick" their bike is gonna look.

As king of the mechanical-hog world, Harley-Davidson profits both from hard-core riders and from lawyers and sales managers who just wish they were hard-core riders. And does this company profit. Operating margins are absolutely stellar (25%-plus), return on equity is nearly 30%, and the company pays a dividend and still beats analyst estimates.

All this, and you get double-digit, five-year compound revenue growth, and stock price appreciation, too.

You wanna talk brand value? Everybody says Coca-Cola (NYSE:KO) has one of the best brands in the world.


How many people tattoo "Coke" on their arms?

Harley-Davidson is known everywhere, and its customers are some of those most brand-loyal folks around. If you doubt me, go to the Sturgis, S.D., rally some time and start talking smack about Harley-Davidson. (Note: Neither the author of this piece nor The Motley Fool will be held responsible for any injuries you may suffer as a result of such an experiment.)

Trading at only 20 times earnings, Harley-Davidson is a solid "wide moat" stock that should do well if the economy improves. Heck, there's even a fuel-efficiency play here, since motorcycles generally get better mileage than most of the cars on the road do. As an American legend with a strong brand, Harley should do well for years to come.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned.

Seattle , Wash.
52-week low-high : $21.65-$41.70
$541.4 million market cap

By Rich Smith

Were you late getting your boat into the Amazon (NASDAQ:AMZN)? Didn't drop anchor in eBay (NASDAQ:EBAY) until the stock had moved out to sea? Not to fear, sailor. There's a new river of profits a-flowin', and so far, the suits on Wall Street have yet to point their yachts towards it. Blue Nile is wide-open water, offering smooth sailing powered by a balmy breeze of free cash flow. So pick up your oars, and let's get rowing.

First, though, a brief introduction. For those who aren't yet familiar with this Motley Fool Rule Breakers recommendation, Blue Nile's game is selling high-quality diamonds over the Internet at prices that bricks-and-mortar retailers just can't match.

Five years into its business plan, Blue Nile is already the leading online diamond retailer. It's profitable under generally accepted accounting principles, it's free cash flow positive, and it has cash in the bank equal to 19% of its market cap. Even better -- and here's where we break the rules -- the company's price is artificially depressed because of heavy shorting by traders, who knock the stock's high price-to-earnings ratio.

But here's the hidden treasure for Foolish investors: Blue Nile actually sells at a discount to its true worth. With its enterprise value of about $340 million and annual FCF of $28 million, Blue Nile has an EV/FCF ratio of just 12.1. Compare that with the company's 14.7% return on equity and to the 30% rate at which analysts expect it to increase profits over the long term. Any way you cut it, this diamond's on sale.

Fool contributor Rich Smith has no position, short or long, in any company mentioned in this article.

Here is a battle between companies that sell things no one needs. But exclusivity matters! You can buy diamonds anywhere -- including online from retailers such as Zale (NYSE:ZLC) and Tiffany (NYSE:TIF). But there's one and only one Harley-Davidson.

Wanna talk return on equity? How about 29.7% for HDI, 14.7% for NILE? Free cash flow? $817 million vs. $28 million. Seems to me that NILE is heading for a case of road rash in this matchup. -- S.S.

Pretty good arguments, Stephen. The strange thing is, Harley's management seems to disagree with you. Insiders own a minuscule 0.03% of Harley's stock -- three hundredths of one percent. Even more frightening, they've sold off more than 70% of the few shares that they did own over the past six months.

Fools want to know: If management's jumping off this hog, why should investors climb aboard? -- R.S.

Who won? Go here to cast your vote.

The Motley Fool is investors writing for investors.