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Friday Five: Energy Bargains Bubble Up as Oil Slides

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: Up first this week, we heard from the ECB and Mario Draghi. They keep dancing around QE, but they are not ready to pull the trigger yet.

Glaser: He really does, and we heard this week about how they are preparing for QE, they are thinking about it. But no sign of a concrete timetable of when it will happen. They say they are going to consider it early next year, but we just haven't seen that action yet.

This just shows how QE is much harder for the ECB to implement than you had at the Bank of Japan or the U.S. Fed, because they have these constraints and concerns about, is this going to create too much inflation? Will this get out of hand?

But the eurozone is still showing signs of inflation getting dangerously low, and with oil prices continuing to come down, that doesn't show any signs of abating outside of maybe some intervention from the central bank. I think we're still going to see some action from them, but it might be a little bit later than investors had initially thought.

Stipp: We got monthly auto sales data this week, and it looked really good--better than it has for a long time.

Glaser: It was a good month for auto sales. This was the best November since 2001. Automotive News estimates that on an annualized seasonally adjusted rate, over 17.22 million cars were sold, which is a very good number. And it looks like we are on track, according to our auto analysts, to have around 16.5 million cars sold on a seasonally adjusted annualized rate basis for 2014, which is up 6% from 2013 and well above the 10.5 million that were sold in 2009 at the base of the recession.

Clearly the auto recovery very much continues to progress; people are feeling more confident to go out and buy cars, and they are able to get the credit to buy cars. The results from GM and Chrysler were pretty good; Ford was a little bit more mixed.

Overall, the market has recognized that the automakers are doing better. These stocks were recently very undervalued but have come up. They are now trading in 4-star territory. But they are still trading under their fair value estimates, and even if they are no-moat businesses and have a lot more uncertainty, they still are trading at a discount.

Stipp: Auto sales are moving up, but oil prices continue to come down after OPEC's Thanksgiving meeting. But we are seeing some opportunities potentially opening up in energy.

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Glaser: Oil prices have continued to fall since that Thursday meeting over concerns of oversupply. Our energy analysts do think that oversupply is one of the major drivers that's bringing these prices down so much. They expect in the short term we could see even lower prices if we were to see more supply or weaker demand out of emerging markets.

But we think over the medium to long term, prices will stabilize, will move up as lower prices stimulate demand, and people will be willing to consume a little bit more oil than they are now. That could be a positive catalyst.

For investors, the question is, has this big sell-off in energy stocks (as oil has sold off) opened up an opportunity, or is it really just representing these new lower oil prices? In a lot of cases, our analysts think that the selling has been overdone, and they think that some opportunities in some very high-quality businesses have opened up here.

You look at oil majors like ExxonMobil and E&P companies like Pioneer Natural Resources trading at a discount. Those could be some interesting opportunities. I think investors need to look at these companies to make sure they understand the specifics of the businesses, understand what the balance sheet looks like, what their exposure is to oil, and how long they could sustain having lower oil prices. But in many cases, there are some good buys in a market that obviously does not have very many values right now.

Stipp: We also learned this week that Best Buy will be leaving its China business. What does this mean for the turnaround that the retailer is trying to enact?

Glaser: Best Buy is getting rid of its Five Star stores in China, and this really had become more of a distraction to them than a growth driver. R.J. Hottovy, who covers the firm for Morningstar, thinks that Best Buy's cash flows aren't going to be impacted in a major way by this divestiture, but it will allow Best Buy to focus on the U.S. stores and the U.S. online presence, which is really key to its turnaround.

Best Buy has been doing a good job in terms of cost-cutting, but the market right now still is pricing in very generous growth in the years to come, which is probably a little bit too optimistic given the competitive forces that the company faces. The stock is trading in 2-star territory right now. So even though things are getting better and the turnaround is continuing, it still is probably not a great investment idea right now.

Stipp: Lastly Microsoft and Barnes & Noble will break up their Nook partnership. What's your read on this situation?

Glaser: Barnes & Noble is paying Microsoft about $125 million in cash and stock for the stake in Nook that Microsoft took a few years back. If you remember, there was some … I don't know if excitement is the right word … when Microsoft took this stake, that maybe it would become a broader partnership, and that this could be a savior for Barnes & Noble. It just hasn't worked out that way.

I think one of the big drivers is that Microsoft's strategy has shifted a lot over the past couple of years. They are looking to integrate their software and the cloud and their devices together. You look at the Nokia acquisition, you look at the fact that they are making the Surface tablets. Having this investment in Nook just didn't make sense.

And for Barnes & Noble, they are looking to spin-off the Nook business and create two separate companies sometime next year. Having Microsoft out of there makes it a much cleaner transaction for them. But Barnes & Noble, even after this, is still going to have some challenges. They reported some pretty weak earnings with this announcement as well, and I think it's going to be an uphill battle for them.

Stipp: Great read on the news of the week, Jeremy. Thanks for joining me.

Glaser: Thanks, Jason.

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