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Where the Chips Fell in the Market

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five. What was in the chips for the market this week? Quite a lot it turns out. Here with five chip shots is Morningstar's Markets Editor, Jeremy Glaser. Jeremy thanks for joining me.

Jeremy Glaser: You're very welcome, Jason.

Stipp: What you have for the Friday Five this week?

Glaser: We'll look at Blue Chip Procter & Gamble, at Apple, at Paul Ryan's proposed budget, at Texas Instruments' latest buy, and also DISH Network's bid for Blockbuster.

Stipp: So, we're going to start off talking a little bit about potato chips, there is a potato chip deal this week. I happen to like potato chips, but also it may be interesting from a business perspective. What's your take on that?

Glaser: Yeah. Apparently, a lot of people do. It looks like Procter & Gamble got their Pringles can out and really found some money along with the chips. Certainly, they are able to spin off Pringles into a company with Diamond Foods, which is the maker of nuts and other snack products. It really helps them divest from this food business that they've been getting out of here for a long time.

They have sold Folgers; they've sold some of their other non-core brands. It really allows Procter & Gamble to focus exclusively on their personal-care products and on things that are of really high margin and they really have that widest mode on. We still think Procter & Gamble looks pretty attractive. I think this is another move that shows the management has a lot of focus and knows what they're after. So we're glad that they are willing to let these chips go.

Stipp: That's quite a vivid color on those chips, Jeremy.

Glaser: Yeah, absolutely. We'll see if Diamond can keep up quite that cheesy of Pringle.

Stipp: So secondly, Jeremy a chip was taken out of Apple this week, because news of the NASDAQ Index. What's the story behind that?

Glaser: The NASDAQ OMX Group announced this week that they're going to recalibrate the NASDAQ 100 Index, which is an index that the very popular ETF QQQs follows, and this is because Apple has just become too big a part of this index. It's over 20%, so a fifth of the money that goes into that is going right into Apple and that just doesn't really make a lot of sense. It doesn't really help people actually get the diversified exposure that they want.

So, they're cutting the Apple stake down substantially, so it's going to be a big part of the index but they're cutting it down to size. And they're going to allow some of other big tech giants to take up some of that space and to become larger components of the index. This could hurt Apple a little bit in the short term as there will be forced sales that people who hew to this index have to move out of the shares, but I think it makes a lot of sense for NASDAQ not have a fifth on all their assets in their most popular index just in one company.

Stipp: Well, Jeremy, it looks you took some chips off the table recently, but Paul Ryan put some chips down on the table in Washington, with an alternative budget to Obama's. Who is going to win this wager?

Glaser: Well. I'm not sure anyone is going to win or lose anytime soon, but certainly Paul Ryan, whose a Republican from Wisconsin's proposal for a budget is vastly different from what the Obama Administration has proposed and really anything that we've seen in the discourse about closing some of the deficits and really getting that debt situation under control in the United States.

He proposes a really sweeping, almost radical, reform to the tax code and to a lot of health-care spending in an attempt to bring some of those costs from the entitlement program such as Medicare and Medicaid--that have been spiraling somewhat of control--bringing those back into line. I don't think that this proposal has much of a shot of getting enacted as is, but certainly it changes the conversation in Washington. It makes people really come up and makes Democrats come up with an alternative proposal. I think we're going to be hearing a lot about these kind of ideas throughout the 2012 Presidential election, but certainly it's the first time they've put all those chips there. We've let them see exactly what they are planning on doing and we're going to be hearing this conversation going on for a long time.

Stipp: In the tech industry, Texas Instruments coughed up quite a few chips for fellow chipmaker National Semiconductor. This is a long time rivals of TI's, but is this a good bet for them to make?

Glaser: We'll see. They spent over $6 billion on this deal, and our analysts are not thrilled about it. They think they paid a pretty hefty price, and it's certainly something that's not just an unbelievably accretive to shareholders right away but certainly has the possibility of making sense in the long term. They are able to get a lot of cost savings out of National Semiconductor, get their plants up to more capacity, really get them running at a 100% from where they are now. It could be a big boon to their bottom line, but we'd really have to see if TI is able to do it. It certainly riskier than their old organic-growth strategy. And it just shows that when you have a lot of money available for M&A activity sometimes people will do the deals rather than not, and hopefully it will work out for TI shareholders.

Stipp: So, also this week we had a couple of people putting some chips down on Blockbuster. It seems like a strange bet to make to me?

Glaser: Yeah. I think so too. DISH Network apparently won this prize, and I use the word won extremely loosely in this case because I don't think Blockbuster is much of a prize. I think Dish Network is hoping that they will be able to jumpstart some of their anemic subscriber growth maybe by having retail outlets that they could show some of their satellite TV products at, and maybe use the Blockbuster name to help launch some streaming services, stream DVDs, or to really compete against Netflix in a more meaningful way. I think it's going to be challenging for them to really make that work. I think Blockbuster is a business that's in terminal decline, I think that that's why we're not so concerned about it as a going concern. That's why it went bankrupt, and I think just trying to resurrect the name I don't think it has a lot of brand equity left. I think they are going to be hard-pressed to make this one really pay out.

Stipp: Well, Jeremy, I'm glad that we got to dip in the chips today. Thanks for joining me.

Glaser: You are very welcome, Jason.

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