Weekly Wrap: Home Improvement Builds on Success

Jeremy Glaser: Home improvement retailers on a roll; a buying opportunity for Fiat Chrysler; and are defense stocks overhyped? This time on the Morningstar Weekly Wrap.

As other retailers struggle, home improvement stores have been posting strong results, says analyst Jaime Katz.

Jaime Katz: With another quarter in the books, the home improvement retailers continue to buck the retail trend, generating positive comp and retail sales performance. Lowe's continues to lag it's home improvement competitor, Home Depot, generating only 1.9% positive comps this quarter versus Home Depot's 5.5% comps in the period. Furthermore, Lowe's was able to generate positive comps in only eight of 11 categories and 12 of 14 regions versus Home Depot generating positive comps across the board. At this time we view Lowe's as a relatively better value trading at more than a 10% discount to our $93 fair value estimate.

Glaser: Rich Hilgert doesn't think the Department of Justice's lawsuit against Fiat Chrysler should dent investor enthusiasm for the stock.

Richard Hilgert: This week Fiat Chrysler, one of our best ideas, was in the news. The Department of Justice filed a lawsuit against the company alleging diesel emissions cheating on tests for vehicle certification. We think that with the stock weakening a bit, in light of this news, this is an opportunity for investors to own this stock. This is not going to be a Volkswagen situation. Fines at Volkswagen were over 4 billion euros while at Fiat Chrysler there's been no admission of guilt. The number of vehicles involved in the allegations were one fifth as much, and we've already taken 2 billion euros out of our fair value estimate, which is $18 and trading currently at a 45% discount to our fair value estimate. This is a 4-star rated stock. For every billion euros additional fine on top of what we've already calculated, it would only impact our fair value estimate by another 50 cents. We think this is an opportunity for investors.

Glaser: Defense stocks have been on a roll recently, but analyst Chris Higgins thinks that some of the hype is overdone, yet he still sees these as solid businesses.

Chris Higgins: There's been a lot of positive headlines coming out on defense stocks this week. There was the Saudi Arabia deal for over a $100 billion, and there's also the Trump defense budget that features $640 billion in defense spending for 2018. We think investors are excited about the headlines but are maybe overlooking some of the nuances in the market. The Saudi deal, given our energy team's forecast for 50 to 60 dollars a barrel crude oil, looks like it's a bit stretched given the Saudi government finances and that it spends 13% of it's GDP on defense. If you look at the Trump defense budget request for 2018, it's $640 billion. We think that given the political dynamics in Washington, D.C., the actual number is going to come in a bit lower than this.

Still defense stocks are quality names. Every defense stock we cover has a moat, either wide or narrow. A lot of them offer nice dividend yields, and they all generate lots of cash for shareholders. Across the universe of defense stocks that we cover, we like Raytheon from evaluation perspective. It's trading close to fair value at this point. General Dynamics, while slightly overvalued, we think it's a very quality name in the sector.

Glaser: In case you missed it on Morningstar.com this week, Patty Oey explores why fees paid by fund investors declined again last year.