Plus, our take on Micron’s blockbuster earnings.
n this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss last week’s wild ride for tech stocks and whether further pullbacks are likely. They talk oil prices, inflation, and what the Fed’s next move may be. Tune in to find out which company earnings reports to have on your radar this week and whether Micron is a buy after its blowout earnings report.
Adobe and Lululemon are both having terrible years; Are these stocks value traps or opportunities today? As June comes to an end, they wrap the show with three stocks to sell and three stocks to buy heading into July.
Episode Highlights
The tech sector roller coaster: More plunges ahead?
Expectations for oil prices, inflation, and interest rates
The economic and earnings reports to watch this week
Does Micron MU look like a buy after earnings?
Whether Adobe ADBE is a value trap or Lululemon LULU is a lemon.
Stocks to buy and sell
Read about topics from this episode.
US Stock Market Outlook Update: Harvesting Growth Gains, Restoring Barbell
Read Dave’s complete archive.
Got a question for Dave? Send it to themorningfilter@morningstar.com.
You can follow Dave Sekera on X (@MstarMarkets) and on LinkedIn (Dave Sekera) to subscribe to his weekly newsletter and keep up to date with his latest research, and follow Morningstar on Facebook (MorningstarInc), X (@MorningstarInc), Instagram (MorningstarInc) and LinkedIn (Morningstar).
If you would like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. Subscribe to The Morning Filter to get notified when we post next. We’ll see you on Monday!
Susan Dziubinski: Hello and welcome to The Morning Filter podcast. I’m Susan Dziubinski with Morningstar. Every Monday before market open, I sit down with Morningstar Chief US Market Strategist Dave Sekera to talk about what’s been going on in the market, what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. Now, before we begin, we have a programming note for viewers. We will not be streaming a new episode of The Morning Filter next Monday, July 6. We’re taking some extra time off to celebrate the Fourth of July holiday. Speaking of time off, welcome back, Dave. Glad you decided not to stay in Italy permanently.
David Sekera: Buongiorno, Susan. It’s amazing just how fast 10 days in Italy can go by. Got back from Italy, came over this past weekend to visit my parents for a little bit. Unfortunately, tried getting my car started yesterday. That was no bueno; did not go, so we’re doing the podcast here from Wisconsin today, so we’ll see how it goes. Unfortunately, I also don’t have my reading glasses, so if I’m a little rusty this morning, please forgive me today.
Dziubinski: Well, we’re just glad you’re back, Dave. All right, let’s start by talking about last week’s market activity. Now, we really saw quite a bit of a tech stock pullback last week. Walk through what happened, and again, given where we are from a valuation perspective with tech stocks, would you expect some additional pullback?
Sekera: Yeah, I mean, the tech sector fell just over 5% last week. In fact, if you look at the sector and look at the individual stocks, it’s pretty much all the tech stocks were down across the board. As you’d expect, the biggest detractors to the index were also the largest of the market-cap AI stocks. For example, Nvidia NVDA was down almost 9%, Broadcom, down 11%. Companies like Oracle ORCL, Western Digital WDC, those were down about 20% each. But the thing is, you also have to remember that even after this selloff, the sector is still up 15.25% year to date. I think there are a couple of things going on here. First, I think it’s just natural profit-taking. I mean, we’ve had some huge gains in some of these stocks over a relatively short period of time. To some degree, I think people are just locking in those gains.
I think there’s also some indigestion going on with the SpaceX IPO. I think that was down 17%. I think that took some of the speculative error out of the tech sector. As a reminder, I did do an interview with Nic Owens. He’s Morningstar’s equity analyst who covers SpaceX, talking about what the company does, his valuations, his forecast, why we think that stock, even at this level, is significantly overvalued. If I remember correctly, that was the June 8 episode of The Morning Filter. Lastly, I think the selloff also had a lot to do with international markets. A lot of international markets sold off last week as well. For example, the KOSPI, that was down 7%; that’s the index for the South Korea market. But yet even after that little bit of a pullback, that index is up over 100% in just the past six months.
Over the past year, it’s up 173%. Huge gains there in South Korea. Japan was down a bit as well. That was down about 3%. Again, that’s one where it’s up 37% just over the past six months. That one’s up 73% over the past year. You have to remember, in those markets, and especially Korea, they’re highly leveraged to memory semiconductor stocks. Those are up just ridiculous amounts over the past six months and the past couple of years. Again, I think it’s just some profit-taking in those markets. As far as where does the tech sector go here in the short term, who knows? I mean, it remains to be seen. But as far as valuation goes, it is starting to look more attractive once again. Currently trades at a 13% discount to a composite of our fair values, but not nearly as undervalued as it was at the end of March, when we were recommending the overweight technology stocks.
At that point, it was trading at a 23% discount. If we do see much more of a selloff from here, it becomes more and more of a buying opportunity for the sector. Just highlighting some of those stocks that trade at the greatest discounts by market capitalization that are really going to impact the sector going forward. Nvidia, at this point, is now trading at a 30% discount to fair value. Microsoft, 38% discount, and Broadcom, a whopping 44% discount to fair value.
Dziubinski: Wow. All right. Well, let’s pivot and get caught up with oil and oil prices. Where do they stand this morning?
Sekera: I took a quick look. I mean, oil prices, West Texas Intermediate is trading at about $70 a barrel this morning. Still a little elevated over where oil prices were prior to the beginning of the Iranian conflict. They were at $67 back then. Unfortunately, to me, I still think the situation is clear as mud. The US and Iran are both disagreeing on whatever it was that they said that they agreed to. Over the weekend, there were several different military actions. Last I saw in the news that the truce is supposedly back on again. Again, at least things are better now than they were during the hottest part of the conflict, but in my mind, it’s still not totally resolved at this point, and we haven’t gotten to that new normal.
Dziubinski: Given that, Dave, what are your expectations for oil prices ahead, and what impact do you expect oil to have on inflation?
Sekera: I mean, honestly, it’s just impossible to know what oil is going to do in the very short term. Of course, it’s just going to depend on the status of the military conflict, whether or not oil tankers are crossing the Strait of Hormuz. At this point, it sounds like they are continuing to cross, and that’s what brought prices down. With storage levels being so depleted, I think this renewed supply really just starts to refill the tanks at this point. Of course, the impact of high oil prices is going to be with us for a while. It’s going to keep headline inflation up for at least the next couple of months at this point. And of course, those higher prices also disproportionately negatively impact lower-income households, so I think that’s going to weigh on the economy for the next couple of quarters as well.
Just takes a long time for wage inflation to catch back up to that headline inflation to get purchasing power back where it should be. But again, it’s all about positioning, looking for those individual stocks that are still undervalued at this point. When we look at our longer-term forecast for oil, we haven’t changed anything there. Our midcycle oil price forecast for West Texas is still $60/bbl, $65/bbl for Brent. Longer-term, we still expect oil prices to continue to come down from here, but a lot of those stocks still look attractive to us.
Dziubinski: Now, speaking of inflation, last week’s PCE number was in line with expectations. Anything in that report stand out to you?
Sekera: Nothing really in particular stood out all that much. When you look at the individual contributors, core PCE was up 3.4% on a year-over-year basis; that’s higher than the prior month, when it came in at 3.3%. Of course, for me, it’s really all about headline PCE. That was up 4.1%. That was a pretty big increase from the prior month, when it was at 3.8%. Again, with oil prices coming down, that should let some of the steam out of headline inflation, but it’s just going to take a while for that to really dwindle anywhere near back toward the Fed’s 2% inflation target. I think it’s also going to take a while before that is no longer weighing on the economy over the next couple of quarters.
Dziubinski: You’ve been saying for a while that you thought the Federal Reserve might raise interest rates later this year, and that’s what new Fed Chair Warsh sort of hinted at after the recent Fed meeting. What’s the market pricing in today?
Sekera: As far as the short term, the market’s currently pricing in a 30% probability of an increase to the fed-funds rate as soon as the July meeting. Now that was actually under 10% probability just a month ago, so that is increasing pretty quickly. As far as looking out through the rest of the year, there’s now a 77% probability of at least one hike as of the December meeting, could even be multiple hikes by the end of the year. That was less than the 50% probability just one month ago. The other thing I’d highlight is the 2-year US Treasury; the yield on that has been climbing. It’s now over 4%. As the market prices in that higher probability for interest rate hikes by the Fed, that really impacts the 2-year Treasury. In fact, the yield on the US Treasury right now is currently at the highest it’s been since early 2025.
Dziubinski: All right. Well, let’s move on to talk about the week ahead. We have nonfarm payrolls coming out on Thursday. What do you think, Dave? Are these worth keeping an eye on?
Sekera: Nah, probably not. I mean, we’ve talked about all the problems with payrolls multiple times in the past. Honestly, I’ve kind of stopped focusing on what those payroll numbers are. In my mind, to some degree, they’re just not meaningful. I mean, when you look at what the revisions are in those numbers, both on a month-to-month basis as well as the annual basis when they revise them, they’re just so far off from what those original prints are that I don’t think it really helps you gauge what’s going on in the labor market. So, no, not really going to pay attention to it.
Dziubinski: All right. On the earnings front, they’ve kind of slowed to a trickle, but we have a couple of notable names that are going to report this week. The first is Nike NKE. Morningstar assigns a $97 fair value to the stock and the stock is having—it seems like we always say this—the stock’s having another horrible year. It’s down something like 75% from its all- time high. Dave, is there any hope for Nike? Any chance this could be the bottom finally?
Sekera: I don’t know. I mean, we’ll see. I mean, yes, the stock is significantly undervalued. It is a 5-star-rated stock, trades over a 50% discount to our fair value, has a 4% dividend yield, so that looks pretty attractive as well. Our analytical team still has faith in the company overall. We’ve continued to rate it with that wide economic moat, meaning we think the company has long-term durable competitive advantages. But at this point, I just haven’t seen or heard anything that’s going to be any different from the comments we’ve made when we’ve talked about this stock, even from the last earnings report. I pulled up our model; our earnings forecast for this year is $1.51 per share. With where the stock is trading, that means it’s trading at 27 times this year’s projected earnings. In my mind, that’s just not cheap, especially for a company whose top line has been contracting since 2023.
Of course, the real question here gets to when can Nike start getting back toward more historically normalized types of operating results? If you look at the past couple of years, their earnings in 2023 and 2024 were $3.25 and $3.75 per share, respectively. When they can start moving back to those kind of earnings and levels, then yes, the stock is very undervalued. It trades at only 11.5 times the average earnings for those years. Here, fundamentally, in the short term, I think they’re probably still going to have a negative impact from the tariffs. From what I can see in here, it sounds like they’re still losing some market share to other brands like On Running and Hoka. Product development, our analysts note as being somewhat lackluster here in the short term. Overall, still struggling with China.
I think that, as much as the consumer here in the US might also be under a lot of pressure, I think the consumer in China is struggling quite a bit as well. If we can get any kind of indication that we’re hitting the bottom, that Nike’s starting to right the ship at this point, I think the stock has a lot of room of upside, but for now, until I see that really starting to come through the numbers, I just don’t want to get caught up in this downdraft.
Dziubinski: All right. Well, we have a former pick of yours, Constellation Brands, reporting this week, and we haven’t really talked about Constellation Brands STZ in a hot minute. There’s been some change in Morningstar’s thesis when it comes to the company and Morningstar’s fair value estimate on the stock. Walk us through all that.
Sekera: Yeah, I mean, there’s a lot that’s changed there. The analyst who was covering Constellation Brands is no longer with Morningstar, so it is under new analytical coverage at this point in time. What happened here is after the last earnings report, the new analyst took a deep dive into what’s going on both at the company individually as well as with the sector overall. And he did take the fair value down, somewhat substantially down, to $170 per share from $220. Now, we did recommend this at a very wide margin of safety from our prior fair value. At this point, even after that fair value cut, it is still a 4-star-rated stock, but now it’s only at about a 14% discount. Again, with the company, the crux of the matter really is that alcohol consumption in the US is continuing to recede, and the company is acknowledging that in their results; they cut their fiscal 2027 guidance.
Essentially, on the top line, they’re looking for essentially flat results overall. If they’re putting through some price increases but their top line is flat, that means that they’re still looking for a decrease in volumes over the course of the next year or so. Their operating margin, they cut that to 32% from 33%; you get that negative leverage with the top line being stagnant, and they also withdrew their 2028 guidance. Again, I think the company’s also having a difficult time really trying to understand how much more consumption can fall before it starts to bottom out. Longer term, we ended up reducing some of our estimates. We reduced our long-term sales estimates to 3% from 4%. And even then, we still think it’s going to take several more years here in the short term, but before we get to that new steady state going forward. We’ve also reduced our midcycle operating margin to 31% from 34%. I’d say it’s the combination of bringing that long-term expectation down for the top line with a lower margin, which has resulted in that fair value decrease.
Dziubinski: Well, let’s pivot over to some new research from Morningstar. Micron reported pretty outstanding results last week. What’s Morningstar’s take?
Sekera: Yeah, I mean, the results that they’re posting are just crazy when you look at these numbers. I mean, their revenue was up almost 350% on a year-over-year basis. Their gross margins expanded. They were coming in at 85%. I mean, comparatively, that was only 39% a year ago. Again, it’s one of these situations where there is just so much demand and not enough supply. They can charge whatever price they want to charge, and people are paying for it. It appears that’s what we’re going to see here going forward for some period of time. The growth guidance that they gave implies more growth, more margin expansion. And overall, the longer-term outlook, though, is still the same. What happens here is we’re still trying to figure out just how much more growth can increase here for the next second half of this year and into 2027, but we still think that by 2028, new capacity is going to come online. As that new supply comes online, that’s going to put pressure on pricing, put pressure on margins, so those will come down in 2028 and thereafter.
In the meantime, we did increase our 2027 results pretty substantially and brought up our expectations for the second half of this year as well. That led to a pretty substantial increase in our fair value. Even after we boosted our fair value, it still trades at a 33% premium. It’s enough to put it in 2-star territory. As far as the stock price goes, this is one where there’s so much momentum. We’re still looking for growth in the results over the next couple of quarters. That could still push the stock price even higher and further above that new fair value increase, but yet this is one I’m going to caution investors. Once this stock cracks for whatever reason, this is one that, once it starts to fall, I think it gaps down pretty quickly.
Dziubinski: All right. McCormick MKC, which is a former pick of yours, reported last week. Dave, unpack the takeaways on this one and tell us whether the stock looks attractive.
Sekera: We had a nice little pop in the stock after earnings. I think it was up over 5%. Earnings came in. I mean, they weren’t necessarily stellar, but I think that they were just pretty darn good for what you expect in the food sector today. Organic sales up 2%, gross margin expanded by 270 basis points. I think for McCormick, and one of the reasons I think that we like this stock overall, is the way that their portfolio is positioned has really been able to help them out. Again, they’re positioned both across individual retail consumer as well as institutional markets. They have a great lineup of product, their portfolio of products. I think that combination has really been able to help support, with what’s going on in the food market today. Essentially, the stronger areas were more than able to offset some of the weaker areas that we’ve seen.
Even after that 5% pop, the stock’s still at a 21% discount, which puts it well into 4-star territory. We rate the company with a medium uncertainty. We assign it a wide economic moat, got that almost 4% dividend yield here. Now, I’ll note this is not necessarily one of the cheapest of the food names out there. There are others that are more undervalued, but again, this is one, even when I look at some of those more undervalued food names, I think we find attractive because I think we also have some of the most confidence in our forecast and in the company here.
Dziubinski: Now, Morningstar held its fair value estimate on Adobe ADBE at $380 after earnings. Stock on the surface looks really undervalued according to Morningstar. But again, here’s another stock kind of like Nike that’s just having a horrible year and is also down more than 70% from its all- time high. Dave, what’s your take on Adobe today? Is this a value opportunity or a value trap?
Sekera: All right. Well, that’s kind of a loaded question there.
Dziubinski: Yes.
Sekera: You have to remember, so the software industry overall, I mean, they’re all getting hit. The market is still very concerned about how artificial intelligence is going to impact the software companies, how much AI is going to disrupt or maybe even totally displace their business models. I’d say when I look at the software companies, Adobe is one of the ones that I think the market has the greatest amount of concern about, and so that’s why we’ve seen that one perform the way that it has. Now, fundamentally, Adobe and pretty much all of the software companies are still doing very well here in the short term. Revenue came in better than expected. It was up almost 13%. Operating margin came in within the guidance levels. I mean, that’s at 44.5%, so very strong margins. Annual outlook. I mean, generally, there were some offsets here, but overall, that came in a little bit higher, so a little bit of an increase in the short term for guidance.
I think the problem with this one, too, is that it’s not just the AI. What happened is that Adobe also announced that the CFO was leaving. I think the CFO is going to Marvell. In this case, the timing for that CFO leaving is just particularly bad for the company. The company’s in the process right now of also searching for a new CEO. The CEO had announced, I think, a couple of months ago that he was going to resign. The company’s looking to fill his seat as well. Unfortunately, during this whole AI transformation, the company’s going to be replacing both the CEO and the CFO. I think that’s going to be something that really weighs on this stock for a while. As far as is this stock at value trap or not? Well, honestly, I mean, it really is going to depend on how AI plays out in the next, probably, three to five years.
Our investment thesis overall still remains that we think companies like Adobe are going to be able to use artificial intelligence to add more economic value to their products, so we’re not looking for these companies to be totally disruptive or have their product really get competed away. In that case, if we’re right, this company is significantly undervalued. We’re forecasting a five-year compound annual growth rate for earnings of 13%. Stock only trades at a little over 8 times our 2026 earnings estimate. Of course, if we’re wrong and AI really does displace Adobe’s current product lineup, then yes. Then in that case, you will see those earnings deteriorate over time, and yes, it would be a value trap even at that low of a valuation.
Dziubinski: All right. Well, it is time for our question of the week. As a reminder, if you have a question for Dave, send it to us at our email address, which is themorningfilter@morningstar.com. This week’s question comes from an unnamed “Lulu” stockholder. Basically, the viewer would like an update on your take on Lululemon LULU. Dave and I intentionally held this question until after Lulu reported earnings. Maybe start with that, Dave. How did earnings look?
Sekera: I would say the results were mixed at best. If you look at revenue, it came in up 4%, and most of that really came from China. China is 19% of their sales, and that was up 30%, so doing very well there. In fact, they’re doing very well in their other international markets as well. That’s a 13% increase in revenue, and that’s about 15% of their total revenue overall. The problem is that they had a 3% decline in the Americas. That is, of course, their largest geographic area; that’s 66% of revenue overall. I think the market is really focused on that decline and waiting to see them be able to halt that decline and start moving back up again. Unfortunately, margins also got hit pretty hard. The operating margin contracted by 730 basis points. Again, margins really getting hit.
Unfortunately, the company also noted that results were continuing to get weaker over the course of this past quarter and are weak coming into this quarter as well. That led them to lowering their guidance for 2026. As far as sales growth, they’re now looking for that to be flat to down 1%. Their prior guidance was looking for a 2% to 4% increase, and they brought their earnings per share down to a range of $10.95 to $11.15 per share. Prior to the cut, their earnings guidance was $12.10 to $12.30 per share. A pretty big cut in that earnings guidance. As far as the valuation goes, I mean, that trades at about 10.5 times the midpoint of that newly lowered guidance. Certainly looks like the market was very unhappy with the results and unhappy with what’s going on with the company overall.
Dziubinski: All right. Then let’s look at the bigger picture, Dave. What’s really going on with Lululemon now? I think the company, since we last talked about it, named a new CEO, right?
Sekera: Yeah, and the market is really not enamored with the new CEO that they picked. Now, she is coming from Nike, but Nike in itself hasn’t been doing all that great as well. At Nike, she most recently served as the president of the consumer product and brand. I think the market right now is really looking at her as being much more of a product person. What I mean by that is if you think about Nike and how they market themselves, they heavily rely on athlete endorsements. It’s a brand where you’re really trying to convey aspirational competitive success. So, really a very competitive type of product, which to some degree is the opposite of how you market Lululemon. The brand image there, when you think about it, is much more about lifestyle, much more about wellness. I think in this case, she’s going to have her work cut out for her, really trying to make sure that she understands how to be able to market Lululemon and what those products mean to their customers as compared with how you traditionally try to market athletic shoes and running shoes. I think she’s got her work cut out for her, and she’s definitely going to have to do a lot to be able to convey to the marketplace that she really understands Lululemon.
Dziubinski: Now, Lululemon is trading way below Morningstar’s $280 fair value estimate. Why is Morningstar’s take so different from the market, and do you think there’s an opportunity to put new money to work with Lululemon?
Sekera: Short answer is yes; it still looks like there’s a pretty good opportunity to put new money into this name. However, just kind of like we’ve always talked about before, you know me, I always like to put in a partial position to start, and then that way you have the dry powder, the dollar-cost average going forward. When I look at our projections here, I’m just going to kind of run through what’s in our model today and what our fair value is based on. We’re looking for stagnant revenue this year, maybe up or down like a percent or two, but then we’re looking for a rebound by 2027, getting back to a 4.4% growth rate and then looking essentially for a 6.0% annualized growth rate thereafter. So much more kind of that normal historical kind of growth rate that they’ve been able to post in the past.
Now, as far as margins go, we’re looking for contraction this year. We’re looking for the operating margin to contract the 16.1% that’s down from 19.9% last year. When I look at the longer term for this company, they’ve averaged about 21% over the past decade. Even looking forward, we’re only bringing that margin up to 16.7% in 2027, up to 19.7% in 2028, and then getting back to 20.8%, so that normalized margin, by our out years. Now, as far as earnings go, after the decline this year, we’re looking for that to rebound by 13% next year, 32% in 2028, and 18% in 2029, as the operating margin expansion leverage is able to reduce those earnings over the next couple years. If our analyst is correct with his assumptions and his projections, I mean the company’s only trading at just over 9 times his 2027 earnings estimate.
What that tells me is the market is still pricing in continued earnings erosion from where we are here today. This is one of those stories where, if the company can just halt the bleeding and just even keep earnings where they are today, it looks pretty attractive just on kind of that stagnant basis. If the company can turn things around and start growing again, this one has a lot of upside to our analyst’s fair value estimate.
Dziubinski: All right. Well, it is time for the picks portion of our program. Since we’re about to close the books on June, Dave has brought us three stocks to buy for July and three stocks to sell. We’re going to start with the buys this week, Dave. First buy is Alphabet GOOGL. Now, we’ve talked about the stock quite a bit over the past year or two, but briefly give us some of the key metrics.
Sekera: The stock’s trading at a 22% discount. It’s rated 4 stars. We assigned the company a medium uncertainty. We rate it with a wide economic moat, and in fact, I’d say it’s probably one of the widest economic moats of our coverage. In fact, it’s one of only two companies that we use four of the five moat sources in order to get to that wide-moat rating.
Dziubinski: Now, Alphabet had been on quite a run but pulled back recently. Why the pullback, and why do you like it?
Sekera: Yeah, so month to date, it is down 11%, and it’s down enough that it is back into that 4-star territory. I think there are a number of things going on. First of all, here in the short term, there was news out there that two of the senior artificial intelligence researchers who were at the company left to join competitors. It’s a hit to the company, but overall our analyst doesn’t think that that in and of itself is really all that meaningful to their AI efforts. I’d say probably more broadly what we’ve seen, especially in the technology sector—yes, Alphabet is technically in the communication sector, but I think more people still look at it as a tech stock. The stocks of what they call receivers have been heading higher. What we’ve seen over the past month is that those companies are the ones that sell AI equipment, so those that are ones getting actually paid, those stocks continue to keep ramping up higher, but the stocks of the payers, those companies that are paying, or buying that AI equipment, those purchasing the artificial intelligence semiconductors and equipment, the hyperscalers, have all been selling off.
To some degree, the market is starting to price in that maybe the hyperscalers are getting out a little bit too far over their skis, that they’re spending so much money that they may not necessarily get enough of an economic value out of it over time to make that spending worthwhile. Now, as far as Alphabet goes, it is one of the few tech companies that we see as really having what we call that full integrated AI stack. I mean, it’s involved in the energy sector. It’s involved in chips with its TPUs. It’s involved in the AI infrastructure with Google Cloud. I mean, they’ve got their own AI models. With Gemini, they’ve got the ability to monetize AI in their apps with search and YouTube and so forth. Overall, no matter how AI ends up playing out over the next couple of years, we think that they’re positioned to be able to take advantage of it along these different multiple business lines and different products.
In my mind, I still think it’s a core stock type of holding. Trades at 23 times earnings, not necessarily cheap, but we’re looking at 18% five-year compound annual growth rate on the top line, looking at 20% earnings compound growth rate over the next five years. Even at that 23 times multiple in our DCF model, the company still looks very attractive here.
Dziubinski: All right. Your second stock to buy is a name I don’t think has ever been a pick before, and that’s Palantir PLTR. Give us the highlights.
Sekera: Well, I mean, not only was this never a pick, but in the past, this is one you and I have talked about how overvalued it had been and actually had been a sell just not even that long ago.
At this point, the stock is down 28% month to date. I think it’s down about 45% from its November 2025 high. At this point, it’s fallen enough that it’s now pushed it into 4-star territory. Trades at a 26% discount. Again, this is one where I think you need to have a very good risk appetite if you’re going to get involved. We rate the company with a very high uncertainty. This is one where the value of the stock really is based on all of the growth. Having said that, we do award the company a narrow economic moat. We do see the company as having long-term, durable, competitive advantages for at least the next 10 years.
Dziubinski: Dave, why has the stock been falling, and how does Morningstar’s opinion on Palantir differ from that in the market?
Sekera: Again, I think it just all comes down to it’s a matter of what kind of valuation you put on there and what your projections are for the next five years. Just to put it in context, in our model, we have a 45% compound annual growth rate for revenue over the next five years. Putting that into context, their 2026 revenue was $7.8 billion for fiscal 2027; we’ll project that to go all the way up to $11.4 billion. If you go to the out years of our explicit forecast period by 2030, that’s $28.8 billion. Essentially 2026, almost $8 billion going up to almost $29 billion by 2030. Now, as far as earnings go, very similar compound annual growth rate, looking for 41% over the next five years. Again, to put that in context, $1.29 in 2026, growing all the way up to $3.84 by 2030.
Just tremendous growth over the next five years, but it doesn’t stop there. When I look at some of our outer years after that, we’re still projecting an average growth rate of about 25% for the next five years thereafter. It’s one of these ones where the growth rate is so strong for so long, you can’t really use, I think, traditional valuation metrics like price to earnings, price to sales, and things like that. This is one of those cases where I think you really have to have that discounted cash flow model. That’s the only way you can really capture and come up with what you think the present value of that lifetime of future free cash flow is going to be. In this case, this is one where it’s looking attractive, but again, you really got to believe the story to get involved in this stock.
Dziubinski: All right. Your next stock to buy requires a good stomach there, Dave. It’s Salesforce CRM. Run through some of the key numbers on this one.
Sekera: Yeah. Again, it’s hard to talk about this one because, I mean, admittedly, we’ve been long and wrong about this one for quite a while, but for our tech team, it’s still one of their best ideas. As far as the software sector goes, it’s still the one I think that they have the most confidence in their long-term outlook and how this company is going to work out over time, and utilize artificial intelligence, and how that’s going to change their business model, and they’re going to change with it. At this point, 5-star-rated stock, trades at over 40% discount to fair value, high uncertainty, narrow economic moat. Again, probably the poster child of starting with a relatively small position and having that dry powder just to be able to dollar-cost average into it on the way down. At the same point in time, the stock has had a couple of instances where you’ve gotten a pretty decent pop, where if you did dollar-cost average down, you’ve had some instances to be able to take some profit along the way as well.
Again, with as much as this one has dropped just over the past month, you’re kind of getting that opportunity to try and buy some stock here on the cheap.
Dziubinski: Yeah. And Salesforce really has gone through the wringer along, of course, with other software stocks due to those concerns around AI disruption. Delve a little bit more into why this one is a pick, still remains a top pick for our analysts and for you.
Sekera: Yeah. I mean, so very poor performance month-to-date, down at 17%. It’s down 56% overall from its December 2024 high. So with as much as it fell this month, that was enough now to push it into 5-star territory from 4-star territory. Overall, I mean, still no change in our long-term investment thesis, really no change in our forecasts among the software stocks. This is the one that our team has the most confidence in. Fundamentally, the company is still doing very well here in the short term. Fundamentals look very strong. If you look at some of the AI portions of their business, like Agentforce and Data 360, their annual recurring revenue is still up over 200% year over year. Last quarter, they noted that revenue was up 12%. Their fiscal 2027 guidance was increased slightly. As far as valuation metrics go, I mean, this company trades at 11.4 times our earnings estimate for this year.
Again, that current price is telling me in that current P/E valuation that the market is still looking for a very significant contraction over time. It’s just one of these ones where, if they can just keep revenue and earnings not only growing, but I mean, even if revenue and earnings were to somewhat stagnate here at that 11.5 times P/E, I still think the stock looks undervalued here. This is one where—if you think the same kind of lines that we do, that companies will use AI to increase the economic value of their products and that they’ll continue to keep their customers—a lot of these software stocks look very undervalued. If you’ve got the opposite opinion—you think AI is going to disrupt or displace a lot of these software companies—then yes, they probably still have further to fall.
Dziubinski: All right. Those are the buys for July. Let’s get to the sells. The first stock to sell for July is Applied Materials AMAT. Morningstar’s fair value estimate on the stock is $470. So, why sell, Dave?
Sekera: This is just a matter of this one has run so far so fast. I think it’s just a good opportunity to take some profits. It’s up almost 40% month to date. Over the past 52 weeks, it’s up over 240%. It’s enough that it’s now moved into 2-star territory from 3-star territory. Trades at a 33% premium. We rate the company with a high uncertainty and a wide economic moat. Again, it’s not like we’re not projecting this company to just have incredible growth over the next five years. I mean, the company did just over $28 billion in revenue in 2025. We’re modeling that by 2030, that’s going to be over $60 billion, so more than double earnings per share, even more leverage than that. I mean, the company did $9.40 in 2025 in EPS. We’re projecting that to go up to $27 in 2030. Again, when you look at the valuation here, even with all of that growth modeled into our discounted cash flow model, the stock is still trading at too high a premium in our view.
This is one where, when things start to slow down and you kind of start reducing that P/E ratio, which is over 50 times today, this is one I’m also concerned about has that high probability of gapping down to the downside.
Dziubinski: All right. Your next stock to sell is another tech stock. It’s Teradyne TER. Morningstar assigns a $275 fair value estimate on the stock. Why is this one to pull back on?
Sekera: I mean, it’s a similar story. I mean, it’s up 17% month to date. It’s up 384% just over the past 52 weeks. Again, it’s moved up so far so fast. It’s now in 1-star territory after being in 2-star territory. Stock’s at almost a 60% premium to our fair value. Again, we’re modeling huge growth here over the next five years. Revenue in this case was a little over $3 billion in 2025. We’re looking for that to increase to $7.6 billion in 2030. Earnings per share in 2025, almost $4 a share. We’re more than quadrupling that by 2030, getting up to $16.30 per share. The company’s currently trading it over at 62 times this year’s earnings estimate. This is one where, at the current valuation that the marketplaces on it, they’re valuing it at even higher growth rates than what we’ve got in our model today.
Dziubinski: All right. And then your final stock to sell is not a tech stock. It is not. It is American Airlines AAL. Morningstar pegs the stock at a $10 fair value, and it’s trading well above that. How does Morningstar’s thesis differ from that of the market when it comes to American Airlines?
Sekera: Yeah, this stock is trading at a huge premium to our fair value. I mean, almost 80%. Now, we rate the company with a very high uncertainty, no economic moat. When you think about it, it’s all due to just being in the airline industry overall that we just don’t think allows companies to really be able to position themselves with an economic moat overall. Now, it’s interesting if you look at the chart here over the past couple of years. I mean, initially, the stock and all the airline stocks got hit pretty hard after the conflict with Iran started, but it bottomed out at the end of March. Since then, the stock has been recovering. This month, it’s up 22%; stock’s up over 60% over the past 52 weeks. I think a lot of the pop that we got here in the short term is following the agreement with Iran; the market is pricing in that they’re going to be able to make windfall profits here in the short term.
Of course, once oil prices started going up, the airlines all ratcheted their tickets up higher as well to account for those high oil prices, and now the oil has subsided. They’re going to be able to keep all that additional margin as oil prices and jet fuel are going to be lower by the time those flights actually take off. But again, that’s all just really short-term machinations. It doesn’t change that long-term business model overall. Airlines have definitely seen a benefit from an increase in desire to travel over the past couple of years. Initially, it was just kind of that pent-up demand after the pandemic, but a lot of that demand has really continued, and it’s just economics 101. I think to some degree, people still value experiences more than stuff, but we still see travel remaining higher in the short term, and there’s just not enough supply out there.
Of course, without enough new supply coming online, that increase in demand has led to better pricing and margins. Overall, we think airlines are just a no-moat business. We expect that over the next couple of years, you’ll see more and more supply for airlines and routes and so forth to come online. And as those operating conditions change, you’ll end up having less profitability, and that’s just going to erode the margins over time and bring those valuations down.
Dziubinski: Well, thank you for your time, Dave. Viewers and listeners 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 again in two weeks on Monday, July 13, for our next episode of The Morning Filter podcast. We’ll be here at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe, and have a great Fourth of July, everyone.