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The Friday Five

Thu, 26 Sep 2013

Five stats from the market and the stories behind them. This week: 20 days until the debt ceiling, BlackBerry picked for $4.7 billion, and two stocks worth a closer look.

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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: What do you have for The Friday Five this week?

Glaser: The numbers we're going to take a closer look at are 20, $4.7 billion, 4, $800 million, and finally $1 million.

Stipp: There are 20 days until we hit the debt ceiling, according to the Treasury. This could cause quite a bit of volatility in the market. How should I, as an investor, perceive the volatility we might see as Congress wrangles in the weeks ahead?

Glaser: It really could introduce a fair amount of volatility. Also we're talking about the government shutdown. We have those historical precedents of what a government shutdown looks like, what impact it's going to have, how the market's going to react. So even though it wouldn't be great for the economy, people aren't so worried about it, because we have a sense of what the magnitude of the problem will be.

That's just not true with the debt ceiling, because historically we've never gone through that statutory debt limit before. We don't know what the impact will be on the Treasury market. We don't know what the impact will be on the economy. That's what drives a lot of that market volatility. So if we get closer and closer to that date, and it looks like the Republicans and Democrats aren't able to get together to come up with a bill that would raise that debt ceiling for some time, I think we could see some significant volatility there as we try to figure out what that's going to look like.

That being said, I think it's more likely than not that the debt ceiling problem will get taken care of before then. There probably are enough votes between the Democrats in the House and some of the moderate Republicans in order to pass a bill. I think the Senate would be quite willing to do it, and President Obama would sign it. It's just a matter of if Speaker Boehner is willing to bring that to the floor even if a majority of his Republican caucus isn't in support of it. We've seen that [happen] a few times on some of these deals before. I think that's likely to happen again. So I think keying in on what Boehner is saying could be a good test to see if we really are going to be in trouble with the debt ceiling or if they are going to be able to come to some sort of resolution.

Stipp: $4.7 billion is the purchase price for BlackBerry. We've talked about BlackBerry's woes for a while. So, why would Fairfax be interested in this company? What's the upside for them?

Glaser: I think they really are taking BlackBerry out of its misery in some respects. Just last week BlackBerry warned, saying that their quarter is going to be really awful--significantly below what analysts were expecting, and analysts weren't exactly thinking that BlackBerry was going to be doing great. They are sitting on a lot of unsold BlackBerry 10 devices. Again, these woes are nothing new.

But Brian Colello, who covers BlackBerry for us, thinks that Fairfax probably is still paying a relatively fair price. When you back out the cash that they would get in the acquisition, they're probably paying a decent amount for the patent portfolio, and that gives them access to some of the other parts of the services businesses that maybe BlackBerry can sustain going forward, even if they don't expect a lot of growth, or any growth, in the handset business, if that really is on terminal runoff mode.

There is a "go-shop" period; BlackBerry can look for other suitors. There is a chance that they'll find someone who is willing to pay a bit more, sees a little bit more value. But I think for shareholders, this is probably going to be close to the best deal they're going to get, and they should be thankful that they have this graceful exit strategy from the public market so they can really look at other opportunities.

Stipp: Spice king McCormick is 4 times the size of its nearest competitor. This is something investors might want to keep in mind as they review some of the poor quarters that McCormick has had recently.

Glaser: It really is. McCormick this week announced another middling quarter. Sales declined. Their operating margin declined a little bit. A lot of this is just coming from some macro factors; a weak economy across the globe is weighing on them.

But we think over the long term, McCormick is still going to be by far the strongest player in the global spice industry. They are so much bigger than anyone else. They have that scale and are able to have better profitability and better returns because of that.

The shares are actually looking slightly undervalued right now. It's not an incredible bargain, but McCormick is a very steady company. It's very stable. It doesn't see big changes in earnings, and generally speaking we don't see it trading at any discount, let alone a big discount. So for anyone who's maybe been eyeing McCormick before, or who is looking for a very steady company in this space, this might be an interesting one to take a closer look at.

Stipp: $800 million is the price that eBay will be paying for payment startup Braintree. I think this points to the importance of payments as part of eBay's overall business.

Glaser: It really does. They're spending $800 million on this payment startup that provides a full range of payment services for primarily mobile apps--companies like Uber and Airbnb are clients of Braintree. They process a lot of these payments, and there really are likely a lot of synergies with the PayPal unit at eBay. They'll be able to combine these businesses and probably find some cost savings and also continue to increase the network effect that's so valuable for PayPal.

R.J. Hottovy, who is our analyst covering eBay, really sees payments as one of the unsung heroes of eBay's business. People sometimes focus on the marketplace, focus on that auction business that you really associate with eBay in the popular imagination. But there is a ton of value happening in payments, and it's one that really could grow and continue to be more important over time. He sees this wide-moat stock is looking fairly attractive right now, and in a market without a lot of undervalued stocks, I think eBay is another one for the radar screen.

Stipp: If I have $1 million [in liquid assets], Jeremy, I'm considered an accredited investor, which means I can invest in startups, directly in startups. Due to some recent provisions that went into effect this week, those startups can start courting me and advertising for my investment. But you say, take a moment and really think about if this is something you want to do.

Glaser: As part of the JOBS Act, which was meant to make it easier for small businesses to raise money, the SEC lifted some rules this week that prohibited small businesses and startups, when they had a private stock placement, from advertising broadly to these accredited investors. Now that that's off the table, we've seen a slew of new online startups that are trying to match these investors with these investment opportunities, potentially using social media and other aspects to try to reach out to people that they think might want to put some money into their business.

Before anyone who has that million dollars in liquid assets and $250,000 of income gets excited about this, they should really think about some of the information asymmetries there. When you're making an equity investment in a company, you are really handing over part of your ownership of the business to that management team, and you really have to think about how much do I know about the people who are going to be running this business? Are they trustworthy? Do they have the skills needed to take what might be a really good idea, but actually transform it into a real business--and one that I'm going to be able to potentially either exit out of (will there be someone else who will want to buy it from me?) or will be able to produce dividends, or however you think that you are going to get paid back from these different investments.

I think that generally a lot of these small companies may not be in the best position to do that. When you think about other funding sources out there, particularly in tech, you look at how much venture capital is there. The fact that [these startups] weren't able to get it from some of these sources that might know these markets better, might raise a red flag as to why they are now going out on Twitter and asking for this money.

So I think that people need to be very cautious. These are going to be incredibly speculative investments and probably need to be treated with a lot more caution than maybe buying a traditional stock or mutual fund.

Stipp: Accredited or not, investors always get sound advice on the Friday Five. Thanks for joining me, Jeremy.

Glaser: You're welcome, Jason.

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

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