The first to go out was Michael Martinez of Tucumcari, N.M., for misspelling "borborygmus." Next, youngsters in the 76th annual Scripps Howard National Spelling Bee in Washington, D.C., stumbled on dinanderie, Isthmian, eremology, and momus -- words that won't even pass our spell checker.

In all, 251 spellers are competing for the $12,000 first prize and an engraved loving cup (don't ask). According to the official website, there are 125 males and 126 females. Thirty-four spellers are only children. The remaining 217 have 243 brothers and 243 sisters among them.

The action wraps up tomorrow with the finals, which can be seen live on ESPN from 1:00 to 4:00 p.m. ET.

In today's Motley Fool Take:

eBay Loses Lawsuit

You'll probably see quite a few mentions of eBay's(Nasdaq: EBAY) $35 million court loss today, but it's not yet a cause for great concern if you're a shareholder.

A federal jury in Norfolk, Va., found the auction king had willfully infringed on some fixed-price and software search patents held by the founder of MercExchange, a small company based in Great Falls, Va. Because of the "willful" finding, Judge Jerome Friedman can triple the damages.

eBay vigorously denies the allegations, claiming the patents are not valid. "We believe that the weight of the evidence presented during the trial did not justify the jury's verdict," Deputy General Counsel Jay Monahan said in a statement. And, indicating an appeal is certain, "This issue is far from over."

Its investors should be looking at worst-case scenarios here. If an appeal doesn't bring relief and the judge triples the damages, the company would be looking at an approximately $100 million payout. Certainly that's not small potatoes, but it's less than a third of $341 million in free cash flow eBay generated last year.

Of more concern is the possibility the judge could force the auctioneer to stop using the disputed technology to conduct fixed-price selling. That could cause a disruption and affect earnings until a new method is in place. Hopefully, management has been on the ball and already has backup plans in place. Again, all of this is worst-case and not the most likely outcome. After all, the vast majority of these cases are all about a patent holder who wants the license fees he believes he deserves. Putting the infringing company out of business means no license fees. Smart money is on a settlement, but when that might occur is impossible to predict.

The market has greeted the commotion with a big yawn, with eBay shares trading down less than 2% on the day and, at $101.18, near a four-year high.

Quote of Note

"Your theory of a doughnut-shaped universe is intriguing, Homer." -- Stephen Hawking to Homer Simpson, on The Simpsons

Costco's Q3 Shines

Costco (Nasdaq: COST) , the country's largest warehouse club retailer, put up some impressive third-quarter results this morning. In contrast to competitor BJ's Wholesale's(NYSE: BJ) dismal first-quarter results from last week, Costco excelled on all fronts, demonstrating again why it's a formidable company.

Costco's total revenues, including membership fees, climbed 11% to $9.54 billion. Net revenues rose by the same percentage to $9.34 billion. Same-store sales for the quarter improved a solid 6%. Its same-store sales are up 5% through the first nine months of its fiscal year, with total revenues up 9% during that same period.

The merchant of everything from mattresses to pastries to freshly cut flowers earned $153.8 million for the quarter ended May 11. That's 18% ahead of last year's Q3 income. Diluted earnings shook out to $0.33 a share, vs. $0.28 last year, and beat expectations by two cents.

Its gross margins widened to 12.41% in the quarter from 11.99% in the prior period. Gross margins were even better for the first nine months of its fiscal year, coming in at 12.50%. Net margins also expanded during the quarter, to 1.61% from 1.51%.

As has become nearly standard of late for many retailers, Costco's selling, general, and administrative costs rose. SG&A expenses were up 14%, and increased to 9.68% of sales compared to 9.36% last year.

The wholesaler took a $16 million after-tax charge back in its second quarter to shore up its worker's comp claim reserves, but it didn't highlight those costs as a particular problem this time around. By taking the charge when it did, Costco likely saved itself some future trouble.

Costco hopes to keep the party going through its fourth quarter. It will open three new warehouses before its fiscal year ends August 31, and will add 12 before the calendar year's over. It operated 416 stores at the quarter's close.

The retailer expects to earn between $0.54-$0.56 a share in Q4, bringing its earnings for the year up to $1.56-$1.58, and representing annual earnings growth of 5.41%-6.76%. With shares trading at around 23 times earnings, then, investors should carefully weigh just how much of a premium this discounter deserves.

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Biotechs Bounce High

With positive news on the potential for Genentech's(NYSE: DNA) Avastin to treat colorectal cancer, its shares jumped 70% in six days to close at $63.85 yesterday, in a move not seen since late 2000.

The recombinant DNA pioneer, today the leading monoclonal antibody company by the number of those drugs on the market and in development, sports a market capitalization greater than that of Schering-Plough(NYSE: SGP). Take that, big pharma!

In fact, ever since I wrote Profit in the Biotech Bust two months ago, companies using biotechnology to make drugs or advance the drug development process have exploded. The AMEX Biotech Index and Nasdaq Biotech Index(AMEX: IBB) have far outstripped the S&P 500 and Nasdaq since March 12 lows: 

  
                           3/12/03  5/27/03  % Change
  
AMEX Biotech Index      312.25   456.24    46%   
Nasdaq Biotech Index     47.05    67.50    43%   
Nasdaq Composite       1279.23  1556.59    18%   
S&P 500                 804.19   951.48    22%

This is proof again, as if any were needed, that in the short term the market is driven by herd responses to news, the big wind that blows in from Winnetka, and tea leaves. Anything having to do with biotech -- regardless of the individual business -- has benefited.

That's great if you're a short-term trader or -- like the majority of actively managed stock mutual funds (biotech or other) -- turning over your portfolio at a fast clip each year. But they remind me of a money manager friend whose clients come to her most often after bad experiences with the large Wall Street brokerage firms, and one in particular. She quips, "Ah, yes, Morgan Stanley Dean Witter(NYSE: MWD). 'Impoverishing investors one at a time.'"

If you are an individual investor looking for companies whose business model you can understand and whose growth sells at a reasonable price, you want companies growing free cash flow and selling for less an enterprise-to-free cash flow multiple less than that. You may calculate a company's intrinsic value (IV) based on discounted cash flow and try to buy below its IV. More ambitiously, you may calculate its return on invested capital (ROIC) and compare that to its weighted average cost of capital (the discount rate used in your discounted cash flow analysis). Phew.

According to these various valuation measures, three companies recently scored well: QLT(Nasdaq: QLTI), Ligand Pharmaceuticals(Nasdaq: LGND), and Meridian Bioscience(Nasdaq: VIVO), which you can find, respectively, in A Quick Double?, A Painkilling Double, and Diagnosing a New Prospect. (I own all three, by the way, putting money where my mouth is.) And on the informed speculation side, Jeff Fischer (TMF Jeff) provides his recent take on positive developments at Millennium Pharmaceuticals(Nasdaq: MLNM).

This is how we look at investing -- business strength and valuation, not today's sailing.

Discussion Board of the Day: Investing Beginners

New to the market? Have some basic questions or want to help your new fellow Fools along? All this and more -- in the Investing Beginners discussion board. Only on Fool.com.

Quick Takes

President Bush today signed the $350 billion tax cut bill into law. Beginning next month, most workers should see a little less withheld from their paychecks, and parents should receive child tax credit checks in July.

The National Association of Securities Dealers (NASD) charged former Merrill Lynch managing director Phua Young with several violations including "misleading statements and exaggerated claims" in research reports about Tyco(NYSE: TYC). The regulating body said Young exhibited a "betrayal of objectivity and honesty in research."

Shares of Krispy Kreme Doughnuts(NYSE: KKD) sweetened up by 8% today after the maker of melt-in-your-mouth sugary goodness reported strong first-quarter earnings. Excluding the reversal of a $500,000 accrual related to an arbitration award, the company earned $0.21 per share on total revenue of $148.7 million. Both totals represent about a 40% increase over year-ago figures. Management also helped fuel today's price leap by raising full-year earnings guidance to $0.90 per share.

Saying it plans no more significant acquisitions, Gucci Group(NYSE: GUC) will return 13.50 euros per share to investors in the form of a special October dividend. That payment will be in addition to the annual 0.50 euros per share dividend.

And Finally...

Today on Fool.com:

Contributors:
Bob Bobala, Robert Brokamp, Mathew Emmert, Jeff Fischer, Tom Jacobs, LouAnn Lofton, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Matt Richey, Reggie Santiago, Dayana Yochim