The S&P and the Dow were lethargic, but after treading water for most of the day, the Nasdaq jumped this afternoon to finish up about 1%. Maybe the index got wind that Hurricane Ivan was coming and took off for higher ground.

How many hurricanes will we have this season? And, if you live on an island, where do you run to? Grenada and Barbados have been pummeled, with Jamaica, and possibly the Florida Keys, next in Ivan's path.

In today's Motley Fool Take:

The Best Oil Stock You Don't Own


Chris Mallon

Oil prices have been on a wild ride lately, reaching nearly $50 per barrel in recent weeks before backing off to around $43 for U.S. light crude. Earnings are up at oil companies such as Exxon-Mobil(NYSE: XOM) and Chevron-Texaco(NYSE: CVX) over the last couple years, and oil stocks trounced the S&P over the last 12 months.

Yet chances are you've never heard of one of the best performing oil stocks this year -- Valero Energy(NYSE: VLO). This $8.9 billion refiner might be small-time compared with oil giants such as BP(NYSE: BP), whose $200 billion market cap dwarfs Valero's, but there's much to like about this wild Texan.

First, management has been extremely successful at adding refining capacity on the cheap. Valero is a deep value investor that purchases refineries at well below replacement cost, then rehabs them to new condition. For example, in the first quarter this year, Valero purchased a refinery from El Paso(NYSE: EP) for $365 million, approximately 15% of the estimated replacement cost. And because El Paso spent twice that amount to upgrade it, the refinery added to earnings immediately.

The El Paso refinery had been upgraded to process heavy, sour crude oil, a cheaper and dirtier version of the light, sweet crude we see quoted daily. This was perfect for Valero, which specializes in refining sour crude. In fact, it's estimated that nearly 70% of the oil refined by the company is sour crude, which translates into higher gross margins, since sour crude sells at roughly a 10%-20% discount to the sweet stuff, while the end product is the same.

Valero's gross margin through the second quarter 2004 was 13.3% on $25 million in sales, versus 11.5% on $18 million in sales last year. Translation: Valero is making a lot more money this year than last year, with EPS for the first six months up 147% over the same period last year at $6.41. That, of course, is why the stock's been such a runaway success this year.

At just more than seven times trailing 12-month earnings and only six times free cash flow, Valero looks cheap, though maybe for good reason. The company just announced what the market had already discounted -- that third-quarter earnings would fall short of projections, thanks to lower gasoline margins. Mr. Market will continue to discount Valero's earnings until management proves they're for real. Increasing the paltry $0.60 dividend to something more in line with the industry would be a good first step.

Fool contributor Chris Mallon has to siphon gas from his lawn mower to get to work and owns none of the companies mentioned in this article.

Discussion Board of the Day: Mutual Funds

Are you a fan of index funds, or do you like an active manager giving you a shot to beat the indexes? Would you ever buy a load fund? Is your portfolio mixed with equities and mutual funds? All this and more in the Mutual Funds discussion board.

Delta's Dilemma


Tim Beyers

One of my favorite movies of the '80s is The Karate Kid. I like it mostly for the action and the often-cheesy movie wisdom it shells out frame after frame. Yet even the silliest movies occasionally offer a truism, and The Karate Kid is no different. My favorite is when Pat Morita's Mr. Miyagi in reminding Ralph Macchio's Daniel of the seriousness of karate training says: "You karate yes, OK. You karate no, OK. You karate, guess so -- (insert funny squishing sound here) -- squish like grape."

The truism is that a halfhearted commitment to something serious rarely works out, either in life or in business. Yesterday, Delta Air Lines(NYSE: DAL) appears to have made what I'd consider a halfhearted commitment at being a low-cost carrier. And, naturally, I'm doubtful the airline can pull it off.

But give Delta credit for at least trying a bold plan when nothing else has worked. The airline has lost more than $5 billion since 2001. The new strategy, which includes cutting 7,000 jobs and effectively shutting down its unprofitable hub in Dallas, aims to cut at least that much out of Delta's operating costs annually.

The wrinkle is that while cutting costs Delta will also spend to differentiate itself from low-cost flyers such as Motley Fool Stock Advisor pick JetBlue Airways(Nasdaq: JBLU) and Southwest(NYSE: LUV). Specifically, the carrier will offer more amenities on longer-haul flights, such as leather seats and additional cabin lighting. Coincidence or no, the plan appears modeled after the coast-to-coast upgrades offered by UAL Corp.'s (OTC BB: UALAQ) United last week. But the United initiative was extremely specific, and Delta's plan calls for a gradual, systemwide overhaul. There may not be enough time to effectively implement such a sweeping change.

Delta also said it would expand by one-third its pseudo-hip Song fleet, a low-fare carrier within a carrier that somewhat mirrors United's Ted and competes with JetBlue, Southwest, AirTran(NYSE: AAI), and Frontier(Nasdaq: FRNT), among others.

Of course there are plenty of obstacles standing in Delta's way. The biggest may be its negotiations with pilots. Like troubledUS Airways(Nasdaq: UAIR), Delta needs concessions from its pilots. But they aren't budging. Indeed, after seeing the pension situation at United, many older Delta pilots are taking lump-sum retirements. The payouts drain needed cash from Delta's coffers, and CEO Gerald Grinstein has warned that losing senior pilots in this manner could make it impossible to fend off a bankruptcy filing.

Delta's plan is the clearest evidence yet that all big airlines face what appears to be an intractable catch-22 -- to be a low-fare airline without appearing to be a low-fare airline. It's a dilemma that's bound to change the industry wholesale and, sadly, may leave a few squished carriers along the way.

Fool contributor Tim Beyers owns no shares in any of the companies mentioned, but he has family members who are retired from United Airlines. You can view Tim's Fool profile here.

Nokia Phones Home


W.D. Crotty

Cell-phone giant Nokia(NYSE: NOK) was getting no respect in mid-July when investors sent the stock to a two-year low. It's up 8.6% since then, while the Standard & Poor's 500 has managed only a 0.7% gain.

At that time, Nokia's guidance called for a decline in earnings from an expected euro .17 a share to .08 to .10 a share. Fast-forward to today, and Nokia is telling investors that business is improving and earnings will be in the euro .11-to-.13 range.

For those hearing a Gong Show ring with this news, consider this: Nokia is cash-rich and has industry-leading operating margins -- and the stock sells for a measly 12 times earnings. With the peak holiday season approaching, Nokia is improving just when it really counts.

Alyce Lomax recently reported that there were shortages (because of booming sales) of a popular Nokia model. But, even with an industrywide tightness in some components, Nokia is saying that it expects "healthy sequential volume growth." That hardly sounds like a company in trouble.

When Seth Jayson and I dueled over Nokia, the critics were harping that competitors Motorola(NYSE: MOT), Sony(NYSE: SNE), and Ericsson(Nasdaq: ERICY) had grabbed the mid-priced flip-phone market. Nokia, with 40 products ready for launch in 2004, introduced new flip phones and is now back on its quest for an overall 40% market share.

As with any high-technology product, new feature leadership is critical. Nokia, not NEC(Nasdaq: NIPNY), is the leader in camera-phone shipments. And Nokia, not palmOne(Nasdaq: PLMO), is the world's top seller of mobile computers. So, for now, the features are there.

The key to Nokia: It dominates a rapidly growing business. When mainframes ruled the computer world, its dominance made IBM(NYSE: IBM) a great investment. As Nokia regains its footing, expect it to use its operating margin advantages to maintain and grow its market-share dominance.

For more chatter about Nokia, see:

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned, but he does own a Motorola flip phone.

Quote of Note

"Opportunity is missed by most people because it is dressed in overalls and looks like work." -- Thomas A. Edison

Dirt-Cheap Funds


Rick Aristotle Munarriz (TMF Edible)

There was a time when just about every conversation about index funds took all of three words to complete.

Index fund? Vanguard.

Thanks to the fund family's refreshingly welcome low-cost philosophy, Vanguard 500 Index Fund(FUND: VFINX) has been the top dog in mirroring the Standard & Poor's 500 performance. With a mere pittance of a 0.18% annual expense ratio, more of your investing dollar goes toward buying a piece in companies like Lucent(NYSE: LU), Intel(Nasdaq: INTC), and General Electric(NYSE: GE).

Competing with Vanguard was pretty much fruitless. If you ran a family of actively managed mutual funds, charging 1% or more in fees, you wouldn't want investors to switch over to an index fund within the same fund family charging a fraction of that in management fees. Yet by not slashing fund fees, the passive index tracker would be doomed to a life of underperformance.

It was a catch-22 -- or as in a joke that knocks them dead in the mutual fund manager stand-up circuit -- a catch-12b-1.

Still, times are changing, and that may mean good news for index fund investors. Last week, it was Fidelity that lowered the expense ratio on its Spartan index funds to a measly 0.1%. This week, it was E*Trade(NYSE: ET) knocking its expense ratio on its S&P 500 and international index fund to a puny 0.09%.

Why are they doing this? Undercutting Vanguard -- literally by half -- can't be a profitable move in its own right. But here is where you can load up on investing terminology like competitive advantages, razors and blades, and "woohoo, buddy, it's a fire sale!"

Fidelity remains the country's largest mutual fund operator, and letting its high-end index funds ($10,000 minimum investment as compared to $5,000 at E*Trade and $3,000 at Vanguard) take one for the team should help keep Vanguard away. E*Trade is in an even more understandable position, as folks who open an account with the popular discount broker to take advantage of the dirt-cheap index funds may be tempted to make a few stock trades or consider some of the company's other personal finance offerings.

So while our Motley Fool Champion Funds continues to single out promising actively managed mutual funds, the index fund space is proving that it, too, wants in on a good fight to earn the champion title. As an investor, that ultimately means you.

Longtime Fool contributor Rick Munarriz thinks index cards -- and index funds -- are cool. He does not own shares in any company mentioned in this story.

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