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Five Reasons to Remember 'It Ain't Over 'Til It's Over'

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the Friday Five. Just when we think we're out of the woods or a stock is down for the count, something inevitably happens that proves again, "It ain't over 'til it's over." This week on the Friday Five, Morningstar markets editor, Jeremy Glaser, has five such stories, he's going to share with us.

Thanks for joining me, Jeremy.

Jeremy Glaser: Oh, you're very welcome, Jason.

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

Glaser: We're going to take a look at General Motors, at Sears, at Ireland, Warren Buffett, and finally, we'll take a look at International Week and wrap that up.

Stipp: Thursday was a big day for the auto industry, General Motors coming back to the public market, yet again. This is a company that actually was down for the count, but it seems to have had a rebirth. What's the take on GM?

Glaser: This is truly been a remarkable turnaround. In about two years, you went from a government-assisted bailout that looks like it had almost no chance of succeeding to an incredibly exciting IPO, where investors were almost falling over themselves to get a piece of it. The price had to be raised and the size of it got raised several times. And even when it launched, stock was up in that first day.

Our analyst, Dave Whiston, who covers the stock has said that, this is a completely new company, that you have to throw out your old preconceived notions of GM. They have cut their costs to the bone; they are going to be profitable even at very low rates of industry auto sales. It looks like they've really turned the corner. Now, they have to deliver on these results. Right now it's just more potential. But I think if they do, we're going to see GM being a strong competitor and being a strong company for the long term.

Stipp: So this is the one where you really have to look through the windshield and not in the rear-view mirror?

Glaser: Exactly.

Stipp: Jeremy, another company that a lot of folks had a lot of high hopes for is Sears. They've had a rough time of it lately. There was some talk about the real estate holdings and some potential that they had. Has that played out so well, or what's the story with Sears?

Glaser: Jason, I should start this off by saying that I am a Sears Holdings shareholder. But I think that lot of people, myself included, thought that there was a lot of potential for the stock. When Eddie Lampert took the reigns and then buy that with Kmart, there was lot of talk that they could unlock value by selling real estate by securitizing some of their big brand names like Kenmore and Craftsman.

Unfortunately this hasn't really played out. Although certainly there is still I think still a lot of value in these brands, still a lot of value in the real estate, the retailing part of it has done pretty poorly, and the third-quarter results which came out this week just underscore that. Same-store sales are doing not very well; inventories are building up in a big way. At the same time the other retailers are really starting to flourish. They are expecting a great holiday season, while Sears is expecting a pretty mediocre holiday season.

I think it shows just how difficult it is to turn around the business like this. You can't just think about those, hedge fund intangible parts, that Eddie Lampert was. You really actually have to get out there and get people to buy the goods that you're trying to sell; make the stores nicer. I think the turnaround is still possible, but it's going to be a long road, especially as everyone else is really getting back on their feet and doing well.

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Stipp: Jeremy, in international news, I can't say that I missed all the European crisis headlines, since we had a break for them from the spring time when they were all over the news. But Ireland has popped up in the news again this whole story really isn't over yet?

Glaser: We had hoped that was over, when they set up the bailout funds to help Greece that the EU and IMF are going to be able to step in and help any other country be it Ireland or Portugal or Spain, with any sovereign debt problems that they are having.

But the reality is that a mechanism like that is easier said than done. Because the country has to go in and actually accept the bailout and accept that they are in the trouble that they are and that they are going to need the money from these international organizations.

And there is lot of downside to taking this money. You're going to have to put even large austerity measures that Ireland is already doing, that the country is already doing, you're going to lose lot of the autonomy you have. So, you can understand why there are certainly a lot of reservations that a Finance Minister or Prime Minister would have before accepting the money.

In Ireland's case, it wasn't an eminent crisis. They had enough cash to probably get through middle of 2011, before they'd really started running into any serious problems. But once investors started talking about it and started getting very worried about it and your bond spreads just get bigger and bigger, the problem gets compounded more and more and they are going to be forced to take the bailout.

Now, it looks like they are going to, and that it will be orderly. So, it's not going to be quite the excitement there was surrounding around Greece. But it shows that these problems are going to keep cropping up again, it could happen with Spain, could happen with Portugal, hopefully, won't happen with Italy. But something that people are going to be coming back to over and over again.

Stipp: Jeremy, back here in the U.S., one of the best known investors, actually worldwide, Warren Buffett. Recently he was in the news because he's getting some successors in line. But really, Buffett's not going to just slide into the shadows here, right? He's still pretty active.

Glaser: No, absolutely not. I think, for someone who's had so many successors, he deserves a really long victory lap, which kind of seems like what he's in right now. So, I think he's certainly anointed someone who could be his successor, but we saw this week that he's still actively trading. He closed out of a number of positions that Berkshire Hathaway owns, and he put some new money to work or put that money to work in companies like, Wells Fargo and Johnson & Johnson, kind of names that he has lot of conviction in.

He's going to get the Presidential Medal of Freedom in 2011. He wrote an Op-Ed in New York Times. He's still very much out there. Still very much involved in Berkshire Hathaway. So, even though it might seem or it might be tempting to think that he's sliding to the background. I think it's clear that he's still really running the show there and probably will be for some time.

Stipp: Lastly, Jeremy, we had International Week this week on Morningstar.com. It seems like a lot of investors out there have decided that the story of international investing is over and the emerging markets have won and that's where all the money seems to be going. But the story is really not as simple as that.

Glaser: Exactly. Emerging markets are absolutely going to grow faster than developed markets. I don't think you're going to find anyone who honestly believes that over the next decade, China GDP is going to grow at a slower rate than the United States. But the problem is that growth is not the only thing that investors need to look at. They also need to consider price. They need to consider valuation and emerging markets are nowhere near cheap.

So, even if there is incredible growth. If that's already priced into the stock, if the valuations are sky-high as an individual investors, institutional investor even you might not get a lot out of that. So, it's something that is the same with investing in the United States. Even when you go abroad, you can't throw out your fundamental analysis hat and just pick it up, because you think it's going to grow quickly. You need to make sure that what you're buying is cheap or you're going to end up being pretty unhappy with your investments.

Stipp: Well, Jeremy, unfortunately, this is the Friday Five and not the Friday Six. So, I'm afraid that it really is over for us this week. But I look forward to checking in with you next week.

Glaser: All right. Thanks, Jason.

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