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By Jason Stipp and Jeremy Glaser | 05-24-2012 05:00 PM

5 Signs of Fallout in the Market

Morningstar markets editor Jeremy Glaser studies possible impacts of the Facebook IPO controversy, struggles and turnarounds at Dell and HP, real economy weakness in the eurozone, and slower sales at Tiffany.

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

From Facebook to France, it was a week of fallouts in the market. Joining me with the details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Jason, glad to be here.

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

Glaser: We're going to talk about Facebook, HP, Dell, the eurozone, and finally Tiffany.

Stipp: Facebook had a string of bad news after its historic IPO--it became maybe historic for some bad reasons--following that IPO last week. What was the news, what's the latest, and what should potential shareholders think right now?

Glaser: Like one of those horrible viral videos you can't get out of your newsfeed on Facebook, we couldn't stop talking about the Facebook IPO this week.

The shares really traded down a lot on Monday and throughout the week. I think the first day, certainly, the banks were going to step in and support that $38 IPO price, and those supports really just went away as we entered into this week of trading.

I think it certainly shows that Facebook was probably more than fully valued when it came out, and there are a lot of allegations that also emerged this week that Nasdaq had botched the listing in some ways, that the trades did not go off as expected, that some of the analysts at Morgan Stanley and elsewhere had revised downward their expectations for Facebook growth, but instead of widely disseminating that information, only told a few select institutional advisors. And some concerns over why Facebook raised the size of the offering so much at the last minute, and if that has contributed to some of the share price weakness.

And I think that these are a lot of really valid criticisms of the IPO, and ones that we'll probably hear a lot as there are more investigations into them, and that as we find even more information about exactly how this IPO went off.

But I think for investors who are interested in the company, they really need to focus on the long-term fundamental reasons. The IPO only happens once. It's out there. It's in the public marketplace right now, and people really have to think about the valuation.

Our analyst Rick Summer is sticking with that $32 fair value. It's trading right about there right now, but I think we'd like to see a much deeper discount to that fair value before diving into the business, but it seems like those fundamentals are there. But like he said last week, it's going to be a bumpy ride. So, we shouldn't be surprised that the rollercoaster has started a little bit early.

Stipp: Fallout from sluggish business at HP means that thousands of HP workers will be getting pink slips. The Wall Street Journal said this action showed HP's age as an old-line tech company. What does that news say to you?

Glaser: Well, it really is amazing that they are able to shed 27,000 jobs, about 8% of the workforce, and they don't expect it to have a huge impact on their top line or a huge impact on their growth, and in fact the market really viewed this as a favorable outcome and really started to bid the stock up in the right direction.

I think it certainly shows that HP and CEO Meg Whitman are really committed to truly transforming that business and turning it around and turning it back into the powerhouse that it once was, to really step past some of these former management missteps, some of the issues that the board had for so long, and really turn the company into a truly modern giant.

And we think that they are on the right track there, and these layoffs are probably a necessary, but painful, step that certainly will help them get to that higher level of profitability, help them move away from some of that commodity PC business and focus more on services, focus more on printing, focus more on those areas that could be potentially more lucrative for them.

So, I think this is a turnaround story that is not going to turn around overnight. It's not that you lay off these 27,000 people, that process will take years, let alone seeing the benefit in terms of cost savings there. But I think it certainly shows that Whitman is serious about it, is willing to make those really difficult decisions, and we think it bodes well for the future of the company.

Stipp: We also got results from another hardware company, Dell, and those results disappointed. Are we going to see a similar fallout for this particular company?

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