In an attempt to win his fifth straight Tour de France, Lance Armstrong recovered from a fall today and finished with the lead after two grueling weeks (the race ends Sunday).

Investors could learn from Armstrong's long-term determination. After being battered for a couple of years, your 401(k) and IRA statements likely show a nice increase over the last quarter. One quarter doesn't win the race, however. Nor does one trading session. Today, all the major market indexes were in the red. But it's just one day, in one quarter, in an investing lifetime spanning hopefully decades.

In today's Motley Fool Take:

Southwest Flies (Too) High

Loving Southwest Airlines(NYSE: LUV) is easy -- and not just because it's beautiful (or because of its cute ticker). Rival Continental(NYSE: CAL) is delaying plane shipments, and American(NYSE: AMR) is cutting flights. Southwest just continues to deliver. Don't take our word for it; check out today's second-quarter report, or for that matter, the stock's premium valuation.

Like its rivals, Southwest received a government grant this quarter under the Emergency Wartime Supplemental Appropriations Act. Thanks in part to that gift of green, the airline earned $246 million in the second quarter. Unlike Continental, Northwest(Nasdaq: NWAC), and Delta(NYSE: DAL), however, Southwest managed to turn a profit before the government's help.

For the quarter, total revenues logged in at $1.5 billion, up 2.9% year over year. Excluding items, earnings jumped 22.6% to $103 million, or $0.13 per share, from last year's $84 million, or $0.10 a share. The company, which generated $638 million in operating cash flow for the quarter and $313 million of free cash flow, closed out the quarter with $2.2 billion on its balance sheet.

Southwest even has plans to accelerate deliveries of new jetliners from Boeing(NYSE: BA) in the coming years. As a result, the airline's capacity should increase by 6%-7% in 2004 and another 10% in both 2005 and 2006. It also sees opportunities to expand its flight offerings into and out of St. Louis in the wake of American's decision to cut back on flights there.

Yes, Southwest stands out, as does JetBlue(Nasdaq: JBLU), as an efficient operation amid a contingent of fat and inefficient competitors. And, yes, there's reason to believe that it can sustain the same excellence it has for 30 years. The concern is valuation: A P/E of 57 is just too pricey for an airline, even one as worthy of a premium as this one.

At today's prices, Southwest flies too near the sun.

Quote of Note

"Icarus, Icarus, where are you?" -- In Greek mythology, Daedalus calls out to his son, who in escaping from Crete on artificial wings made for him by his father, flew so close to the sun that the wax with which his wings were fastened melted and he fell into the Aegean Sea.

Ernst Is Stung

The SEC unloaded on Ernst & Young Friday, blasting the accounting firm for denying wrongdoing in a conflict-of-interest case.

First, some backround: Last month, the agency accused Ernst of violating auditor-independence rules by entering into a business relationship in the 1990s with PeopleSoft(Nasdaq: PSFT) -- whose books it audited -- to help develop and market software. The SEC then sued to prevent the firm from accepting new auditing business for a period of six months.

In court briefs filed three weeks ago, Ernst's lawyers denied it violated any independence rules, called the proposed penalty "outrageous," and accused the SEC of leaking misleading information to the media.

The SEC fired back late Friday:

"While the fun of Harry Potter is its other-world view, its power has been said to lie in the real-world truths it reveals," it said in a brief. "By contrast, while the interest of E&Y's brief is its apparent real-world view, its power lies in the truths it conceals."

Like a lot of stuff from the regulatory board, the language is hard to understand, but the meaning is clear. The SEC is miffed at Ernst, and is pushing hard for the six-month penalty to set an example for the industry. Consider that get-tough attitude as a positive by-product of the Enron/Arthur Andersen debacle.

For another, consider the California Public Employees' Retirement System's vote against eBay's(Nasdaq: EBAY) proposal to ratify auditor PricewaterhouseCoopers at a shareholder meeting last month. PwC previously performed consulting services for the online auctioneer, and CalPERS automatically opposes auditors who aren't truly independent.

eBay still easily won PwC's ratification, but -- as the SEC's actions against Ernst & Young show -- the tide is turning for the better.

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Gamers Gaming Reserves?

Late Friday three video game publishers, Activision(Nasdaq: ATVI), Acclaim(Nasdaq: AKLM) and THQ(Nasdaq: THQI) disclosed that the Securities and Exchange Commission has launched an investigation into their accounting practices. All three stocks were off sharply in early trading Monday morning.

At issue in all cases is an accounting convention that Activision in its 8-K called "common to the interactive entertainment industry, with specific emphasis on revenue recognition." The practice involves booking revenues when the title of a product is transferred to a customer, which is standard procedure. The catch is that all three allow returns from certain customers under certain conditions, which vary from company to company. As a result, each company must estimate returns and price rebates for each quarter, and because the return option is typically granted to the largest customers -- i.e. big retailers -- the effect on revenue can be meaningful.

Our guess is that this is at issue in the investigation. Neither the SEC nor the companies will comment, but that's the only aspect of each company's revenue recognition policy that strikes us as potentially aggressive. Keep in mind, wherever you introduce an estimate -- or any type of reserve -- into financial reporting, you introduce the opportunity to fudge the estimate and thus boost (or in rare cases, reduce) earnings in a given quarter. Worst case: A big retailer (or several) returns a lot more product than "estimated" and -- shazam! -- the game manufacturer has booked way too much revenue and must true up. Not pretty.

And not necessarily illegal. And not necessarily what the SEC is looking at -- just an informed guess on my part. The SEC has advised each company that the investigation does not in any way indicate that the commission believes that laws have been broken. And make no mistake, the actions here today come nowhere near the seriousness of the ongoing investigations of impropriety at Take Two Interactive(Nasdaq: TTWO).

Still, even when we like a company -- Activision has been highlighted on numerous occasions by David Gardner in Motley Fool Stock Advisor -- we're not fans of aggressive accounting. Let's hope an SEC investigation will be enough to prompt all three companies to toe the straight and narrow.

Discussion Board of the Day: Rollercoaster Loving Fools

The 2003 season got off to a rough start for amusement parks. Have you made it out to your nearby amusement park this summer? Is a trip in the works or do you just hate them? All this and more -- in the Rollercoaster Loving Fools discussion board. Only on

Quick Takes

Drug company Merck(NYSE: MRK) reported disappointing second-quarter results today. It earned $1.87 billion, or $0.83 a share, a penny below analysts' expectations but 7% ahead of the prior quarter's earnings. Revenues rose 4% to $13.28 billion and missed expectations by about $400 million. Declining sales of Merck's top drug Zocor and flat sales for the arthritis treatment Vioxx hurt the company's results.

Hasbro (NYSE: HAS) , the toy company known for its Trivial Pursuit board game and Transformers figures, turned in strong earnings for its second quarter. Hasbro's net income for the period ended June 29 was $11.4 million, or $0.06 a share. In the prior period, it lost $25.9 million, or $0.15 per share. Revenues climbed 7% to $581.5 million. Hasbro was David Gardner's May recommendation for the Motley Fool Stock Advisor, and has risen 19.53% since then compared to the S&P's 12.79% gain.

Harlan Waksal, ImClone's(Nasdaq: IMCL) co-founder and chief scientific officer, is stepping down from the biotech company. He is the brother of ImClone's former chief executive officer, Sam Waksal, who was recently convicted of insider trading. ImClone's board demoted Harlan Waksal to chief scientific officer in April. He had been serving as CEO and president. He is also resigning from ImClone's board.

Post-It Notes parent 3M(NYSE: MMM) reported $619 million in earnings ($1.56 a share) today for its second quarter. It earned $539 million ($1.36 a share) excluding items in last year's Q2. Sales jumped 10% to $4.58 billion. 3M also raised expectations for its full-year results. It now anticipates earnings per share of $5.75-$5.90 for the year. Previously, the company was looking for $5.65-$5.85.

And Finally...

Today on

  • For updated stories throughout the day, bookmark our ever-changing News section.
  • Speculating in Tech: Mathew Emmert digs up a tech stock for the speculative portion of your portfolio.
  • When a Low P/E Isn't Enough: Sometimes a stock is cheap for good reason. Matt Richey offers an example.
  • Weighing WD-40: The company works (like the stuff), but it's not quite the bargain.
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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