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Archive for Sunday, February 22, 2004

The Motley Fool

February 22, 2004

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Last week's answer

Born in 1995, today I'm "The World's Online Marketplace," with 95 million registered members. People spend more time on me than any other online site. In 2003 I sported nearly a billion listings and handled $14 billion in gross merchandise sales in the United States. I bought the online payment specialist PayPal, and it now processes $475 in spending per second (one in three online users has a PayPal account). My stock has advanced more than 1,700 percent in 5 1/2 years. I'm America's 11th largest product retailer, operating in 28 nations. Who am I? (Answer: eBay)

Alternative tax nightmares

Did you know you have an advocate in Washington, D.C., charged with looking out for your best interests in the world of taxes? Meet Nina Olson, the National Taxpayer Advocate. Her office was created in 1996 to help resolve taxpayers' problems with the IRS.

Olson recently sent a report to Congress detailing big problems faced by taxpayers. The alternative minimum tax (AMT) was cited as public enemy No. 1.

As Olson explained: "Although the AMT was originally enacted (in 1969) to prevent wealthy taxpayers from avoiding tax liability through the use of tax-avoidance techniques, it now affects substantial numbers of middle-income taxpayers and will, absent a change of law, affect more than 30 million taxpayers by 2010." Those 30 million taxpayers represent a full quarter of all American households. More than half will have incomes of $100,000 or less, and they'll include 37 percent of those earning between $50,000 and $75,000. These obviously aren't the rich. They're often people who have large families, live in high-tax states, and/or have exercised certain incentive stock options.

While many taxes are designed to be adjusted to account for inflation, the AMT is not. So as time marches on, it traps more and more people in its net. And what the AMT means for those taxpayers is (at the very least) a lot more time spent preparing their return (one estimate is an additional 12 hours) and the possibility of owing extra taxes.

Olson not only listed tax problems plaguing Americans, but also suggested some solutions. For the AMT, she recommends either scrapping it entirely or tweaking it to reduce its impact on middle-class taxpayers.

Clearly, there are some broken gears in our tax machinery. An Associated Press article recently pointed out, for example, that, "In a recent audit, IRS employees made errors on 83 percent of tax returns they prepared for auditors." If even IRS employees can't sufficiently comprehend our tax laws, what hope do we mere taxpayers have? Well, at least we have an advocate. Go get 'em, Nina!

Get loads of tax information at www.fool.com/taxes and at www.irs.gov (including all the forms you'll need).

Wendy's big surprise

Burger-maker Wendy's (NYSE: WEN) recently reported fourth-quarter earnings up 27 percent and full-year profits up 8.5 percent. Earnings exceeded Wall Street analysts' estimates, which is considered a "positive surprise."

Analysts are typically guided by the company itself, though. In January, Wendy's projected earnings per share for the full year of between $2.01 and $2.04 per share. They rang in, though, at $2.05 -- the positive surprise. What's surprising to us is simply why, with all the information at its disposal, Wendy's couldn't wrap its guidance all the way around $2.05. We can hear Gomer Pyle now: "Surprise, surprise, surprise!"

So how did Wendy's actually do in 2003? At stores open a year or longer, its Tim Horton's restaurants excelled, the Wendy's chain did OK, and Baja Fresh was down. But a decline in operating profit margins from 15.8 percent to 14.2 percent is troubling. Watch these margins in the near future, as the supposed cause of the decline -- high beef prices -- should be reversed with the mad cow disease scare.

McDonald's (NYSE: MCD), meanwhile, posted a 1.6 percent increase in fourth-quarter operating margins to 14.8 percent. Operating margins had been Wendy's competitive strength -- and they still dwarf the 12.3 percent margins of Yum! Brands (NYSE: YUM), parent of Taco Bell, KFC and Pizza Hut. Still, with Wendy's stock trading with a P/E ratio of 19.4, any margin surprises could send it down.

Crashing with Webvan

Webvan, the online grocery delivery company of yore, has to be my silliest as well as my dumbest investment. It was falling like a rock and the news wasn't good. Instead of doing my homework on it and paying attention to the news, I bought it anyhow. I was seeing all these Webvan trucks running around and hearing about the company's plans for expansion. People I knew had ordered from them, and they raved about the service and the food. Yet when I went to the Web site, I decided I could buy my own stuff at the brick-and-mortar stores for much less. I should have known that if I wouldn't do business with them, I really needed to know more about them in the first place. -- D.L. Miller, Pittsburg, Calif.

The Fool Responds: Webvan had many devoted customers, but not enough of them. It went belly-up in 2001. Your mistake was a common one, though, assuming an exciting product or service is part of a successful and promising business. Sometimes terrific ideas never get off the ground, due to bad timing, financial difficulties, ineffective management or consumer apathy.

Insider trading

What is the significance of insider trading activity to an investor? -- E.W., Dewey, Okla.

It's significant only sometimes. Imagine that Rosie, CEO of Wally Burgers (ticker: MMMMM), sells a bunch of her shares. This might make many investors anxious, thinking that something's rotten at Wally Burgers. But there are other explanations. For better or worse, executives these days often get a major portion of their compensation in the form of stock. Rosie might just be selling some shares to generate a little cash to buy a house or pay a college bill. If many insiders are selling many shares all at once, though, that can be worrisome.

Meanwhile, if insiders are buying lots of shares, that's most likely a promising sign since they'd presumably do so only if they expected the shares to rise.

How can I research a corporation? I have the stock symbol, but am having trouble getting information. -- H.S., Bensalem, Pa.

Try getting the company's phone number from a telephone directory or your brokerage. Call and ask for the investor relations department, then ask for an "investor's package," which should feature the latest annual and quarterly reports, and perhaps some recent press releases and other tidbits.

Or fire up your computer. Most major companies (and many tiny firms) have fairly informative Web sites. Public companies tend to have a nook titled something like "For Investors" or "Investor Information." Scour the main page looking for that. There you should be able to view recent financial reports, several years' worth of annual reports, press releases and more. You may also find copies or recordings of presentations that executives have made, which can be illuminating. You'll also find info at http://quote.fool.com and http://finance.yahoo.com.

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