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Friday Five: Wal-Mart, TJX Buck Retail Troubles

Home improvement stores also show strong results; Berkshire's interest in Apple not necessarily a sign of new thinking for Buffett.

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Christine Benz: Hi, I'm Christine Benz for, and welcome to the Friday Five. Joining me to provide insights on the top business and market news over the past week is Morningstar editor Jeremy Glaser.

Jeremy, thank you so much for being here.

Jeremy Glaser: You're welcome, Christine.

Benz: Jeremy, we've been discussing what has been a not-so-rosy quarter for retailers. Wal-Mart though appears to have kind of bucked this trend, surprised on the upside a little bit here.

Glaser: You're right. It has not been a pretty picture for many retailers. But this week we actually did see some better news, starting with Wal-Mart. Shares rallied pretty heavily after they reported same-store sales that were better than expected and that really kind of improved the mood on Wal-Mart and some other retailers as well. But Ken Perkins, who is our analyst here and who is actually very bullish on Wal-Mart in the long run, thinks that you should be careful about extrapolating this quarter into kind of the near future, that Wal-Mart is still going to face some headwinds, particularly from a lot of the investments that they have to make in order to stay competitive, in order to build out their online platform, to make their stores more inviting. He sees this as a sign they are kind of moving into the right direction, but it's not going to be a particularly steady path, that there could be some quarters that don't look quite as good as this one. So, we think over the long run, Wal-Mart still looks like it's in pretty good competitive positioning, but don't get too excited after one quarter. After this big runup their discount to our fair value estimate is really very reduced. It's still trading for a little bit less than what we think it's worth, but it's not that big of a discount that we had seen previously. So, investors may want to kind of maybe wait for that price to come down a little bit before they consider building a position.

Benz: We had been discussing in previous segments the weakness in the apparel space, but it appears that home improvement is an area where consumers are more likely to open their pocketbooks these days.

Glaser: It does appear that way. Both Lowe's and Home Depot had really strong quarters, better than expected sales, had good guidance. They think that this kind of upbeat spending on home improvement is going to continue. I think this really just reflects that the housing market looks pretty stable, looks fairly strong and this really echoes a lot of what Bob Johnson, our director of economic analysis, has been talking about; it echoes what a lot of the data shows that even if housing isn't kind of on a rocket ship trajectory, it's still a really positive contributor to what's happening in the economy. It's not falling off in any meaningful way and we're very much seeing that in these results.

Benz: TJX is another retailer. It's been a real bright spot in the retailing space. Let's talk about its recent results.

Glaser: This has been a big success story and I think you can very much see that those dollars that aren't getting spent at places like Macy's are getting spent at T.J. Maxx, at Marshalls, at the stores of TJX, and we really think that this reflects partially consumer trends, that they are looking for these discounts, they are looking for more of these off-price type of items and also reflects how well TJX is doing in terms of having these strong relationships with suppliers, understanding what local markets want and getting those products to the stores very quickly and turning that around quickly. They've been very successful in there. We think right now the shares are kind of fairly priced, that a lot of this success is already priced in. There's going to be some expenses for them as they continue to expand, as they continue to make investments. So, we're not going to see profitability kind of explode anytime soon, but definitely a bright long-term story.

Benz: In contrast with the previous retailers, Target was somewhat disappointing during the quarter. Let's talk about that.

Glaser: Yeah, this wasn't all good news from the retailers and Target really exemplified that. They had an OK quarter. They gave guidance for next quarter that sales would be kind of flat to down 2%, which is not exactly what people were expecting. And Ken Perkins, who covers Target for us, really does see that there are some serious headwinds, that the company is going to continue to face some serious risks. A lot of the categories that they are most exposed to are ones that are really in the crosshairs of Amazon and of other online retailers that could force them to compete more on price and that's really going to be challenging for them in the future. Right now, we think Target shares have really priced that there is going to be--that this could turn around, but that really is a risk that's not, it's far from certain that that's going to happen. So, we think that investors are better off steering clear of Target right now.

Benz: One of the other big news items that surfaced this week was that Berkshire Hathaway owns a sizable stake in Apple stock. Let's talk about that.

Glaser: Yeah, they do. This was the buzz this week that Berkshire has about $1 billion stake in Apple and also combined with some other news, like Dan Gilbert and Warren Buffett teaming up to potentially bid for some Yahoo assets raised a lot of questions about, oh, has Buffett really changed his mind on technology? It's a sector that he has been very skeptical of before. IBM is really his only major holding there. I think it's a little bit premature to say that he has a wholesale change the way that he is thinking about this sector. I think part of this could be that Todd and Ted, his investment lieutenants, maybe kind of pushing him toward some of these names that he is maybe a little bit less familiar with. But when you look at what his top five holdings are, so that is IBM, but also Kraft Heinz, Wells Fargo, Coke, American Express, so really the blue chip type of companies that he has held forever. That's almost 70% of his total equity portfolios in those five names. So, as Gregg Warren, who covers Berkshire for us, has kind of pointed out, there's really no big change in the way that he is thinking about his investments and I think it's really premature to think that he is totally really rethought the tech sector generally.

Benz: So, did Apple get a little bit of a pop though when people learned that Buffett was an investor?

Glaser: It did. People like to co-invest with Warren Buffett. But that being said, it's not a game-changer for really either side.

Benz: Jeremy, thank you so much for being here to share your insights.

Glaser: You're welcome, Christine.

Benz: Thanks for watching. I'm Christine Benz for

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.