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By Jason Stipp and Jeremy Glaser | 05-07-2015 03:00 PM

Friday Five: Buffett on Market Valuations

Plus, Whole Foods goes after millennials, investors not lovin' McDonald's turnaround plan, and more.

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five, Morningstar's take on five stories in the market this week.

Joining me with The Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: First this week, you were at the Berkshire Hathaway Annual Shareholders' Meeting last weekend--great coverage. Interesting topics, as usual, from the meeting, including current stock valuations.

Glaser: The meeting always covers a variety of topics, and this year was no different, but one that really stood out to me was Buffett's discussion of stock valuations, which he did call "high," but he said that you really need to view those valuations in the context of the interest rate environment we're in. When you have interest rates that are so low and you look at the returns that are priced into bonds right now, maybe that explains a lot about why stocks are priced so high. He said buying into stocks is really a bet on the interest rate environment. He didn't give any kind of forecast of what he thinks interest rates are going to do, but he did point to interest rates as the biggest driver.

Janet Yellen, the chairwoman of the Fed, had similar comments this week. She said that she saw stock valuations as being "quite high" and again compared that to the returns that are available to bonds. But she did say she doesn't see valuations as being a systemic risk right now. She doesn't think it provides any kind of potential for financial instability, which is something the Fed is looking at, but she did give a warning about the valuation levels right now.

Stipp: For our part, what are our analysts saying about the current valuation levels of the market?

Glaser: We still see the market, and particularly the large-cap U.S. market, as being fully valued, maybe a little bit overvalued. I think it's important that investors really pay attention to the margin of safety, and make sure they are buying stocks at a reasonable price, given that there are some areas of the market that do look pretty pricey. This is definitely a time where caution is warranted.

Stipp: McDonald's talked about its turnaround plan this week, and you might say that investors weren't really "lovin' it."

Glaser: It was not particularly well received when the new CEO, Steve Easterbrook, rolled out the plans that they've been hinting at for quite some time now. I don't think there was anything particularly wrong with what he said. I just think that investors expected something a little bit more far reaching or getting a little bit more information about some of the big changes that are going to happen.

Our analyst R.J. Hottovy called them "practical measures"--things like reorganizations, refranchising some restaurants that McDonald's currently owns, and trying to cut costs at the corporate level. We've seen a lot of other fast-food restaurants, like Burger King, for example, under 3G Capital, do very similar moves.

I think that investors are really waiting to see, how are they going to innovate with the menu, how are they going to get operational efficiency better at the restaurants? Those are the big questions that are really going to drive the future returns in terms of getting people back into the restaurants and competing against the fast-casual names like Chipotle. We didn't see a lot about how they're going to do that.

So I think it's still very much wait-and-see if this new management team is going to be able to deliver.

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