Our panelists give you the scoop on all the inside business information before you hear it anywhere else in The Informer segment:

David Asman: Elizabeth – Accounting hanky-panky, you are our watchdog. What’s happening?

Elizabeth MacDonald, Senior Editor: The issue has to do with stock options. We know that a lot of Silicon Valley (search) and high-tech companies have issued stock options, but what a lot of investors don’t know is that these companies also get, as all companies do, a tax refund. In other words, the get to deduct the run up in the price of the stock option against...

David Asman: So what do they do with that tax refund?

Elizabeth MacDonald: They stick it right in cash flow, and it’s been boosting by astronomical amounts.

David Asman: So they’re allegedly misleading the public to thinking that a tax refund is actually profit?

Elizabeth MacDonald: Right. Off of the products and the co-operations of their businesses, but it’s not. We have Microsoft (MSFT), 24 percent over a three-year period boost to cash flow from this tax refund check, for their stock option gains. It’s pretty big. Other companies you should watch out for include Yahoo! (YHOO), Siebel Systems (SEBL), Cisco Systems (CSCO), and Sun Microsystems (SUNW).

Quentin Hardy, Silicon Valley Bureau Chief: They’ve been doing this for years, right Liz?

Elizabeth MacDonald: They’ve been doing it for years.

David Asman: And it’s not illegal?

Elizabeth MacDonald: No, it’s not illegal. The fact is that they can’t deduct the compensation expense on the shareholder reports, they don’t have to right now.

David Asman: Now, I own some of those stocks. Should we all dump stock in these companies?

Elizabeth MacDonald: I think you should be a little worried if the cash flow is relying too heavily on tax refund checks.

David Asman: Quentin, I want to hear about the cover story on Hewlett-Packard (HPQ), tell us what the news is there.

Quentin Hardy: Well, look, I think these guys really deserve a victory lap. Everybody said they couldn’t pull this merger with Compaq off, they got costs down a billion dollars more than they said, a year ahead of schedule. The thing is operating as one, single company now. It’s very coherent; it’s very tight. And now they say they’re going to take on IBM (IBM), you know I really wouldn’t discount them.

David Asman: Now, the CEO, Carly Fiorina, beat the odds-makers. When they went after Compaq, everyone said ‘big mistake,’ but she beat them.

Quentin Hardy: She took a world of heat, she took on the founder’s son, she beat them all back, and she proved that she was right.

Mike Ozanian, Senior Editor: You know, in the computer industry, the margins are shrinking, but I like H-P, because I think that Carly [Fiorina] is going to be the Sandy Weill [chairman and CEO of Citigroup (C)] of the PC industry. She’s going to grow that company by buying other companies and then consolidating, and then firing some people.

David Asman: And, Elizabeth, what do the numbers look like?

Elizabeth MacDonald: I was, admittedly, worried and nervous about this merger, but Quentin, what are the numbers of the cost-cutting so far, and where is the cost-cutting at right now with the merger?

Quentin Hardy: They can get another billion dollars out of it just on their supply chain.

David Asman: All right, Mike Ozanian, speaking of numbers, BEA Systems (BEAS). Now last week, you came out with some numbers that weren’t absolutely correct.

Mike Ozanian: I have to start wearing glasses. Last week, BEA, they make computer software, they’re in San Jose, CA. I said they had a big, deferred tax liability. They don’t have any such liability. I was looking a line above. However, I am still a little nervous about the stock. It’s at fifty times earnings, and their operating cash flow went down last quarter.

David Asman: Quentin, are you wary of BEA?

Quentin Hardy: I am admiring of BEA. I’m wary of anything that has run up as much as it has, but at the same time, these guys are right in the sweet spot. IBM has targeted this, they have dominated this space, however. They’re battling everybody off.

Makers & Breakers

Stryker (SYK)

Robert Millen, Co-Portfolio Manager of the Jensen Portfolio: MAKER

Stryker is a company that is in the business of producing orthopedic implants, and like all companies in the Jensen Portfolio, they have achieved a return on equity of at least 15 percent for ten consecutive years. They company is generating very strong free cash flow, they’re using it to benefit shareholders and, if you think about the demographics of this business, with people wanting to live longer, healthier lifestyles, it’s a tremendous opportunity.

Elizabeth MacDonald, Senior Editor: MAKER

It’s a little bit pricey at around $74-75, which is around forty times earnings, but I think this is a really exciting stock. I’m a maker on it. It has this really interesting, fascinating division that’s creating genetic bone protein, that’s a really good thing to watch.

Bill Baldwin, Editor: MAKER

It’s very hard for me to knock a management that, with one exception, has had 26 consecutive years of 20 percent+ earnings-per-share growth. You almost never see that.

David Asman: Well, Robert, is it a problem that it’s been up for so long, and that it’s trading at it’s high now?

Robert Millen: Great companies sell at a bit of a premium, but they do for a good reason, and that is this company will continue to generate in excess of 20 percent-a-year growth, and, in that regard, we think it’s still priced quite nicely in the market.

Automatic Data Processing (ADP)

Robert Millen: MAKER

Well, a great company. Everybody knows the name; they’re in the business of payroll processing. They produce services for brokerage operations and they have a ten-year record of at least a 15 percent return on equity, forty-one years of double-digit earnings increases, and while they’re going to be down a little bit this year, they’re still generating good shareholder values.

Bill Baldwin: MAKER

There’s a money manager that I really like who has loved this stock since 1965. He still does. It’s up for him 20,000 percent, or something close to that. I thought it could go up another 20,000 percent over the next 37 years.

Elizabeth MacDonald: MAKER

I’m a maker on this stock too. Sometimes, boring is beautiful. This is a stock that also is expanding, the company is expanding into brokerage services transactions. It’s growing overseas. I just see upside in the revenue line all the way.

David Asman: Well, Robert, I have to ask you again. Up 20,000 percent, can any stock stay up that long?

Robert Millen: When you have the consistent earnings power that ADP has, even though it’s down a little bit this year, this stock is, in our opinion, because the market has taken its price down this year, is a really good buy right now.

David Asman: And really quickly, the numbers are OK? No hanky-panky here?

Elizabeth MacDonald: You know, both these stocks, we went through the financials, and we didn’t see anything that looked untoward.