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Friday Five: Priceline Is Worth a Bid

Jason Stipp
Jeremy Glaser

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five: Morningstar's take on five stories from 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 is the midterm elections. They dominated the headlines. There is a lot for political junkies to think about, but what about investors?

Glaser: We'd be remiss if we didn't start by talking about the midterm elections. But as you recall, we haven't talked about this much before, mainly because I don't think it's going to have a major impact on investors.

I think over the next two years we're not going to see a lot of legislative action. We're likely to see the gridlock that's defined Washington since 2010 continue apace. There is a potential maybe for some things like trade deals, maybe an outside chance of a deal on immigration, or maybe even tax reform.

But even if those things were to come to pass, it's just not going to have a major impact on the way that investors should think about their long-term asset allocation. It doesn't make a lot of sense from an investing standpoint to try to stake out a claim, or stake out investments, solely because of a political thesis. You really should look for great businesses, ones that are going to continue to earn cash through all types of political climates. Those are your best long-term bets. Leave these elections to political junkies rather than trying to read too much into the investment implications.

Stipp: Mario Draghi got the markets excited again on talk of more stimulus. What's your read?

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Glaser: He did, and this seems to be a recurring theme: Just when it seems like the ECB isn't actually going to act, he makes it clear they really do want to expand the size of their balance sheet, and that they are going to try some unconventional measures to address the very low inflation and very low growth we see in Europe. I think he is likely telling the truth. I think he is going to try to be somewhat expansionary in monetary policy, maybe not to the scale that we saw in the United States or in Japan.

It is important for investors to see that this is not a cure-all for Europe's ills. It could provide a short-term boost, it could help keep bring inflation up a little bit, but it's not going to solve the underlying competitiveness issues, and if the eurozone doesn't take steps to cure that as well while the quantitative easing is going on, it's going to be a very temporary boost. I think the same thing is true with Japan's program, which they talked about last week. If they don't solve some of their underlying economic issues, it's only going to have a short-term effect.

Stipp: Whole Foods jumped after the strong quarter they reported, but you say investors might want to pause before shopping on those shares?

Glaser: They did have a good quarter. Comps were up over 3%, and their new stores are being more productive than many analysts had initially expected. But it probably is too soon to say Whole Foods has completely turned the corner and is going to see very strong growth from here on out.

They still have some competitive threats from other grocers moving into the organic/natural space, and shedding their image of being "Whole Paycheck," being very expensive and really limiting the size of their market.

It's still a good business. It's still going to continue to do well, but future growth prospects could be somewhat constrained by that competitiveness. With the jump in the shares, they are now trading above our fair value estimate, and Ken Perkins, our Whole Foods analyst, thinks you'd be better off waiting for a margin of safety, waiting for a discount, before diving in.

Stipp: Alibaba's first report as a public company showed that the firm's wide moat really is working.

Glaser: It looked very strong, and you saw that network effect in actual. There were a lot of new users particularly on mobile, which looked strong. Mobile had been a question mark: Can Alibaba fully make that move to mobile? Merchandising volume looked good. Margins were a little bit lower. They are investing on building out their network effect and making sure that they stay strong. RJ Hottovy, our Alibaba analyst, doesn't think that's anything to worry about right now. With the rise in the shares, again, they are above our fair value estimate right now. But if there were to be a quarter that doesn't look so good, and there is a sell-off, Alibaba could be a good long-term holding.

Stipp: Priceline also reported this week, and they took a hit after some worries about headwinds that they might be facing in the quarters ahead.

Glaser: Priceline had a decent quarter, but they did say that growth is slowing, particularly in Europe, which is going to be a problem for them, and this makes sense. is a big part of their business, a big part of the growth engine, and that does have a lot of exposure to Europe and also to Asia.

But we don't think just because they are having some of these macro issues that the thesis on the company is broken. We still think there is a potential for a strong network effect that's starting to build here. A lot of boutique, non-chain hotels want to be on the platform. As more join the platform--we saw more join in the quarter--more users are going to want to go on there to find those hotels. The fee structure is a little bit better than, say, Expedia or some of the other agency model sites out there, and that potentially could be a boon for the company.

We see they have a moat now. We think that it's getting bigger, and that is because of these growing network effects. Some macro headwinds now don't derail that, but this has created some weakness in the stock. So you have a fast-growing company with an economic moat that is trading for less than its fair value estimate. In a market like this, that's something investors might want to take a closer look at.

Stipp: Great insights for investors as usual, Jeremy. Thanks for joining me.

Glaser: You're welcome, Jason.

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