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The Friday Five

Fri, 15 Mar 2013

Five stats from the market and the stories behind them. This week: Samsung enters a new Galaxy, Yum serves improved China sales, inflows continue into bonds, and more.

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Video Transcript

Jason Stipp: I am Jason Stipp for Morningstar and welcome to the Friday Five, five stats from the market and the stories behind them. Joining me, as always, with the details is Morningstar markets editor, Jeremy Glaser. Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: So, what do you have for the Friday Five this week?

Glaser: We're going to look at IV, 15%, 5, 2%, and finally $52 billion.

Stipp: IV is for the Samsung IV, which was released this week, maybe giving the Apple iPhone a bit of a run for its money?

Glaser: Yeah. It's really been remarkable over the last few years, just how much buzz Samsung has been able to build around its Galaxy line of smartphones. And with the announcement of the Galaxy S IV this week, we kind of saw this sort of hype and this sort of excitement that we usually see reserved for Apple product launches, that people really were looking forward to getting their eyes on this new phone to see what the new features were. I think it just shows how much Android has matured as a platform and how much Samsung really dominates that mature Android platform, particularly on the high end. This really does represent an opportunity for Samsung and really a risk for Apple.

Apple may not see a big new smartphone launch for some time. If historical trends continue, chances are that this year Apple is going to release relatively minor update to the iPhone 5, maybe change some of the internals, but it'll look very similar. Apple is not going to have that kind of big splash that Samsung is going to get from its new Galaxy S IV. That could really present a risk when there are a lot of investors worrying about a slowdown in Apple's iPhone growth and the potential impact that that's going to have on margins and profitability and other things for Apple. So really watching this launch and seeing the buzz around it is really quite fascinating.

Stipp: 15% is an increase in the membership fees at Costco. This coming at a time when we're not keeping as much of our paycheck due to a payroll tax, and gas is also high. What does this increase mean for Costco?

Glaser: Costco is doing a really great job. They've had a pretty successful run through the great recession. They didn't see a ton of members drop out of the club. Members really saw value in that membership, and they kept showing up. Costco makes a lot of their money from those membership fees. Seeing that increase so substantially shows that their membership-fee increase was something that people took in stride. They're not seeing a lot of people dropping out because of things like that payroll tax expiration, like you just mentioned.

So, add in the membership fees; add in [increased] same-store sales. Costco is able to keep operating margins high; those expanded a little bit in the quarter. When we saw the results this week, I think it shows just what a great operator Costco is. The best part in the market that's pretty fairly valued, their shares actually looks slightly undervalued, not an incredible bargain, but definitely trading below our fair value estimate, and could be an interesting play in that consumer defensive space.

Stipp: 5 is a five-year low in initial unemployment claims. Are they finally getting some traction in the employment market here?

Glaser: It really looks that way. On the heels of last week's payroll report and unemployment rate that showed that February looked pretty good, as it had in the year before, this confirmation that initial jobless claims are now at a five-year low was just a sign the labor market really is healing,. And that doesn't mean there aren't long-term problems with the long-term unemployed, that there aren't still some structural problems. We're not anywhere near out of the woods.

We are definitely making those very concrete steps to getting back to a more normalized market, and I think it's going to start begging the questions of, when are we going to get to that 6.5%, and what's the Federal Reserve going to do? Are they really going to start tightening when they hit that number that they've been talking about for a couple of months now?

I talked to [Morningstar director of economic analysis] Bob Johnson last week about this, and he thinks that we could do see some tightening sooner than people might expect as that unemployment rate comes down. That's going to be a huge story for the rest of year. It will be what's the Fed going to do, what's their exit strategy, and how is it going to impact the economy?

Stipp: 2% refers to a bounce-back for Yum Brands. This after some concerns about quality issues in China. So is this a sign of relief for Yum investors?

Glaser: I think it has to be. There were a lot of discussions of analysts of the company itself that after these highly publicized issues in China about Yum's chicken suppliers and the safety of their chicken suppliers, Yum saw a big drop-off in sales. But in February there was a 2% gain in same-store sales in China. Now that includes a big gain from Pizza Hut, and KFC was about flat there, but it shows that it's not just a complete free-fall. [It shows that] Yum has strong brand equity there. Their advertising campaign assuring customers that their chicken is safe has been successful. It doesn't mean it's going to be an easy road. There will probably be some bumps along the way. But Yum really has made that really concerted effort to get people back in the stores. People aren't shying away. It's not a disaster for them. Unfortunately, that's priced into the shares; we think they're about fairly valued. But it's definitely a good sign for existing investors.

Stipp: $52 billion is the fund flows into open-end mutual funds for February. This wasn't quite as good as January, but a pretty good number. In many ways, though, the story is still the same.

Glaser: Yeah. It was a big number coming in, so it seems like people are kind of taking that money out from under the mattress and putting it into the market. But they're still putting it into bonds, and this is, I think, a really fascinating tale of investor psychology that even though stocks have been on an incredible run and are now at record highs with many of the indexes, people are still pretty afraid of equities. Maybe it's that those record numbers are making people think that there is some overvaluation in the market and they think bonds are safer.

Over the long term, this could be a risky bet for a lot of investors, particularly those with longer time horizons. With interest rates potentially rising at some point, there could be lot of potential headwinds to bonds, while stocks, though they look fully valued, don't look ridiculously overvalued. There could be some better opportunities there, so we'll see over the next couple of years how the bond market shakes out and if investor flows really start that so-called great rotation as they move out of bonds and potentially into equities in the future.

Stipp: Some very interesting numbers this week, Jeremy. Thanks for taking us into the data.

Glaser: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

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