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Friday Five: Fed Guessing Game Continues

Jason Stipp
Jeremy Glaser

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, the Fed did remove the "patient" language from its statement, but there's still a lot a doubt about when exactly rates will increase.

Glaser: By far the biggest story this week was this Fed statement, and we knew that going in. As expected, they got rid of the language that they are going to be patient about raising rates. But in removing that language, they also cast a lot of doubt elsewhere in the statement about when they are going to raise rates, and if it's going to happen anytime soon.

They said they are seeing moderating growth across the economy, that things aren't quite as strong as they were before. They still want to see further improvements in the job market, and they want to see further signs that their 2% inflation target is going to be hit in the medium term. They want to see more signs of that before they start to raise rates, and they said it definitely won't happen at the next meeting.

That still leaves the door open for June. I think that's still a possibility. That's what a lot of people were betting on before this statement. But given a lot of the discussion in the statement about some of the issues holding them back, it seems like it could be later in the year. Even if it still happens in 2015, there are also signs that they may be raising rates over a longer or over a slower period of time, and maybe people thought raises were going to come a little bit faster. So, the market turned around and cheered this news.

As we've said many times before, individual investors shouldn't be that worried about, is it the June meeting, is it the September meeting? The exact timing isn't terribly important. Yes, there's a chance that on the day it actually happens, there will be a big sell-off; there may be some volatility around it. Maybe you should have a watchlist so you're ready to take advantage of some of those sell-offs. But when you think about the long-term big picture, rates are going to have to go up at some point; it's likely going to happen sometime this year, and exactly what meeting it happens shouldn't be material.

Stipp: Although some think shopping malls are dead, mall REIT Simon Property Group is making a bid to get bigger this week.

Glaser: They strongly disagree, and if you look at their fundamentals, particularly at their higher-end properties, you really see that the mall is far from dead in a lot of places.

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Simon is the largest mall REIT, and they want to get even bigger by purchasing their peer Macerich in what's potentially a $22 billion deal. Macerich is not so excited about this combination. They've rejected it and aren't entering into conversations or negotiations with Simon. They've actually adopted some poison pills and a classified board structure to make sure Simon can't take it through brute force.

Simon isn't backing away; they're going to go direct to the shareholders. They think their deal is the best thing for Macerich shareholders. Todd Lukasik, our REIT analyst, thinks that Simon does have a good point, that they really will be able to bring out some synergies, and it does make sense to have a bigger portfolio. Macerich's high-end properties in geographic areas where Simon doesn't have a footprint are a good fit.

But he does warn that if they go much over their current valuation for Macerich, it really isn't going to add a lot of value for Simon shareholders. We should watch it closely to make sure they don't ratchet that price up too much to the point where they're destroying value.

Stipp: FedEx reported this week. They had a strong operational quarter and did pretty well over the holidays.

Glaser: They did. FedEx had a strong holiday season, and in sharp contrast to UPS, they did it without sacrificing profitability.

UPS brought on a lot of extra drivers and resources in order to make sure they didn't have a repeat of the 2013 holiday season, which went so poorly for them, while FedEx was able to retain their profitability while still delivering well from an operational standpoint.

They're also making some strides in terms of how they're thinking about pricing and making sure that it really reflects how much space the packages take up, and not just weight. That's important as a lot of retailers aren't as efficient as they could be in putting things in the rightsized box. They said that they're making some good progress there and that's going to be a good thing for them over the long term.

Still, the company is facing these currency headwinds that everybody else is. They narrowed their guidance; they're a little bit more cautious for the full year, and the market wasn't so happy with that. But Keith Schoonmaker, our analyst who covers FedEx, thinks there is still some room for operating margins to expand somewhat over the long term, and he does see the shares as being about fairly valued right now.

Stipp: Continuing a theme we've heard a lot about in corporate earnings, currency headwinds really impacted Oracle's results.

Glaser: They did. The reported results showed zero growth in revenue for Oracle. But if you strip out the impact of currency, it was actually 6% revenue growth, and that was being driven both by software sales and also by long-term maintenance and support contracts.

Rick Summer, our Oracle analyst, thinks those maintenance contracts are a good sign for Oracle indicating that they are not being completely disrupted by cloud-based systems such as, and that they still have a wide moat and a competitive advantage. These kind of contracts will allow the business to create a nice cash flow for investors over time.

That doesn't mean necessarily there is going to be a lot of growth in the business. Margins were a little bit below where Rick thinks they could go eventually, but we're not going to see a huge amount of margin expansion here. But it is a solid business, and I think it will continue to produce solid cash flows over time. Shares aren't undervalued right now; they look about fairly valued. But obviously it's a great business we want to keep an eye on.

Stipp: Lastly, Guess shares popped after they reported results. What were the drivers there?

Glaser: Investors seemed pretty excited about Guess' results, with the stock up over 15% at one point on Thursday after they announced late on Wednesday.

Guess' e-commerce growth was up quite a bit. Some of their lines had positive comps, and there are some signs of a turnaround there. Management said they think, with some store closings and some other efficiencies, they're going to be able to increase operating margins, excluding those currency headwinds that we've been talking about.

But Bridget Weishaar, our analyst for Guess, thinks some of this is a little too optimistic. This is still a no-moat business that's operating in an incredibly competitive space in denim, in fashion, and elsewhere. There are other players with more competitive advantages, and over the long term Guess is going to have some market share issues, and they are really not going to be able to turn the business around enough to justify some of the excitement after this one report. She sees the shares as about fully valued today.

Stipp: Another great update on the news of the week, Jeremy. Thanks for joining me.

Glaser: Thanks, Jason.

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