Weekly Wrap: Fiduciary Rule Delay Could Prove Useful

Jeremy Glaser: A delay to the fiduciary rule; Tesla's market cap overtakes Ford; and Panera gets snapped up. This time in the Morningstar Weekly Wrap.

The Department of Labor announced a 60-day delay to the fiduciary rule. Morningstar's director of policy research, Aron Szapiro, thinks the delay could prove useful.

Aron Szapiro: We've noted before that a small delay could be helpful, particularly when it comes to setting up things like T shares, which take a while to roll out. We should also note the department, in complying with President Trump's memorandum, is continuing the examination of the rule. We think that, particularly given that the fiduciary standards are going to go into applicability, that the broad principles of the rule will survive, but there may well be some changes to the enforcement mechanism. I think it's always important to keep in mind in these conversations, the momentum toward offering holistic advice is inescapable, so regardless of the specifics around modifications to the fiduciary rule, firms are moving toward a client-centric business model and delivering financial services that put investors' interests first.

Glaser: As Tesla's market cap overtakes Ford's, Morningstar's Dave Whiston explains what this says about auto investors.

Dave Whiston: With Tesla, I think the market cap surpass of Ford, it's rather symbolic, and we're probably going to see them pass GM and Honda pretty soon the way things are going. It just shows that the market right now is willing to pay more for the option value of Tesla with its very vast potential in the markets that are in their infancy, rather than established automakers that have actual cash flow and profitability. I would also say Tesla is overvalued in my opinion. We have a $197 fair value. I think that people need to remember there's a lot of debt out there that they took on, especially like closing on SolarCity, about $3.3 billion that they will have to satisfy in cash, as opposed to Tesla shares, unless they can refi that debt, so that's something to watch for over time.

Glaser: Whiston was also surprised this week at the market's reaction to weaker monthly auto sales.

Whiston: Auto sales, I was a little surprised by how much the market frankly, freaked out about it. I'm forecasting a 2.5% decline. We're now down 1.6% for the quarter. Really, it was inevitable. You've got leasing very high and you've got a lot of vehicles coming off lease now, so that's increasing use supply. That also makes it harder to buy a new vehicle because residual values go lower and your trade-in is worth less, so I think you're going to see a lot of this going forward. The thing to remember, though, the weakness is really in the car segments. Cars are down low double digits. Light truck models, pickups, van crossers, SUVs, they're up 6% for the quarter, so it's not by any means an indication that demand is falling off a cliff.

Glaser: Panera agreed to be purchased by JAB for $7.5 billion joining the stable of brands owned by the private equity firm, including Pete's, Einstein, and Krispy Kreme. Morningstar's R.J. Hottovy thinks the buyout isn't a surprise given Panera's leadership, loyalty programs, digital sales, and the recent uptick in restaurant merger and acquisition activity. At a more than 20% premium to our estimate of the firm's stand-alone worth, Hottovy thinks shareholders are getting a fair price here and that rival bids are unlikely to materialize.

In case you missed it on Morningstar.com this week, Karen Wallace took a look at some undervalued stocks recently added to the Morningstar Dividend Yield Focus Index.