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5 Things They Wish They Could Return

Fri, 27 Dec 2013

Some business and political leaders got a few unwanted 'gifts' in 2013, says Morningstar markets editor Jeremy Glaser.


Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.

If you got something you wish you hadn't this holiday season, you're not alone.

Joining me with five business and political leaders who have gotten things they wish they could return is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Happy holidays, Jason.

Stipp: What do you have for The Friday Five this week.

Glaser: We're going to talk about Target, J.C. Penney, Detroit, health-care reform, and finally, Twitter.

Stipp: Target wishes they could take back a security breach that happened to them recently at a really crucial time for retailers. What's the latest on that story?

Glaser: There are a lot of companies that got gifts that they didn't want throughout 2013, but Target got their gift at almost the worst possible time.

Right during the crucial heart of the holiday shopping season, they've had to announce that there was a pretty massive security breach … to their payment systems. Up to 40 million customers were impacted. Potentially, their credit and debit card numbers were exposed, and hackers and scammers could be out there trying to use them now.

This has really set off a scramble with the banks trying to stay on top of it, potentially limiting how much money debit card users who shopped at Target can take out every day, how much they can spend, to try to mitigate the damage. They are sending out notices to all the credit card companies. Target is trying to offer discounts to get people back in the stores, so that they don't see traffic fall too much during this crucial period because of these security breaches.

I think even if there are some short-term problems, Target will be able to survive this. People will forget about it soon enough, and chances are not every single one of credit card numbers that were stolen will be used unlawfully or the fraud detection won't work.

That being said, I think these kind of security breaches are something that we could very well see more of in the future. T.J. Maxx a few years ago had a big one; Target is having this big one now. As more and more of our lives move online, hackers are becoming a more sophisticated and are figuring out ways to get into these large corporate systems and get these numbers. I think it's going to become a fact of life and something that other companies are going to have to adjust to and think about the way they use their security in order to keep it from happening again and again.

Stipp: Another retailer, J. C. Penney, has been trying to turn its ship around for quite a while now, and they probably wish that they could have returned Ron Johnson earlier this year.

Glaser: They returned him in April, and I think they probably wished that they, like you said, had done it during the holiday season last year.

J. C. Penney thought that they were on to something big here. With the backing of hedge fund investors and with other activist investors, they brought Ron Johnson from Apple, and he was really [supposed] to transform the company.

Unfortunately, his vision for transformation just didn't work on two folds. First was cultural. Within J. C. Penney, he never really fit in that well. He brought in a lot of executives who didn't want to move to the corporate headquarters or who were flying in and out, and just didn't really meld with the existing workforce, and they were even putting out press reports saying, all they did was watch YouTube all day instead of actually doing any work. That doesn't really help to get all of your fellow co-workers together and really moving in the same direction when you are making such a radical change.

Customers didn't like it either. They didn't like everyday low pricing. They wanted their coupons. They didn't like the new merchandising mix. It just wasn't something that interested them. They burned through a lot of cash doing this.

Even after he was out the door, the board still has really tough decisions. They've already burned through all that cash, and cash continues to go out the door as they try to right the ship again. It's not going to be easy to do. Retail is ultra-competitive. These old-line department stores are already having plenty of problems to begin with.

Even though he's gone, it's not like they can snap their fingers and return to where they were before, which obviously wasn't an incredible place to begin with; that's why he was brought in for the transformation.

This is just a cautionary tale that a bunch of hype doesn't necessarily mean it's actually going to create value for shareholders and doesn't necessarily mean it's going to be a good deal.

Stipp: Detroit is trying to return some of its debt in one of the biggest muni headlines of the year--it's bankruptcy. But if Detroit can return some of its debt, what about other municipalities that are also under pressure?

Glaser: That is the important question. Our muni analyst team has called to the Detroit filing a watershed event. And what's particularly interesting about it is that the federal judge has said that things like pensions and other obligations that many thought either couldn't go through bankruptcy, or wouldn't be allowed to go through bankruptcy because of Michigan law and other reasons, are in fact on the table. And the way that this case plays out and the way that those negotiations unfold are going to have really big consequences for the kind of negotiations that other municipalities and other states are going to have with their stakeholders over the next few years as they come to grips with their own problems.

This isn't a huge, widespread issue. For the most part, the municipal market is fairly healthy, but for the pockets where there is some distress, what happens in Detroit is going to be incredibly important. For muni investors, it means that it's more important than ever to really know what you own. Just trying to reach for yield by buying any issuer isn't the best strategy. Knowing exactly what's backing those bonds, making sure that tax revenues are coming in to support it, is what's incredibly important. Muni investors can still do well, but Detroit is truly a cautionary tale of why you do need to be careful about security selection.

Stipp: The Obama administration probably wishes it could return some of those folks tasked with getting their health-care website up and running. But what does it mean for health-care investors as they're looking at health-care stocks that the website has had these problems and now it seems to be doing a little bit better?

Glaser: The issues with the HealthCare.gov site were just one of the many problems that the health-care law ran into this year as it really started to get implemented. The Obama administration changed a lot of rules. Things like the employer mandate got pushed back. A lot of other little things here and there that were happening made it difficult to follow the implementation and difficult to see exactly how it's going to work in practice.

The truth is, we still don't really know yet. Even though things are getting a little bit better and we're starting to see more sign-ups, we're still far from the kind of projections from when the law was originally written of the number of people who would sign up. And it probably will take a couple of years, if Massachusetts is any example, until we see exactly how many people are interested in signing up, and how many people might just take the fine or just not really be that worried about it. Until we get all that data, we don't want to draw too many conclusions.

But I think health-care investors shouldn't be too worried. When this law was first passed, our health-care analysts said they thought it was basically neutral. Certainly there would be some winners, and there would be some losers, but on balance, the number of new customers in the health-care system would outweigh the new taxes and regulations that were being put on the industry, and investors shouldn't expect any too big of changes.

We still think that's the case today. There probably will be changes to law down the road. The way it's written now seems like it might not be completely workable, and we could see the chances of possible legislative changes over the next couple of years, but we think the health-care firms will mainly be able to adapt.

Investors need to be focused on those fundamentals. What kind of services do they actually provide? What does their footprint outside the United States look like? What's the profitability look like? What's the valuation look like? Those kind of fundamental questions are the ones to ask. And if things look cheap, there could still be attractive names, and if they look expensive, they're not. Instead of focusing too much on the politics of the health-care law, they should focus a lot more on the fundamentals of the companies.

Stipp: Newly public company Twitter has a lot of users, of course, and not a small number of them probably wish they could return some of their less-than-thoughtful tweets.

Glaser: That's absolutely the case. There are plenty of people on Twitter who wish that they hadn't hit that "post" button when they did.

But one group of people who are pretty happy with Twitter are those early investors. They made out like bandits through this IPO. The IPO priced very aggressively, and then the stock has really driven up since then. And right now, we think it's trading for almost 2.5 times its intrinsic worth. And that's not because our analyst Rick Summer is sandbagging the valuation or thinks Twitter is not going to continue to grow. In fact, he does think it's going to grow pretty aggressively. But right now, the valuation on it just really doesn't reflect the underlying economic reality.

This is true of a number of the social-networking stocks--both Facebook and LinkedIn look overvalued right now--not quite as much as Twitter, but still reasonably overvalued. This is a sector that has gotten a lot of attention. There's a lot of momentum behind it--a lot of excitement and growth behind it--and investors have been pouring a little bit too much cash in there.

So, if you have any money left over after your holiday returns, it might be best to sock it someplace else other than these social networking stocks.

Stipp: Jeremy, I wouldn't return a single episode of The Friday Five from this year. Thanks for joining me again.

Glaser: You're welcome, Jason.

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

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