Archive for Sunday, March 16, 2003

The Motley Fool

March 16, 2003

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Last week's answer

I trace my roots to 1976, when Price Club began selling just to businesses. Today I'm a no-frills establishment for members only, selling everything from wine to books, luggage, candy, tires, televisions and cans of creamed corn. Based in the state of Washington, I operate more than 400 locations in the United States, Puerto Rico, Canada, the United Kingdom, Korea, Taiwan, Japan and Mexico, and employ 102,000 people worldwide. My average store size is 135,648 square feet. I'm patronized by nearly 20 million members and more than 23 million households. I raked in $38 billion in fiscal 2002. Who am I? (Answer: Costco)

Know the answer? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.

Are you game?

Are there any board games that could help my children (or me, for that matter) learn about the financial world? -- R.K., Boynton Beach, Fla.

There sure are. Playing card and board games is a terrific way to painlessly teach kids all kinds of things, and it can help sharpen adult brains, too. At www.Funagain.com, www. GameSurplus.com and www. BoardGameGeek.com, you can read reviews and descriptions of a host of modern games. Too few folks realize that there's a wide world of great new games out there. You have many more options than Monopoly or Yahtzee.

Good children's games help young ones learn to count, deduce, make tough resource allocation decisions, and/or explore interesting worlds and themes. With ZooSim, for example, they'll try to build the most successful zoo and will build amusement parks in Roller Coaster Tycoon. In Mamma Mia!, they'll make pizzas to order.

Both adults and older kids can enjoy many business-oriented games.

For example, in the best-selling Settlers of Catan, they balance resources and trade as they build a settlement, while in Pizarro & Co., they're kings financing explorers. In Acquire, Mogul and Shark, players speculate in stock. In Pit, they trade commodities. In Industrial Waste, they try to produce goods efficiently.

What's the difference between dividend-paying stocks and high-yield stocks? -- Henry Zacek, via e-mail

Dividend yield is simply the current annual dividend amount divided by the stock's current price. If The Three-Legged Chair Co. (ticker: OOOPS) pays $2 per year and trades for $50 per share, its yield is 4 percent (2 divided by 50 is 0.04). A high-yielding stock offers a significant dividend yield. Some dividend-paying stocks, such as Microsoft or Wal-Mart, sport low dividend yields (below 1 percent), so they're not high-yielding.

Coke loses fizz

Coca-Cola (NYSE: KO) recently announced fourth-quarter and year-end earnings results. It was a predictably flat year for the soda giant, as it struggled with worldwide economic woes and its own restructuring efforts.

But there were some bubbly spots to be found. One was total revenue, which rose 11.5 percent for the year to $19.6 billion. Worldwide unit case volume, an important measure of strength, improved 5 percent in 2002. Coke owes some of that growth to its acquisitions and licensing agreements for Evian and Danone waters and Seagram's mixers. Without them, volume would have grown by just 4.5 percent. New products Vanilla Coke and Diet Coke With Lemon also helped grow volume.

Net earnings were hit, in part, by Coke's commendable decision to record as expenses its stock options. On an annual basis, income dropped 23 percent to $3.1 billion. Operating income, though, inched up 2 percent to $5.5 billion, and free cash flow rose an impressive 16 percent to $3.9 billion.

The company spent $691 million on stock repurchases in 2002, and plans to do more of the same in 2003. To cut costs and improve efficiency, Coke will close several bottling plants, reduce its staff, and combine operations at Coca-Cola North America, Minute Maid and Fountain.

Coke shares have been trading at half of their 1998 peak, but with a trailing price-to-free-cash-flow ratio of 25, the stock is still not a bargain.

All that glitters

With the world mired in geopolitical and economic uncertainty, many investors' thoughts turn to gold, which can seem like a smarter investment than stocks.

Here are several ways to invest in gold, as described by David Kathman of Morningstar.com:

  • gold stocks -- often very volatile, combining the volatility of gold with the riskiness of a business.
  • gold mutual funds -- generally less volatile than stocks, but still rather volatile.
  • gold accounts -- purchased through bullion banks, usually with large minimum investments.
  • chunks of gold -- in coin or bar form, which have to be stored somewhere safe.
  • gold certificates and pool accounts -- available for those who wish to buy small amounts.

Kathman notes: "Returns aren't the point when you're investing in gold; diversification is. ... A small amount of gold alongside your stocks can be a stabilizer." He suggests considering these funds: American Century Global Gold (ticker: BGEIX), Vanguard Precious Metals (ticker: VGPMX) and Fidelity Select Gold (ticker: FSAGX).

But all does not glitter in the world of gold. In his seminal book "Stocks for the Long Run" (McGraw-Hill, $30), University of Pennsylvania finance professor Jeremy Siegel reveals what a dollar invested in various things would have grown to, from 1802 to 2001 (yes, just about 200 years!): stocks, $599,605; bonds, $952; bills, $304; and gold, $0.98. (Amounts have been adjusted for inflation.)

So through many wars and economic times even more troubling than those we face today, gold hasn't proved to be a great long-term investment.

In Fortune magazine, David Rynecki wrote: "Gold investors are notoriously bad forecasters. From 1985 to 1987, for example, a collapse in the dollar boosted gold 76 percent and had many metalheads predicting an extended rally. Instead the price fell 15 percent the very next year." He adds: "Even bullish gold pros caution the average investor to put no more than 5 percent of a total portfolio into gold-related holdings and say it's safest to invest through funds."

Learn more about investing in gold from the World Gold Council at www.gold.org/value /invest.

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