During World Series week, we've been sharing with you an interview Tom Gardner recently did with Moneyball author Michael Lewis. Lewis' book, which focuses on Oakland A's General Manager Billy Beane's method of finding undervalued ballplayers, has numerous lessons for finding undervalued stocks. It makes for good weekend reading -- once you're done with our Stocks for Halloween special. Enjoy. And don't eat too much candy.

In today's Motley Fool Take:

DreamWorks Draws a Crowd


Rick Aristotle Munarriz (TMF Edible)

Slaying dragons and sharks has been kid's play for the company behind the popular Shrek and Shark Tale movies. Now DreamWorks Animation(NYSE: DWA) is slaying the market as well. After pricing its IPO at $28 a share -- well above the initial range that priced the deal between $23 and $25 a stub -- the company took off in a hurry yesterday. The shares opened at $39.50 and closed out their first publicly traded day at $38.75.

Raising $700 million will serve the company well as it has set up an aggressive release schedule to produce two animated feature films a year. But do investors know what they are getting themselves into at this point?

With just over 105 million shares outstanding, DreamWorks is valued as a $4.1 billion company. Rival Stock Advisor recommendation Pixar(Nasdaq: PIXR) is now a $4.6 billion studio. But just because the market caps are similar that doesn't mean the pedigrees are.

Pixar has been consistently profitable while DreamWorks Animation has posted losses during three of the past four years. While that can be dismissed as ancient history -- DreamWorks Animation is putting up great numbers this year and will continue to do so if the hits keep coming -- that's pretty much the point.

Pixar has an enviable track record, batting five for five at the box office with its computer-rendered features. DreamWorks Animation has a few duds like Sinbad and The Road to El Dorado in the tank. While the company's latest release has been impressive, tallying up nearly $140 million domestically over its first 27 days, that pales when compared to the $236.9 million that Pixar's last release -- Finding Nemo -- generated over the same number of days.

As the highest grossing animated film of all time, Shrek 2 pulled in $356.2 million over that timeframe. Great. Yet DreamWorks will need more bona-fide blockbusters, and Shark Tale was close but not quite there.

So where's the beef? Backing out the distribution fees that were booked as revenue and the distribution costs that were tacked on as expenses -- items which will now be tacked on to its parent's financials -- DreamWorks Animation earned $66.5 million on $181.5 million in revenue over the first half of the year. Pixar earned $64 million on $120 million in revenue over the same six months.

Similar market caps, similar profits? Well, yes, but Pixar still has to fork over 50% of its profits to Disney(NYSE: DIS). That will end with the company's first fully independent release in 2006. When you consider Pixar's net margins of 53% through those six months against DreamWorks' 37%, while both are incredible, it's hard not to like Pixar's chances.

Yet after catching the promising trailer for DreamWorks' next release -- next summer's Madagascar -- I was hoping DreamWorks would come to market with a more reasonable valuation. As a fan of Wallace & Gromit who is looking forward to DreamWorks Animation's first full-length feature next year, I was really hoping to discover DreamWorks Animation before the crowds came.

But, alas, it's too late. Pity.

Longtime Fool contributor Rick Munarriz is still a kid at heart. He owns shares of Pixar and Disney but held back on the DreamWorks Animation IPO.

Discussion Board of the Day: Give Me all the Chocolate!!

What is the best chocolate candy? If you savor the stuff, is there any chocolate that you will refuse? All this and more -- in the Give Me all the Chocolate!! discussion board. Only on Fool.com.

The Future's Bright for Flamel


W.D. Crotty

What a difference three months make. Last quarter, investors were disappointed with biotechnology and nanotechnology company -- and Motley Fool Hidden Gems recommendation -- Flamel Technologies(Nasdaq: FLML) for missing analyst earning estimates. The stock fell 6%.

Investors really turned a cold shoulder and sent the stock down 25% (ouch) when Bristol-Myers Squibb(NYSE: BMY) announced it was pulling out of a partnership to develop Basulin, one of Flamel's lead products -- and one that Novo Nordisk A/S(NYSE: NVO) had waived.

The stock has fallen 45% over the last 52 weeks. That's about as unloved as you can get for a company that is cash-rich, has an interesting product pipeline, and has partners like Merck(NYSE: MRK).

Then there is yesterday's news that the company earned $2.8 million in the third quarter. Investors liked that and sent the stock up 8%.

These profits would be great news if they were from product sales (although cash from any source is welcome). Instead, a milestone payment for the start of phase 3 trials for a reformulation of a major existing product from partner GlaxoSmithKline(NYSE: GSK) is behind the profit.

With generic-drug company Biovail's(NYSE: BVF) long-acting Genvir micropump formulation for genital herpes also in phase 3 testing, Flamel, a partner, does have prospects for product sales. Still, the five analysts who cover the company (up from three a quarter ago) are split on whether the company can be profitable in 2005. Their mean estimate is for a $0.01 per-share profit.

Flamel, part of the Merrill Lynch(NYSE: MER) Nanotech Index, offers exposure to the drug world of the future without taking on many of the drug development risks. The company's premier micropump technology is aimed at long-acting versions of existing drugs. One success in the two phase 3 trials should usher in many other candidates.

The company's Medusa nanoparticle technology, which still needs a partner, improves the delivery of native protein drugs through a more evenly controlled release of the drug. With its potential to avoid side effects, there are plenty of prescription takers who hope the technology is a success.

Many Motley Fool Hidden Gems recommendations face a bumpy road. They are small and have little analyst coverage. Flamel's stock has certainly taken its share of bumps, but with two drugs in phase 3 trials, the company is worth watching.

For related Fool analysis, see:

The Motley Fool is investors talking to investors. Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.

Quote of Note

"The first step to getting the things you want out of life is this: Decide what you want." -- Ben Stein

Martha's Scarier on Halloween


Seth Jayson (TMF Bent)

Martha Stewart Living Omnimedia (NYSE: MSO) isn't just a scary corporate moniker, it's been an absolute fright for anyone who was silly enough to put money and faith in Martha from the beginning. Click here for the gory details.

More gory details: Let's get them out of the way, because I want to discuss something a bit more arcane with what little space we'll have left. The firm's sales were 24% lower. It blamed much of that on sales at Kmart(Nasdaq: KMRT), but the drop was across the board. The earnings picture was even worse. By earnings, of course, I mean losses. This year's $0.30 per share nearly quadruples last year's $0.08 in red ink.

What does the firm offer investors who have bid the stock up over 60% during the past three months? Optimism. You read me right, optimism. It thinks ad sales will pick up once Martha gets out of the clink in the spring of 2005. Maybe, but I sure wouldn't bet my money on it. And what about her upcoming prime time show? I'm not sure it will matter much now that every channel on the cable spectrum is sporting younger, hipper home improvement.

Now that we've got that out of the way, there's an even spookier trick hidden at the back of yesterday's release. It involves an accounting change that would end the current policy of smoothing out subscriber acquisition costs across the year. Instead, they'll be expensed, as they should always have been, during the quarter in which they occur. In theory, this is more accurate accounting, and we ought to salute it. Except...

Keep your eyes peeled, folks. If you refer to the company's reconciliation table at the bottom of the release, you'll see that there's been some obvious seasonality in these subscriber acquisition costs. That means a big bath next quarter, and the firm has already braced investors for that. By reducing expenses, the accounting change will (surprise!) favor the spring and summer quarters -- exactly the quarters for which management is making vague, rosy predictions. Convenient, eh?

Don't be tricked. This is no treat. If next year's Q1 and Q2 look a bit too shiny and bright, make sure you're comparing earnings to the restated results, not those originally reported.

This is not a McDonalds(NYSE: MCD) or Home Depot(NYSE: HD) type turnaround folks. Heck, it's not even Intel(Nasdaq: INTC) today. This firm's got everything riding on Martha's return to grace. Why bet your hard-earned cash on that? Even if she's not laughed off the tube, who's to say her star power can still deliver revenue? The risk here far outweighs the potential rewards, and that, my friends, is a bad thing.

For related Foolishness:

Seth Jayson wishes there were something good to write about Martha or her company. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.

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In other news:

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