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Five Open Questions

Jason Stipp

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

Normally, on the Friday Five we like to bring you all the answers, but this week we have five important and still outstanding questions to keep on your radar. Here with the queries is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: You're welcome, Jason.

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

Glaser: Well, this week we're going to take a look at St. Joe, at Western Union, the new PIMCO Total Return ETF, retail sales, and finally tech patent woes.

Stipp: So, St. Joe has been in the news a lot recently, and it hasn't been good most of the time. We got some more news on St. Joe and the SEC this week. What are the questions that are there?

Glaser: We haven't heard a lot of good news out of St. Joe recently, and Friday [July 1], right before the holiday weekend, late in the day, St. Joe released an SEC filing and kind of buried in the bottom was some weird language about ... the SEC starting a formal investigation of the company. Before, the SEC had an informal take to see if some of the accounting issues that many short sellers and other people had been pointing to for a while were actually true, if there was any validity to those arguments. It looks like they are going to be taking a closer look now.

We have no idea what this means. Our analyst Eric Landry took a look at it, and said that he was disappointed in the way that it was disclosed, but that he didn't think it was going to have a material impact on the company, that they probably wouldn't have to make any big changes, but it's really too soon to tell. There really are a lot of open questions here.

The investigation could take some time. We don't know exactly what they are going to find. But it just puts even more pressure on St. Joe's management. It puts even a larger microscope on them, and I think it's going to be a long time before we really know the real story about what's happening there and whether it's going to play out positively or negatively for investors.

Stipp: Sticking with stock news, Jeremy, we had some Western Union news involving a merger. Normally, mergers are a sign that there is some confidence out there, but whether they are actually a good thing is certainly an open question. Is that the case with this merger as well?

Glaser: It certainly is. We've talked about this a few times that companies that have a lot of cash, and especially in this environment where they want to find some growth, are spending a lot of money on acquisitions, and it looks like Western Union is doing that right now.

They are spending about $1 billion to acquire a unit from Travelex, which will do business-to-business payments, which is something that Western Union has done in some small-scale ways, but they really want to expand that.

Our analyst Brett Horn thinks that it's a great strategic fit, but that they are spending way too much money on this acquisition. So maybe the synergies will be there, and they will be able to really make money on it, but this certainly looks like another case where management is just spending that money because they have it and because they want to see that growth, and not because it's best for shareholders.

Stipp: In fund news, Jeremy, a powerhouse of active management and fixed income got into ETFs, traditionally an area of passive investing that follow indexes. What are the questions that we'll be looking for because of this big new player in ETFs?

Glaser: We got some new information on the PIMCO Total Return ETF, which has been generating a lot of buzz since it was announced a few months ago that they were going to come out with it. We found out the expense ratio is going to be 0.55%, which is a little bit higher than the institutional shares of the Total Return mutual fund, a little bit less than the individual shares. But I think the most interesting open question here is what this ETF will mean for the future of actively managed ETFs.

In the past, most ETFs have been passive investments that track indexes and that don't have high-profile managers behind them. Active ETFs have not had a lot of success in generating assets and having people put their money to work there.

One of the issues has been, there haven't been any high-profile managers with great track records that have really put their name behind an active ETF. This is the first one that really is going to get people's attention, and I think it will be a real bellwether to see if the active ETF structure is one that's going to take off, or if active investing is really going to stay in that open-end mutual fund wrapper.

Stipp: Jeremy, also in stock news, we got some retail sales data and it actually looked pretty good; through all of the headwinds, consumers have still gone out there and been able to spend some money. So, what could be an open question about this? This is good news, right?

Glaser: It certainly was good news. We saw a lot of good sales across a lot of different retailers. So, high-end retailers like Nordstrom did well, companies like Costco, some more mainstream brands also did pretty well. People were out there; they were shopping.

But the real question is, was this revenue gain that the retailers reported profitable? Were they just doing a lot of discounts, getting people into the stores, trying to work through some of this weakness, work through some extra inventory that they had on hand, or was it real consumer strength where people were willing to pay even more for that kind of merchandise?

I think that we'll be able to see that when we start to get second-quarter results in a month or so here from the retailers. We'll see if this was really a boom from the consumer, or if it was just the discounts or it was just promotions that got people into the store and that came at the expense of profitability.

Stipp: I've heard people say, you could sell dollar bills for $0.50 and have a great sales, but your bottom line might not look so good.

Glaser: Exactly.

Stipp: Lastly, Jeremy in tech, Apple and Samsung in a bit of tussle over patents. What are the questions that this issue raises?

Glaser: There have been a lot of tech patent squabbles recently, and it seems that it's a theme that comes up over and over again. What we saw this week is that Apple asked the United States government to block the import of all Samsung tablets and phones into the United States because they claimed that it infringes on their patents, and Samsung has asked for sanctions against Apple because Samsung says that Apple is infringing on its patents.

We just see that this back and forth goes on a lot. We saw it between Apple and Nokia, something that was recently resolved on that front. We saw Research In Motion's BlackBerry almost shut down a few years ago over patent concerns. There are lots of these intellectual property companies that own all these obscure patents and try to sue other companies to see if they will be forced into complying to pay a big royalty fee.

It just seems to be this recurring theme that there are all of these tech patents out there, a lot of them are for very vague things that are difficult to pin down, and because the industry moves so quickly, it's hard to tell exactly what's infringing, exactly who owns the patent. Even companies that I think are trying to act in good faith, it's difficult to get that protection.

So, I think it just creates another wildcard, another layer of uncertainty about exactly what these patent protections are going to come against. Who's going to be the next one to be ensnared in one of these mix-ups, and who knows when one could impact sales for real? So, I think in the short term, this particular squabble probably isn't all that important, but the open question is, over time are these patent battles going to become more and more severe and really have an impact on investors.

Stipp: Jeremy, I have no question that you'll be back next week with another excellent report, but thanks for joining me today.

Glaser: You're welcome, Jason.

Stipp: For Morningstar I am Jason Stipp. Thanks for watching.