Plus, our take on the quarterly results from technology heavyweights.
On this week’s episode of The Morning Filter, Dave Sekera and Susan Dziubinski parse Federal Reserve chairman Jerome Powell’s post-meeting comments and discuss whether the Fed will cut interest rates again in December. They also explain why it matters that the market cap of Nvidia NVDA hit $5 trillion. They’re watching the earnings reports from Advanced Micro Devices AMD, Qualcomm QCOM, and Fortinet FTNT this week; watch to find out what to listen for.
They unpack the latest earnings reports and forecasts from tech and tech-related heavyweights Microsoft MSFT, Meta Platforms META, Alphabet GOOGL, Amazon.com AMZN and Apple AAPL and explain which of the stocks look most attractive today. They wrap up with some overvalued stocks to sell this month and an a few undervalued stocks to buy instead.
Episode Highlights
NVDA’s Latest Milestone
Earnings Watch: AMD, QCOM, More
Tech Titan Earnings: Takeaways
Stocks to Buy and Sell This Month
Read about topics from this episode.
Q4 2025 Stock Market Outlook: No Margin for Error
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Susan Dziubinski: Hello, and welcome to The Morning Filter podcast. 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.
Well, hopefully everyone got an extra hour of sleep this weekend when we move those clocks back because we have another big episode this week. Dave and I will cover last week’s Fed meeting and Nvidia’s latest milestone. We’ll also unpack the earnings reports that came out last week from the tech titans. And then we’ll wrap up today’s podcast with a few stocks to sell and a few stocks to buy this month. All right.
Well, good morning, Dave. Good to see you. Let’s start with last week’s Fed meeting. We got the 25-basis-point interest rate cut we were expecting. Now, what about December?
David Sekera: Good morning, Susan. So, for the December meeting, the market’s now pricing in a 70% probability that they’re going to cut another 25 basis points, which actually is down from over a 90% probability prior to this past meeting. During the press conference, Chair [Jerome] Powell did state that a December cut was not necessarily a foregone conclusion.
I think the market thought that that was a little bit more hawkish than what they were expecting him to say. But from my point of view, I don’t know what else they expected him to say. Really, in my mind, there’s really no change going into the December meeting than there was coming into this October meeting.
Dziubinski: Also, last week, Nvidia’s market cap topped $5 trillion for the first time, and that’s just staggering. What should investors make of that, Dave? Besides, of course, that the AI trade is continuing to dominate the market.
Sekera: What it says is just how old I am. I can remember when, like, a couple billion dollars used to be a lot of money; now we’re talking trillions. But really, it’s just indicative of just how much growth the market is currently pricing in from artificial intelligence. And not just this year and not next year, but really for at least the foreseeable future. And even further out than that. While there are several other competing products out there, Nvidia, of course, right now does sell the best GPUs for AI training. The market’s really expecting them to keep that first-mover advantage for quite a while that they can use their capex to stay at the forefront of chip design.
But I just want to put something into perspective for you. When I take a look at Nvidia’s revenue, I pulled up our model last night. Back in fiscal 2023, they did $27 billion of revenue, that then doubled in 2024 and doubled again in 2025. We’re now expecting them to do $208 billion here in fiscal 2026. And we’re looking for that to grow all the way up to $525 billion by 2030. Now, as far as earnings go, there’s only $0.33 a share in 2023. We’re forecasting the company to do $4.50 this year and going all the way up to $12.75 in 2030. Just think about just the rapid growth that it takes to be able to hit those numbers.
And it’s not just Nvidia. I mean, the market caps of all of these AI-related companies have all been surging the past couple of years. At this point, though, I will note most of these AI stocks are either fairly valued or moving into overvalued territory as compared to our base case.
So, if AI growth fails to live up to these types of projections and expectations, I’d say, look out below on a lot of these different stocks. But on the other hand, I mean, there’s still a possibility they could even well exceed our current expectations. There was a quote from the Nvidia CEO on his last conference call, essentially stating over the next five years, we’re going to scale into effectively a $3 trillion to $4 trillion infrastructure opportunity. Nvidia historically typically captures about a third of all AI infrastructure spending, which means that would be like $1 trillion worth of sales in 2030, which is currently more than double our forecast.
So, again, while there’s certainly a lot of downside if they miss their numbers. There’s also just as much upside still left to come if AI plays out like the Nvidia CEO thinks it does.
Dziubinski: All right. So, a lot of very high uncertainty around those pure AI stocks.
Sekera: Exactly.
Dziubinski: Let’s briefly touch on tariffs. It appears that President Trump’s meeting with China’s President Xi went pretty well last week. Do you think we’ve averted that China trade war?
Sekera: Time will tell, but it certainly appears that we’re on a better path now than compared to earlier this year. It looks like over the weekend, the White House did release a fact sheet. There are a couple of different things in here that they’ve highlighted, some agreements, including commitments to halt the flow of fentanyl precursors. And in response, the US will then reduce specified tariffs and extend some other current tariff suspensions.
So, again, some good news coming in here. China will eliminate controls on rare earth elements. Some agreements surrounding some of the semiconductor restrictions and tariffs that the US had in place. And then China is going to reopen their market to US soybeans and other agricultural exports.
I read through the fact sheet, not a lot of detail in here just yet. I think at this point, we’re going to need to know more really to be able to update any of the financial projections for the stocks that we covered that might be impacted here. I’d also note that this really ain’t over just yet. I mean, several of these US tariffs were really just extended to November 2026. So, I would say the trade negotiations aren’t completely over yet. There’s still going to be a lot of ongoing negotiations in the months ahead. So, certainly moving in the right direction, but I would say not necessarily out of the woods just yet.
Dziubinski: All right. Well, we are in the thick of earnings season. Let’s talk about a couple of companies you’re going to be watching this week, starting with AMD. The company made headlines last month after reaching a massive deal with OpenAI. What do you want to hear about from management?
Sekera: It’s really just more of the same. I mean, for the past year or so, we’ve really been in the midst of an AI arms race. I mean, everyone’s just trying to build out as much as they can, as fast as they can, in order to try and lock in that first-mover advantage. So, yeah, some of the things I know our analyst team will be focused on, you’re looking for additional color and timing for the buildout. Additional detail on how AI players are forecasting the growth of future AI usage.
I would just say, overall, when I think about artificial intelligence, our base case is still that AI stocks are not in a bubble yet. The computing power that is needed, even for AI today, is still undersupplied. Anytime any new capacity comes online, it’s immediately being utilized. But it’s really much more thinking about how much capacity there is yet to come in the next three to five years. We want to make sure that this isn’t a “build it, and they will come” kind of strategy. So, I think we really need to all still have a better understanding on what the inference use cases are, as opposed to the current training use cases.
Dziubinski: Now, AMD stock was up almost 60% last month. How does the stock look from a valuation perspective heading into earnings?
Sekera: Yeah, now you have to remember with AMD, we’ve long opined that we thought AMD would ultimately end up being the number-two player behind Nvidia. This was a 4-star stock earlier this year. And I think this deal really underscores that assessment. We have increased our fair value pretty substantially. We’ve raised it to $210 per share. That’s coming up from $155 per share after the OpenAI announcement. But with as much as the stock has gone up, it’s now trading at a 20% premium. It’s still within the 3-star territory, but it’s definitely at the top of the range, getting pretty close to going to 2 stars at this point.
Dziubinski: All right, well, Qualcomm, ticker QCOM, announced last week that it’s developing AI chips that will compete with AMD and Nvidia. What are you listening for on this week’s earnings call? And is the stock attractive heading into earnings?
Sekera: Specifically, our analysts noted that there are still a couple of different technological aspects regarding QCOM’s products that remain unanswered, in their minds. I know they’re going to be listening for more details there. And then also, just given that there’s already very strong established AI alternatives out there, we’ve noted QCOM is really going to need to hit the ground running really to have any chance to be able to get much of a market share here.
So, I think they’re going to need to prove to the market that their products will be very competitive against what’s already out there. The deal, in and of itself, does represent some upside, but it doesn’t cement their position as an AI leader among the likes of like an Nvidia, Broadcom AVGO, or AMD.
So we did increase our fair value here, maybe not as much as I think some people might have expected. It rose to $185 a share from $170. And we got there by incorporating $2 billion worth of new AI revenue in 2027. So, the stock’s currently trading pretty much right there at fair value. It’s a 3-star-rated stock today.
Dziubinski: Fortinet, ticker FTNT, also reports this week. Why is this one on your radar and how’s the stock look heading into earnings?
Sekera: I mean, first of all, all the cybersecurity stocks are always on my radar. We’ve talked about this sector for multiple times over the years.
Now, in this case, the stock for Fortinet has been trading somewhat in a range for much of the year, whereas a lot of the other cybersecurity stocks have traded much higher. But then that stock got hit really hard after the last quarter’s earnings. It dropped over 20%. Our analyst thought that the market was pretty disappointed by slower hardware and networking cybersecurity sales. Than what the market had expected. However, he does think that the selloff was overdone. Since then, it looks like the stock has stabilized here.
So, I know specifically, he’s going to be looking for anything that either supports his existing long-term view or will cause him to reevaluate his projections. I’d say keep an eye out for our note on this one afterward. Specifically, he’s noted a lot of his projections are based on the company moving into secure access service edge. More security operations. Both of those have been growing quite strongly. I know they’ve had well into double-digit increases there.
So, if there are any disappointment in those two areas and their growth rates, I think that could lead to further downside. Otherwise, if they come out with earnings and get the guidances within our expectations, our base case is calling for a five-year compound annual growth rate of over 13%, looking for an earnings growth rate of almost 16% over the next five years. Stock trades at about 26 times our 2026 earnings. It’s currently a 4-star-rated stock at a 20% discount. So, certainly one to keep your eye on for earnings. All right.
Dziubinski: Well, let’s unpack some of the big tech earnings that came out last week. And we’ll start with one of your picks, Dave, Microsoft, which is, of course, MSFT. Earnings were solid, but the company boosted its forecast for capex spending in 2026, and shares pulled back. What did Morningstar think of the report overall?
Sekera: From a fundamental point of view, it all looked very good to us. I mean, revenue and earnings all beat the high end of the guidance. Guidance for this next quarter is in line with our own end consensus forecasts.
Our analysts noted that maybe revenue could have been slightly low. Maybe the market’s a little disappointed by that, but the margin was better. So that made up for slightly lower growth on the top line. But as we talked about coming into earnings, one of the things we were really looking for was acceleration and growth for Azure, which is what we got. Growth there was 39% this past quarter. That surpassed guidance of 37%.
But, as you noted, the stock was a little soft. The market was obviously probably looking for more. There’s a lot more detail in our stock analyst note, but I would say the takeaway here really is results were consistent with our long-term thesis. So, at this point, no change to our fair value.
Dziubinski: So then, given that pullback and no change to the fair value, is the stock a buy?
Sekera: I think so. It’s still rated 4 stars and trades at a 14% discount. We rate the company with a wide economic moat and a Medium Uncertainty. And overall, when I look at the market broadly, it’s really still one of the few undervalued mega-cap stocks out there, and still one of the few undervalued stocks that is a play on artificial intelligence.
Dziubinski: Morningstar increased its fair value estimate on Alphabet, which is ticker GOOGL, by quite a bit after earnings. First, tell us, Dave, how big the increase was, and then what the rationale was for it.
Sekera: We increased the fair value by 13%. That takes our fair value estimate up to $340 a share from $300. Earnings themselves were substantially better than expected. The biggest driver to the fair value increase, though, was the growth in the backlog for Google Cloud. That was up 79%, up from 37% last quarter. Our analyst thinks that really points to just a real upside inflection in that cloud demand. Which will be coming here in 2026. He increased his Google Cloud five-year forecast growth up to 34%, up from 30% in our prior forecast. And I think that’s what led to a lot of the fair value increase here.
Dziubinski: All right. So then, from a valuation perspective, Dave, after that fair value change, any opportunity in Alphabet stock today?
Sekera: We think so. Other than Microsoft, which we just talked about, Alphabet is one of the other very few undervalued mega-cap stocks. One of the other few undervalued plays in AI stocks, currently at a 17% discount to our fair value, puts in 4-star territory. Again, another company we rate with a wide economic moat and a Medium Uncertainty.
Dziubinski: Meta Platforms finished the week down 12%. Results were strong, but the market seemed spooked by the company’s AI spending. What does Morningstar think? Is that spending justified? And what did you think of the report overall?
Sekera: I guess a little trick or treating going on with Meta with the spooking the marketplace. But it really all came down to, in my mind anyway, that they announced their plan to spend $100 billion on capex next year.
Just to put that in perspective, we’re forecasting the company to do $234 billion in revenue in 2026. So, $100 billion of capex as a percentage of sales, it’s going to be about 43%. Just a huge amount of the money that they’re making is all going into capex spending for artificial intelligence.
So, to some degree, I think what we talked about last week ahead of earnings is what really caused the stock to fall. Unlike Amazon, Microsoft, or Alphabet, Meta does not have its own cloud division to directly monetize all of this capex spending going into AI. And so while they are getting a good growth in AI-supported ad revenue, I think investors are just getting increasingly concerned about Meta’s AI strategy.
Meta, of course, does have a pretty checkered history as far as spending a lot of money that ultimately hadn’t really ended up working out, that they were not able to monetize, such as the Metaverse. Overall, we did maintain our $850 fair value. From a strategic perspective, our analyst does think it’s important that Meta invests in its own foundational models. Just the other cost of running someone else’s models at Meta scale just would not end up being economically feasible.
So to some degree, Meta is kind of in a corner right now where it’s got to spend this amount of money in order to be able to build out its own AI divisions. But at the same point in time, the market’s still very concerned that with as much as it’s spending, especially as much as a percentage of their revenue, that they’re really going to end up having to monetize this to a large degree in order to get the market to buy off on this story.
Dziubinski: So then, Dave, any changes to Morningstar’s fair value estimate on Meta stock after earnings, and how’s the stock look from a valuation perspective?
Sekera: Well, from a valuation perspective, the stock did fall enough to land into 4-star territory, you know, from 3-star. So, the question is, is it a buy? Technically, yes, it is a buy. It’s a 4-star-rated stock at a 24% discount to fair value.
My own opinion, I don’t know. I just don’t feel like the stock has really fallen enough yet, really, to pique my interest just yet. And when I think about the catalyst that it’s going to take, it might be a while until the market really gets enough clarity on the forward path to generating enough money to be able to really monetize this $100 billion in capex spending before the stock really starts to work again. Personally, even though they might be at lower discounts to fair value, I still prefer Microsoft and Alphabet right now.
And just as a complete aside, I would highly recommend for investors just take some time, go to whatever AI platform you prefer, and look up Hyperion. Hyperion is Meta’s data center that they’re building out down in Louisiana. The total project has 5 gigawatts of computing power when it’s fully built out. Just to put that into perspective, I guess that’s about double the peak electricity demand of New Orleans. So again, it’s just crazy thinking about how much power this facility is going to require. The size of this facility is supposed to span 2,250 acres. Supposedly, that’s like 1,700 football fields. Now, in order to power the first phase of this buildout, they need to build three 700 megawatt power plants just to be able to turn on the lights of this buildout when it’s ready to go.
To me, when I’m just thinking about what’s going on with artificial intelligence, this really gives me some background thinking about the size, scale, and scope. Just think about the amount of concrete you’re going to need to be able to pour the foundation and the floor for a facility that size. The amount of aluminum, steel, and materials just to be able to build the buildings, much less all the infrastructure. You’re going to need all the racks, all the servers, all the GPUs to get this thing up and running. And granted, this is, as far as I know, like the largest of the data centers being built out, but it is just one of many data centers that are all under construction right now.
But in my mind, just take some time, just do some queries on this one. And I think it really affords you a better understanding of just the scale of what’s currently being built out in order to be able to power what’s needed for artificial intelligence.
Dziubinski: And you can imagine then, well, that’s where the money’s going, because then that’s not cheap. And maybe we need to talk about some of the builders and all of that, and that’s probably a topic for another show, of the impact that it’s going to have on their bottom lines to be involved with AI. All right, back to earnings. Amazon, ticker AMZN, reported pretty good results across segments last week. Morningstar edged up its fair value estimate as a result.
Go through the results, Dave, and tell us what you think of Amazon’s stock today.
Sekera: Top line exceeded guidance. Most of that beat, as it’s going to be no surprise to anybody, came from AWS, which is its cloud division. So, again, earnings, once again, it’s still all about artificial intelligence, everywhere and all the time.
Now, what happened here, though, is the operating margins and earnings did come in a little weaker than expected. That was due to really what’s considered more like one-off charges. They had a settlement with the FTC. They took charges for some severance as they are going through a pretty large layoff program. So, the operating margin came in at 9.7%. That’s compared to 11% a year ago. But when you adjust for those charges, add them back in, ex-charges, the up margin came in at 12%. So actually better than where it was by 100 basis points.
So that actually would have led to a beat on the bottom line without those one-time charges. Guidance came in slightly better than what we anticipated for both revenue and profitability. We did bump up our fair value to $260 from $245. The other thing we talked about we’re going to watch is the retail division. I think here, they noted that consumer buying patterns, at least for Amazon, are unchanged at this point. I think that bodes well for their online platform. Having said all that, the stock’s only at about a 6% discount to our increased fair value. It is rated 3 stars at this point.
Dziubinski: Well, I took a look at Morningstar’s note on Apple, ticker. It seems like our analyst was impressed with the results and increased Apple’s fair value estimate by 14%. Dave, what stood out in those results?
Sekera: Last week, when we talked about what we were looking for and thinking about for Apple, we had noted that we’d heard a lot out there about how iPhone sales were doing very well, probably a lot better than expected. And it did come in exceeding what our model was in our projections. Profitability also came in better than what our analyst had projected.
So, between the iPhone revenue guidance of double-digit year-over-year growth, as well as coming in much more profitable than we expected, services doing well. Once we kind of updated our model for all of that to include kind of the better-than-expected performance and the increased guidance, we did raise our fair value to $240 a share from $210.
Dziubinski: Apple stock did look overvalued ahead of earnings. After that fair value increase, how does it look?
Sekera: Well, it’s interesting, too, here. The stock really didn’t do all that much after earnings. So after we increased our fair value, the stock is now still at a 13% premium, leaves it in 2-star range. But I would just note that after our fair value increase, it is much closer at this point to 3 stars.
Dziubinski: All right. So, Dave, we made it through the tech titans. Take a drink of coffee for that. Let’s cover a couple of other companies that reported last week. Let’s start with ServiceNow, ticker NOW. Stock was up a bit after earnings, and Morningstar ticked up its fair value estimate a little bit on the stock. So, walk through the results on service now and tell us if there’s an opportunity for investors in the stock.
Sekera: I would call this one an AI-related stock. Results came in, I think they were better than the high end of guidance on a couple of different key measures that our analysts pointed out. But generative AI still just remains the key driver for this story. ... We think that’s really going to extend the really their overall growth for at least the foreseeable future within the five years of our explicit forecast period here. They’re tracking ahead of its goal to achieve $500 million in annual contract value from AI by the end of this year, on its way to be able to get $1 billion of annual contract volume in 2026.
Now, this stock has been a recommendation a number of times on The Morning Filter. In fact, I think it was a 4-star-rated stock as recently as July 2024. It’s run up, really, just ran up too far, even early this year, all the way up into 2-star territory. It then dropped in the spring, dropped too much as far as our valuation goes all the way into. Like, a 4-star-rated stock at this point, it’s now only at a 13% discount, so it is a 3-star-rated stock.
But I’d say keep this one on your radar. It’s pretty close to 4 stars. So if there was any more of a retreat in this one, it would look attractive to us once again.
Dziubinski: UPS stock has been a pick of yours in the past, and it was up more than 10% last week. What did the market like about the earnings report, and what did Morningstar think?
Sekera: Well, in my own personal view, this one having been a recommendation, it was definitely a sigh of relief on my part. Nice to see what looks like hopefully a bottoming-out process going on with the story and the stock here. And hopefully the beginning of a long-term recovery. Unfortunately, I think I started recommending this one too soon. Our analyst team did cut their fair value several times over the course of this year. But at this point, we’re now maintaining our fair value of $113 per share. UPS, the story overall this year has been that they just really needed to work through to be able to adjust their cost base here in the US. Of course, they are losing their Amazon delivery business, and it seems like working through kind of their readjustments here, finally starting to get a foothold adjusted margin did raise slightly this past quarter. It looks like the story here and the stock are starting to finally come together after this one has traded down to my face here since the early recommendation. And I do also want to give one other word of caution on this one, especially for people who are buying the stock for the dividend. Looks like they did hold the dividend steady this quarter, but our analyst has noted that the dividend here might be at risk next year.
Dziubinski: Is UPS UPS stock still attractive after the rally last week?
Sekera: It is. It trades at a 15% discount, which is enough to put it in that 4-star territory. And it is a company we rate with a wide economic moat, which was a large part of the basis, as far as why we thought that the stock has been attractive for quite a while.
Dziubinski: All right. We talked about Fiserv, which is ticker FI, on the show a few weeks ago. And the stock fell 44% last week after management slashed its guidance. So, Dave, what happened here?
Sekera: If you remember, this is one where someone in our audience had asked us to highlight some bold stock situations, essentially to look for where we had a pretty differentiated view from the market. So at that point in time, I did a stock screen where I looked for stocks where stock prices had plunged year to date, but yet we had held our fair value steady or only made maybe some small downward adjustments. And where we’ve assigned the company at least a narrow or maybe a wide economic moat. And for those that were trading at a very large discount to our fair value. And Fiserv ended up coming up on that screen, and so we had noted it at that point in time.
But unfortunately, not only were third-quarter earnings weak, but management also provided a very weak outlook. A lot going on here. I would say take a read of the analyst note on this one and why he’s cutting the fair value. Essentially, the synopsis here is that a new CEO has taken over, reviewed the company’s position, and determined that the company had been trying to attempt to really maximize kind of short-term growth and margins in a way that the new CEO doesn’t think is sustainable over the long term.
So, the company’s now going to have to raise reinvestment within their own company. That’s going to end up reducing their margins. He expects growth to decline as well. So, as a result, as we recalibrate our financial model to take all of this into consideration, it appears that we’re cutting our fair value by 35% once all is said and done.
Dziubinski: All right. Well, viewers, we didn’t get to all the earnings reports we wanted to this week, or we would be here all morning. We’ll get to more of them on next week’s episode. But we want to make time for our question of the week. This week’s question is from Alec, and it’s actually a couple of questions in here. So, Alec asks, consumer staple stocks like Campbell’s CPB, General Mills GIS, and Kraft Heinz KHC have all fallen this year and don’t seem to be recovering. Meanwhile, the major supermarket stocks have all increased. Is this a sign of the shift of power away from the supplier and to the retailer in the food sector? And will that continue? And what does that mean for consumer staples stocks?
Sekera: That is a great question, Susan. And in fact, if you remember, we’ve been talking about within the consumer sector, how a lot of these consumer packaged-goods companies, the food companies in particular, have been significantly undervalued as compared to our long-term valuations. In this case, I reached out directly to Erin Lash. She is the sector director for our consumer equity analyst team. And here’s what she had to say as of Monday, Oct. 27.
Sekera: Thanks, Dave. Overall, we don’t think that there has been a shift in power between retailers and manufacturers.
We continue to believe that there is an interdependent relationship, whereby CPG Manufacturers need to ensure their products are stocked where consumers are shopping. And retailers depend on manufacturers to help them drive traffic into retail outlets and onto e-commerce platforms.
From where we sit, CPG shares have been capped because of concerns in the market around an intensifying promotional environment. And the extent to which manufacturers could opt to chase short-term market share and volumes at the expense of investing for the long-term health of the business. We haven’t seen any evidence to suggest that this is manifesting, but we think the overhang continues to weigh on shares.
Conversely, retailers are benefiting from investments made behind their own private-label lineups, as well as technology enhancements and capabilities, including around artificial intelligence, that have led to an appreciation in share prices. However, we think expectations around retailers on the defensive side look rich, particularly those of Walmart WMT and Costco COST. For an appreciation in packaged-food firms to manifest, we think the market is looking to see more of a sequential improvement in volumes that isn’t coming at the expense of price, nor at the expense of investments behind research, development, and marketing. And so that’s where our attention is going to be focused going forward.
Dziubinski: All right. Well, Alec, thank you for that question. A reminder to viewers to keep sending us those questions via email. You can reach us at themorningfilter@morningstar.com. All right, well, it is time for this week’s stock picks. But this week, Dave didn’t just bring us stocks to buy; he also brought us a few stocks to sell, which is something viewers have kind of been asking us for.
So here you go, so Dave, let’s start with those sells, your first sell is Citigroup C. Why?
Sekera: A lot of longtime viewers in our audience probably are tired of hearing me talk about how a lot of times the market, both at the market level and as well as at the specific stock level, can act like a pendulum swinging too far in one direction or the other. And I think that this is really just a good example of that.
In fact, it really wasn’t that long ago it seems like you and I were talking about how Citibank was actually a best pick idea of ours. The stock had been trading at way too much of a discount to its total capital levels. And at this point, the stock has moved up so much over the past couple of years. It’s now trading at a 23% premium. So, going from something that was a deep-value pick now to a 2-star-rated stock.
So I would just note here that when I look at the mega US banks, they’re all overvalued at this point. So I just really picked Citibank as being the one that would be of most concern to me. Citibank’s actually tied with JPMorgan JPM as being the most overvalued, yet we rate Citibank with no economic moat, whereas JPMorgan is a wide-moat stock. And in fact, even like Bank of America BAC, Wells Fargo WFC are wide-moat stocks.
We don’t think that Citibank has those long-term, durable competitive advantages that we’re going to see among the other large banks. So at these valuation levels, even with JPMorgan at the same valuation level, I’d rather own any of those other banks than Citibank. In my opinion, I think that whenever we do finally get a correction, among the big mega banks, this would be the one that I would expect to sell off further and faster than the others.
Dziubinski: All right. Your next sell is a stock we talked about on the podcast a couple of weeks ago. It’s Progressive PGR. What’s the rationale for selling on this one?
Sekera: Well, again, this is really much more of a sector call than necessarily just one individual stock call. We’ve talked about for a while how all the insurance company stocks were generally pretty overvalued. Over the past couple of years, we’ve seen insurance companies be able to push through some very high premium increases. That’s led to faster-than-expected growth. But the market has just been overextrapolating too much growth too far into the future. And I think right now we’re just starting to see the market readjust to lower growth expectations going forward.
The reason Progressive caught my eye is that it was one of the more overvalued stocks within the insurance sector earlier this year. It’s down 14% since they reported earnings, yet it’s still a 2-star-rated stock.
Dziubinski: And your last stock to sell is eBay EBAY. The stock was down about 16% after reporting earnings last week. Why is this one to sell?
Sekera: This was one of our stocks that earlier this year was certainly one of the more overvalued stocks under all of our entire US coverage. Now, even after that decline that you talked about, it’s still a 30% premium, still a 2-star-rated stock. Generally, I think it’s just a story of the market pricing in way too much growth for too long.
In our model, I pulled that up, and our expectations here aren’t too modest in my mind. Top-line growth, five-year compound annual growth rate of almost 7%. And that’s after top-line growth has really been flat since 2021. With that, we’re looking for a little bit of margin expansion to get to EPS compound annual growth rate of 9.5%. Even with those, what I would consider to be stronger expectations than what the company has put up in the past couple of years. Even with those assumptions, the stock is still just too expensive. All
Dziubinski: right. Well, let’s pivot over to your stocks to buy. Your first stock to buy this week is Alphabet. We talked about Alphabet in the show 22 minutes ago. Viewers can go back to that part of the show for more details on Alphabet. Just give us a quick hint about why the stock is a pick this week.
Sekera: The synopsis here it’s a 4-star-rated stock, trades at a 17% discount, wide economic moat, Medium Uncertainty. To some degree in the market, sometimes you just need to go with what’s working.
I mean, the stock is on a pretty strong upward trend. Our fair value has also been getting readjusted, pretty strong on an upward trend as well. And I think generally, the market has just become much more comfortable that search isn’t going to be totally replaced by AI. And in fact, you know, Google has been able to use AI to enhance its search, which has actually been helping them, you know, with engagement and with ad revenue.
Dziubinski: Well, it’s helped Google; it’s not helping the rest of us publishers who need the page views from Google. But what can we say? OK. So, your next stock to buy this week is Salesforce CRM, so start with the highlights on this one.
Sekera: Salesforce, a 4-star-rated stock at a 20% discount to fair value. It does have a High Uncertainty, but that’s going to be pretty common among tech stocks. That won’t put me off on this one. And we rate the company with a wide economic moat based on switching costs and network effects.
Dziubinski: The stock’s having a little bit of a tough year. Why do you like it?
Sekera: The stock’s been under a lot of downward pressure this year. To some degree, we just think it’s because the market has a lot of uncertainty around AI adoption and how that’s going to potentially impact the company’s business going forward.
When I look at the chart here, it looks like maybe this downward trend seems to be bottoming out here over the short term. But what I like about this one is a note that our analysts just put out relatively recently. The company did have an investor day, I think about two weeks ago. A lot of the investor day, the company was very focused on its AI plans, its Agentforce 360 solution, which is its AI utilization. And the management also introduced some new long-term financial targets. Maybe just run through some of these.
Looks like they’re projecting $60 billion of revenue in 2030. So, in order to be able to hit that $60 billion mark, we’d actually have to boost our own growth rate by 150 basis points annually. To get our revenue expectations up to what the company is now giving those long-term guidance targets for. And then they also have this Rule of 50 framework, what they were talking about as well. In order to get to that, we’d actually have to increase our margin assumption by 200 basis points annually to get there as well.
So, overall, our analyst held his fair value steady for now, but he did note that if we were to incorporate those into our model, that would increase our fair value by 8%. In my mind, I think this provides some potential upside. If we start seeing some more evidence of sustained revenue acceleration, more evidence of substantial margin improvements over time as well. Not only is this one undervalued based on our current fair value, but even further undervalued. If the company is really able to hit some of those long-term targets.
Dziubinski: Your final pick this week is a REIT. It’s Ventas VTR. Tell us about it.
Sekera: In the real estate sector, it’s a 4-star-rated stock at a 9% discount, 2.6% dividend yield. Now, I have to note, we do not assign an economic moat to this company, but that is pretty typical of the real estate sector overall. Rarely do we see long-term, durable, competitive advantages among the REIT space.
But what I do like about this company and the sector that it competes in, it’s a diversified healthcare company. Has a portfolio of almost 1,400 properties, I think substantially in the senior housing markets, but also medical, office buildings, hospitals, life sciences, skilled nursing, postacute care. And when I’m thinking about the real estate sector overall, I’m much more comfortable with these types of tenants today than I would be, for example, with office space.
Dziubinski: Now, Ventas was up quite a bit after earnings last week, so why is it a pick this week?
Sekera: Well, it’s just real estate overall.
I look back at some of our notes here, and we’ve been recommending real estate for quite a while at this point in time. In fact, this stock was a pick. It was a recommendation of ours on our July 1, 2024, episode of The Morning Filter. And the stock is actually up 45% since then. And that’s not even including dividends. And just out of curiosity, I graphed it compared to Nvidia. Nvidia is only up about a little bit more than 60%. So it’s amazing just how much some of these real estate plays over the past year have worked out.
But there’s still a lot of tailwinds left behind the real estate sector overall. Real estate will benefit over time as interest rates come down. As we have the Fed lowering federal-funds rates, so then as they refinance their short-term debt, that’s going to help boost their earnings. And then as they refinance y’all their long-term, when that comes due, long-term interest rates we expect to come down over the next two years as well.
So, while I’d still steer clear of urban office space, I still like a lot of the real estate deals, especially those with much more defensive-oriented tenants. In this case, reported earnings last week were much better than expected. And a lot of that was because of very strong growth that they experienced in the senior housing market. They also announced that they made a billion dollars’ worth of senior housing property acquisitions at an average cap rate of 7.1%. We think that will be very value accretive over time. And overall, management did boost their guidance toward our estimates as well.
So, just kind of the quick synopsis here is good momentum, still undervalued. You have a lot of tailwinds within the sector overall from declining interest rates, and specifically this one with the subsectors that they’re in, specifically senior housing. That also still has a very good tailwind for the next couple years with the aging baby boomer generation.
Dziubinski: All right, well, thank you for your time this week, 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 next Monday morning 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.