The markets continued their confident march higher today, the Nasdaq leading the way with a gain of 1.5%, with both the DJIA and the S&P 500 fractionally higher as well. Today's move puts the Nasdaq at a 14-month high. It has sprung mightily since both the October trough and the most recent March lows. Almost everything has.

We'll reiterate what we said yesterday: Enjoy it while you can, but market directions, particularly on a daily basis, are pretty meaningless. Not every company that hit a new high today deserves it, and neither are those scratching at new lows necessarily dog meat.

In Today's Motley Fool Take:

Websense Shorts Get Squeezed

It just doesn't pay to short a cash-rich company trading at a low price-to-free cash flow multiple.

Just ask short-sellers of Websense(Nasdaq: WBSN), which surged 28% today after the company issued an upside preannouncement last night. With 21% of shares in the hands of short-sellers, today's move was clearly amplified by the buying pressure of shorts scrambling to cover their positions -- a classic short squeeze.

The shorts' critical mistake was a failure to consider Websense's dirt-cheap valuation. At yesterday's $15.62 close, the stock was valued at just 9.7 times free cash flow. If you back out excess cash of $6.94 per share, Websense's free cash flow multiple at yesterday's close was just 5.4. Shorting a stock this cheap is financial suicide.

The Websense short thesis also failed to appraise the strength of the business. Shorts had counted on increased competition to drive down margins in the Internet-filtering software space. It was thought that Websense's premium pricing ($14 per seat versus competitors' $9 to $10 per seat) would come under pressure, which would in turn hinder revenue growth.

Hardly. For the quarter ending in June, management now expects revenue of $19.4 million to $19.6 million, comfortably above the consensus analyst estimate of $19.3 million. This represents 5% growth over the first quarter and 33% growth over the year-ago quarter. Apparently, Websense's software has some type of advantage -- possibly its industry-leading installed base? -- that justifies its higher prices.

(Tom Gardner presumably knows all this; after all, he recommended the stock to subscribers of the Motley Fool Stock Advisor.)

The only thread of hope for the shorts is the continued selling by Websense's top management. Just last week, the CEO and CFO each disposed of their remaining shares obtained through past option grants. While this type of selling puts a damper on investor confidence, this just goes to show that financial results and valuation are what really count. Insider buying and selling can only be considered as corroborating evidence.

Pepsi Bottling's Flat Q2

Lackluster worldwide case volume took the fizz out of Pepsi Bottling Group's(NYSE: PBG) second-quarter profits. PepsiCo's(NYSE: PEP) largest bottler and distributor managed to raise domestic prices 2% during the quarter, but that wasn't enough to offset weak stateside volume.

For the quarter, Pepsi Bottling earned $131 million, 5.8% below the prior year's Q2 net of $139 million. Per share, earnings kept pace with last year's at $0.47, thanks to a 5.7% reduction in shares outstanding. Analysts had been expecting $0.46 per share.

Revenues, on the other hand, rose nearly 15% to $2.5 billion from $2.2 billion. The revenue growth combined with increased pricing power helped expand gross margins to 49% for the quarter, versus last year's 46%.

However, worldwide volumes were flat, including a 2% decline in U.S. volume and 3% growth in international volume, which squeezed net margins to 5.17% from 6.29% in the year-ago quarter.

On the balance sheet accounts receivable and inventory levels rose in line with sales, with the former rising 12.5% and the latter 13.6%. Cash and equivalents declined, however, to $193 million from $202 million in the prior year's Q2.

Looking ahead, Pepsi Bottling expects to earn $1.61-$1.67 per share in fiscal 2003, with the lower end being more likely. The company, which earned $1.46 a diluted share in 2002, anticipates free cash flow of $400 million for the year, above last year's $391 million.

That leaves Pepsi Bottling trading at a forward price-to-earnings ratio of around 13.66 and a forward price-to-free cash flow ratio of 15, on expected earnings growth of 10.3% and free cash flow growth of 2.3%. Investors looking for a bargain won't find it here -- particularly after today's five-plus percent move.

Discussion Board of the Day

According to his biography on, Spike Lee was born Shelton Lee. His mother nicknamed him Spike because of his tough nature. Now that Lee has settled with Viacom to let Spike TV air as named, can we start discussing Lee as a filmmaker again? And since Lee doesn't have any movies out in the theaters this summer, care to share any gems of celluloid that you've come across? All this and more -- in the Great Movies Discussion Board. Only on

EMC Goes Soft, Buys Legato

Data storage hardware company EMC(NYSE: EMC) is buying software maker Legato Systems(Nasdaq: LGTO) for $1.3 billion in stock, offering 0.9 shares of EMC for every Legato share, valuing Legato at $10.57 a share based on Monday's closing prices.

EMC has seen its annual revenue decline from $8.8 billion in 2000 to $5.4 billion last year due to stalled corporate capital spending and steady competition from the likes of Network Appliance(Nasdaq: NTAP). The company aims to differentiate itself from other hardware makers by offering a full suite of software solutions.

Just last week, EMC acquired the rights to storage management software developed by BMC Software(NYSE: BMC), while Legato is EMC's tenth software company acquisition in the last three years. Not only does software offer EMC a potential leg up in the crowded storage hardware market, it offers much higher margins and return on investment.

With today's acquisition news, EMC also shared that it expects second-quarter revenue to click in at the high-end of expectations, around $1.475 billion, and earnings per share to be $0.03 to $0.04. For the year, the company was expected to earn $0.15 per share prior to the Legato acquisition.

With $260 million in annual sales, Legato is expected to reverse several years of losses and earn $0.10 per share in 2003. The company hasn't achieved free cash flow since 1999. Its new owner, EMC, has consistently generated free cash flow, including $928 million in 2002. The $24 billion acquirer fetches a 26 multiple to free cash flow.


Two of the nation's largest trucking operations are uniting. In a cash and stock deal valued at $966 million, Yellow(Nasdaq: YELL) will buy rival Roadway(Nasdaq: ROAD) for $48 per share. Yellow will assume $140 million of Roadway's debt. The new combination will be called Yellow-Roadway, and is expected to generate cost savings of $45 million within two years.

In yet another attempt to jump-start the market for new car sales, General Motors(NYSE: GM) has decided to extend its incentive program. The company will continue offering cash rebates of up to $4,000 on select new 2003 cars and trucks, and five-year, zero-percent financing for qualified buyers on certain 2003 vehicles. GM currently offers cash rebates on several new 2004 models. The new incentives will remain in place until July 31.

Women's apparel retailer Chico's FAS(NYSE: CHS) reported blowout total and same-store sales for June. Total sales increased 41.7% to $65.9 million, and same-store sales jumped 16.5%. Shares rose more than 12% on the good news.

No more Mr. Nice Guy: Auto parts maker ArvinMeritor(NYSE: ARM) has launched a hostile bid for competitor Dana(NYSE: DCN). The $15-a-share offer to shareholders represents a 25% premium over Dana's closing price yesterday. ArvinMeritor chose the hostile route after Dana's board rejected its earlier overtures.

And Finally...

Today on

  • For updated stories throughout the day, bookmark our ever-changing News section. Today, KFC gets sued, Viacom gets Spike TV, and Pacific Sunwear shines.
  • It's a credit jungle out there. Dayana Yochim has all you need to know to navigate the maze of credit agencies and credit protection plans.
  • Tom Jacobs has owned Rambus. He knows Rambus. And he thinks that Rambus isn't a tech bargain in disguise. The stock just might be too pricey right now.

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