Plus, our take on Microsoft, Apple, Amazon and Meta Platforms before they report.
On this week’s episode of The Morning Filter, David Sekera and Susan Dziubinski unpack the busy week ahead for investors. They cover pivotal economic events, including the looming tariff deadline, the Fed meeting, a crucial inflation report, and the latest jobs numbers. Plus, they preview the Magnificent Seven stocks reporting earnings this week—Microsoft MSFT, Apple AAPL, Amazon AMZN and Meta Platforms META—and revisit some former stock picks reporting soon, too.
They reveal whether Tesla TSLA or Alphabet GOOGL are good investments given their latest guidance. And they wrap things up with a list of stocks investors should consider buying and selling post-earnings.
Episode highlights:
On Tap: Tariffs, The Fed, Inflation & Jobs
Mag Seven Earnings We’re Watching
New Research on Tesla, Alphabet & Others
Stocks to Buy and Sell After Earnings
Read about topics from this episode.
Follow Morningstar’s coverage of earnings season: Company Earnings
Learn more about Morningstar’s approach to stock investing: Morningstar’s Guide to Investing in Stocks
Read the full stock analyst reports for Microsoft, Apple, Amazon, Meta, Tesla, and Alphabet.
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Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday before the market open, Morningstar chief US market strategist Dave Sekera and I sit down to talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. We’ve got a really busy week ahead. But, Dave, before we get started, I understand there’s some special meaning behind this morning’s coffee mug you’re using, so why don’t you tell us about it?
David Sekera: Hey. Good morning, Susan. For this week, I picked the Iron Man mug. Let’s just say, for those of you who know, it’s a little bit of my own personal tribute this morning for our Black Sabbath lead singer Ozzy Osbourne, who of course sang the song Iron Man. So, sorry to see you go, Ozzy. Hope you’re doing well on the other side.
Dziubinski: And it was a tough week for our household. In addition to Ozzy, we lost Hulk Hogan, and we are a WWE family over here. So, it was a rough one, but, uh, may they both be enjoying themselves on the other side. All right. Back to our busy-
Sekera: Now, that’s an interesting combo to see the two of them hanging out together.
Dziubinski: Right. There’s a scene. Anyway, all right, so let’s get to our busy week ahead, Dave. We’ll start with tariffs. President Trump’s Aug. 1 tariff deadline is fast approaching; on that, we had some activity over the weekend. Where do we stand with tariffs as of Monday morning before the market open, and are you expecting market volatility this week in anticipation of that Friday deadline?
Sekera: There are reports out that they did reach a trade agreement this weekend with the EU, setting a 15% baseline tariff for European goods, and then also includes commitments from the EU to buy $750 billion worth of energy products as well as invest $600 billion in the US, as well. Now, having said that, we are still in talks with Mexico, Canada, and China.
So, there is a little bit of a sigh of relief in the markets. Futures are up. They’re slightly in the green this morning, but really not all that much. Just tells me that the market already expected this news, and in fact, I think the market this week is just going to be much more focused on earnings coming out than it is going to be focused on tariffs. So, if we have volatility, that’s where it’s going to be coming from.
The only real takeaway here, in my own mind, is I don’t think this really sets a precedent for the negotiations with China. I think those negotiations are going to be much more contentious. My guess is that the US will probably be pushing for much higher tariff levels with China. Of course, China’s gonna be very aggressive in pushing back on those levels. The deadline for those negotiations is going to be Aug. 12 if they’re not extended. That’s where I’d really be looking for tariff-induced volatility to come from.
Dziubinski: We also have the Federal Reserve meeting this week. What are the odds we’re going to see an interest rate cut, Dave?
Sekera: Yes. It’s going to be somewhere between none and zero, Susan, but all kidding aside, just took a look, the CME FedWatch Tool has a 2.6% probability of a hike this week. So, the market is not pricing in a hike whatsoever. In fact, that 2.6% probability, if there was a hike, I think that’d actually be very concerning to the market. They’d probably think that the economy was falling off a cliff if the Fed really cuts this week.
Now, looking toward the September meeting, the market is pricing in a little bit over a 60% probability of a cut after the September meeting, and then a little bit over 60% for another cut before the end of the year, which is also the same as what the Morningstar US Economics team expects.
Dziubinski: Given the slight cut expectation for September, do you think that Fed Chair [Jerome] Powell is likely to say anything new in his comments after this week’s meeting? And then again, given where we currently are with tariffs, the economy, employment, inflation, all of it?
Sekera: We’ll see. As much as I kind of joked about how I skipped the last meeting and his Q&A afterward, this one I’ll definitely be tuning into and listening to with a pretty close ear. With the market pricing in a 60% probability of a September cut, I think the market’s going to want to get some sort of indication from Chair Powell of that cut coming up in September. Now, if he doesn’t allude to the conditions being appropriate to cut in September, I think the market would actually be pretty disappointed. We’d see that probability decrease, and I think that could lead to some sort of shallow selloff if that were to happen.
Dziubinski: Let’s talk a little bit about inflation because we have the June PCE number coming out this week, which is the same day as the Fed decision. I think it’s the same day. The June CPI numbers that came out earlier this month showed a little bit of tariff-induced inflation, and then the PPI number came in lower than expected. Given that, what are you expecting from PCE this month?
Sekera: Taking a look at where consensus is coming out, headline PCE should be doing better. On a month-over-month basis, the consensus is one-tenth of a percent. That’s down from three-tenths of a percent last month. But consensus core PCE is going the other way. On a month-over-month basis, the consensus there is up three-tenths of a percent. That’s higher than the two-tenths of a percent that we saw last month.
Essentially, I think the market’s going to be looking at these numbers just trying to figure out when will tariff-related inflation finally start to roll through the reported inflation metrics. But even more specific than that, I think they’re going to be looking at where that inflation is by category. And of course, then the big question will be if we start seeing that tariff-induced inflation, is that going to be just a one-time hit, or is that something that could lead to increasing expectations for inflation over the longer term? I know the Fed is watching that very closely, so we’ll see where exactly those numbers come out and where that inflation is starting to hide.
Dziubinski: Nonfarm payroll numbers will come out on Friday. Now, I know from past conversations with you that you don’t put a lot of stock in these numbers on a month-by-month basis. You’re more watching the trend over time. But I still have to ask you about it, Dave. Why are these numbers on your radar this week?
Sekera: Consensus this week is really pretty low. It’s a range. I’ve seen the numbers anywhere from 102,000 to 108,000. That would be a pretty marked slowdown from last month. It came in at 147,000. The question really is, are we finally going to see indications of an economic slowdown in the jobs numbers? I’d say overall for the first half of the year, it kind of feels like the economy has been running faster than what economists had expected, where we would be by this time in the middle of the year. I know the Morningstar forecast has been for a sequential slowdown in the rate of economic growth over the course of this year.
We’re still kind of waiting for that really to play out. When it does, that might surprise the market a little bit, just because the economic numbers, I think, have been better than expected. So, we’ll see. If the numbers come out much lower than consensus, I think that could maybe spook the market a little bit. We could see a bit of a selloff on that. If it comes in higher than expected, I don’t think that really means all that much because again, as you mentioned, these numbers can be pretty volatile, and they did come in higher than last month as well. While there was a slight movement in the market, the market kind of quickly corrected thereafter.
Dziubinski: And then lastly on the economic front this week, we have second-quarter GDP numbers coming out. What are the expectations here?
Sekera: I took a look at the Atlanta Fed’s GDPNow, that’s at 2.4%, which is also the same as what consensus is. I would just say that when that GDP print comes out, even if it’s higher or lower than expected, personally, I’m just gonna ignore the headline overall. If you remember, first-quarter GDP was a negative 0.5%. The reason was because you had a huge amount of inventory pull forward before the tariffs, and that resulted in that negative headline print as imports do reduce GDP.
Now, of course, we then had a slowdown in imports. The companies are using up that inventory they bought at the beginning of the year. That’s going to result in a GDP reading that’s going to be higher than what the real underlying economic growth rate is going to be. Again, I would ignore that headline number. What you really are going to want to focus on is the different consumption and investment metrics within GDP, that’s going to give you a much better feel as far as the economic health and what the real rate of underlying economic growth is going to be.
Dziubinski: All right. Let’s talk about earnings. We have more than half of the companies in the Magnificent Seven reporting this week, and that’s Microsoft MSFT, Meta META, Apple AAPL, and Amazon AMZN. Now these stocks all look fairly valued heading into earnings. Dave, is there anything that’s notable among these stocks, and anything in particular you’re watching for this week?
Sekera: I’d say from a valuation perspective, as you mentioned, there’s really nothing to do here. Microsoft, Meta, and Amazon, those stocks have all risen enough year to date to move into 3-star territory. Apple has gone the other way. It’s fallen 15% year to date, but again, that was enough to take it from 2-star down into that 3-star territory. I think overall, I’m just going to be listening for kind of that typical update on fundamentals for each company, whether that may or may not change some of our longer-term forecasts and change any of the fair values.
But more importantly, I think what the market’s going to be listening for is anything to do with artificial intelligence, whether that’s the amount that they’re going to be spending on capex [capital expenditure] or how they’re incorporating it into their own products and the success that they’ve had. Now, Google, or Alphabet, did announce last week that they’re increasing their capex spend by $10 billion on AI. Let’s see if anyone follows. If so, I think that could be a pretty good tailwind for AI hardware stocks overall. If not, if no one else is increasing their capex spend, that might be a little bit of a disappointment for AI hardware or maybe even AI in general.
Dziubinski: Several of your recent chemical producer picks, including Scotts Miracle-Gro SMG, FMC FMC, and LyondellBasell LYB, all report this week, and their stocks got banged up a little bit last week after Dow Chemical DOW issued pretty awful results and cut its dividend in half. Given that, do you think we’re gonna hear more bad news from the others this week?
Sekera: That’s a great question, Susan. Unfortunately, I don’t have a great answer for you. The short answer is I don’t know. So unfortunately, I wasn’t able to get ahold of Seth [Goldstein]. He’s the analyst who covers those stocks. But here’s how I’m looking at the situation this week. With those stocks having already sold off a little bit, that kind of lowers the market expectations, lowers the market sentiment on those stocks. So, if they do have a miss, it wouldn’t be necessarily as much of a surprise as what I think partially pushed down Dow’s stock, not only cutting its dividend and having kind of the weaker-than-expected results, but I think the surprise also was a big reason why it sold off as much as it has.
Looking at these individual companies, so you’ve got FMC, SMG, Scotts Miracle-Gro. Now, those are very different chemical types of companies. FMC is focused on crop protection chemicals. Scotts Miracle-Gro focused more on home lawn and gardening, whereas Dow, in the results, really specified international construction and manufacturing as particularly weak areas. So, different business lines. We won’t necessarily expect those kinds of businesses to really give an indication as far as what Scotts and FMC might do.
Now, Lyondell is probably more at risk based on its polypropylene business; that’s going to be a lot more economically sensitive. I would just note here that when I’ve talked to Seth in the past about Lyondell, he thinks that they’re in a much better position to maintain their dividend, even through a downturn in the commodity chemical sector. He thinks that they should be able to maintain that dividend unless we have either a protracted or a deep recession. He’s also noted that Lyondell’s balance sheet was in much better shape than Dow’s. So, even in a bit of a downturn, they can use their balance sheet to support that dividend at least for a couple of quarters.
Dziubinski: We have several makers of sweets and snacks reporting earnings this week. We have Kraft Heinz KHC, Hershey HSY, and Mondelez MDLZ. How do these stocks look from a valuation perspective as they’re heading into earnings, and is there anything in particular you want to hear about from their management teams?
Sekera: There’s actually a lot more going on here than just the underlying fundamentals this past quarter. Within the food sector, WK Kellogg KLG just announced that it was being bought out. Kellanova K agreed to being bought out last fall. There have been some recent reports that KHC, Kraft Heinz, has started to look at potential spinoffs or split-ups. That kind of tells me, I think, that food companies right now, at least to some degree, are in play. Considering how undervalued most of these companies are trading as compared to our fair values, I suspect there are a lot of other strategic buyers out there, as well as probably private equity buyers sniffing around looking for other different types of deals. So, I’m curious if any of these companies make any allusions as to either looking at different types of strategic alternatives to unlock shareholder value.
Other than that, I would say fundamentally most of these companies should be reporting a revenue that’ll be flat to maybe up a percent or two on the top line. We are looking for overall further progress on bringing the operating margins up, getting back to more historically normalized type of operating margins. That is our long-term investment thesis on a lot of these stocks. Overall, their operating margins had been under pressure the past couple of years. Essentially, they weren’t able to pass through their own inflationary cost increases as fast as they could with their own pricing, so that squeezed margins. And of course, we’ll be looking for any kind of guidance or discussion regarding the impact on their businesses from the GLP-1 weight-loss drugs. Been a lot of concern about that. And then Hershey specifically, I’ll just be listening for any kind of updates that they may have on their expectations for cocoa prices, which still remain near long-term highs.
Dziubinski: On the defense front, we have Boeing BA and Huntington Ingalls Industries HII reporting this week, and defense is a theme you’ve talked about that you like this year, so how do these stocks look ahead of earnings from a valuation perspective, and what will you be listening for?
From a thematic perspective, there is still this tailwind in defense spending globally. We had the increased budget in defense spending here in the US. There’s been a commitment by pretty much all of the NATO members to increase their own defense spending as well. And then there’s been agreements by a number of other allies to increase their purchases of US defensive equipment as well. So, definitely still a tailwind in that sector.
Now, as far as the individual companies and how that may impact them, Huntington Ingalls, for example, I think that one’s much more idiosyncratic in its own type of fundamentals and earnings as opposed to the more broad defense sector. They, of course, specialize in manufacturing nuclear submarines. So, in this case, I think it’s a matter of if the company is still operating within the expected constraints of the contracts it has on those submarines. The investment thesis here is that over time, as they negotiate newer contracts with the US government, that they’ll have a better ability to pass through those inflationary cost pressures, which is what hit their stock a couple of times last year.
That’s currently a 4-star-rated stock at a 16% discount. This is one where if you remember about a year ago, I think, when we first recommended this stock, and it’s also a good example of why, or at least in my own opinion, when you start a position in a stock, usually start it at a third to half-size position. In this case, that stock just got hammered last fall. It got hammered again earlier this year.
Yet, our analyst did stick with his long-term fair value, his intrinsic valuation on this stock through it all. And that did provide opportunities to dollar-cost average down. That stock has recovered quite substantially, so if you did dollar-cost average down in those parts of your position, you actually have some nice gains right now.
And then just to wrap things up with Boeing, that’s tied to not just defense but commercial aircraft as well. In commercial aircraft, they seem to be doing pretty well. They’ve had several announcements of some long-term contracts with several international carriers and countries. On the defense side, they also had a couple of new contract wins in the past couple of months. I’ll just be listening if there is anything really new that’s not already priced into the stock. Any other good news that hadn’t been released already.
This was a stock that we recommended on our May 19 episode of The Morning Filter with a couple of other trade recommendations based on some of the agreements that came out after Trump’s visits to the Middle East. The stock’s up 13.5% since then, so I think the tailwinds have already been reflected in its stock. It’s still a little bit under fair value, but it is a 3-star-rated stock for Boeing.
Dziubinski: Let’s put it over to some new research from Morningstar, but we’ll stick with the defense theme for now. We had Lockheed Martin LMT and Northrop Grumman NOC both report earnings last week, and Lockheed’s stock was down after earnings, but Northrop’s stock was up. Walk us through what happened, along with any changes Morningstar made to its fair value estimates of those stocks.
Sekera: Let’s go through the bad news first. On Lockheed, we did lower our fair value by $10 a share to $529 per share. Not necessarily a huge cut percentagewise, but you never like to see that fair value going the wrong way. In this case, they had several cost overruns in a couple of different classified programs. They also took some restructuring charges on two different helicopter contracts. On the positive side, in their missiles and space divisions, they reported quite healthy results. So, even with the stock movement and even with our fair value being cut a little bit, it still trades at a 20% discount to fair value, keeping it in that 4-star range. It is a stock with a wide economic moat and a Medium Uncertainty.
Now to the good news, just taking a look here at Northrop, the top line was up 1%. Operating margin expanded by 1 percentage point. That’s mainly due to some positive results in their Sentinel missile program. Now, in this case, we increased our fair value by $10 to $630 per share. Not necessarily a huge increase, but definitely at least in the right direction, in this case. I’d also note, too, that the company is in talks with the Air Force to increase the speed at which it can build B-21 bombers. I think if that were to happen and they get those deliveries out there faster than what the market’s pricing in, that could come with some additional financial upside. This one is rated 4 stars, only trades at a 10% discount to fair value, but also does have that wide economic moat and a Medium Uncertainty Rating.
Dziubinski: Tesla’s TSLA stock fell after the company reported lower second-quarter earnings and offered no deliveries guidance for the year. Morningstar maintained its $250 fair value estimate on the stock. So, two questions here, Dave. First, why no fair value change after the disappointing results? And second question, is Tesla stock attractive after it pulled back?
Sekera: The vehicle sales numbers were not new news. Those had already been preannounced. Those were generally in line with our expectations. So, there’s really nothing that changed this past quarter that led us to recalibrate our longer-term assumptions. First-half deliveries were down 13%. In this case, we think that indicates that the current product lineup has pretty much saturated the market as far as the demand there. I think the key to Tesla in the short term and especially to our valuation is going to be the affordable-vehicle launch, which is expected later this year.
To put that into context here, I took a look at our model. We expect that Tesla will ramp up those affordable vehicles to 1 million annually by 2028. Comparatively, in 2028, our model is looking for total vehicles of 2.7 million. So, it’s a very large percentage of what our total expectations in 2028 for vehicle deliveries are going to be. That is definitely key for them to get those out there up and running in the marketplace.
Over the medium term, I would say probably the key to the valuation here is going to be when they’re able to have that full robotaxi launch. Currently, we’re looking at that in 2028. If that gets pushed back any further, that could be negative. But at the same point in time, if Tesla’s able to get that full robotaxi launch out there sooner than expected, that could provide some upside to our stock valuation.
Having said all of that, we don’t think that the stock is attractive here. It is a 2-star-rated stock at a 26% premium, and that’s even with the stock having fallen about 22% year to date.
Dziubinski: Alphabet GOOGL issued good results, but the market really didn’t get too excited by them, and Morningstar maintained its fair value estimate on the stock. Unpack the results for us, Dave, and tell us whether Alphabet still looks like a buy from your perspective.
Sekera: Fundamentally, from that earnings perspective, the company’s still just posting out strong top-line results, strong earnings growth. I mean, it really looks like the company’s still hitting on all cylinders when you look at each of the different divisions. They’re all doing very well, whether that’s Search, Cloud, or YouTube. The stock, it looks like it did try to move up a little bit, but as you mentioned, not really all that much. It is still 4 stars at an 18% discount.
So, to some degree, I’m just wondering if maybe what the market is concerned about is that increase in capex spending to $85 billion from $75 billion. I think in the short term, the market just wants to make sure that extra spending from Google on AI is going to end up earning them a return on that spending.
In the medium term, I think the market is still very concerned about the overhang from the DOJ lawsuits, as well as the market’s still trying to get its arms wrapped around how much of a threat AI could be to their search business.
In our view, I took a quick look at our model over the weekend, and we’re still looking for 15% earnings growth on a compounded annual growth rate for the next three years. Looks like the stock’s only trading at a 19 times PE rate at this point. And when I look at the other Mag Seven stocks, that is the lowest PE relative to those. In our view, it is undervalued both on kind of that absolute basis, being a 4-star-rated stock, as well as that relative value basis compared to the other Mag Seven.
Dziubinski: ServiceNow NOW stock rallied after earnings, and Morningstar raised its fair value estimate a smidge by about 4%. There isn’t really much of a margin of safety on this stock after earnings. Would you say that ServiceNow today is more of a watchlist candidate, or do you still think it’s a buy?
Sekera: Yes, I think it’s a little bit of both. I mean, taking a look at the numbers here, revenue up 22%, operating margin of 30%. Our analysts note that the company ended up beating guidance on pretty much every measure that it gives guidance for. We think generative AI still remains a key driver for our long-term view of this company, and I think that as the market in the second half of this year and probably in 2026 turns its focus away from a lot of the AI hardware companies into trying to identify which companies will end up benefiting over the long term by being able to take artificial intelligence, incorporate that into their own products and services, and be able to drive top-line growth. And we think that ServiceNow will end up being one of those stocks.
It’s only a 3-star-rated stock, but it’s, as you noted, not a lot of margin of safety, trades only by the 8% discount to our fair value, which is $1,050 per share. Of course, I always prefer to buy stocks that are trading at a greater margin of safety, but I wouldn’t argue if someone wanted to start a position here. Personally, I would just take a starter position and then make sure you have that dry powder that if we did have any kind of pullback, whether it’s that stock individually or the market overall, that you could dollar-cost average in to the downside.
And I’d note that it still remains one of the favorite picks of our tech team. They just think it’s one of the better stocks in terms of having the ability to continue to drive top-line growth as well as having some of the higher margins and profitability within the technology sector.
Dziubinski: We had the three big telecoms report last week: Verizon VZ, AT&T T, and T-Mobile TMUS. What did Morningstar make of those results, and are there any opportunities here?
Sekera: Well, let’s just start off with T-Mobile and get that one out of the way. Pretty strong rebound in customer growth. However, they are using promotional activity to bring in those new subscribers, but they were able to do that while keeping margins in line. So, between the higher subscriber growth with margins in line with expectations, that did lead us to bump up our fair value by a couple of percent to $235 per share. But even with that, the stock is still a 3-star-rated stock, so in my view, probably nothing to do there.
AT&T is also a 3-star-rated stock, but at this point, it’s up quite a bit from when we first started recommending that stock back in the summer of 2023. In fact, it’s actually toward the top of that 3-star range. In my view, probably nothing to do with AT&T at this point as well. They have pretty good top-line growth both from their cell phones as well as their fiber broadband. Management maintained their free cash flow guidance. They also noted they’re seeing some more price competition, probably more than I think what we’d like to see, but they did express their own personal hope that competitive activity should dissipate over the rest of this year, which is also the same thing that we heard from Verizon.
Now, Verizon stock is still rated 4 stars, trading at a 19% discount to fair value, and provides that nice, healthy dividend yield of 6.3%. It’s a company we rate with a narrow economic moat and a Medium Uncertainty. So, taking a look at the results, generally I’d say they looked pretty solid. There was a little bit of sub loss, subscriber loss from some churn. But as the largest US wireless carrier, our analysts noted that Verizon really typically faces the most pressure when competitive intensity rises. But in this case, we do hope, or at least expect, competition will moderate, at least in 2026 and thereafter.
If you remember our investment thesis for wireless overall and why we still think Verizon is undervalued is that over time we expect that the wireless carriers will act more like an oligopoly, that they will compete less on price over time, and that will allow their margins to expand. So in this case, taking a look at Verizon, the revenue was up 5%, free cash flow up 4%, and management did increase their 2025 free cash flow guidance slightly. So, that is still a stock that we find very attractive for long-term investors today.
Dziubinski: Well, it’s time for our question of the week. This question came into our inbox from Bruce, who asks, “When one company is bought by another company, what happens to the value of the stockholders’ shares of the company being purchased?”
Sekera: As far as I know, really for the most part, there are only three ways that the deal is going to get completed. Whether it’s going to be an all-cash deal, an all-stock deal, or some sort of combination of cash and stock. So, just kind of running through the three different options, when it’s an all-cash deal, that’s exactly what it sounds like. When the acquisition closes, the acquirer pays cash, and your broker will receive that cash for the amount of shares that you have in your account and will deposit that cash in there and then pull those shares out.
In an all-stock deal, when that deal closes, you’ll receive a pro rata number of shares from the acquiring company into the stock in your account. So again, they’ll just swap the shares out of the company that’s being bought for the number of shares that you should get. Now, just kind of like the way it would work out, let’s just say you get like one-tenth of a share of the acquirer for every share that you have of the company getting acquired. So, if you had, you know, 100 shares of the acquiree and it’s a one-for-10, you’ll get 10 shares of the acquirer.
A combination deal is gonna be something investors will have to pay attention to. In this case, you get some amount of cash and some amount of the acquirer’s stock, depending on what was agreed to during those buyout negotiations. And then sometimes in this case, shareholders might be given an option where you can pick if you want all cash or if you want all stock. And, of course, that’s just going to depend on which you think is a better deal on the day that you have to make that election by. In that case, you would take a look at how much of the acquirer or stock you’re supposed to get, and then you’ll figure out where it’s trading in the market versus getting that cash.
And of course, I’d also recommend taking a look at Morningstar’s rating on the acquirer stock just to see if we think it’s undervalued or overvalued. And I think that will help you decide which way you should go if you do get that optionality.
Dziubinski: And just a reminder to our audience that you can send Dave your questions at themorningfilter@morningstar.com. All right, it’s time for Dave’s picks this week. You’ve brought us three stocks to buy and three stocks to sell after earnings. Let’s start with the sells. The first one being Tesla. Now we already touched on Tesla this morning, so briefly remind us why this one is a sell.
Sekera: It’s really just all about the valuation when I take a look at our model. We also expect a very strong long-term growth for this company. Our model forecasts a 22% compound annual growth rate over the next five years, but even in our DCF model, that stock is trading at a 26% premium to fair value, which puts it in that 2-star territory. Essentially, that just tells me the market is pricing in even greater long-term growth than what we’re currently modeling.
When I look at our long-term earnings expectations, even going all the way out to 2029, the stock is trading at 55 times our 2029 earnings estimate of $5.71 per share. In this case, you really have to believe in Elon if you’re buying the stock here. It’s probably not necessarily a bad bet, but it’s definitely a bet nonetheless.
Dziubinski: Your next stock to sell is Intuitive Surgical ISRG. The stock pulled back after earnings, but it still looks really overvalued, right? It’s a similar story in this case as for Tesla, very strong growth profile.
Sekera: Again, we’re looking for a 22% compound annual growth rate over the next five years. But the stock trades at over a 40% premium to our fair value. It’s a 2-star-rated stock. Just to put that in context, it’s trading at 64 times our 2025 earnings estimate of $7.78 per share.
Dziubinski: And then your final sale this week is Dover DOV. Dover is an industrials conglomerate, and I’m not sure we’ve talked about it on The Morning Filter before. Why is this one a sell?
Sekera: Well, taking a look at our earnings note here, our analyst in his write-up called it a “decent quarter,” but decent is just not necessarily enough to keep that stock up based on where the current valuation is. The stock fell after earnings. That’s not a good sign, especially in such a strong market that we’re in now. It’s a 2-star-rated stock. Even after falling, it’s still trading at an 11% premium, only pays a 1.1% dividend yield. Based on all that, even in a market that’s getting to be overvalued like it is today, I still think better opportunities lie elsewhere.
Dziubinski: All right, turn to your buys this week, Dave. The first is Verizon, which we talked a little bit about already. Run through the key metrics on this one.
Sekera: Verizon’s still rated 4 stars. It trades at a 19% discount to our fair value, has a 6.3% dividend yield. We rate the company with a Medium Uncertainty, and we also rate it with a narrow economic moat, with that narrow economic moat being based on its cost advantages and efficient scale.
Dziubinski: Is the best reason to like Verizon today because it’s the most reasonably priced of the telecoms, or are there other reasons to recommend it?
Sekera: I think it is attractive because it is the most undervalued of the telecoms, but it is just undervalued on an absolute basis in and of itself. I like to see the long-term investment thesis is, to some degree, playing out. Now, in this case, T-Mobile or AT&T have already traded up. You might also benefit from the market looking to swap out of AT&T and T-Mobile into Verizon.
Verizon is a value stock. So, over time, that should benefit from the rotation out of growth, which we think is overvalued, into the value category, which we think is undervalued. And it’s still one of these ones where, with that high of a dividend, I like getting paid to wait while the stock catches up to its long-term intrinsic valuation.
Dziubinski: Your second pick this week is another stock we touched on today, and that’s Northrop Grumman. Give us the bird’s-eye view.
Sekera: Northrup is a 4-star-rated stock, trades at a 10% discount to fair value, 1.6% dividend yield, company we rate with a Medium Uncertainty and a wide economic moat, with those moat sources being intangible assets and switching costs.
Dziubinski: So then, Dave, why do you like Northrop stock today?
Sekera: While my personal hope would be that geopolitical conflict starts to subside and quiet down, hope is not an investment strategy. So for now, still this long-term tailwind from the increase in defense spending here in the US as well as globally. And I also prefer investing in stocks where we’re seeing increases in our fair value. This one really touches both on that long-term tailwind as well as looking at the recent increase in our own fair value. Plus, the market is recognizing the value of this stock as well. So, I would expect to see that short-term momentum in this stock continue as the market is catching on.
Dziubinski: And then your last stock to buy this week is Thermo Fisher Scientific TMO. Give us the highlights.
Sekera: Thermo’s 24% discount to fair value puts it well into 4-star territory. Not much of a dividend yield here. So, for dividend investors, it may not necessarily be one of your favorite picks. It’s only four-tenths of a percent dividend yield, but we rate the stock with a Medium Uncertainty and a wide economic moat. Its wide economic moat sources are based on intangible assets and its switching costs.
Dziubinski: What does Morningstar think the market is missing when it comes to Thermo?
Sekera: Second-quarter results were decent, not necessarily knockout kind of results, but in this case, management did increase their revenue and their profitability guidance slightly. That puts them now in line with our forecast. I think just the combination of decent results for a stock that had been beaten up pretty hard for a while, I think there’s pretty low sentiment. I think that these decent results, in combination with the higher guidance were just enough to be able to help position that stock to move up.
When I look at the chart here, it does look like that stock has bottomed out, and not only bottomed out, but it’s now starting to break through the top end of the trading range that it’s been in since mid-April. So, it appears to me, I think the market is now starting to recognize the value that we’ve seen in that stock for quite a while.
Dziubinski: All right. Well, thank you for your time this morning, Dave. Those who’d like more information about any of the stocks Dave talked about today can visit morningstar.com for more details. We hope you’ll join us next Monday for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.