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The Friday Five

Thu, 12 Sep 2013

Five stats from the market and the stories behind them. This week: Lehman five years on, Apple's non-game-changer, lululemon's downtime, and more.

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Video Transcript

Jason Stipp: I'm 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 Friday Five 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: The numbers we're going to look at are 5, $49 billion, $25 billion, $549, and 8%.

Stipp: Five years since the Lehman collapse really kicked off the financial crisis. What have you learned in those five years, Jeremy?

Glaser: It's really amazing that it's only been five years since the Lehman bankruptcy really sent the global financial crisis into even a sharper downward trend. There are a few big lessons here. From the banking sector more narrowly we've seen some big changes over the last five years. Banks, either because of their own volition or because regulators have really forced them, have raised a lot more capital, they've shed a lot of their bad loans, they've stopped making as many risky loans that got them in trouble the first time. As they bring that leverage down, it really brings the risk down a lot. [Although] we've seen that de-risking, obviously, there is still a lot of risk in the financial sector, but much less than it was five years ago, and it's much safer particularly in the U.S. now.

Outside the U.S., it's a slightly more complicated story. The European banks haven't been quite as aggressive as they have in the U.S. But generally speaking, the global financial system is sounder now, if not completely sound, than it was not only at the height of the Lehman bankruptcy, but even probably a few years afterward as well.

But from a broader perspective, the Lehman bankruptcy points out to investors that you really do sometimes have these systemic events, these tail risk events, that really can cause a lot of havoc, and very quickly, in ways that you might not expect. It's important to always have a plan--that if one of these events comes from the financial system or somewhere else--the next crisis probably will come from somewhere else--how are you going to handle it? How do you think about your portfolio? How do you make sure you don't panic, so that you don't look back five years later and say, oh, I wish I hadn't sold all my stocks when you look at the performance since the bottom of the market in 2009, a little bit after the Lehman bankruptcy. I think that's one of the big lessons that investors really have to draw looking back five years.

Stipp: $49 billion is the size of Verizon's recent bond deal. It's one of the biggest non-financial bond deals in history.

Glaser: If you want to see exactly how far we've come from Lehman Brothers, I think the Verizon bond issuance this week is a great example of that. They need to issue a lot of bonds and raise a lot of cash to complete their buyout of Verizon Wireless from Vodafone that we talked about just last week. They went to the market pretty quickly, and very aggressively, to get this $49 billion done in one fell swoop across a pretty broad [maturity] range, up to 30-year notes that they were selling. And they priced them fairly aggressively with pretty good yields, because the market knew that they needed to issue these bonds. It was such a big issuance.

But the bond market absorbed this $49 billion pretty quickly. Even with outflows from bonds and the bond sector that we've seen recently, [the Verizon bonds] even traded in a little bit, so those yields actually fell, and people made some immediate money on buying these bonds, which shows that it was a healthy issuance.

I think this is not only a good sign for the corporate bond market, and a good sign for Verizon, it also shows just how we really do have a normal-functioning financial system now. The markets are open for companies that need to raise debt, that need to do these financing deals. That really is in incredibly stark contrast to the days right after the Lehman bankruptcy, when getting almost anything done would have been basically impossible.

Stipp: At $25 billion, the Dell buyout is finally done. What is your take on this very long saga?

Glaser: I really promise that this will be the last that we talk about the Dell buyout; at least I hope it's the last time we'll talk about the Dell buyout.

This is really a buyout deal that did not go smoothly. I think that Michael Dell, when he teamed up with Silver Lake Partners to take the company private, thought it was going to go smoothly, and Carl Icahn and others really ensured that that was not going to be the case. Icahn really fought hard here in order to convince other shareholders that this [deal] would undervalue the company, that his leveraged recapitalization really made more sense, and he finally bowed out this week, but not without fighting. He said in his letter, "What's the difference between a dictatorship and Dell?" He said, "In most functioning dictatorships you only need to postpone the vote once to win."

He was not happy with the way that the stewardship and the way that the board handled his offer, and instead of really taking it seriously, they just kept changing the rules of how voting would take place until they were able to get the required shareholders to sign on to get the deal done.

Now, they did have to raise the price that they paid somewhat, so Icahn did get something out of it, if not everything that he wanted. I think this just goes to show how important stewardship can be. Particularly in these buyout situations and particularly when it's the founder and someone who is an insider who is doing the buyout, it can be difficult for shareholders to really make their voice heard, no matter how big or how loud they are on some of these cases. Always keep in mind, make sure that the board really does have an independent voice, and if not, shareholders need to think twice about if [the board] is going to really be in their corner if they have to make a choice like this on a buyout.

Stipp: $549 is the price of the new cheaper iPhone. That's cheaper, but not exactly cheap.

Glaser: I think that's probably a good way to look at it. Apple, as expected, released their new iPhone lines this week. They released the high-end 5S that was about what everyone expected. But the lower-end 5C, I think a lot of people thought that the off-contract price would be below where they've offered a phone before, and it really wasn't. Apple basically just took the regular iPhone 5 that's being sold now, put a colorful plastic case on it and are charging just a little bit less. So $549 off-contract is still going to make it a very expensive gadget in emerging markets and elsewhere, where that unsubsidized pricing is more of the norm.

It's not a game-changer for Apple. It's always good to see them iterating and coming up with some new innovative devices, but this isn't going to open up a big new market segment for them. They've always had the older generation [phones] that have been selling at these price points with similar performance specs that they have now. It's not all of a sudden going to open up a big new customer base for them. So nothing transformative in this announcement.

Stipp: 8% is the same-store sales growth reported by lululemon this week. This is a stock that, despite some volatility, has looked overvalued for a very long time. But [the retailer is] also indicating some continued troubles with some of its inventory. What's the story on the valuation now?

Glaser: This has been an interesting story. Lululemon had "sheer pants-gate," where they produced some pants that maybe were a little bit too sheer for some of their customers when they were doing yoga. That's really put a lot of pressure on the firm and kept it in the news for a while. The CEO left, and they're currently searching for a new CEO.

They posted results this week; they really actually weren't that bad. Jaime Katz, who's our analyst covering lululemon, said that 8% same-store sales growth was actually decent, considering some of their problems.

But there still are some overhangs. You look at some of the inventory issues that they still have. You look at the CEO lack of leadership at the moment, and some of the other potential problems. It's really hit the stock along with some reduced guidance for the rest of the year, which is in line with what some other apparel retailers are seeing as well. The stock really has come down. It's now trading at about the fair value estimate, which is the first time it's really been down there. It's usually, as you mentioned, looked quite overvalued.

This is a good example of why it's important to wait for valuation. Even if there is a story, like lululemon, that you might really like: Here's a new high-end athletic apparel manufacturer that's really on-trend, and they're getting people to pay a pretty hefty premium for their clothing. They … have a lot of potential to open new-store growth; they're hardly saturated yet. That might seem like a compelling story.

But if you paid too much for it, as you're seeing today, that could really not work out. And waiting for that price to come back to you, and waiting for a good buying opportunity is going to be a much better investment decision. That doesn't mean right now it's a great buy. It's still trading at fair value. We'd want a bigger margin of safety before diving in. But still I think if it were to fall more, that's when it could start to become a bit interesting.

Stipp: Great insights as always, Jeremy. Thanks for joining me.

Glaser: You're welcome, Jason.

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

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