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By Jason Stipp | 01-27-2011 04:04 PM

Five Barriers to Break

Morningstar markets editor Jeremy Glaser on breakthroughs in the market, the REIT sector, and the kitchen.

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

Here on the Friday Five, we like to think that we're making breakthroughs in the world of financial infotainment, but out there in the market this week, there were five potential breakthroughs.

Here with me to offer the details is Morningstar's markets editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Glad to be here, Jason.

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

Glaser: We're going to take a look at breakthroughs at the Dow, breakthroughs in real estate M&A. Hopefully, we'll see a breakthrough at Johnson & Johnson, at Starbuck's, and finally in the culinary fields.

Stipp: There were few headlines this week because the Dow came back over that 12,000 mark. How big of a milestone is this? Is this important to even keep track of?

Glaser: We're really excited to get the Dow 12,000 confetti out of the basement and be able to spread it across our offices here at Morningstar, but I think you're right. This is maybe a psychological milestone, but it doesn't really mean a lot to investors. But it's just interesting to note that the all-time high of the Dow, a little bit over 14,000, we're not so far away from that. When we are at that level, looking back at it, we could see that it was so unbelievably overvalued and how frothy those valuations were.

So I think it gives investors pause to say, "All right, if that was so unbelievably overvalued, what do valuation levels look like now?" I don't think we're anywhere close to those kind of valuations, but certainly it gives you some pause. I think certainly a lot of people are feeling a little bit more cautious about valuation right now. We've had so much run up. It's not clear how much longer that can last.

Stipp: It might be a good idea to save that confetti in case we have a pullback, and we have to go back over to 12,000 again. So we'll see. In the real estate front, there is some barrier-breaking in M&A. There was a malaise that we'd seen there for a while, but a deal this week shows that we might be breaking barriers there.

Glaser: Before the financial crisis, real estate investment trusts were merging with either private equity or with themselves, at a really impressive rate, and then obviously stopped with the height of the crisis. The financing wasn't there. It wasn't possible. People just didn't know what the real estate market was going to look, and news this week that AMB and ProLogis, which are two of the largest industrial REITs that own warehouses and other types of industrial properties, were thinking of doing a merger of equals, really is a breakthrough in the M&A space.

It's one of the largest real estate deals in a while--even if it is merger of equals instead of a private equity takeover, it certainly shows that there is a lot of confidence in the industrial market and in some of the other real estate categories. Certainly, these two companies performed pretty well throughout the crisis. They didn't have some of the big problems that their peers did, but I think it's a good sign that M&A is back and that people have more confidence in that market.

Stipp: Earnings news this week, J&J investors probably are hoping to see some sort of breakthrough, but they were disappointed likely again with the results. What's the story of with J&J?

Glaser: We've certainly been waiting for a couple of quarters for Johnson & Johnson to have a real breakthrough. They have had some disappointing results, issues with recalls of the over-the-counter drugs, sales of their branded drugs have not been as good as I think a lot investors have been expecting, but our analyst Damien Conover keeps pointing out that Johnson & Johnson has a really strong drug pipeline, and they are going to be able to bring products to market that can make up for some of this lost revenue.

It's a big company. It's one that has very solid cash flows, has a pretty nice dividend yield, and is one that is still a stalwart in the pharmaceutical space. So, even though they had a couple, somewhat disappointing quarters, we think they are going to be able to pull through that. They are going to be able break through. It's not a company that's in terminal decline and that's in a tailspin, and that really provides some opportunities for investors to look at it.

Stipp: In the consumer space, Jeremy, Starbucks is looking to break some barriers and become, perhaps as ubiquitous in the kitchen as they are on the street corner. What's the story with Starbucks?

Glaser: Starbucks is really trying to make a transition. If not a complete transition from having a lot of coffee stores to really being a true consumer packaged goods' company. I think we've seen this in a few ways. Their VIA instant product has had a lot of success, I think, much more than analysts and a lot of pundits thought that it would. Now, that they are having this fight with Kraft to take back the distribution of their coffee beans that are on the store shelves, away from Kraft and be able to handle it themselves and handle it with other arrangements that they have with distributors.

I think it really shows that Starbucks sees that a lot of the growth is in the supermarket. A lot of the growth is getting people to consume their coffee products or other branded coffee products outside of their stores. They tried to open more stores in North America. Obviously, it didn't work. They had to retrench. They had to really work on their core stores, and I think they see the growth is in this area.

I think it's going to be a risky move for them. Obviously, it's an area they don't necessarily have the same scale and certainly don't have the advantages that they have with all of their stores, but I think they have a really strong brand name. I think people are excited about it. They've had success. I think it's a good move for them, and it's one that we'll be watching very closely.

Stipp: In the consumer packaged goods space, finally, Jeremy, breaking a barrier that might mean that dinner time will be different from now on. What is that story?

Glaser: Jason, you know, that here on the Friday Five, we love talking about new culinary treats, either ones that you can buy the fast food restaurant or ones that you can make at home, and Nestlé has blessed us with a new product. It's a DiGiorno Pizza with Toll House cookies. So you get a frozen pizza and you get frozen cookie dough that you can bake at the same time so you can have a lovely meal and dessert all at the same time.

I know this is, of course, made possible because Kraft sold its frozen pizza business including DiGiorno to Nestlé, and I think it's a nice synergy between the two products. So I think it really is a breakthrough for people to be able to get hot desserts and hot meals in one box, with one oven cooking time, and I think it's really going to revolutionize the way that we eat warm cookies.

Stipp: Well, I think if they can package that with a trip to the gym, they might have a customer in me. But I might have to wait for that one. Thanks for joining me, Jeremy.

Glaser: You're very welcome, Jason.

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

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