Plus, how to position your stock portfolio today.
In this episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss the impact the war in Iran has had on the markets so far and how a prolonged conflict could impact inflation and the Federal Reserve’s interest-rate stance. They cover what the war means for oil stocks, defense stocks, and other industries. On the earnings front, they unpack results from Okta OKTA and Marvell Technology MRVL and dissect Morningstar’s upgrade on Crowdstrike. Is now a back-up-the-truck moment for Broadcom’s stock? Tune in to find out.
They answer a viewer’s question about how to know when it’s time to sell a stock. And they discuss a trio of stocks to sell that look overpriced today and three stocks to buy instead that look attractive.
Episode Highlights
00:00:00 Welcome
00:02:09 What impact the war in Iran is having on the US stock market—and what it might mean for inflation and the Fed’s next move.
00:05:43 Is it too late to buy defense and oil stocks?
00:14:52 Whether Broadcom AVGO is a buy after earnings and key takeaways from the recent results of other technology companies.
00:18:52 A deep dive into Crowdstrike’s CRWD big upgrade.
00:23:13 How to position a stock portfolio after the market’s rotation.
00:27:11 Knowing when it’s time to sell a stock—or at least begin scaling back.
00:32:17 Overvalued stocks to sell and undervalued stocks to buy instead.
Note: In the March 9, 2026, episode of The Morning Filter titled 3 Stocks to Sell and 3 Stocks to Buy Instead, we removed the commentary about private credit as a percentage of base management fees because we are unable to determine equivalent comparisons across alternative asset managers.
Read about topics from this episode.
US Stock Market Outlook: Where We See Investing Opportunities in March
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).
Viewers who’d 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 investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.
Now, before we get started this week, we have a programming note for our audience. We dropped a bonus episode of The Morning Filter last week. I sat down with Morningstar senior analyst Gregg Warren to talk about Berkshire Hathaway, now that Warren Buffett is no longer CEO. Now, if you missed the bonus episode, you can find it wherever you get your podcasts.
All right, Dave, well, good morning. Let’s discuss the impact the war in Iran is having on markets. We saw the price of oil skyrocket last week and over the weekend, too, and US stocks have fallen. Unpack the market’s response for our audience.
David Sekera: Hey, good morning, Susan. So, unfortunately, it looks like the military action in Iran has not abated. And in fact, from what I can tell, it seems to be in this stage where it’s either getting worse or expanding from what we’ve already seen. So taking a look at the futures markets premarket open this morning. Now, it’s not nearly as bad as it was when I went to bed last night, but it still looks like it’s going to be a pretty ugly open. Last I checked, the S&P 500 futures were down over 1% and oil was up 13%. And of course, as we’ve talked about the last couple weeks, it’s all about oil prices. I mean, the market is just acutely aware of the importance of oil. So, depending on how high and for how long oil prices are elevated, they’ll have a very adverse impact on the economy.
Now also got a lot of people asking questions about what’s the market pricing in? for how long the military action is going to be ongoing? So I’d just note here, over the weekend, I put into Copilot a question how to pull up oil futures in Yahoo Finance, and so what I got was finance.yahoo.com/quote/CL=f/futures And so in there, you can see each of the individual months what the pricing is for that futures contract and then how much that’s moved, so you can see that right now the market is pricing in a pretty high probability that that military action is going to be ongoing for, at least, the next couple of months.
Outside the US, international markets also hit pretty hard. Korea was down at 6% overnight. Not that worried about that market, really, just because, I mean, it looks like it was getting pretty bubbly before all of this started to occur. I think that it doubled over the past 52 weeks. But Japan, of course, they’re a huge importer of oil. So the Nikkei, that’s down over 5%. Depending on which Chinese index you’re looking at, they’re down at least 1%. And the different European markets are down anywhere from 1% to 2%. In the US, generally, I would say, it seems like most people have pulled off the shelf their military action playbook. If you take a look at some of the sectors, like energy and defense, those stocks are significantly higher, whereas anything that’s reliant on oil prices as an input is much lower. Think airlines or anything that’s reliant on consumer strength, also lower, which is why you see the consumer cyclical sector down over 5% year to date.
Now, I would have expected technology to at least done OK over the past couple of weeks, but we’re definitely seeing AI stocks still not performing, even though we’re getting very strong earnings and guidance out of some of the more recent reporters in that sector. I think what’s going on is that there’s been so much media focus with everything that’s going on in Iran. Some people are still looking at why we’re seeing AI stocks not perform. In fact, we saw a lot of the selloff in some of those stocks at the end of last week were due to reports that the US is working on restrictions as far as like what AI chips can be exported outside the United States. They’re looking at restricting those AI chips such that you need to get approval from the US government to be able to sell them outside the US, so that also is putting a dampener on tech and AI specifically.
Dziubinski: All right, what about the impact on inflation here, Dave, and the Fed’s interest rate stance? What do you think that might look like if the war continues?
Sekera: Well, it’s definitely going to have a huge impact, depending on oil prices. So if oil prices are higher for longer, that certainly looks like that would lead to a stagflationary environment. That’s an economy where you have both higher inflation and a weaker economy. So the worst of both worlds. And to some degree, that ends up handcuffing what the Fed’s able to do. They can’t cut rates because that’s going to lead to more inflation, but at the same point in time, they can’t raise rates because that would lower economic growth.
Dziubinski: So let’s talk a little bit about some of the sectors and industries that you alluded to earlier that did pretty well and not so well last week. We’ll start with defense stocks. Now, of course, those did rise early last week in light of events. Was that a good investment move? Any opportunity left here?
Sekera: Well, that just reminds me of that old Warren Buffett adage: You should be buying when others are selling, and selling when others are buying. So in my mind, now is not the time to be buying stocks like defense stocks. If you think about defense stocks, the way those companies really make their big money is selling entire defense systems, not necessarily the munitions. I mean, using up the munitions, of course, they’ll have to replace that, but that’s not where the bulk of their earnings come from.
I mean, realistically, the time to buy those defense stocks was over the course of last year. We recommended a number of defense stocks a number of times. Valuations at that point were much lower. We had Trump, a year ago, twisting the arms of a lot of allies to buy US defense goods. The EU had committed at that point in time to increasing their defense spending as a percent of GDP. So looking at some of these individually, like Lockheed Martin LMT, Northrop Grumman NOC, those stocks are up 40% to 50% since we recommended them. So, in my mind, you don’t need to sell down your entire position, you can let some of it run, but I think now is actually a pretty good time to start taking profits in some of those.
Dziubinski: Oil has, of course, broken through the hundred dollar a barrel mark, so has Morningstar made any changes to its oil forecast due to the war? And then, secondly, is there a case to be made for investing in oil-related stocks today?
Sekera: For now, there’s really nothing that changes that supply/demand curve over the long term or what our assumptions were when we think about the long-term case for oil. So, for now, no change to our long-term forecast. We’re still looking at $60 for West Texas, $65 for Brent. And of course, in our model, we don’t think that we can guess any better what oil is going to do in the short term. So for those oil companies we cover, we use the two-year forward strip curve in the model, and then we adjust that price in year two to what our year price is in year five.
As far as investing in oil today, I mean, considering oil prices have almost doubled over the past couple of weeks, I’d probably be a better seller than buyer here. I think now is probably a good time to take a little bit of a profit, but I certainly wouldn’t sell my entire position here. So if you remember, oil stocks did a lot of nothing most of last year, yet we continue to keep recommending a position in the oil sector. Originally we were recommending ExxonMobil XOM. And then, once that moved up enough to go into 3 stars, we moved to Devon DVN, a good US producer. Generally, the thesis there was that the stocks were undervalued. You were getting good dividend yields while you waited for them to perform. Plus, they provided a good natural hedge in your portfolio in case inflation were to rise or if geopolitical risk were to get worse.
So when I think about oil stocks, they’ve done what we’ve wanted them to do. They’ve been you a good hedge in your portfolio against geopolitical risk. So depending on the recommendation date that you go to when we made those recommendations, and we’ll see where stocks go this week, but they’re up anywhere from 30% to 50%. So I think now’s a good time. Take a little bit of profit off the table. There’s still a lot of momentum to the upside, so you don’t need to sell your entire position. But again, I’d take a little bit off the table. And that way you’ve got some additional dry powder to reinvest in those other areas in the market that are still getting hit pretty hard.
Dziubinski: Now, an extended conflict would have an impact on fertilizer stocks like Nutrien NTR, which is a name you’ve recommended in the past. So, talk a little bit about that, Dave, and whether there’s maybe any opportunity here as a result.
Sekera: Well, for background, a lot of people might not necessarily know, but the Middle East is a huge producer of nitrogen and phosphate fertilizer. In fact, I think 10% of the global nitrogen fertilizer all goes through the Strait of Hormuz. And, of course, natural gas has a huge input into manufacturing fertilizer. So, if natural gas prices were to stay higher for longer and or fertilizer production is halted in the Middle East, we’d see a big increase in fertilizer prices, which, of course, is going to end up leading to higher food prices overall. So I guess the only good news there is that that is some potential upside for CNH CNH. That’s a stock that we recently recommended last week. But I’d say the upshot here is, depending on how long and just how much natural gas prices go up, if you do have that supply constraint, that would actually end up being a benefit to US fertilizer stocks. So if natural gas prices were to stay higher for longer and we see that supply constraint coming from the Middle East, you could see us raise our fair value on those US fertilizer stocks, anywhere from 10% to 20%.
As you mentioned, we did recommend Nutrien several times in the first half of 2025. I pulled it up. It looks like the first time we recommended that stock was on the March 31, 2025 show. Stock’s up 50% since then. Almost half of that has come just year to date alone. So this is another one. There might be some more short-term momentum higher, but I’d be careful chasing it higher. At this point, I think now’s a good time to take a little bit of profit off the table. You can let some of it run and again, give you that dry powder, so if we really do have much more downward action in the market more broadly, you can redeploy that and get cheaper prices on stocks elsewhere.
Dziubinski: We saw airline stocks were down double digits last week due to the conflict. So what’s Morningstar’s take on the impact of the war on airlines? And did we make any fair value changes to airline stocks as a result?
Sekera: As a result, no. So there’s no changes to fair values as of right now. But you do have to note that fuel accounts for anywhere from 20% to 25% of the costs that an airline has in order to get people to move around. So, it does make sense that stocks are down, and yes, I mean, short-term increases in oil is going to hit earnings pretty hard this quarter and maybe next. But overall, it doesn’t permanently change the business model of the airlines.
So I talked to Nic Owens last Thursday— Nic’s our analyst that covers the airline stocks—and here’s how he explained it to me. Typically, airlines don’t do much hedging in the oil futures market, but what they do is they essentially incorporate a hedge into their ticket prices. So again, depending on when you buy that ticket and when you plan on flying, depending on where the oil futures curve is, they’re going to put some sort of hedge for that oil price into your ticket. So if you’re buying a ticket for tomorrow, that ticket doesn’t have to have much of a hedge in it. But if you’re not going to be flying for like three more months, that ticket price is going to have got some sort of oil price hedge embedded within it. So that way, if oil prices end up being lower than where they thought they were going to be, they’re going to actually make more money on it. But when you see oil prices spike quickly, like they are now, they’re going to lose money on those tickets already sold. Fortunately for me, I already bought my tickets for spring break.
Now again, they’re probably going to have a pretty bad quarter, this quarter, just based on those future flights that they’ve already sold tickets for. But again, the duration of those tickets is relatively low. I mean, they only sell tickets, I think, maybe up to six months ahead of time. And, of course, as soon as oil prices and oil futures start to move, they very quickly incorporate that into those ticket prices. So really, I think from an investing point of view in the airlines, I think what you have to figure out is if oil stays higher for longer, how much is that going to price out the marginal traveler and for how long? So if you think about it, someone might be willing to take a flight for $400. But if it goes to $500 or $600, maybe they’re not going to take that flight—maybe they’re going to drive instead. Taking a look at some of the stock prices, United UAL is a 3-star-rated stock. Delta DAL, even after the pullback, looks like that’s still a 4-star-rated stock. So in my mind, really nothing to do with the airlines at this point.
Dziubinski: Well, let’s move on to the week ahead. We have a couple of inflation reports to look forward to, including the PCE, which is the Fed’s preferred inflation measure. Dave, what’s the market expecting here? And could the inflation reports contribute to any market volatility this week?
Sekera: When I’m thinking about these inflation figures, I’m going to take a look at what the nonenergy components of inflation are, see if there’s anything in there to be concerned about. But overall, I’d say these prints are really not necessarily going to be all that important. I mean, for now, it’s just still all comes down to how high and for how long are oil prices going to be elevated? That’s going to be the much more significant impact on inflation over the next couple of months to even potentially the rest of the year.
Dziubinski: Let’s pivot over to some new research from Morningstar about a few companies that were in the news last week. And we’ll start with Broadcom AVGO. Now, the stock was up after the company reported good results, and Morningstar increased its fair value estimate on the stock by $20 to $500. So what are some of your takeaways from the report?
Sekera: Takeaway, very strong quarter overall. They beat on both the top line and the bottom line. They provided strong guidance as well. They’re looking for a 30% sequential increase in AI chip sales for this quarter. For fiscal-year 2027, which is actually calendar 2026, they’re looking for $100 billion in AI revenue. Just to put that in perspective, that implies that AI sales double in 2027 after tripling a year ago. And our analyst still thinks that could be conservative. He’s looking for even potentially more upside in both revenue and margins. So the stock right now is 330 a share. I mean, that’s only 10% above what our bear case would be, so that bear case you have to assume that there’s a pretty significant correction in AI spending in fiscal 2028 and thereafter to get to that price.
Dziubinski: All right, so, Dave Broadcom stock therefore, it looks very undervalued. So do you view this as sort of a back-up-the-truck moment?
Sekera: In this environment, no, I wouldn’t look at this as being a back-up-the-truck type of opportunity. It is an attractive investment as compared to our fair value. It trades at a 34% discount, puts it well into 4-star territory. But again, all of these AI stocks have really paused since last fall. I mean, they’re already pricing in this quarter, this year, and to some degree, even next year’s guidance. So I think what the market really needs is they need confidence in those forecasted years, year three to year five, as far as seeing that ongoing growth in order to make further gains from here.
Dziubinski: Well, we had a former stock pick of yours, Marvell Technology MRVL, issuing great results last week, and the stock soared. I think it ended up 18%. Now, Morningstar did lift its fair value estimate on the stock to $130. So unpack those results and tell us whether you still like Marvell today.
Sekera: Sure. So as you mentioned, this was a pick. I think the first time we recommended it was on the March 17, 2025, episode of The Morning Filter. It’s up 27% since then. We actually reiterated that pick on May 12 last year after the stock had fallen. So it’s now up 39% since that recommendation date. Although, I do have to admit, like you said, a lot of that gain came after that 18% increase they had after earnings last Friday. I think the market finally became convinced of the strength of their products, how much their products are needed for the AI buildout. Of course, they make networking, optical and custom AI chips. And I think the market also finally became convinced that they’re not losing market share, they’re not losing customers, as a lot of people had feared.
The other thing the company did is they provided two-year guidance. That’s not something you see very often. You don’t see a lot of other management teams giving two-year guidance. So I think that really shows their confidence in their outlook and in their client orders. So for fiscal 2027, which is again calendar 2026, they’re looking for $11 billion in revenue. That’s a 30% growth rate. They’re looking for that to increase in fiscal 2028 to $15 billion, which would be essentially a 40% growth rate. So with that, we incorporated that into our model. Those guidance were higher than what we were expecting. So that was really the bulk of our fair value increase. Now, taking a look at our valuation today. So we’re looking essentially at the stock being worth 22 times fiscal-year 2028 earnings. Again, that’s calendar 2027, whereas the market right now is only valuing it at 15 times.
Dziubinski: Well, let’s talk about CrowdStrike CRWD, Dave. Now, the stock was up after earnings. Talk about the results.
Sekera: Honestly, I don’t think there’s really that much specifically to say here about the earnings. I mean, generally, we think they were in line with our own expectations. So no change from our point of view, from a fundamental perspective. I mean, the results were pretty strong. The quarter was up 23% as far as revenue. Operating margins expanded by 370 basis points to 25%. We’re seeing ongoing indications that customers are consolidating their spending with fewer cybersecurity vendors, which generally has been our investment thesis in the space overall. So I’d say nothing really new, necessarily to report as far as the quarterly earnings go.
Dziubinski: Well, Morningstar raised its fair value estimate on CrowdStrike to $460 after earnings. And Morningstar also increased its economic moat rating on the company from narrow to wide. So talk about both of these upgrades, Dave, and tell us if CrowdStrike looks like a buy today.
Sekera: Yeah, and I would say, when I’m thinking about the fair value increase, it really mostly came from that upgrade in our moat to a wide economic moat. Really, that just indicates increased confidence we have in the company’s ability to be able to generate excess returns on invested capital over its weighted average cost of capital for a longer time period. A wide economic moat means that we think they can generate those excess returns for the next 20 years or more, as compared to a narrow moat where we’re only pricing in excess returns for the next 10 years.
So, based on our analysis of CrowdStrike fundamentally and thinking about the benefits from AI, essentially AI threats are just going to increase the economic value for the need for cybersecurity and CrowdStrike’s ability to use AI within its own cybersecurity products, I think really is the genesis of why we increased that moat. Now, taking a look at the stock, it’s only trading at a slight discount to fair value right now, puts it in 3-star territory. Personally, I see better value in other names like Palo Alto PANW that we’ve talked about in the past or maybe a cybersecurity ETF, like we’ve talked about: ticker BUG.
Dziubinski: All right. Okta’s OKTA stock was up 11% after its earnings beat, and Morningstar held its fair value estimate on this one at $100. So what did you think of the report?
Sekera: Pretty solid quarter. Revenue up 11%. Operating margin expansion of 190 basis points to 27%. Taking a look at their guidance for fiscal 2027, they’re looking for sales growth of 9% and a margin of 25%. Generally, that’s in line with what we had already modeled in our financial model. So we maintained our fair value at $100 per share. I would just say here, specific to Okta itself, our analysts noted that as you see more and more agents, or AI agents specifically, proliferate, they see a demand for an agentic identity and governance cybersecurity, which is really the wheelhouse for Okta, so I think that’s going to just be a good general trend that’s going to be a tailwind for this company for at least the next couple of quarters or next couple of years.
Dziubinski: All right. So does Okta’s stock look attractive after earnings?
Sekera: Yes, it does. It’s a 19% discount to fair value, puts it in 4-star territory. But I have to note, this is one that we rate with a no economic moat. So if you’re to take a look at the other one we’ve already talked about, like Palo Alto, which is a recommendation of ours, that trades at a much greater discount to fair value at 27%. It’s also a company we rate with a wide economic moat. So I actually much prefer Palo Alto at this point over Okta.
Dziubinski: All right. Well, you recently published a new Stock Market Outlook, and our audience can access that report via a link in our show notes. Now, in the report, you had this really nifty heatmap depicting the year-to-day performance of each sector. So we have a slide of that to share with our viewers. So walk us through the slide and what’s been going on.
Sekera: Sure. So the reason that we published this one is, I think it really helps investors visualize what’s been going on in the marketplace. Now, before kind of this quick selloff that we’ve had over the past week from the surface, the broad market appeared to be relatively stable year to date, at least through the end of February. From peak to trough, the market really had only varied by 3%. But when you go beneath the surface, huge amount of turbulence beneath the waters, significant sector rotations going on. And based on the market capitalization of those sectors, I think you can really see much better using a heatmap, what’s been going on.
So, of course, first couple months of the year, a lot of fears that AI is going to either disrupt or displace a lot of different types of industries. So sectors like software have been selling off for really over the past year. Those got hit even harder first couple months of this year. Then we started to see that spread into a lot of other industries. So we saw a big selloff in consulting, wealth management stocks, insurance brokerage companies, logistics firms, and so forth. So through the end of February, the tech sector was down 5.4%. You got the financial sector down 6%.
So when you look at the size of those, you can see that even those aren’t down all that much because there’s such a large market cap. That’s allowed a lot of these other sectors that are considered to be safe from AI to raise quite considerably. Energy, just through the end of February, up 25%. Basic materials up 19%, industrials up 17%, and so forth. So again, that’s why I really like looking at this heatmap, because you can see how these large market-cap sectors don’t really require that big of a percentage move in order to have outsize impacts on a lot of these other smaller sectors.
Dziubinski: All right, so Dave, given today’s market, how should investors be thinking about their stock allocations?
Sekera: So, I’d say, if you’re at your long-term targeted allocations between fixed income and equity, I probably wouldn’t be making any big moves here. If you remember, in our 2026 outlook at the beginning of the year, we noted a lot of different reasons why we thought 2026 was actually going to be a lot more volatile than 2025. Two of those key reasons being AI valuations and geopolitical risks, both of which are working their way through the system right now. And that’s why we recommended essentially a barbell position at the beginning of the year. So we’re looking to overweight value stocks and balance that with an overweight in AI tech stocks. That way, when we had volatility, when you had the market trading off, those value stocks would at least hold their value, if not trade up from market rotation, and be able to offset the broad market downturn.
And then, conversely, when you have market rallies, I would expect those AI tech stocks to outperform to the upside, and we’ve been seeing a lot of that year to date. If you look at the Morningstar US Value Index, that’s up over 5% year to date, whereas the Growth Index is down 2.5%. So, in my mind, I think this provides investors a good opportunity to take profit in those areas that have outperformed, especially those value stocks like Lockheed Martin. That’s up 38%. Deere DE up 33%. And then you can reinvest in those AI tech stocks that have sold off. Palo Alto, down 15%. AMD AMD down 11%. So this is a good opportunity to do some rotation between the market movements.
Dziubinski: Well, it is time for our question of the week. Our question this week is from longtime viewer Danny, and I’m going to paraphrase Danny’s question a little bit. He wonders if you buy a core holding when it’s really undervalued and then it hits fairly valued, which is 3 stars, pretty quickly, would it be wise to take some profits at 3 stars or maintain that position and then wait until it goes to 2 stars before scaling back? And again, this would be a core holding.
Sekera: Yeah, and I mean, that’s a great question, to some degree, a little impossible to answer. It always comes down to a matter of valuation, but also you need to kind of understand what your own risk profile is and what your portfolio construction is. So, even if it’s a core holding, if it’s getting to be too far into overvalued territory, especially if it’s now become a larger and larger position of your overall portfolio, and you’re now overweight in that name, yeah, always a good time to take a little bit of profit off the table. Again, just like I like to layer into positions, I also like to scale out of position so you don’t have to sell the entire position, you can take some profit, you can keep some. That way, if you have more momentum—again, you always want to let your winners run to some degree—but you also then have the ability to have that dry powder and then be able to repurchase it if that stock sells off.
Now, when I think about that star rating system, again, that’s our risk-adjusted fair value range, so for a 3-star-rated stock, that means it’s in the range we consider to be fairly valued. So for long-term investors, you should expect to earn, based on our assumptions, kind of that cost of equity type of return. Absolutely nothing wrong with that, especially for a core holding. Typically, the cost of equity for those type of companies is 8%-9%. So typically, I’d say it’s once something hits 2 stars, typically where I consider to start maybe trimming some. And of course, when it gets into 1 star, that’s a good spot to sell some more. And the further gets into 1-star territory, you want to continue to keep cutting your exposure to that stock.
I think the hardest part is knowing when to cut losses to the downside, when a stock starts to sell off, where, for lack of a better way to put it, when we’re wrong in our valuations. I mean, generally, I think our track record is pretty good over the long term, and it’s pretty good if you look at our overall coverage. But we’re always going to have instances where we’re wrong. And then sometimes, even when we’re right, we might be wrong for a while. Just based on how much market momentum there might be in some of these stocks. So, again, I think you need to have your own informed view, based on your own analysis. But always watch for those cases where the company fundamentals are weakening and the stock is selling off, especially if we’re cutting our fair values to the downside. Those would be the one where I try and look to cut our losses before the stock has too much more downward momentum.
Dziubinski: Well, Danny, thank you for your question. Viewers and listeners: If you have a question, send it to us at our email address, which is TheMorningFilter@Morningstar.com.
All right, Danny, your question inspired the picks portion of the podcast. This week, Dave has brought us three stocks to sell and three stocks to buy instead. Now we’re going to start with the sells. Now, all of these have been picks in the past.
So the first stock to sell was one of your favorite core stocks for a while, Dave, and that’s Johnson & Johnson JNJ. So tell us, why is that one a stock to sell today?
Sekera: Yeah, and that was one that we talked about on April 29, 2024, when we talked about a lot of the core holdings or stocks that we consider to be core holdings. Stock is up 65% since then. I mean, almost all of that gain really came just since last summer alone. But taking a look at the chart, it looks like it might be rolling over. It looks like momentum appears to be wearing out at this point. It’s a 1-star rated stock at a 32% premium. So again, this one, I think, is just a good indication that it’s getting to be too far overvalued. Momentum has taken it up high enough that, if nothing else, now’s a good time to at least take some of it off the table.
Dziubinski: All right, your next stock to sell is Huntington Ingalls Industry HII. Now this one is up, I think, it’s 122% last time I checked during the past 12 months, so that’s pretty much a home run right there, Dave.
Sekera: Yeah, this was a pick initially on July 8, 2024, and we actually recommended it multiple times thereafter. I mean, this is a stock that went against us for a while in 2024. So from the initial pick, the stock is up 77%, but it’s up even a lot more based on those other times that we re-recommended it after it traded down. As you noted, it’s had a tremendous run over the past 52 weeks. Unfortunately, we just think the market’s probably getting ahead of itself. It’s trading at a 20% premium, which puts it just into 2-star territory.
Dziubinski: All right, your final stock to sell is Newmont NEM. Now, this one is up 165% during the 12 months. So my guess is it’s really overvalued.
Sekera: Yeah, so this is one we first recommended on the Jan. 8, 2024, episode of The Morning Filter, and we recommended it a few times thereafter. Now, personally, maybe I disagree a little bit with our analysts as far as what the long-term forecast price for gold should be. But yeah, after the stock has gone to 116 from $40 and we first recommended it, I think you have to at least take some of the profit off the table. Again, you don’t need to sell all of it, take some profit. If there’s a pullback, you can always buy back into it. But it is trading at a 66% premium right now, which puts it well into 1-star territory.
Dziubinski: All right, so let’s pivot over to your stocks to buy instead. Your first stock pick this week is S&P Global SPGI. Give us the highlights on this one.
Sekera: S&P Global is currently trading at a 21% discount, just enough to put it in 5-star territory. Not much of a dividend yield. It’s a little bit under 1%, but it is a company we rate with a low uncertainty and a wide economic moat, that moat being based on intangible assets, network effect, and switching costs.
Dziubinski: Now, S&P Global is down, the stock’s down quite a bit this year. So talk about why that is, and then explain why you like it.
Sekera: Well, first of all, I have to admit, I’m really no fan of credit rating agencies myself. And that could be a separate podcast in and of itself as to talk about why. But, in this case, you got to separate your personal opinion from the valuation on the stock. This one got pulled down with all of those other stocks that people thought were at risk from AI. But we just don’t see this one being at risk from AI for a number of different reasons. So, for example, if you think about, really, why we rate this with a wide economic moat, there are a huge number of regulatory barriers to entry to become an NRSRO, which is nationally recognized statistical rating organization; the use of their ratings are incorporated into most fixed-income portfolio documentation.
So, for example, a lot of investment-grade corporate bond funds will specify that the rating agencies have to have an investment-grade rating or better in order to be able to buy into those portfolios, or if they fall below investment grade into high yield, they have to sell those positions. So, again, it takes long time periods to be able to change those kinds of documentations. And then if you look at some of their other businesses, like their index business, S&P indexes are the benchmark for just a huge number of funds and ETFs out there. They have a lot of proprietary data in the commodity markets. If anything, AI makes proprietary data even more valuable in the future. And then, lastly, maybe some concerns about what’s going on in the private credit markets and how that might impact the rating agencies. In this case, private credit is mostly nonrated. I don’t think S&P Global rates very many private credits. So I don’t see this one getting caught up in the downturn that we’ve seen in the private credit market.
Dziubinski: Your next stock pick this week is Amazon AMZN, so give us the bird’s eye view.
Sekera: Amazon trades at an 18% discount to fair value. Puts it in 4-star territory. We rate the company with a medium uncertainty, and it has a wide economic moat. In fact, it’s one of only two stocks that we rate with four of the five reasons that we look for a wide economic moat. In this case, we think they have a cost advantage, intangible assets, network effect, and switching costs.
Dziubinski: So then why specifically, Dave, do you like Amazon stock today?
Sekera: So when I think about Amazon stock today, I think the stock has a lot of pressure on it and sold off to some degree about worries that they’re spending too much money on capex this year in order to build out artificial intelligence and their platform. And to be honest, yeah, it’s hard to disagree with that concern. But when you think about Amazon, they have a very long history of being very successful with big bets on new technology and new business lines.
So in my mind, I think I’m going to give them the benefit of the doubt for now. I think this is a core holding type of name. I don’t think Amazon’s at risk of being disrupted or displaced by AI. Underneath the surface, they’re just hitting on all cylinders. We still think there’s a lot of room to run, a lot of upside potential in AWS. That’s where they host artificial intelligence. If they can continue to keep improving their retail margins, I think there’s a lot further to go there. Their advertising business doing very well, very valuable. Just generally, we’re looking for pretty stable growth and operating margin expansion. So again, this is one where, I think, when you look at where it’s trading compared to where it’s traded in the past on a valuation basis, now’s a good time to be looking at this stock.
Dziubinski: All right. And your final stock pick this week is Blackstone BX. Run through the key metrics on it.
Sekera: Blackstone’s trading at a 37% discount to fair value, puts it well into 4-star territory. Nice, healthy dividend yield at 4.3%. In fact, it’s really getting pretty close to 5-star territory. Now, we do rate this one with a high uncertainty, but that’s offset my mind by being a wide economic moat based on intangible assets and switching costs. And I’d also note of the alternative asset managers, this is the only one we rate with a wide economic moat.
Dziubinski: Now, Blackstone stock has been knocked down quite a bit this year, along with the stocks of other asset managers with exposure to private credit. So now, given that, Dave, why do you like it?
Sekera: I’ve kind of been vacillating on this one over the course of the weekend a little bit, to be honest. So let me first talk about why I initially picked this as being a pretty interesting opportunity last week, and then why, over the course of the weekend, I’ve kind of been second-guessing myself on this one.
So, again, the company is an alternative asset manager, essentially, they make money on charging fees based on the amount of assets they have under management. In our view, we think that this company is the best of breed among those nontraditional asset managers.
The other thing that I think is a positive on this one is they allowed 7% of redemptions in their private credit fund, even though the documentation only required 5%. So, in my mind, I think that shows they have better liquidity than their competitors who closed their gates. May also be indicative of better credit quality in their fund compared to some of those competitors. As far as the dividend goes, When I talked to Gregg, he said he didn’t see any near-term risks of that. So, at least if nothing else, you’re getting paid a pretty good dividend yield as we work through all the machinations as far as what’s going on in the private credit market.
We’ve talked private credit a number of times in the past. Why I have a lot of concerns about private credit specifically, especially as far as Morningstar DBRS talking about how they’ve seen the fundamental credit quality in the private credit market weaken over the past year, year and a half. So I’d say if private credit isn’t as bad as we think it is, this thing is very, very undervalued. And even if private credit does go through a major repricing and restructuring, this one is the least exposed. It’s going to be a survivor in the marketplace, and I would say it’s probably positioned in a good place to be able to buy up private credit exposure from those other funds, that, to the downside, are going to be forced sellers. And in this one, if you have that capital, like I think they will, they’re going to be able to buy up a lot of those positions at big, deep discounts.
So offsetting all of that, and why I’ve really been second-guessing myself over the course of the weekend, private credit is still in the stage where it’s getting worse; credit quality is deteriorating. I don’t think credit spreads have probably widened out enough in order to fully reflect kind of the fundamental deteriorating. Now we don’t have a way to see where private credit spreads are actually right now in those funds. But just taking a look at, like, the high-yield market, the public high-yield market as a benchmark, if you look at the Morningstar High Yield Index, the credit spread there for that index is only 310 basis points. That’s only about 50 basis points higher than where the historical lows or historical tights are. For perspective, the index was over 450 last year following the “Liberation Day” tariffs. When markets were falling in 2002, it went up over 500. Those are more to me, like, average, or even slightly better than average type credit spreads compared to where they’re trading today at just over 300. We have seen a lot of other private credit funds halting redemptions, closing their gates.
Thinking about private credit, I do think this is going to be at higher risk of a spike in default if oil prices were to stay higher for longer. So I’d say this is one, if you want to get involved now, I’m not going to necessarily disagree with that. I’d start with maybe a smaller position and keep this one on the watchlist. So that way, if it does trade down, if private credit does become worse, this is definitely the one that would be my pick after we get to deeper and deeper valuations.
Dziubinski: All right. Well, thank you for your time this morning, 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 for The Morning Filter podcast at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe and have a great week.