Fri, 7 Mar 2014
This week: Geopolitics and investing, a real value in automakers, a value trap in retail, and a new CFO--but lingering questions--at Apple.
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five: five more stories from the market this week and Morningstar's take.
Here with The Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: Topping The Friday Five this week is Ukraine. It topped The Friday Five last week. We had some market-moving events earlier this week. What's the latest on Ukraine for investors?
Glaser: There was volatility earlier this week: a big sell-off on Monday and then stocks rallied, and I think they rallied when markets saw that although this is a very interesting political story and, again, an interesting and important human story, it's one that is fundamentally a regional story at the moment and not one that's going to have a major impact on the global economy.
This could change. You could see scenarios in which the situation escalates and becomes more important. But for the time being, most investors are assuming that it's going to remain a relatively localized conflict, and they are not out selling stocks and trying to take risk off of the table.
I think more broadly this is a good example of how geopolitical risk--although important and something that could have a big impact on markets--is something that's very difficult to immunize yourself against. One of the things that you are getting paid for when you're taking on equity risk, are these kind of risks. You don't know what's going to happen with the political or the broader economic landscape, and accepting that risk is one of the reasons you're getting higher returns than some safer assets.
So although these can be interesting news stories to follow, you don't necessarily need to be making big portfolio moves or thinking about making portfolio moves because of them.
Stipp: In other European news, the ECB kept rates the same this week. What does this say for investors about their view of the eurozone economy?
Glaser: The ECB did upgrade its view of the economy a little bit. They said that growth is going to be slightly faster than they thought before, but still well under 2% into the medium-term. They also said that although they think inflation will pick up a little bit, it's also going to remain relatively low, and actually below their 2% target.
Mario Draghi said again that even though they are not doing any extraordinary measures in this meeting, and they are just going to keep rates where they are, he is ready to act if something were to happen.
Even though inflation is below their target, the fact that they aren't doing bond-buying, the fact that they aren't lowering rates to try to get inflation up a little bit, shows that it really is a very high bar before the ECB is going to act again and is going to be very aggressive. They are willing to accept inflation below their target at the moment.
I think it shows for most investors that Europe is starting to get a little bit better, although growth is going to be very slow. And although the ECB is going to be a backstop, they are going to wait until we see some major stress before being much more active than they are today.
Stipp: Retailer Staples sold off this week after a disappointing quarter. Is the stock looking cheap?
Glaser: It's probably not too cheap now. Staples did have a very disappointing quarter, and on top of that, they decided to close 225 stores, over 10% of their base, basically saying that these stores just can't support themselves anymore.
After the sell-off it could be tempting to say, maybe the shares do look cheap right now. On a couple of different valuation metrics, they do look like they could be somewhat undervalued at the moment. You could argue that they have this big delivery business that has a good cost structure that will support them throughout all of this.
But I think that could be falling into a value trap, and our analyst Liang Feng agrees that Staples just doesn't have any sustainable competitive advantage. Given the headwinds against the use of office supplies generally and also with non-traditional office-supply retailers--the likes of Costco and Amazon and Walmart--continuing to take strides to enter the space, Staples is just not going to be able to defend their profitability. It's not like they are going to go away or this a bankruptcy story, but it certainly is a sign that their margins are going to continually be under pressure and that even if things look OK with current valuations, given the way their earnings are probably going to be squeezed, it might not look quite as cheap as it appears at first glance.
Stipp: Auto sales data this week showed some improvement, alleviating fears that auto sales were driving off a cliff.
Glaser: Sales did look a little bit better in February from January. Estimates are at about 15.4 million of that SAAR--that's the seasonally adjusted annualized selling rate, which is one of the key metrics that people look at in the auto industry.
It was very encouraging that sales started to pick up a lot toward the end of the month. The beginning of the month still seemed to be very much hampered by the poor weather, people just weren't interested in going to the auto dealerships. But things started to pick up as the month went on. I think that's a sign--and Dave Whiston, our auto analyst thinks that's a sign--that although weather is keeping it down, consumer demand hasn't evaporated by any stretch of the imagination, and those consumers are going to come back and keep buying cars later.
This is also an interesting story because of Ford, which is rated 5 stars right now, and GM, which is rated 4 stars. They are some of the most attractive stocks we have under coverage right now. So in a market that doesn't have a lot of values, these automakers, particularly Ford, really do look quite attractive right now.
Stipp: We learned this week that Apple is getting a new CFO. What does this mean for this widely held and closely watched stock?
Glaser: Probably not too much. As Peter Oppenheimer steps down, and the man who is hired as the heir apparent, Luca Maestri, will be taking over, I don't think investors should expect any major changes.
Maestri is known as someone who is shareholder friendly in his previous roles. He's been known to really initiate buybacks--to really be a champion of that. We've seen Apple walking down that road, having more buybacks, initiating a dividend and growing the dividend. I think we expect to see more of the same.
I don't think this helps solve that existential crisis that Apple might be in right now--which is, are they a mature slower-growth company that's going to be producing all this cash and returning it to shareholders? Or are they still a younger, innovative company that is going to be able to come up with new product categories and new products that are going to be able to grow at a significant clip, or at a rate that's close to what they have seen over the last couple of years.
I think having a different CFO is not going to make a huge difference on that front, but it does, again, bring that question to the forefront.
Stipp: There is no replacement for your insights on The Friday Five, Jeremy. Thanks for joining me again.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.