Video Transcript
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, a big surprise on Thursday as the Swiss National Bank said that it was going to stop actively intervening in the currency markets to keep the Swiss franc from appreciating against euro.
Glaser: This one really was a surprise. Back in 2011 the Swiss Central Bank put a policy into place to hold the Swiss franc at 1.2 to the euro, and not allow it to rise above that, because they were worried about the impact that too much appreciation, too quickly, would have on the Swiss economy. The Swiss franc is seen as a safe-haven currency, and during the euro crisis that was going on in 2011, the inflows into the Swiss market were worrying the Central Bank very much. Throughout the past couple of years, they have been vigilant about this, and you could see their balance sheet getting larger and larger as they bought euro-denominated assets in order to keep this pledge.
I think what happened here was that, as the European Central Bank gets ready to do its quantitative easing program to get more euros out there, the Swiss Central Bank saw that it probably wasn’t going to be able to keep defending this. It was going to become too expensive and too unpopular of a policy. So, they scrapped it overnight. The franc immediately appreciated dramatically against the euro and also against the dollar.
This is going to have a lot of ramifications for Swiss businesses. It’s something we'll talk about for a while. But I also think it’s just important to note that this really came as a surprise, and it shows that as much as you try to think and worry about every contingency, there is always going to be something that comes out of left field, and those are the things that could have a big impact. This just speaks to why it’s important to have a long-term focus and not try to make these short-term bets, because things like this, which you really do not expect to happen, can materialize.
Stipp: Earnings season kicked off this week, including a raft of big bank earnings that were pretty disappointing.
Glaser: It has not been a good quarter for the big banks, and this was even after expectations for those banks had come in quite a bit. We did hear from Bank of America, from Citigroup, from J.P. Morgan, and Wells Fargo. You don’t want to overgeneralize, but there were a couple of themes that came out of these earnings.
The first is that trading losses were an issue for a lot of the banks. Given the volatility we saw in the fourth quarter, that was something many people had expected would drag on earnings.
Another thing is legal costs. These banks really are a big target for regulators, and the legal costs do seem like a cost of doing business these days, as our bank analyst Jim Sinegal describes it. They are not one-off fines for bad actions that happened years ago. They are recurring costs. We saw that very much in the quarter.
Cost controls, which had been a big push for the banks, were a mixed picture. It seems like the banks are doing a reasonable job of cutting costs, say, in their mortgage business and at retail branches, but they’re having a lot more trouble reining in compensation expenses, particularly among their investment bankers and traders. They are still finding that they need to pay those people more in an environment like this. That’s been a challenge.
On the whole, it wasn’t a great quarter for these banks, and given that they are all very much in a fairly valued range right now, there is not a lot of opportunity.
Stipp: We also learned this week that after only about two years, Target is pulling the plug on its Canadian operations. This is something we’ve discussed in the past.
Glaser: It is. Canada has been a big drag on Target for a couple of years now. There was a lot of excitement that this was going to be their first international market. It would give them a chance to expand as they’ve saturated much of the United States by now. But it was an experiment that did not work out for a number of reasons. There were lots of complaints about the stores not being staffed and stocked appropriately. The locations weren’t great; oftentimes they were located in out-of-the-way places that people just didn’t want to go to. And the stores never reached anywhere close to the profitability … or at any kind of profitability … that the company had set.
This was one of the big reasons that the former management team was ousted. The new management team came in; they assessed it, and thought it was going to be quite a long time until they could get this turned around, and they decided it wasn’t worth it. They are going to take some charges now in order to exit and really focus on the U.S. business, which is probably smart given that they still need to recover from some of the data breach issues, get margins and profitability back up, sharpen their focus on driving sales in the U.S. This decision should allow them to focus on that.
Stipp: Sticking with the retail sector, Tiffany shares sold off after they reported some disappointing holiday sales.
Glaser: Tiffany had a very sharp decline in their stock price after they said that holiday sales didn’t look that great, were basically flat, and they also reduced their guidance for the rest of the year.
A few things are going on here, but the big one was they said that the strong dollar was keeping tourists to the U.S., who are a big part of their market, from wanting to spend money on Tiffany’s products. And they’re also worried that their overseas sales are going to be impacted by the stronger dollar throughout year. So, they reduced their guidance as well.
This really spooked investors. Like I mentioned, the stock came in quite a bit. But it’s important to note that, A) we still think Tiffany has a wide-moat business, that their intangibles and brands are still very much in place, and this is probably more of a temporary blip than any kind of long-term issue. And B) this hasn’t really opened up an opportunity. The shares were looking pretty overvalued before the sell-off and now they are in fairly valued territory. This is probably more the market recognizing the reality of what the macroeconomic climate means for the company than overreacting and creating a big opportunity.
Stipp: One place that we are seeing some opportunity, though, is in Priceline’s shares. They have sold off recently for a number of reasons.
Glaser: They have. They recently entered into 5-star territory, which is why I wanted to highlight it this week. People might think of Priceline.com in the U.S., but really Priceline’s big business is Booking.com, which is primarily a European-focused site, and it connects travelers to boutique hotels, which really dominate the European hotel market versus the chain hotels here in the U.S. Priceline has built quite a good network effect there; both the hotels and the travelers want to be on that site because they are both there, and they have created a pretty profitable and fast-growing business.
But because it is in Europe, it has generated some worries--both from currency concerns and also from economic concerns, given the strength of the European economy. That’s led to some sell-off in the shares and also some concerns about the competitive positioning.
But given how much it’s sold off, our analysts think that it has created a buying opportunity in the shares. Matt Coffina, who manages our Morningstar StockInvestor newsletter, recently initiated a position in one of his portfolios. And given that we’re in a market that just doesn’t have a ton of values right now, Priceline might be a name that’s worth doing some more research on.
There are definitely some risks here. It is a high-uncertainty stock, but it does look like it’s trading cheaply enough that you are being compensated for taking some of those risks. It’s one worth taking a closer look at.
Stipp: Another great week of insights, Jeremy. Thanks for joining me.
Glaser: You’re welcome, Jason.
Stipp: For Morningstar, I’m Jason Stipp. Thanks for watching.
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