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Weekly Wrap: Market Dive a Good Chance for Reflection

Fri, 19 May 2017

The year's biggest stock decline was no reason for panic but a good chance to double-check your plan. Plus, why Wal-Mart looks well positioned, and Cisco looks pricey.

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Video Transcript

Jeremy Glaser: Stocks take a midweek dive; retailers report; and Cisco's guidance disappoints. This time on the Morningstar Weekly Wrap.

After months of a sometimes eerily calm market, volatility returned with a vengeance on Wednesday, with the biggest decline of the year over political worries. A decline like this is not a time to panic, but as Christine Benz points out in an article this week, it can be a good time for reflection. Is your asset allocation still reasonable? Does your financial plan really have the risk capacity to handle a short- or medium-term decline in equity prices? Do you personally have the tolerance for it? And, of course, always keep in mind that declines in prices also open up attractive entry points for investors, something that's been in short supply recently.

Wal-Mart and Target both reported this week, and analyst John Brick gave us his take.

John Brick: Wal-Mart and Target both reported earnings which are better than expected this quarter. However, over the coming years, we see diverging storylines, and recommend investors look at Wal-Mart over Target.

So, to Target first. We think that they are undergoing necessary changes that capture e-commerce and digital sales, however, a high proportion of their sales are higher margin, which, in this increasingly e-commerce and digital world, have more price transparency. Secondly, we don't think that they are done investing in their business, which will ultimately constrain margins and shareholder returns.

Wal-Mart, on the other hand, had a great quarter. We saw them beat numbers, but we also saw a 63% organic e-commerce sales growth which was above our estimate of 30%, and Target's 22% just a day ago. We also think that they are better positioned to withstand the competitive pressures coming into the U.S., as Aldi and Lidl enter the market over the coming years.

Glaser: Cisco shares declined after reporting results this week. Analyst Ilya Kundozerov still doesn't see the shares as cheap.

Ilya Kundozerov: Cisco reported third-quarter 2017 earnings, roughly in line with our expectations, but the company issued downbeat top-line guidance, expecting 4% to 6% decline over the next quarter. The company's switching business along with the wireless and security business were positive in the quarter, but we think that the company remains challenged in its core hardware business, primarily switching routing and data center. So we think the company's on the right path by building up the portfolio of software products, and we think that's the right strategy for the company, and we expect Cisco to continue on the same path over the next couple of years.

With that said, we still see Cisco shares as a little bit overvalued compared to our $28 fair value estimate.

Glaser: And in case you missed it on Morningstar.com this week, Ben Johnson looked at how investor returns differ for passive and active funds.

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