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Halloween 2001

eBay (Nasdaq: EBAY)
By Robert "Boo!" Brokamp (TMF Bro)

trading at $55.58 as of 10/23/01

You're trick-or-treating in San Jose, choosing a ritzy neighborhood because the denizens give out the best loot. You and your fellow Halloweeners stroll up the walkway of one of the biggest mansions on the block. "I heard this lady exercised $26 million in stock options this past August alone!" you say as you ring the doorbell. (The sign on the door says "We Bid You Welcome.")

A jovial woman opens the door. "What an adorable S&M 500 costume," she says, admiring your embroidered logos of Anheuser-Punch, Harshly Applied Materials, Crisco Systems, Cruel Rubbermaid, Unicleaver, and Jim Nabors Industries. "Sorry, boys and girls -- no Godivas this year. All I have are these certificates."

You and your friends thank the woman, walk back to the street, and pull the certificates out of your plastic pumpkins.

"Certificates?! Why would someone give out certificates?!" says Timmy, dressed in a Nasquack costume (doctor's scrubs, WebMD ball cap, and drkoop.com name tag).

"They probably say 'This is to thank your for not egging my house,'" says Jane, swiping aside the love beads of her DJIA (Davy Jones Incorrigibility Average) getup. "Let's use them to T.P. her house!"

"It doesn't even taste good," says Johnny, taking a break from the See's Candy, Dairy Queen Blizzards, and Cherry Coke of his All-You-Can-Eat Buffett costume.

But then you look at the certificate. Your eyes widen. You prance in the streets, dropping candy everywhere and not caring.

And why not? You have just been given a share of eBay(Nasdaq: EBAY) from kindly Ms. Whitman who lives down the street.

Who wouldn't be glad to be given shares of eBay? It's the premier tollbooth for buyers and sellers of... um... stuff, providing the pathway and taking a chunk of the change. No inventory, no catalog, no expensive mall space to decorate for Christmas.

You turn to your fellow shareholders and exclaim, "People actually pay to use eBay -- lots of people! People do business through it! People love it!"

Jane adds, "Wow! eBay is actually a profitable dot-com. My dad says that's an oxymoron, then laughs, but I don't get it."

"I'm just glad we got these shares for free," says Timmy. "Could you imagine paying for them? At today's price of $55.58 a share? At a trailing-12-months P/E over 176? At 24 times trailing-12-months sales?"

"Ah, yes," you say as clouds begin to gather. "There's the trick."

Your friends fall silent. A howling wind blows the autumn leaves from their trees.

"But there are Fools who have argued that eBay is just about fairly valued, or even undervalued," says Johnny, almost pleadingly. "They make many some good points... don't they?"

"But eBay is valued for perfection, maybe even then some," answers Jane. She pauses at the groan of approaching thunder, then continues. "This makes an investment in the company a shaky proposition when you look at the risk/reward profile."

The streets were full of trick-or-treaters just a few minutes ago, but now they're empty. Porch lights begin to go out.

You and your friends decide it's time to go home, but as you turn around, a tall man in black overalls stands in your way. He turns on a lantern that casts an icicle of light from under his chin.

"When a company doesn't meet expectations," he says in a slow croak, "the stock price suffers. That fall is often proportionate to the premium the market had placed on the stock. When a company with a richly valued stock stumbles, it has much farther to fall."

Lightning dissects the sky. Johnny is so startled, he drops his DQ banana split.

"As for the reward," the stranger continues, "how much higher can eBay go? The stock price already assumes outstanding growth. Will eBay come up with even more ways to warrant such a high premium a few years down the road?"

He lets loose a frothy laugh, then coughs, hacks a bit, and spits. "You kids best get home. And whatever you do, don't smoke!" he says, coughing some more as he disappears into a row of trees.

If any company can do it, you think to yourself as you turn homeward, it'll be eBay. But if it can't, your share of eBay will be worth a lot fewer jellybeans.

Robert Brokamp (TMF Bro) once won a costume contest by wearing a Jets shirt, a Giants hat, lots of hosiery, and calling himself the New York Sock Exchange. He doesn't own shares of eBay, but he tried to buy a castle bed loft from the site. He was outbid in the last 10 seconds of the auction. His stock holdings can be viewed online, as can The Motley Fool's disclosure policy.


Countrywide Credit (NYSE: CCR)
By Rick "or Treat" Aristotle Munarriz (TMF Edible)

Trading at $41.93 as of 10/23/01

What comes around goes around. I say this because as kind as the Fed has been to inflate the real estate market, last I checked, poor Alan Greenspan only had a few huffs of easing air left. While housing stocks like Lennar(NYSE: LEN) and Centex(NYSE: CTX) are priced fairly, fetching single-digit earnings ratios as we near the sector's cyclical peak, the same can't be said for the piggybacking mortgage makers like Countrywide Credit(NYSE: CCR).

As we learned in the various Halloween horror flicks, if you live by the cut you die by the cut. With real estate market prices on the bubble and the reversal of easy money looming, do you really want to bet the house on a company like Countrywide? I remember some Halloween fireside poetry about this very thing. Really! If memory serves me well it went something, like, this:

Once when interest rates were falling,
Mortgage brokers came a-calling,
With promises of cheaper funds and nothing more.

Oh what a time to refinance
Don't hold your breath, it's your last chance.
Countrywide Credit's knocking, knocking at your door

Today's a car but where to park it?
In this crowded housing market?
With Greenspan running out of downticks left to score?

Just as Countrywide's backlog grew
And its earnings did outdo
Any estimates that were sprawled out on the floor

What will be left to surpass
When real estate runs out of gas
And like a cyclical returns back to where it was before?

Let Mr. Freddie Krueger tell you....

One.
Two.
Interest rate hikes for you

Three.
Four.
Billeth Countrywide no more

Five.
Six.
Better lock in quick.

Seven.
Eight.
Tomorrow might be too late.

More Resources:

Rick "Howl at the" Munarriz (TMF Edible) can't wait to refinance his haunted house. That said, he's not going anywhere near Countrywide Credit. Rick's stock holdings can beviewed online, as can the Fool's disclosure policy.


Cepheid (NYSE: CPHD)
By David "Haunted" Forrest (TMF Bogey)

Trading at $6.12 as of 10/23/01

The horrors of the last six weeks provide an all-too-scary backdrop to our traditionally mischievous Halloween celebrations. People are spooked, for real. Turn on any television, open any newspaper, or click on your favorite news website and it's virtually impossible to escape the stories about plane hijackings and bioterrorism. People are justifiably emotional right now and that emotion is finding its way into their portfolios.

In the weeks following the terrorist attacks, as concerns about Anthrax and other biological agents develop, investors have sought out companies that will benefit from the changing landscape. The traditional military heavyweights like Lockheed Martin(NYSE: LMT) and General Dynamics(NYSE: GD) are rising to reflect the reality that national defense will be a higher priority for a very long time to come. The stock prices of other companies, where a logical connection can be drawn between the attacks and future profits, are rising as well. One such company is Cepheid(Nasdaq: CPHD).

On September 10, 2001, the day before the attacks, Cepheid's stock closed at $1.53 per share. It rose this month as high as $8.19, and at yesterday's close you'd have to pay $6.12, or three times as much as you would have a month and a half ago.

Cepheid's I-CORE technology is able to analyze a sample of DNA to see if a particular molecular agent is present. For example, you could use Cepheid's portable technology to detect whether someone has Anthrax, smallpox, or some other disease that they'd test for. The one catch with Cepheid's technology is that it's only capable of detecting those things that are specifically being sought out. In other words, if they are testing you for Anthrax, the results will only show whether or not you have Anthrax. Their technology is not designed to detect agents other than what you're testing for.

Now, before I get ghoulish calls from the company, let me state emphatically that I'm happy Cepheid is around. I think the technology is great and it's especially needed now. What frightens me about this whole story is the fact that company is currently valued at $162 million, will bring in less than $10 million in revenue this year, is burning over $4 million per quarter, and only has enough cash at that burn rate to get it through 2002.

The company held their quarterly conference call on October 23, and while revenues were up we've seen no new announcements about contracts for the company. Even at yesterday's close of $6.12, the stock is still trading at a rich 15 times sales. Additionally, cost of goods sold has been rising at almost double the rate of revenue this year and the company predicts that R&D will increase as a percentage of sales.

Repeating, as a concerned citizen I'm happy Cepheid is around and able to help diagnose these things. It's wonderful. But, for the sake of the shareholders, business better materialize or this will be the biggest "trick" of the year. Don't get caught up in it.

David "Dancing Skeleton" Forrest (TMF Bogey) doesn't own a gas mask and isn't stockpiling water and rations in his basement, so don't come to his house. He also doesn't own any shares of Cepheid. You can find his stock holdings in his profile, in line with the Fool's disclosure policy.

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The Motley Ghoul's Tricks represent the opinions of each Fool only and should in no way be taken as the opinion of either The Motley Fool, Inc. or any company in question, or as representative of anyone or anything other than that specific Fool's thoughts. So do your homework, and review The Motley Fool'sdisclosure policy.


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