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Investing Specialists

Morningstar Runs the Numbers

We take a numerical look through this week's Morningstar research. Plus, our most popular articles and videos for the week ended Nov. 25.

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Inspired by Harper's Index (with a tip of the hat to FiveThirtyEight's Significant Digits blog), Morningstar Runs the Numbers uses a numbers-based approach to highlight recent Morningstar research, along with some outside news stories.

This week, Bryan Borzykowski explores the incredible rise of biotech stocks over the past five years. But despite the big gains, recent sell-offs in the sector have highlighted some companies with bright prospects, trading at cheap valuations. 

Between 2010 and July 2015, the S&P 500 biotech sub-industry index climbed by an incredible 360% compared with just 86% for the S&P 500. The gains might have continued but for presidential candidate Hillary Clinton, who mentioned that if she were elected, she would consider curbing drug price increases. Within days, the sector plummeted by 6% and then continued to fall, dropping by 24% between July 2015 and Election Day. Until Nov. 8, it was one of the worst performing sectors globally.

Morningstar's Dan Wasiolek recently visited Macau and he's sticking with his fair value estimate and narrow-moat rating for  Wynn Resorts (WYNN). He expects sales to grow at the firm by 7% a year and for margins to expand over the next decade, but it could be a bumpy ride given the slow start of the firm's recently opened Cotai Palace property. He sees ongoing infrastructure construction as one issue, but that design plays a role as well.

We now believe that the Palace’s slow ramp-up is also due to the design of its large and open casino space, which is leading to the perception of thin crowds and thereby reducing the feel of compressed energy that many gamers seek. Wynn plans to adjust wall configuration to reduce its gaming area while increasing casual dining options to meet demand. We think this will increase reinvestment needed to obtain traffic, and we’re reducing our 2017 Palace EBTDIA margin to the mid-20s from the high 20s while maintaining all other forecasts.

Shares of  Cimarex Energy (XEC) are up over 45% year-to-date versus 31% for the broader oil and gas exploration and production sector. Our analyst Mark Hanson thinks that the price has now run up to much and thinks shares have entered "speculative territory" and thinks you need to make two key assumptions to get to today's stock price. 

To justify Cimarex's current stock price, investors have to believe that one of two things will take place over the next few years: (1) oil prices will be much higher than they are now or (2) Cimarex will be able to replicate its long-lateral, high-proppant experiments across the vast majority of its Permian and midcontinent leasehold. Based on our macro work and our analysis of the company's well results to date, neither of these outcomes appears to be substantiated. Accordingly, we recommend investors avoid Cimarex at its current stock price.

The so-called break-even rate--the yield differential between nominal (noninflation-adjusted) Treasuries and Treasury Inflation-Protected Securities--jumped in the days following the U.S. presidential election. The break-even rate stood at 1.71% the day before the election; by Nov. 14, it was up to 1.83%. That's an indication that investors think inflation is moving higher. Treasury Inflation-Protected Securities can give investors a hand in an inflationary environment because their principal values (and therefore yields) adjust with changes in the CPI-U. However, TIPS' interest-rate sensitivity and volatility can be vexing. Christine Benz offers some portfolio considerations to bear in mind when considering a TIPS stake for your portfolio.

Most Popular Articles, Videos, and Securities

Most Popular Articles

Most Popular Videos 

Most Requested Stock Quotes
Berkshire Hathaway
Old Republic International

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Procter & Gamble
Valeant Pharmaceuticals

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Vanguard 500 Index
Fidelity Contrafund
Vanguard Inflation-Protected Securities 
Vanguard Dividend Growth
Vanguard Wellesley Income

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Dodge & Cox Income
Vanguard Wellesley Income
Vanguard Inflation-Protected Securities
Vanguard Wellington
Dodge & Cox International Stock

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Vanguard Total Stock Market ETF
SPDR S&P 500
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Vanguard High Dividend Yield
iShares TIPS Bond ETF

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Vanguard Small-Cap Value ETF
Vanguard Dividend Appreciation ETF
iShares Core S&P 500
iShares TIPS Bond
iShares Core S&P Small-Cap does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.