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By Jason Stipp | 05-06-2011 02:45 PM

Five Caution Signs in the Market

Morningstar markets editor Jeremy Glaser is seeing some yellow flags in earnings, commodities, and retail sales.

Jason Stipp: I am Jason Stipp from Morningstar, and welcome to the Friday Five.

After some surprise market news this week and not a small bit of volatility, the Friday Five is asking, "Is it time for caution?"

Here with me to offer some details is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Glad to be here, Jason.

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

Glaser: We're going to take a look at caution at retailers, at Opentable, at General Motors, commodities, and finally at Boston Beer.

Stipp: So a lot of retailer reported same-store sales on Thursday. They looked pretty good. Where is the caution there?

Glaser: The sales did look good. Overall, a lot of retailers, big ones like Target and Costco had really good quarters. A lot of that was driven by Easter. Easter spending being in this particular month. But certainly we heard a lot of caution from executives in terms of raising guidance, and in terms of trying to temper investor expectations for the coming months.

They think that rising gas prices are keeping people from going to the mall or taking up a lot of extra consumer disposable income, and that unemployment is still a problem, and really could be a drag on earning sales.

So even though they had a pretty good report, generally speaking there was lot of caution about what things could look like in the future.

Stipp: One area where we do hope that consumers will continue to spend is in the restaurant arena. Opentable is a company that helps them make reservation for restaurants. They reported this week. Any signs of caution there?

Glaser: I think we do have some reservations about picking up Opentable stock. This is a hot IPO, and it really soared after it came out of the gate. People are excited about the tech boom. People are excited about the innovative model, but our analyst R. J. Hottovy has really considered the stock to be pretty overvalued, and their earnings release this week did nothing to dispel that notion.

They had a lot of trouble with keeping costs under control. They spent a lot of money on technology, a lot of money on headcount, a lot of acquisition-related expenses. That really kept profitability down, and this is a business that should be extremely profitable, if you think about it. Their general levels of cost of goods sold should be relatively small, but certainly they have had trouble executing on that.

They are still a young company. Things will probably improve over time after they make these investments. Hopefully, they will pay off. They will be able to reap them later. But for the time being, the valuation is just too rich, and we think investors should be cautious about the stock.

Stipp: GM reported on Thursday. It's a big name a lot of folks were looking for. We expect that there is still a lot of pent-up demand in autos. Did the results play out as we would have liked to have seen?

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