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Friday Five: Don't Fret Over Rate Hike Timing

Jeremy Glaser
Jason Stipp

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: Up first this week, we got Fed minutes that seem to indicate the Fed is willing to wait before it begins to raise rates. So, does this change the story?

Glaser: These minutes don't make a big impact on the way that people should think about the Fed's eventual increase in interest rates. The minutes from January showed that concerns about a rate increase hurting the economy seem to weigh a little bit larger than concerns about keeping rates too low for too long and maybe creating asset bubbles or the potential for inflation down the road. There still seems to be quite a bit of patience within the Fed to wait a little bit longer until those rates actually increase.

But at the same time, there was a significant discussion about how rate increases should be communicated, and how the Fed should make it clear that it still will be dependent on the economy for future increases after the first one. Given the length of that discussion, it seems likely that we still are going to see an increase sometime this year. The exact timing of that shouldn't have a huge impact for most long-term investors. Obviously, it will be a big event, but if it happens in the middle of the year, if it happens toward the end of the year, if it happens tomorrow, it shouldn't change your long-term investment plan.

Stipp: Wal-Mart surprised some this week by announcing it's boosting pay for its workers. What are the implications of that decision?

Glaser: This was an interesting one. Wal-Mart said they are going to, in some cases, significantly increase their employees' minimum wage well above the country's minimum wage in many of the states they operate in.

You could read this a few different ways. Maybe this is bowing to some political pressure that's been put on them to increase pay and change some of their working conditions. Maybe it's just part of wanting to get more productivity out of their workers; maybe by doing this, they will get a boost there. But a lot of this could be that we really are starting to see what a tighter labor market looks like, and that a lot of companies--Wal-Mart and others who have started talking about this--feel like they do need to pay a little bit more in order to attract some of the best talent. It could be a combination of all of these factors, but this will certainly be a significant change for the company.

This comes after they reported quarterly results, which looked pretty good. They had another quarter of same-store sales growth in the U.S., and that comes after a long time where they were struggling to see any growth in the United States. Their outlook was a little bit disappointing. A lot of that was because of the expenses that are going to be associated with some of the new training programs and with these new wage increases.

We will be watching to see if this the first step in a period of more wage growth than we have seen before because of a tight labor market, or if this is more of a one-off decision due to some other idiosyncratic factors.

Stipp: We got an update this week on Berkshire Hathaway's investment portfolio, and it included a sale in the energy sector. What's the takeaway?

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Glaser: As oil fell, Berkshire Hathaway, Warren Buffett and his lieutenants, trimmed their stake in a lot of energy companies. They sold out of ExxonMobil, they sold out of ConocoPhillips, and cut a big part of their stake in National Oilwell Varco.

This may be a sign that they didn't have a lot of confidence in what was going to happen with energy prices, or maybe they didn't want to bet on energy prices. Maybe it's a sign they just saw better opportunities elsewhere and decided to take this opportunity to get out of those names. It seems like a lot of that money has gone into a bigger position in IBM and also into Deere.

It's always important when looking at the Berkshire portfolio to consider the big picture, and that really hasn't changed very much. Just five names--Wells Fargo, Coca-Cola, American Express, IBM, and Wal-Mart--represent two-thirds of the portfolio. That really hasn't changed much. So yes, he trimmed some of the energy positions, added in some other ones. But overall, no signs of a huge strategy shift or anything like that at Berkshire.

Stipp: Burger King/Tim Hortons released its first earnings report as a combined company this week, and it's doing pretty well.

Glaser: Restaurant Brands International, which is the name of that combined company, posted pretty good results. Both Burger King and Tim Hortons had over 4% same-store sales growth in North America. Tim Hortons is their global chain, which is mostly in North America. Those results are much better than a lot of other results we have seen, particularly from, say, McDonald's, which has been struggling recently.

I think this shows that a lot of the moves Burger King and Tim Hortons have been making have been paying off in terms of that growth. We are already seeing them starting to make some of the cuts to try to capture some of the synergies in terms of getting rid of some corporate staff, finding ways to cut costs there. We saw that starting to happen in the quarter already, which is a sign that they will deliver on those targets they had promised before.

Longer term, R.J. Hottovy who has initiated coverage on this firm for us, sees it as a narrow-moat company that's going to be able to continue to use these management skills and master franchise agreements that they have across the globe to drive growth in both of these brands, and even though the shares are fairly valued right now, it could be an interesting story and an interesting name in this very competitive space.

Stipp: A company you have talked about a few times on The Friday Five, Priceline, saw its share soar after it reported solid results this week.

Glaser: I figured we'd do an update here, given it is one of the few very undervalued stocks that we cover right now. They did have a very good quarter. Bookings were up 17%, which was higher than expected, and the currency headwinds were actually a little bit lower than expected. That had been one of the big concerns around the stock, given that so much of their business is in Europe: How much would a lower euro hurt that? So that was certainly good news.

Profitability looked good, and that's in stark contrast to Expedia, which didn't look as great. Dan Wasiolek, our analyst covering Priceline, saw that as a very good sign that Priceline's network effect and a lot of its competitive advantages very much seem to be in place. The stock did rally quite a bit on this news, but the shares still look attractively valued in a market without a whole lot that looks cheap.

Stipp: Great update as always, Jeremy. Thanks for joining me.

Glaser: Thanks, Jason.

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