Sometimes the numbers can play tricks on you. We spend a lot of time calculating free cash flow here at the Fool, but the formula can vary depending on the business. This week, Rich Smith takes a close look at some Free Cash Flow Illusions that discerning investor must pay attention to. Soak it in as part of your investing education.
In today's Motley Fool Take:
- The Back-to-School Bummer
- Discussion Board of the Day: Starbucks
- Apple Plants a Seed
- Starbucks Jolts Prices
- Quote of Note
- Fidelity Cuts Fat
- More on Fool.com Today
The Back-to-School Bummer
Sometimes you just have to tip your hat to Fred Hickey. The editor of the High-Tech Strategist noted a year ago that companies' summer quarters were being pumped up by the coincidence between American consumers receiving federal tax rebate checks and the back-to-school season. Hickey noted that there would be no tax check coming in this year, said that the refinancing boom and its resultant liquidity would be long gone, and predicted that the back-to-school season this year would be lousy. Of course, technology largely being Hickey's bailiwick, he was talking primarily about the consumer electronics and PC companies such as Dell
But money is money, spending is spending, and back-to-school is back-to-school. And companies such as Costco
There are, of course, easy targets for blame. Hurricane Charley, for one, is an easy scapegoat (and certainly did have some impact). Spiking prices at the pump, similarly, took a bite out of consumers' spending budgets. But these elements weren't surprises. If they were truly complicit to the degree suggested, then their impact should have been baked in. I think that Hickey's point -- one I made more generically long ago -- is more germane: Consumers are running low on money, and the sources that helped push them along a year ago have dried up. Watch closely for the earnings reports coming from the consumer technology companies: This could be a very interesting quarter, and not in a good way.
Bill Mann owns shares of Costco.
Discussion Board of the Day: Starbucks
Starbucks plans a jolt in the price of its java. Will you shell out a few extra cents for your fix? Talk it over with Fools on the Starbucks discussion board.Apple Plants a Seed
Wednesday, the computer maker borrowed from Amazon
To be sure, the music downloading market has been hotter than September in Vegas. The problem is the cutthroat nature of the business. Not only are the margins near zero but also everyone wants in on the game. RealNetworks
It would be easy (and understandable) for investors to brush off the iTunes announcement as just the latest salvo in an overhyped digital music war. But there's more to it than that. If the records ever stop playing at Apple, its digital entertainment franchise -- headlined by the cultish iPod -- will take a serious hit. Sure, there's hope that the super-sleek new iMac will revive flagging desktop computer sales, but it's the pod people who have been driving revenues and profits recently. Investors shouldn't expect that to change.
Need more rockin' Foolish iTunes coverage? Try these:
- When it comes to Apple, RealNetworks is becoming real annoying.
- Napster lives! Again.
- Borrowing a page from burger purveyor McDonald's
, Apple said last month that it had served 100 million through iTunes. (NYSE: MCD)
Fool contributor Tim Beyers thinks Apple hit another home run with the new iMac, but he won't be trading in his PowerBook anytime soon. Tim owns no shares in any of the companies mentioned, and you can view his Fool profile here.
Starbucks Jolts Prices
The WSJ article said that the price hike is expected to be in the 4% to 5% range, adding about a dime per cup to the bill. The article surmised that the higher price "could push Starbucks' luck" and cited market research from Mintel International Group, indicating that about two-thirds of "regular coffeehouse customers" say gourmet takeout coffee is too pricey.
We've all been well aware of pricey coffee ever since the advent of Starbucks, and it hasn't stopped anybody. When I did a Web search for the Mintel data, I unearthed similar data from 2001, which says to me that actually the public's view of "expensive" coffee hasn't changed. It makes it clear people have been willing to pay the price for good coffee.
Last week, I was on vacation and blissfully unaware of Starbucks' news as I threw back a few lattes in my leisure time, surprised that the suburban Starbucks stores I was hitting were bustling, even though I was going at odd hours on weekdays. Unbeknownst to me, Starbucks' August same-store sales growth wasn't quite what we've all become accustomed to. Investors were selling, inspiring Fool contributor Jeff Hwang to ask whether it's time to sell Starbucks.
The idea of impending price hikes at Starbucks is nothing new. One of the summer's major stories was high cost of dairy. However, if Starbucks is going to venture a price increase now, it doesn't hurt to remember that the coffee purveyor weathered the recession wisely by keeping prices stable; it hasn't passed a price increase on to customers since 2000.
Will higher prices drive customers to cheaper coffee break venues such as McDonald's
I'd also venture to guess that once Labor Day's behind us, things should be just as strong as ever at Starbucks. School will be back in session, and the vacation season will be largely over. It's back to reality, and for many, that reality includes a Starbucks jolt of caffeine.
For more on Starbucks, check out the following articles:
- Sell Starbucks? by Jeff Hwang
- Satellite Now Serving Starbucks, by Steven Mallas
- No Stopping Starbucks, by Alyce Lomax
Alyce Lomax does not own shares of any of the companies mentioned.
Quote of Note
"What is the first business of one who practices philosophy? To get rid of self-conceit. For it is impossible for anyone to begin to learn that which he thinks he already knows." -- Epictetus, Stoic philosopher
Fidelity Cuts Fat
Longtime Fool readers know that most of us are not big fans of mutual funds. That's not only because the vast majority of them underperform the indexes over time but also because far too many of them charge you big -- often cleverly hidden -- fees for their underperformance.
Despite specious arguments to the contrary -- such as a recent article by Chuck Jaffe at CBS MarketWatch.com -- most of us still feel stocks or an index fund are a better choice for the majority of investors. Don't believe me? Look here. Or here.
Unfortunately, even stock fans like us can't avoid mutual funds altogether. My wife's retirement plan -- cough, AIG Valic, cough -- is one that, like many, doesn't permit buying individual stocks. (Restrictions like these are one reason we now offer our Champion Funds newsletter to help people choose the best actively managed funds out there.)
That's a long-winded introduction to this article's raison d'etre, a polite golf clap for Fidelity Investments. The reason? America's biggest mutual fund firm has cut expenses on some of its standbys -- the index funds -- leaving more money for you.
Fidelity capped the expense ratio at 0.10% on its Spartan 500 Index Fund
How much will the move reward investors? Well, it trims by half the previous 0.19% rate on the S&P 500 index trackers. The previous 0.47% cut Fidelity took on the international index will be clipped by nearly four fifths. While that looks puny, if you put $1,000 away each month into an index that earns just around 9% over 30 years, the difference between 0.19% and 0.10% on the expense rate will come to almost $40,000 -- of the roughly $1.8 million total.
Pennies add up, as any Fool knows. So let's set aside the urge to ask why it took Fidelity so long to drop these fees and just hope that other fund companies are moved to do the same.
More on Fool.com Today
In other news:
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