Plus, what to watch for in the earnings reports from Alphabet, Amazon, Apple, Microsoft and Meta this week.
On this week’s episode of The Morning Filter, Dave Sekera and Susan Dziubinski discuss expectations for this week’s CPI report and what it could mean for the Fed rate decision at the end of October. They cover what to listen for in key earnings reports from Tesla TSLA and Netflix NFLX this week, plus a handful of other companies they’ll be watching. They share key takeaways from big bank earnings, whether regional banks could face a bad loan crisis, and if go-to bank pick US Bancorp USB is still a buy after earnings.
They discuss whether Taiwan Semiconductor Manufacturing TSM, ASML ASML, and Salesforce CRM look attractive today after being in the news last week and if insurance stocks are compelling after their post-earnings pullbacks. They wrap up with a handful of stocks to buy before the market rally stalls.
Episode Highlights
Fed Rate Cut This Week? You Bet!
Watching Earnings from AI Titans
New Research: TSLA, NFLX, INTC, More
Stocks to Buy: Halloween Edition
Read about topics from this episode.
Q4 2025 Stock Market Outlook: No Margin for Error
Got a question for Dave? Send it to themorningfilter@morningstar.com.
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Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday before 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. Now we have a lot of ground to cover on the podcast this week, including the Fed meeting, upcoming earnings reports from several AI titans, a new fair value estimate on Tesla, and, of course, Dave’s stock picks. So let’s get started, Dave. So have you brought back the Halloween mug this week?
David Sekera: Heck, yeah, I have. Here we go.
Dzuibinski: There it is.
Dziubinski: Looking forward to it. Hope everyone has a happy Halloween. Now, the stock market finished last week on a pretty high note, even though the government shutdown continues, and there were still plenty of questions around tariffs left. So what do you think keeps driving stocks?
Sekera: Well, for right now, the market still just doesn’t really seem to care about the government shutdown. Now, granted, the longer it goes on, it will at some point have an impact on the economy. But for now, we’re just not seeing that significant impact just yet. So I think it’s just a matter of, there’s no change to our forecast. I mean, yes, we still think the economy is slowing sequentially, but there’s not going to be any recession. So it’s going to get resolved in some way, shape, or form. But for now, no one really cares about it. Everyone is paying attention to the tariffs, though, and that seems to be going pretty well for now.
Just looking at the headlines this morning, it seems like, over the weekend, there’s some reports out there that the negotiators between US and China have had some pretty constructive talks. So going into the summit later this week, we’re on a positive trend right now.
Took a quick look. It looks like futures are up, almost up 1% this morning. So I think there’s a lot of positive sentiment, especially going into an earnings week where we’re going to see results from at least five of the biggest of the mega-cap stocks, most of those being tied to AI, which also has a pretty good tailwinds behind it. So a lot of positive vibes coming into the market this week.
Dziubinski: Now, Dave, we also had last week’s inflation number come in better than expected. So, given that, what’s the market pricing in as far as the probability of a rate cut at this week’s Fed meeting? 100%, right?
Sekera: Well, it’s effectively 100%. So it’s a 98% probability, based on the market right now, that they’re going to cut this week. They’ll take the Fed-funds rate to 3.75% to 4.0%. And there’s also a 96% probability of another cut coming at the December meeting. That’d take the Fed-funds rate down to 3.5% to 3.75%. And there’s still another 50% probability after that. So even in January, essentially a coin flip for that third cut coming, that would then take the Fed-funds rate down to 3.25% to 3.50%.
Dziubinski: Talk a little bit about Morningstar’s expectations for interest rates, a little bit longer term.
Sekera: So, Morningstar’s chief US economist is looking for the Fed-funds rate to drop to 3% by the end of 2026 and to 2.75% in 2027. So that should bring short-term rates down pretty significantly over the course of the next year and a half to next two years. Now, in the longer end of the curve, every time we’ve talked about fixed income, we’ve been continually recommending investors to extend duration, move further out the curve into those longer-term bonds. We are looking for longer-term rates still to come down even from here. So our current forecast right now for the 10-year US Treasury is to average 3.9% in 2026. And fall further into 2027, and average 3.5%.
And in fact, I would say, when I’m looking at the long-term rates, we’re already well on our way there, Looking at just how much they’ve come down over the course of this year. In fact, it looks like the 10-year just broke through that, 4% range into a three handle this past week.
Dziubinski: And as you mentioned, it’s a big week on the earnings front this week, with many of AI’s heaviest hitters reporting. So let’s start with a stock that’s been a pick of yours. And that’s Microsoft, which is ticker MSFT. So what are you going to want to hear about from management?
Sekera: We’re going to listen to the fundamentals on how all the other different business lines are doing, But I think that really takes a backseat, so long as those are within expectations. Everyone wants to hear about what’s going on with artificial intelligence. Specifically, we’re going to look at revenue in the Azure division—that’s their cloud hosting business—and looking to see how much is growth accelerating. Now, it had been capacity-constrained in the first half of the year. Our analyst has noted several times that he expects that that capex spending in the first half of the year should start showing up here in the second half of the year. We also want to hear what’s going on with their capex plans going forward. Are they going to be holding them steady at these levels, or are they increasing investing even further and more than they already have over the past 12 to 18 months?
I think the market probably wants to hear them saying that they’re going to be spending even more money on capex for artificial intelligence. Maybe it stays steady here. I just would note that it better not be decreasing. If you start seeing any of these mega-cap companies decreasing their capex spending on AI, I would say, “Look out below,” because the market is really paying up higher valuations right now for that additional spending. And then, lastly, AI usage. I mean, just how much is demand for that computer power increasing? How much more demand do we see coming online over the next couple of years in order to be able to absorb all of the new capacity that’s being planned? So I think it’s really just all still about AI.
Dziubinski: Is Microsoft still a pick of yours heading in earnings?
Sekera: It is. It’s still a 4-star-rated stock. I mean, at this point, it’s only a 13% discount to fair value. But one of the few mega-cap stocks that is trading at a discount to fair value today. And I’m just looking at that growth and really looking for accelerated growth in the Azure division to help move that stock up toward our fair value. And purely just in my own opinion, with everything that’s going on out there, I think there’s probably A higher probability of an increase to our fair value than I would expect, any potential of a decrease to our fair value.
Dziubinski: All right, Alphabet, which is ticker GOOGL, also reports this week. What are you going to be listening for here?
Sekera: Specifically, whether or not there’s any additional details that they can provide about the deal that they just announced with Anthropic. So Anthropic announced a significant expansion of its use of Alphabet’s AI accelerators. It’s a deal our analyst team noted is probably worth tens of billions of dollars. The deal also includes the use of Google Cloud services, with up to more than one gigawatt of power coming online in 2026. Other than that, fundamentally, we’ll be listening for updates on engagement from the use of Gemini to support its AI overviews.
Elsewhere, we’re expecting search sales to be pretty strong. We’re looking for cloud revenue to accelerate sequentially. Similarly looking for that, with Microsoft’s cloud revenue accelerating as well. And then, lastly, what updates are they going to provide on capex plans? And if they have any additional detail on the timing and ability to be able to monetize all this capex that they’re spending.
Dziubinski: Same question here, Dave, would you say Alphabet is a buy ahead of earnings?
Sekera: Well, I have to note that following the announcement of that deal with Anthropic, we did increase our fair value up to $300 a share from 237. And that was really just based on this faster cloud growth and the improved long-term profitability that this brings to the company. So, just to put that into perspective, that increase takes the valuation up by $840 billion of market capitalization. When you think about it, I mean, when you look at these mega-cap companies, these increases in valuations are just huge. I mean, that’s worth eight $100 billion companies. Suffice to say, after increasing our fair value by 27%, the stock is trading at a 13% discount to fair value. So that does put it in a 4-star range, so it does look attractive to us.
Dziubinski: All right. Well, Meta Platforms, excuse me, ticker META, was in the news last week after announcing it was laying off about 600 employees from its AI Superintelligence research lab. So, safe to say that AI spending is something you’re going to want to hear about more when Meta reports, right?
Sekera: Yeah, in this case, it’s actually a little bit more than just AI. So from a fundamental point of view, we want to listen for just how much improvement there is with their AI-driven ad revenue. So, specifically, the AI portion of their ad revenue. I know we’re expecting a double-digit growth there, but I think the biggest focus for them will be on their capex commentary for 2026 and beyond. So it is expected to grow. But by how much is going to be the question? So, unlike some of the other companies out there, like Amazon, Microsoft, and Alphabet that have their own cloud divisions, Meta doesn’t have its own cloud division to be able to directly monetize its AI investments. And I think investors, to some degree, are starting to become increasingly concerned about the firm’s AI strategy. So I think at least we would like to hear a little bit more about what that strategy is over the next, call it, 12 to 24 months. So
Dziubinski: How does Meta look from a valuation perspective, heading into earnings?
Sekera: I would say not particularly attractive. It is at a discount at this point, and it is kind of in the bottom of the 3-star range, so kind of between 3 and 4 stars but still rated 3 stars right now.
Dziubinski: Well, last Monday’s AWS outage not only delayed our podcast, but it disrupted a whole host of businesses. So do you think the outage is going to be addressed when Amazon reports earnings this week? And then, besides that, what are you going to want to hear about?
Sekera: Yeah, I mean, I think they have to. It was such a big deal. I think investors are going to want more detail on exactly what happened and why. But even more importantly than that, what are they doing to make sure that this doesn’t happen again? Either way, I think Amazon needs to provide that clarity to their customers. I think this outage could probably have a lot of people like rethinking what they’re doing for their backup providers to AWS right now. Just so that way, when you do have any potential outage like this in the future that they have the ability to move on to other platforms that are still up and running.
Otherwise, any commentary they might have on the impact of tariffs for their business, I want to see if the ongoing efficiency efforts that they have are going to result in some operating margin expansion. And then lastly, we’re getting into the holidays, so I’m going to be curious to hear what their outlook for consumer spending this holiday season is going to be.
Dziubinski: All right, and the ticker on Amazon is, of course, AMZN. Now, this one’s been a pick of yours in the past, so what do you think of it heading into earnings?
Sekera: So this is another one that’s right on that border between 3 and 4 stars. So depending on the day, if we have that stock move up or down a percent, it’s going to change. It’s right now listed as 4 stars, but I would say it’s really not particularly undervalued at this point. I mean, in my opinion, I think there’s probably more upside potential than downside risk. But not trading at enough of a margin of safety that we’d necessarily be looking to put new money into that stock today.
Dziubinski: All right. Well, Apple stock, ticker AAPL, hit an all-time high last week after some new research came out that initial iPhone 17 sales were outpacing initial iPhone 16 sales. So no doubt management’s going to talk about this when Apple reports this week. What else are you going to be listening for?
Sekera: So I think you’re right. And so I think the first thing will be the focus on the fundamentals. Like the iPhone sales and the revenue and what’s going on with the services segment, looking for additional increases in revenue there. We’ll want to hear what their thoughts are on the holiday sales this year, what consumer spending patterns look like for phones and the high-end phones in particular.
But in my opinion, I think Apple still really needs to be able to better communicate to investors its AI strategy. I think when I’m talking to people about Apple, there’s still a lot of investor concerns. A couple of things that people highlight would be just their overreliance on third-party AI providers, having pretty limited cloud capacity on their own, some of the delays in the rollout for some of the AI products that they’ve had in the past. So overall, when I think about Apple, I think their AI use case has been a little bit underwhelming compared to what people had been expecting. And there’s certainly some concern out there that Apple is falling behind.
Dziubinski: Now, how far above our fair value estimates is Apple trading today, Dave?
Sekera: Pretty far. I mean, it’s a 25% premium, puts it well into 2-star territory.
Dziubinski: All right. Well, let’s do a little bit of a lightning round about a few other companies Dave’s going to watch this week and why. First, Dave, ServiceNow, which is ticker NOW.
Sekera: So ServiceNow, that has been a company we’ve talked about. It’s been a pick of ours in the past when it sold off. In fact, the stock is still down 12% year to date, trades at an 11% discount to our fair value today, which is three stars. Specifically, I just want to hear from them about any more benefits from incorporating AI into its products and services. That’s really the big concern here. Still, a lot of people concerned that AI may end up actually eroding some of its revenue over time. We think it’s going to be the opposite. We think AI will be a beneficiary for them.
Dziubinski: All right. How about Eli Lilly, ticker LLY?
Sekera: Well, of course, this company’s had just phenomenal growth from its GLP-1 weight loss drugs. We think that’s already more than priced into the stock. It’s a 2-star-rated stock at a 27% premium to fair value. In fact, when I pulled up the chart on this stock, it’s still trading pretty close to where it was in March of 2024. So I think they need to really come out and show some strong long-term growth dynamics. Otherwise, I think this is one that is at risk of selling off once the market starts to dial back their growth expectations. All
Dziubinski: All right. How about Bristol Myers Squibb, ticker BMY?
Sekera: Yeah, and this one has also been a stock pick we’ve talked about a couple of times. Right now, this stock is trading at its lowest levels that it’s been at over the past decade. We think it’s a deep-value stock. I mean, the market is very concerned about the number of drugs that are coming off patent over the next couple of years. We know that’s coming. We already modeled that into our projections. We just don’t think the market is giving the company any value for its pipeline of research and development. It’s a 5-star-rated stock at a 34% discount, 5.7% dividend yield. So I think whenever we get any indications of positive results from drugs in development, I think that could cause that stock to start to rally.
Dziubinski: How about Sherwin-Williams, ticker SHW?
Sekera: Now, this one, I am really curious to see what these results look like and if they have any guidance or not. So we’ve noted on prior episodes of The Morning Filter that this company had announced that it was halting the match on its 401(k) program. Being the cynic that I am, of course, that makes me then wonder just how bad results of the outlook like might be. if they’re in such dire straits that they think that they need to eliminate that match in order to try and save some money. The other times they’ve eliminated that 401(k) match, we’re back, like during the global financial crisis or during the pandemic. Having said all that, irrespective of whether this cut to the 401(k) match really has any indications for the short-term results. Longer term, we still think the stock is overvalued at a 29% premium. Puts it in 2-star territory.
Dziubinski: And then, lastly, Dave, UPS UPS.
Sekera: Yeah, so another one that we’ve had as a relatively recent pick has been pretty disappointing. But I think you need to take a longer-term view here with UPS. Now, this stock surged way too high in 2020 and 2021, well into 2-star territory. I think it even hit 1 star a couple of times, but it’s been in a long-term downward trend ever since. This stock also now lower than where it was trading prepandemic. Granted, we’ve been pretty disappointed with the way that it’s performed, but it is a 4-star-rated stock. 23% discount, 7.5% dividend yield.
Now, I do have to note, if you’re a dividend investor, we have noted in our most recent analyst note that this dividend could be at risk. So I want to hear if there’s any commentary on the call. As to whether or not they continue to keep playing this high of a dividend yield or if this one might get cut back. I’d just note that, overall, the market sentiment on this name just seems to feel so negative right now that any good news could send the stock much higher in our review.
Dziubinski: All right, well, it’s time to pivot over to some new research from Morningstar about companies that were in the news last week. We’ll start with Tesla. Stock ticker is TSLA. Now it pulled back after earnings, but Morningstar raised its fair value estimate on Tesla by $50. So, Dave, unpack the market’s response and our fair value increase.
Sekera: Yeah, I mean, there’s a lot of things that are going on here. There were several positive highlights. We saw sequential improvement from record auto deliveries and an increase in energy storage deployments. They also noted that they’re removing employees from the robotaxis in Austin, where they’re testing there. So that must indicate the testing is going pretty well. So, overall, our analysts noted that his fair value increase was really a combination of a higher valuation for the robotaxi business and an increased adoption rate that he modeled in for Tesla. full self-driving. But it’s still a 45% premium to fair value. Puts it well into 2-star territory.
And he also noted a couple things that he wants investors to make sure that they’re aware of if they’re thinking about this stock. We have the expiration of the US EV tax credits coming, so that’s going to weigh on EV sales in the near term. Management did note that they’re delaying the outlook for the full launch of their robotaxi product. Yeah, that was initially set for 2026. We always were a little skeptical of that. That is getting pushed out as well. And then, lastly, our analysts noted we are seeing an increase in competition in the energy generation and storage businesses as well. So I think those are probably the biggest reasons that we probably have a much differentiated view on the stock from the market.
Dziubinski: All right. Now, Netflix, which is ticker NFLX, was down about 10% after reporting earnings. What did Morningstar think of the results, and does the stock still look overvalued after that pullback?
Sekera: Well, not only did the stock fall after earnings, but it continued to keep sliding thereafter. And I think what’s really going on here is the company took an unexpected charge of over $600 million for taxes in Brazil. And I think this just left investors with a lot more questions than answers with what’s going on with that situation and how that might work out, and whether or not that’s something that’s going to really hit their operating margins going forward on an ongoing basis. We do think that it probably will end up reducing our operating margin expectations.
Now, having said that, fundamentals were better than what we expected but definitely weaker than what the market wanted. From a top-line perspective, they did have 3% sequential sales growth in the US and Canada. So that’s up 17% on a year-over-year basis. Operating margins ex that tax charge is actually better than expected as well. But we think all the positive news and more is priced into the stock. We think the market has too high of a long-term growth expectation. The stock trades at a 42% premium to our fair value, which puts it well into two-star territory.
Dziubinski: Now, Intel, which is ticker INTC, has been in the news a lot during the past couple of months between its partnership with Nvidia and then the US government taking a stake in the company. And it, too, reported earnings last week. So how did they look? And is the stock attractive?
Sekera: Well, the stock had a really big bounce off of the bottom once you had those investments. We increased our fair value based on that as well, but with as much of a bounce of its take, and I think it’s trading at like a 37% premium to fair value, puts that into 2-star territory. Fundamentally, third-quarter revenue was up 6% sequentially, so that was good. That was above the high end of their guidance. Their gross margin of 40% also exceeded guidance. But I think the thing here is to really think about why that margin was better than expected. Specifically, our analysts noted that the company is selling a higher mix of the older PC processors, so that’s good for their margins. But that leads us to having concerns that customers aren’t adopting their best, or their most technologically best, products out there. Overall, we still think Intel has a long way to go to successfully complete its turnaround, and we still think that, for now, it’s losing market share. to AMD. So we’ll be curious to see when AMD’s numbers come out, how they look compared to Intel’s.
Dziubinski: Now, on last week’s episode of the podcast, you said you were watching Lockheed Martin, which is ticker LMT, and Northrop Grumman, which is ticker NOC, because you wanted to hear whether there was really any reason why these stocks had weakened quite a bit in October. So did you get the answer to that, Dave? And is either stock a buy today?
Sekera: Actually, no. I mean, I really didn’t get an answer as far as, like, why both of those stocks have been sliding recently. So I think it’s just you got to look at each one individually here, fundamentally, and try and figure out what’s going on. So with Lockheed, the stock pulled back a bit, yet we actually raised our fair value a bit. So it seems like investors are still concerned that some of the priorities in the Defense Department and how they’re changing their budget might be competing for F-35 funds going forward. Seems like the market is a little bit concerned that they did tighten up the range of their 2025 free cash flow forecast. But overall, our analyst doesn’t foresee any change to his longer-term expectations. In fact, he increased his forecast for F35s for deliveries in the near term.
He also has increased confidence in further export orders that are likely to materialize. So that led him to increase his fair value. Stock’s at a 10% discount. Puts it in 3-star range. And then with Northrup, results were in line with our expectations. He noted there could be some upside in the future. He thinks that talks with the Air Force to increase the speed at which it can build B-21 bombers is coming to fruition. He noted, and this really isn’t in our model just yet, but he favors Northrup over Boeing in competition to build the new sixth-generation carrier-based fighters. So that could be something that could be a positive for this stock in the future. But overall, nothing changed really in our model, so we maintained our fair value at $630 per share. So it’s a 3-star-rated stock, only trades at a 4% discount.
Dziubinski: Now, you also said on last week’s episode that you were watching for the reports from two of your picks from the healthcare sector. And those were Donaher, ticker DHR, and Thermo Fisher Scientific, which is ticker TMO. So, any takeaways here? And are the stocks attractive after earnings?
Sekera: Yes, I mean, Danaher stock, it got a nice pop in that stock after earnings. Fundamentally, everything is kind of going in line with what we were expecting. Top line, 3% core growth in revenue, 11% earnings growth. Management maintained their 2025 guidance, 7.70 to 7.80 a share. Plus, they gave an initial view for 2026, looking for core revenue growth of 3% to 6%. And for margin improvement, that should lead to high single digit earnings growth. So I think that gave the market a lot of comfort, kind of took some of the negative sentiment out of this one.
Now our forecasts are unchanged because it came in in line, so no change to our fair value. But still, a 17% discount looks pretty attractive to me. 4-star-rated stock, and then Thermo—also a nice pop in the stock after earnings. I think the takeaway here after reading our note: Good earnings, operating margi, expansion. demand slowly improving across most of its major segments. China’s still a drag, but been made up more than otherwise elsewhere. Management provided a higher guidance, which is in line now with our forecast. So our fair value is unchanged. 9% discount just kind of barely puts it in that 4-star range.
Dziubinski: Well, it’s time for our question of the week. Sharice asks, Do you like Capital One, which is Ticker COF? Well, Dave, do you?
Sekera: So Capital One: Looks like the stock price closed last Friday at $225 a share. So that is just slightly above our fair value of $210 per share. So it’s a 3-star-rated stock. Looks like it only has a 1.1% dividend yield. So I’d say, really, the takeaway here for investors if you’re in the stock is really expect kind of a principal plus dividend return over the long term to essentially equal the cost of equity for the company. We do have a high Uncertainty Rating on the stock, really because of its high exposure to credit card and auto debt. We rate the company with a narrow economic moat based on cost advantages and switching costs.
But I think the big thing here is it has an operating profile that’s a bit different than what you’re going to find with most of the other larger banks. They have fewer retail bank locations. Now, that does keep costs down. But then it makes them more reliant on gaining deposits from online activity. So the result is that they have to pay higher deposit interest rates to compete online, but it does keep their costs lower. So, in my mind, I think this is one stock that should benefit as the Fed lowers the federal-funds rate, because they’ll have much lower funding in the short term.
Taking a look at their book, a high percentage of their loans are to credit cards. I think about 60% of their loan book. Another 20% of their loan book is for auto loans. The remainder mostly being commercial loans, but at least on the commercial side, they really don’t have any office exposure. But within their credit card receivables and their auto loan books, they do have a very high percentage of receivables to people with poor FICO Scores, so 28%, I’m sorry, of those credit card receivables are to people with low FICO Scores, and almost half their loan book in their autos are to low FICO Scores as well.
Now, taking a look at default rates, they had risen in 2023 and 2024. That was really just in response to labor market weakness. We think that typically after labor markets start to weaken, those defaults typically peak 12 to 18 months thereafter. At this point, our analyst noted, he thinks default rates are stabilizing at kind of normalized levels right now. Looking forward, he thinks they probably stay pretty much in line with where they are. His expectation is looking for unemployment to be in like a 4.6% to 4.7% range, so higher than actually where we are right now. And, of course, also incorporates our view from an economic point of view of no recession, but slowing rate of economic growth for the next three quarters.
Lastly, with this company, they did make a very large acquisition. They bought Discover that closed earlier this year. And generally, we have a pretty positive view of the merger. Now, the part that is most interesting here is that Discover has its own credit card processing network. So what you’re going to see here is that Capital One will end up switching its debit cards to that network by 2027. That will help reduce costs from paying fees to those other credit card processing networks, being able to keep that in-house, and then over time, I also suspect that they’ll take their credit card business, switch that over to Discover, away from Mastercard over time. That also will be a good tailwind for them to be able to lower their costs to outside providers and be able to keep that money in-house as well.
Dziubinski: Well, a reminder to viewers to keep sending us your questions via email. You can reach us at themorningfilter@morningstar.com. All right. Well, it is time for this week’s stock picks. And Dave has brought us a few undervalued stocks he likes that are tied to Halloween. So Dave’s first pick this week is Mondelez, ticker MDLZ. Give us the highlights.
Sekera: Mondelez trades at a 19% discount to our fair value, puts in 4-star territory, has a nice dividend yield at 3.3%. We rate the company with a low uncertainty and a wide economic moat. And that economic moat being based on cost advantages and their intangible assets.
Dziubinski: All right. So explain how Mondelez fits the Halloween theme and why you think it’s a stock to buy now.
Sekera: So Mondelez sells a pretty wide variety of chocolate and candy. Now, the candy includes some of my family’s favorites, Sour Patch Kids and Swedish Fish. But the chocolate brands are also pretty internationally very well known, Cadbury, Toblerone, and so forth.
Now, what’s interesting is, I don’t think you and I have actually talked about Mondelez in the past. I mean, like a lot of the other food manufacturers, we think they’re actually at a greater discount to fair value. But this is a stock we think looks pretty attractive here. And I’d also note, too, for investors who want to invest in growth in emerging markets, this is actually a good one to take a look at, especially for investors, if you don’t want to take the risk of investing directly in those emerging-market stocks, but you want that exposure, 60% of the revenue from Mondelez does come from developed markets, but 40% comes from the emerging markets. In fact, I think our analyst has noted that this is one of the food companies that has some of the highest percentage of revenue coming from emerging markets.
Overall, we’re looking at targeting mid-single-digit long-term sales growth coming from the emerging markets, which is much better than the low-single-digit growth you’ll see in the developed markets.
Dziubinski: Your second pick this week is Dollar General, ticker DG. Run through some of the numbers on this one.
Sekera: 4-star-rated stock, trades at a 13 discount to fair value, 2.3% dividend yield. We rate the company with a medium uncertainty and a narrow economic moat, that narrow economic mode being based on cost advantages and intangible assets.
Dziubinski: So, explain how Dollar General fits the Halloween theme and why you like the stock.
Sekera: Well, I was just over there over this weekend, Susan, and I can tell you that there’s a wide variety of seasonal items: decorations, costumes, candy. And the thing you have to remember with the dollar stores is they make much higher margins on discretionary items as opposed to nondiscretionary.
Now, we’ve talked about the dollar stores a number of times in the past on The Morning Filter, and this is just a good example of how markets oftentimes will overreact to positive news or negative news. Now, early during the pandemic, Dollar General and Dollar Tree were overvalued. They were both 2-star-rated stocks. We thought they ran up too far during the beginning of the pandemic. And then they fell pretty disproportionately thereafter. I mean, high inflation really hits low income and middle to low income households much harder. And as their operating margins were getting pressured, you saw these stocks both fall such that, by fall of 2024, both were rated 5 stars.
Long story short, our investment thesis with these companies is that, as wage inflation catches up to the broad market inflation, you would see purchasing patterns normalize. That is what we have been seeing to some degree over the past couple of quarters. In fact, both of these stocks have recovered pretty substantially off their lows. In fact, Dollar Tree is actually overshot to the upside. It’s now a 2-star-rated stock. Now, both of these have given up some of that rebound in the past month or two. But Dollar General is the one that sold off more and has now dropped back into that 4-star territory.
Dziubinski: And your final pick this week is another name that I don’t think we’ve talked about much before, and that’s Diageo, which is ticker DEO. So give us the overview on this one.
Sekera: Yeah, I don’t think we’ve ever talked about this one. I mean, for the most part, most of my focus is usually talking about US- domiciled companies. But Diageo does have ADRs that trade here in the US. It’s a 4-star-rated stock at a 25% discount, has a 4.3% dividend yield, medium uncertainty, and a wide economic moat.
Dziubinski: Dave, explain how Diageo qualifies as a Halloween pick, both in terms of the theme and as an investment.
Sekera: Well, I mean, as far as the theme goes, when the kids are out trick-or-treating, I like to have a little something here for the adults. Now, overall, when you look at all of the alcoholic manufacturer stocks, they’ve all been on a long-term downward trend for multiple years right now.
So what’s happened is that alcohol consumption in the US and really all other developed markets, has been on a multiyear downward trend, so prepandemic in 2019, according to Gallup poll surveys, I think it was about 65% of US adults reported drinking alcohol. That rose during the early years of the pandemic. It peaked at 67% in 2022 but has been on a pretty steady downward trend since. At this point now, only 54% are reporting that they drink alcohol. That’s the lowest level in Gallup’s poll for, like, the past 90 years.
So, when you look at the performance of the company, the revenue did decline 1.4% in 2024. It’s been stagnant here in 2025. And then they’ve just really suffered kind of that negative fixed cost leverage. They’ve also taken several impairment and restructuring charges. And that led to reduced operating margins, which have come all the way down to 21% from 30%. So overall, the investment thesis here is we’re expecting revenue to start to stabilize in 2026. Then kind of resume more of like a normalized top line growth pattern thereafter. That should help the company be able to bring operating margins up to get toward more historically normalized levels.
So overall, we’re forecasting upper-single-digit growth rate for earnings. Yet the stock only trades at about 13 times earnings, so definitely a value stock in our mind today.
Dziubinski: All right, well, any recipe drink ideas for us there, Dave? One you might try on Halloween?
Sekera: Well, I’ve got to say, when you’re thinking about artificial intelligence, this was an excellent use case for AI. So I went out there and I looked up for recipes for Halloween-themed cocktails using Diageo brands. One of the first ones that came up was Captain Morgan Zombie Punch, uses both original and dark Captain Morgan. rum, orange liqueur, a little bit of brandy, some orange juice and lime juice, grenadine, some bitters. So this is one I’d recommend serving in your favorite Tiki mug. You could probably garnish it with a gummy worm. Some of the other cocktail recipes that came up were like Bailey’s Pumpkin Spice Martini, the Johnnie Walker Black Fog. So with that, you know what? Today might be a little bit of a shortened day today, Susan. I might need to go test a few of these recipes before Halloween.
Dziubinski: Well, maybe I’ll ask you about that on next week’s show, Dave. All right. Well, have a great Halloween. Viewers and listeners who’d like more information about any of the stocks Dave talked about today, you can visit Morningstar.com for more details. We hope you’ll join us next Monday morning for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. And in the meantime, please like this episode and subscribe. Have a great week.