The big post-election rally on Wall Street fizzled a bit late in the day as oil prices surged once again. By the time Sen. John Kerry gave his concession speech, the Dow, which had been up nearly 200 points this morning, leveled off and snatched a 1% gain. The S&P and the Nasdaq also took about 1%. And George Bush took Ohio to pocket a second term.

In today's Motley Fool Take:

AOL Plagues Time Warner


W.D. Crotty

The 5-year chart for Motley Fool Stock Advisor recommendation Time Warner(NYSE: TWX) fails to show the fantastic success of the Lord of the Rings trilogy and the Harry Potter series of films. It is the pall of AOL that has kept this company's stock from rocketing upward.

Overall, third-quarter results were mixed. Revenue increased 5% and net income fell 7.8%. What was impressive was the near tripling of free cash flow to $1.4 billion.

Hurting income was a $500 million legal reserve for "pending government investigations" at the AOL unit -- and, since a reserve for shareholder and civil litigation has not been established, you can expect more reserves!

While AOL's revenue increased an anemic 1%, operating income surged 74% (not including the legal reserve) because of a sharp reduction in network expenses. Overshadowing the earnings news is a 646,000 decline in subscribers in the U.S. and 8,000 in Europe -- and no clear way for AOL to steal customers away from cash-rich content providers such as Google(Nasdaq: GOOG), Yahoo!(Nasdaq: YHOO), and Microsoft(Nasdaq: MSFT).

Time Warner's Cable division produced a 10% increase in revenue and operating income because of strong growth in digital video and digital data services.

The Filmed Entertainment unit saw a 1% decline in revenue and a 4% drop in operating income. While the company was No. 1 in the U.S. in home video sales and rentals, the previous year's home video release of The Lord of the Rings: The Two Towers was too much to top.

Networks (Turner, HBO, WB Network) saw revenues climb 8% and operating income increase 13%. TNT was once again the No. 1 ad-supported cable network for delivering adults 18-49 and 25-54 during prime time. Publishing revenue increased 3% and operating income climbed 28% on the strength of advertising revenue.

Time Warner's 11.1% operating margins this quarter are below those at competitors Disney(NYSE: DIS), News Corp.(NYSE: NWSWI), and Viacom(NYSE: VIA). Still, the stock trades at a lofty 25 times estimated 2004 earnings because analysts see 15% earnings growth in 2005, a continued reduction in net debt, and strong free cash flow.

If it were not for AOL, Time Warner would be an easy story to tell. But, because of AOL and the ongoing government investigations, the outlook is clouded.

For more on Time Warner and AOL, check out:

Fool contributor W.D. Crotty, a movie fanatic, owns stock in Disney and News Corp.

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Ignore Your IRA


Dayana Yochim (TMF School)

We're not a country that's fond of delayed gratification. (Take a gander at personal debt statistics if you're curious about the Joneses' Visa bill.) But when it comes to retirement savings, it pays to resist the temptation to take an early dip -- even when Uncle Sam allows it.

Perhaps you've eyed your IRA savings when facing higher education costs. Many first-time homebuyers have taken a penalty-free loaner (up to $10,000) to cover some of their costs. Or maybe your family has been sacked with extremely high, unreimbursed medical bills that could only be covered with funds earmarked for retirement. For those with limited resources, dipping into IRA money early is the only way to get to college, become a homeowner, or cover catastrophic medical expenses.

In any other situation when you might be tempted to borrow money from your IRA before age 59 1/2, don't do it. The price in taxes and early withdrawal penalties is too steep.

Take, for example, Jim, who invested $2,000 in a Roth IRA seven years ago. Earning the stock market's average returns, today his balance is $3,500. When his brokerage account statement arrives, Jim doesn't see retirement dreams; he sees dollar signs. His neighbor is selling a really hot car that -- like a sign from above -- is going for exactly $3,500. Jim cashes out his IRA so he can get behind the wheel by the weekend.

However, Jim has a problem. He still can't afford the car even though he thought he had it covered. After paying taxes on his Roth earnings of $1,500 at his marginal tax rate (let's say that he's in the 28% tax bracket) as well as shelling out a 10% early withdrawal penalty, Jim's $3,500 Roth becomes a pipsqueak $2,900.

Had Jim been able to resist the new ride or been able to come up with the money without touching his retirement funds, he would have been a lot better off. Had he just let his IRA ride it out for the next 30 years (at the stock market's average annual returns) it would have been worth more than $20 grand.

Sometimes resistance is fruitful.

More reading:

  • How can you access Roth IRA funds without paying a penalty? Robert Brokamp argues that sometimes using the Roth as an emergency fund makes sense.
  • For more on the nuts and bolts of opening an IRA, spend the next minute perusing our 60-Second Guide.

Quote of Note

"Our patience will achieve more than our force. " -- Edmund Burke

A Small Stock With a Big Kick


Rick Aristotle Munarriz (TMF Edible)

There is usually a great deal of risk when you're trolling for smaller companies. Yet a lot of that volatility is created because the entities just aren't being followed by the analytical masses. To a trained Hidden Gems gemologist that's also the scent of opportunity.

Consider a company by the name of LaCrosse Footwear(Nasdaq: BOOT). Back in December, Dave Marino-Nachison wrote about the stock notching up big gains after announcing a $4.9 million contract to supply the military with its Danner boots (yes, the ticker symbol was no accident).

Why did the market get so excited about a company that had posted operating losses during each of the four previous years? Was a petty deal to deliver less than $5 million worth of boots to the country's armed forces over the next two quarters really that impressive?

See, this is exactly why I love these companies that fly under the radar. For starters, yes, for a company like LaCrosse, with just $95.7 million in sales last year, the publicized military deal was significant. Yet after the first two quarters of 2004 came and went, with sales inching up by just 10% and earnings coming in at only $0.14 a share, investors figured that these boots were made for walking -- right out the door.

So the stock that treaded as high as $11 as a story stock could have been bought months later at yesterday's close of $6.99. Investors counted two quarters, ignored a company that was reversing a declining sales trend, and moved on. They probably couldn't have been troubled to consider that while the top line had suffered in the years prior to 2004, gross margins were now climbing for the fourth straight year. It was probably too much to ask to pull up the second quarter's 10-Q filing in which the company emphasized that this was a seasonal business with the first half of the year typically being its weakest.

So when the company shocked the market last night, earning $0.64 a share on a 15% spike in sales during its September quarter, investors learned that there are two sides to every story stock. How often can you say that a stock is trading at just 11 times trailing quarter earnings? Did I mention that the stock was trading yesterday at what was essentially its book value?

Sure, LaCrosse is no Nike(NYSE: NKE). In the footwear space it isn't as well recognized as Rocky Shoes & Boots(Nasdaq: RCKY), Deckers Outdoors(Nasdaq: DECK) or Vans, which was acquired this year by VF Corporation(NYSE: VFC). Yet that's the point.

And I'm sure you're going to find folks who go overboard and miss the point again. They may turn right back around and buy into the stock figuring that if they multiply $0.64 by four to arrive at some ludicrous annualized earnings target, the stock should be trading at $30. Oh, please. That defies the very convention of the seasonality that they missed the first time around. The stock was a steal at $7, a bargain at $8, but buyer beware if it heads into the teens. The market's got suckers at both ends of the buy and sell lines. Now you know why I love companies like these.

Longtime Fool contributor Rick Munarriz is not a LaCrosse investor -- and not much of a lacrosse player if you get down to it. He does not own shares in any of the companies mentioned in this story.

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