Plus, whether it’s time to overweight stocks.
Hello, and welcome to The Morning Filter. Every Monday, Susan Dziubinski sits down with Morningstar Chief U.S. markets strategist Dave Sekera to discuss one thing that’s on his radar this week, one new piece of Morningstar research, and a few stock picks or pans for the week ahead.
Key Takeaways:
On Radar: Inflation, Earnings
New Research on AMD, NVO, GOOGL, Others
Should You Overweight Stocks Today?
3 Stocks to Sell and 3 Stocks to Buy
Read about topics from this episode.
Read Dave’s latest Stock Market Outlook: May 2025 US Stock Market Outlook: Eye of the Hurricane
Keep track of earnings at Morningstar’s earnings hub: Company Earnings
Learn more about Morningstar’s approach to stock investing: Morningstar’s Guide to Investing in Stocks
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Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services Chief US Market Strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or pans for the week ahead. Well, good morning, Dave.
Before we talk about the week ahead, we had some news break this morning that the United States and China have come to a bit of a breakthrough on trade, significantly reducing tariffs on both countries’ goods for 90 days. So what’s your reaction?
David Sekera: Hey, good morning, Susan. It’s a beautiful spring day out, markets are up about 3% premarket, so what’s not to love?
Now, seriously, I’m still reading through the news trying to figure out exactly what this agreement is. At this point, it appears to me as though it’s really just another 90-day pause. Essentially, the US and China agreed to suspend most of the tariffs. So here in the short term, it’s a good de-escalatory move, but between the different tariffs that were outstanding, like the 10% tariffs, the fentanyl tariffs, and so forth, I still think the total tariffs on China, by my estimates, are still 30%. So it’s still higher now than it was before all of this began.
So while it is a good step forward and it allows breathing room for both parties to be able to have some negotiations, but it’s still high enough that it’s going to keep the pressure on both sides. It is still going to be contractionary for both economies. So it still forces both sides to be able to negotiate further from here.
In my mind, I still think we have a long way to go before we get any kind of real specificity as far as what the final trade terms between the two countries are going to be, what specific product, product categories are going to be covered, which ones are excluded. So again, a good first step, but certainly not any kind of conclusion that we’re really going to want to have at the end of the day.
Dziubinski: Now, as you mentioned, the market’s responding very positively to the news this morning as we’re taping this. So what do you make of the market’s response?
Sekera: I think it’s just too much, too far, too fast. I mean, the markets, last time I checked, futures were up give or take about 3% this morning. That puts the market now back to where it was trading at the beginning of March, so we’re only down a little bit from where we began the beginning of the year. So I just think it’s too far too fast.
Now overall, I still think that even with this morning’s move, the market trades at a couple percent discount to our fair value. So I still think for long-term investors, you still want to be market-weight equities. I would not be moving to an underweight at this point in time. But I think it’s just a good indication of how sometimes the market probably moves too much too fast, like a pendulum, where it might swing one direction or the other before you move back toward the middle.
I mean, if you remember, we officially changed our recommendation to overweight US equities on the April 7 edition of The Morning Filter. At that point in time, the market was panicking. It was just selling off way too much as compared to valuations. Now since then, we’ve moved back to a market-weight recommendation over the past few weeks to be able to lock in those gains. So while the market is still probably at a couple percent discount, I think this rally is just too much too fast until we get more specificity as far as what the real trade terms are going to be, what they may have as far as impacts on the economy overall, as well as what individual companies will be affected and which ones aren’t.
Dziubinski: All right. Let’s talk a little bit about last week‘s Fed meeting. Now as expected, the Fed left rates unchanged. Was there anything notable, in your opinion, in Fed Chair Powell’s comments?
Sekera: Not really. I think overall, the meeting itself and then the Q&A afterward was what I consider to be much ado about nothing. I heard him say a lot of words, which in my mind, I just kind of interpreted it as him just really saying, “We have no idea how the tariffs are going to pan out as far as what they do for the economy and inflation in the short term, much less what they’re going to do over the longer term. But when they do pan out, we will take action in order to support our dual mandate, as needed.”
So definitely the Fed is on hold here until they see the economy either getting worse than what they were expecting, and if so, having to make an adjustment that way, or conversely, if inflation and inflation expectations start moving, too high above where they want to see that, then they’re gonna have to move that way. Of course, either of which, the economy getting worse faster than expected or inflation going higher faster than expected, both of those would be negative for the stock market as well. But again, for now, just the market or the Fed on hold until we get more data coming in.
Dziubinski: Well, and we are going to, let’s look ahead now, we are going to get some data this week. We have both the CPI and PPI coming out. So what’s the market expecting? And what could a higher than expected number or reading mean?
Sekera: It’s actually kind of the same thing I think you and I talked about last month. I think if the numbers come in in line or better, I think you can really just ignore them because they’re not going to have any bearing on what future inflation is going to be going forward depending on how all the tariff negotiations work out. Now conversely, if it is worse than expected, I do think that would be a bad sign, that would handcuff the Fed even further from being able to cut rates anytime here in the next couple of months. So again, I think keep an eye on it, but it’s not necessarily anything I’m going to read too much into.
Dziubinski: All right. Well, are there any companies reporting this week that you’re interested in hearing from?
Sekera: To be honest, really the only one I’m really gonna be listening for is going to be with Walmart WMT. Now, as you remember, that is a stock that we think is significantly overvalued. It’s a 1-star-rated stock. It trades at over a 50% premium to our fair value. I think it trades at about, like, 36 times forward earnings, so a very expensive stock. Great company, wide economic moat, had very good numbers the past couple of quarters. Very good increases in foot traffic and same-store sales, so I want to see if they’re still getting that same kind of growth as consumers trade down from more traditional supermarkets and retailers to an everyday low-price provider like Walmart. Want to hear if there’s any changes in consumer spending habits. So we’ll just see how this one works out. Any kind of miss here, I do think there is a lot of downside risk in this stock.
Dziubinski: All right. Well, let’s move on to some new research from Morningstar. And we had a few tech companies report earnings last week, so we’ll start right there. AMD‘s numbers were good, and the forecast was, too. What did Morningstar think of the report, and how does the stock look from a valuation perspective after earnings?
Sekera: Yeah, just a quick recap here. So first-quarter revenue came in above guidance. Second-quarter revenue guidance was above consensus expectations. Now, their EPS guidance was a little bit lower than forecast, but in our mind, that’s really not that much of a concern. A lot of that is really just due to the previously stated 800 million in charge-offs that they’re going to have to take for those AI chips that they were building specifically for China to get around the regulations.
Now in the short term to medium term, we still think AMD is poised to take market share away from Intel, both in PCs and servers, so that’ll be a good tailwind for them here in the short term. Longer term, we still think AMD will ultimately be the number-two player in AI GPUs, behind Nvidia NVDA. Still a couple years out, but as that occurs, again, another longer-term tailwind for the company. Overall, we maintain our $120 per share fair value estimate. The stock has risen off of its early April lows, so at this point, it’s now back into 3-star territory after bottoming out in 4-star territory.
Dziubinski: All right. Now Arm ARM‘s stock was down after the company reported decent earnings but issued weaker than expected guidance. Morningstar held its fair value on the stock. So what did Morningstar think of the report?
Sekera: Generally, I think the report really kind of supports our investment thesis that we think this stock is significantly overvalued. We think the market is just pricing in too much earnings growth for too long. Taking a look at their revenue guidance here—is probably a little disappointing to the market. 1 to 1.1 billion in consensus was at the high end of that guidance range. As far as earnings guidance, that was 30 to 38 cents per share, much lower than what the consensus is at 42 cents per share. And in order to make their numbers for the full year, the management of this company is banking on a much stronger second half of the year. So if that’s not to play out, probably still more downside risk in this stock. It’s very highly valued. It’s really based on outsize earnings growth. To be honest, I’m actually kind of surprised the stock didn’t pull back more after that earnings announcement.
Dziubinski: Now, even after that pullback, Arm stock looks way overvalued according to Morningstar, and you talked a little bit about how our thesis is different from the market’s on the stock. Unpack that a little bit more, because it seems like we really have quite a different take on the company than the market does.
Sekera: We do. So this business model is what we call being an asset-light business. So what they do is they develop the architecture that’s used for designing the CPUs for smartphones. So they’ll make money, really charging a royalty fee. They don’t manufacture anything. And since they don’t actually have those manufacturing costs, any growth that they have really falls almost straight to the bottom line.
So as more cellphones are sold using their architecture, it’s a very highly leveraged effect to earnings growth over time. Having said that, we have a pretty strong growth built into our model. Even with all that, it’s a 1-star-rated stock at a 60% premium, just as an indication of how highly valued this company is. It trades at 63 times our 2026 earnings forecast, and taking a look at our model, I think we expect earnings to double over the next five years. It trades at 36 times 2029 earnings forecast, even expecting earnings to double over that five-year time period. So you have to have a much stronger growth, even over what we’re currently modeling in, to think that the stock is undervalued or looks attractive today.
Dziubinski: Yeah. Sounds pricey. All right. Now Fortinet FTNT stock fell 12% after reporting earnings. Morningstar’s analysts thought the report was solid, and management held its guidance, and we maintained our fair value estimate. So what do you make of the market’s response, and is there a buying opportunity here?
Sekera: So they started 2025 with what we considered to be pretty strong results. Top line growth of 14%, margin expansion of 565 basis points to 34.2%. We think this supports our longer-term investment thesis, both in cybersecurity stocks and for this company specifically. The company is getting the benefits of product expansion. Their legacy business was really just firewalls. They’re now moving into what’s called secure access service edge and into security operations. We did maintain our fair value at 108 per share. So the only thing that we can really think of here is that maybe the stock sold off as the market was expecting the company to raise its 2025, sales and billings outlook, whereas management maintained their guidance or their outlook on both.
Maybe it’s just a matter of the company at this point in time with everything going on in the world just being conservative in an environment where the economy is slowing and the impact from tariffs is somewhat unknown. The stock has fallen to a 10% discount from trading on top of our fair value. However, at this point, that’s not enough to move it into 4-star territory. It’s still a 3-star-rated stock. So maybe one of those stocks you keep on your buy list here, watch it, and if it does have more of a correction, one that you can start layering into over time.
Dziubinski: All right. Well, let’s talk about some companies outside of tech that reported last week. Clorox CLX reported a sales decline for the quarter. What did we think of the report?
Sekera: I think we were actually kind of disappointed in the top line. They had a 2% decline in organic sales. It’s just a combination of lower prices and an unfavorable mix shift. Having said that, the margin expansion, we thought, was encouraging. The gross margin expanded 240 basis points to 44.6%. That was based on a combination of some cost savings that are working their way through the system, as well as some divestitures of some lower-margin businesses. And the other aspect that our analyst highlighted here is that they did hold ground as far as their market share numbers, so we’re not seeing a shift to private label. So overall, no change in our longer-term thesis.
Taking a quick look at our model, over the weekend, we’re forecasting only 3.3% top line growth, combination of a little bit of pricing and a little bit of volume. So nothing very aggressive there. We do forecast the operating margin to gradually return to prepandemic averages, over the next couple years, getting up to about 18% on average. So it’s just a matter of the combination of moderate top line growth with slow to steady margin normalization. It gets Clorox back on track to about 8% earnings growth rate over time.
Dziubinksi: Now management suggested that increased tariffs will add $100 million to costs over a one-year period. So given that, is there any change to our fair value estimate for Clorox stock, and is Clorox a buy today?
Sekera: Yeah, we still think it’s a buy today. It trades at a 24% discount to our fair value. It’s a 4-star rated stock, pretty attractive dividend yield at 3.5%. In our mind, it’s a wide economic moat-type company, so has those long-term durable competitive advantages that we look for, and the stock is only rated with a medium uncertainty. So while it might have been a little disappointing this quarter, for longer-term investors, we still think this is a pretty attractive opportunity for a very high-quality branded business.
Dziubinski: All right. Well, Novo Nordisk NVO‘s first-quarter results were a little below expectations, due largely to disappointing sales of obesity drug Wegovy. So what did Morningstar think? Any change to the fair value estimate on the stock?
Sekera: Yeah, as you mentioned, the first-quarter growth was below our expectations, and specifically that was due to what they called disappointing sales of Wegovy in face of unbranded competition. Now, looking forward, we expect that that competition coming from those generic competitive products should decline. That grace period for compounding ends May 22. So the company is looking to reaccelerate sales by improving its products later this year for self-payments as well as for insurance companies. They recently announced a new deal with CVS to be the national formulary for GLP-1 drugs. So the expectation is that the disappointing results in the first quarter will be balanced by higher-than-anticipated growth in the second half of the year.
And then the other part with this story, too, is that we think the next catalyst in the GLP drugs is going to be a launch of an oral version as opposed to the injectable. We expect that that could occur here in 2026, and we think Novo has a pretty solid position for being one of the first movers there. Overall, no change to our fair value, $89 a share.
Dziubinski: All right. Now Novo’s stock looks pretty undervalued today. Is it time to buy, Dave?
Sekera: So I think this is going to be one where it’s maybe more for those investors that are willing to take a little bit more of a speculative position in their portfolio. The stock has been pretty volatile. It dropped, I think, over 50% from its peak of $143 a share—I think that was in June of 2024. It was a 1-star rated stock at that point in time. But it’s down enough now, it does trade at a 27% discount. It’s a 4-star-rated stock.
So to some degree, I also think for investors, it’s also going to just really depend on your own personal outlook for the GLP-1 drugs, overall, as well as for Wegovy to be able to maintain its growth rate in the face of greater competition as we have other GLP-1 drugs come online over the next three years.
Dziubinski: Now, International Flavors and Fragrances IFF is a name we’ve talked about quite a bit in the past. Morningstar cut its fair value estimate of the stock by 8% after earnings. Why?
Sekera: Well, I did reach out to Seth Goldstein, he’s the analyst that covers IFF, just to talk to him about a couple of things. First, I just didn’t know if there was concern in the marketplace that new restrictions on artificial food colorings might impact this company very negatively. And Seth was able to confirm to me that the company only sells a pretty small amount of food coloring and that what they do sell is all natural. So really shouldn’t be any effect on the company, and if anything, it could actually be a slight positive. They might see some sales pick up there. But overall, we did cut our estimates for the company in two of the different divisions—for scents as well as their health and biosciences segments.
In Seth’s mind, those two areas are much more correlated to consumer discretionary spending, and with our view that the rate of economic growth is going to contract, or I’m sorry, not contract, but decline sequentially for the next couple of quarters, he just wanted to make sure he took that into consideration with our fair value.
Dziubinski: So is International Flavors stock still attractive?
Sekera: It is. It’s a 4-star-rated stock at a 33% discount. It’s only a 2.2% dividend yield. Personally, I’d like to see a little bit higher here, but in this case there’s probably enough margin of safety to make it worthwhile. It’s a company we rate with a wide economic moat. Just have to note here that we do rate the stock with a high uncertainty—really because it’s in that basic materials sector.
Dziubinski: Now in company news that wasn’t earnings-related last week, Alphabet’s GOOGL stock took a tumble after an Apple executive said that Apple is exploring adding AI search to its browser in place of its current default, which is Alphabet’s Google. So why did that move Alphabet’s stock, Dave?
Sekera: To some degree, I just think it brings back the question that’s really plagued Google, specifically, as far as when AI really came to the market’s attention. Back then, there was a lot of questioning whether or not AI would end up being a substitute for Google’s search engine, and it also just raises more questions as to what ultimately will happen with the Department of Justice antitrust lawsuit.
Apple Safari, I guess, represents about 20% market share of the global mobile browser market and Safari’s default placement is the Google Se...uh, I’m sorry, Safari’s default placement of Google Search has really been at the center of the DOJ’s antitrust lawsuit, so think to some degree, the market is still waiting to see how that DOJ antitrust suit is going to shake out and what the implications might be for Google Search business.
Dziubinksi: So, what did Morningstar think of this news? Is Alphabet still attractive? Any fair value change?
Sekera: Yeah. In the short term, we think Apple’s pretty unlikely to end its revenue-sharing agreement with Google, and we think that over time, as searches migrate over more toward AI search bots over time, our analyst continues to think that Google will be able to hold on to a high percentage of what he considers to be those monetizable type of queries. Especially in light of Google’s rollout of AI Overviews, which has been doing very well and increasing engagement and ad spending. So at this point, no change to our fair value, 5-star-rated stock, at a 35% discount.
Dziubinski: All right. Well, let’s move away from specific companies and talk about your new stock market outlook. The Morning Filter audience can find a link to your outlook article in the show notes. Now, Dave, in your outlook, you say that we’re currently in the eye of the hurricane. What do you mean by that?
Sekera: Yeah, and it’s a tough day to be talking about being in the eye of the hurricane with all the news and the market trading up as much as it is this morning, but yeah, I just take a bigger step back and really think about the market actionthus far this year.
I think the storm clouds really kind of began on the horizon in January and February, we had the bear market in all of those AI stocks that we thought were overvalued and overextended, but then the hurricane landfall really hit when Trump announced the “Liberation Day” tariffs on April 2. stocks fell all the way into a bear-market territory. The Morningstar US Market Index was down 20% from its highs.
Now, at that point in time, we thought this storm was pushing stocks down too much. On April 7, on that episode of The Morning Filter, we moved officially to a recommendation to overweight stocks. Then we had the implementation of the 90-day pause, the skies started to clear, stocks immediately bounced higher. The focus shifted away from the tariffs toward earning season, stocks climbed throughout earning season, and earnings were what I consider to be relatively benign this past year.
Now we do have the news out this morning. I would say it’s good productive talks, but it’s still one of those things where we don’t know exactly what these tariffs are going to be at the end of the day, while we have this 90-day pause, and that gives both sides really the breathing room to be able to have these negotiations. My guess would be that these are going to be very difficult negotiations, there’s going to have to be a lot of give and take, so we’ll see how these really kind of play out over the next couple of months, with the market getting back pretty close to fair value, doesn’t really give you a lot of margin of safety, so if these talks do break down or there are negative headlines out there, I wouldn’t be surprised to see the markets sell off once again.
And of course, if we do have that second half of the hurricane coming through, and we do see a market selloff, depending on how much of a selloff that is, I do think that could be another opportunity to move back to an overweight, but for now, I would stay in that market-weight position for long-term investors.
Dziubinski: All right. So just to reiterate: no underweighting, no overweighting, really right now it’s still a market-weight, right?
Sekera: Exactly, and at this point, I think it’s really all about positioning.
Dziubinski: Well, then let’s get a little bit to the stock allocations. How would you suggest that investors be positioning that stock sleeve today?
Sekera: We still like value stocks, that would still be a part of the market that we would overweight, barring today’s move. As of the end of last week, value stocks overall were trading at a 16% discount, very attractive valuations in our mind, and also an area of the market that if we do have another selloff, if we have some negative tariff headlines, those will hold up better to the downside than growth stocks. So to pay for that overweight, I think you need to be underweight growth stocks. Those were trading at a 5% premium last week. I suspect those are going to be an even higher premium after this morning’s move, but they are overvalued, and I also think that if we do have another market selloff, those would be the ones that would sell off faster to the downside.
Taking a look by capitalization, still underwei- I’m sorry, still overweight small-cap stocks, those are significantly undervalued. It might be a bit of time before they really start to work. I think that’s probably not until the second half of the year, once we can really start seeing that the US economy is in a position that slowing, this rate of slowing, probably slows and that we see better skies ahead for the US economy expanding in 2026. So once those small-cap stocks see that, they will move relatively quickly to the upside, but they might be a little bit of laggards for now.
But overall, still, I think watch what’s going on in the markets. If we do have some downside volatility, that will be opportunities to add exposure to the downside and then be in position to be able to profit to the upside as you move back to a market-weight position.
Dziubinski: Now, in your outlook you say, and you mentioned this in our conversation just now, that the market may be in for a summer swoon, which makes sense if we are in fact in the eye of the hurricane. So what can investors do to prepare for that scenario?
Sekera: Well, first of all, I think you just need to review your allocations in light of kind of what your targets are, just to see where you are now compared to what those targets are and maybe have to move a little bit here and there, get back to kind of those targeted allocations, just because there have been such large dislocations in the market over the past couple of months. And I think you also just need to make sure that, you personally, based on what your allocations are, are comfortable that, if we were to have another 10% correction, that not only will you be able to sleep at night if we have that correction, but also have the ability to move back into overweight positions if we do have kind of that market selloff.
As far as positioning, I still think, looking for those companies, their high-quality, long-term, durable competitive advantages, those that we identify as narrow or wide economic moats would be the best place to be. Again, they would outperform to the downside, and then be able to benefit to the upside as valuations continue to improve. And I also think, just keep that buy list ready for those stocks that have been dragged down by the overall market and then be able to be in position to be able to add to those positions if they do hit your price targets to the downside.
Dziubinski: All right. Well, it’s time for our audience question of the week. Longtime listener, Danny, and Danny, thank you for being a longtime listener. He has some questions about Becton Dickinson BDX.
So Danny asks, “If BDX is suffering from weaker sales growth than expected, then why is Morningstar’s fair value estimate unchanged at $325?”
“Don’t the worsening economic headwinds portend lower future net cash flows despite technically in-line profits this quarter? What is it that Morningstar sees that the broader market is missing?”
Sekera: Well, and overall, I think Danny is correct that the company did report weaker performance in its life sciences and diagnostics segments. A lot of that was just due to budget cuts at the NIH here in the short term. We also suspect that they’ll probably see some soft spending coming out of other government agencies and from the educational systems as well. And it also looks like a little bit slower business than what was expected in China in the short term. And just anecdotally, I’ve heard on multiple different conference calls this past quarter that business in China has been slower than expectations. So maybe I’m kind of wondering if the economy in China is a lot slower than what’s being officially reported. But, that’s a discussion for another day.
Getting back to BDX, so again, when we think about how we value stocks, the valuation is the present value of all of the future free cash flow that a company’s going to generate over its lifetime. So when you have small changes in near-term performance, that’s not usually a really big driver of valuation changes. The big valuation changes are when there’s some catalyst that causes us to reevaluate our long-term thesis and our longer-term assumptions. In this case, our long-term investment thesis is we still expect that the company will return back toward more-normalized growth and earnings and margins over time. It’s just to some degree, it’s still kind of bumpy getting there. To some degree, the company is still normalizing after the pandemic.
Took a look at the model here, the company had 19% revenue growth in 2021, just a big giant huge pull forward as people were positioning their medical supplies for the beginning of the pandemic. And then we had a 1.6% decline in 2022, only low single-digit percentage growth, in 2023 and 2024, and kind of that deleveraging caused the net income margin to decline. It bottomed at 7.7% in 2023. Now having said all of that, we do expect that going forward, the company will be able to get back on track. Taking a look at our financial model, we’re looking for a five-year compound annual growth rate of 5% for revenue over the next five years.
So if you take a combination of that top line growth as well as that operating margin expansion as they get back toward more-normalized margins that you would see for this company, you’re going to get to an earnings growth rate averaging 10%. Company’s only trading at 12 times our 2025 earnings estimates. So, we still think the valuation here looks pretty attractive overall.
Dziubinski: All right. Well, we’d like to thank Danny for his question. And audience, keep sending Dave and I your questions at themorningfilter@morningstar.com.
Let’s move ahead to the picks portion of The Morning Filter. This week, Dave, you’ve brought us three stocks to sell and three stocks to buy instead. So, how did you come up with these sells and buys, Dave?
Sekera: Yeah. Essentially, for the sells, I just looked for those stocks that were undervalued at the beginning of the year that had just looked for those stocks that were undervalued at the beginning of the year but have since then run up too far, too fast into the area that we now think that they’re overvalued, and you can do some profit-taking. And conversely, as far as the buys goes, we look for those stocks that at the beginning of the year were overvalued but have since fallen enough or that we and/or raised our fair value such that they’re now looking to be pretty undervalued.
Dziubinski: All right. So again, really just kind of looking for those ones that move too far in one direction or the other in order to trip our star ratings. All right. Well, then, let’s look at the sells first. Your first stock to sell is Philip Morris International PM, and this one’s up 85% during the past 12 months, which really surprised me. So, talk about the sell.
Sekera: Yeah, so I mean, as far as the stock a year ago, it was a 4-star-rated stock. As you mentioned, the stock is up, what is it? 80-some percent over the past 52 weeks. Back then, we thought that the market was greatly underestimating the value of Zyn, that’s their smokeless nicotine pouches. In fact, now it looks like 40% of the company’s revenue actually comes from smoke-free products, but with as much as that stock has run up, it is now a 2-star-rated stock and trades at a 13% premium to our fair value. So if you’ve ridden this stock that far, certainly a good time to at least take a little bit of profit off the table on this one.
Dziubinski: All right, your next stock to sell is Exelon EXC, why?
Sekera: Yeah, a year ago, May 2024, it was a 4-star-rated stock. Just thus far this year, it’s up 20%--that’s a big move for a utility company. Now trades at a 10% premium so just edges into 2-star territory, and I think that’s actually emblematic of most utility stocks that, while a couple of years ago we thought that they were very undervalued, once they became that second derivative play on artificial intelligence, most of the utilities now have just moved up too far, too fast. The market is just pricing in too much additional growth for electricity demand from AI.
Dziubinski: All right, and your final stock to sell is American Water Works AWK. Tell us about it.
Sekera: Coming into this year, it was a 4-star-rated stock. It’s up about 17% year-to-date so it now trades at a 7% premium, just enough to put it in 2-star territory, so again, 17% run, nice rally especially in a market that has traded off, maybe not so much off after this morning’s move but again, a good time to at least pare your position, take some profit off the table and have that capital to either redeploy in something else that’s undervalued or be able to redeploy here if you do have the market sell off and this one sell off with it.
Dziubinski: All right, let’s move on to your stocks to buy. The first is Amazon AMZN. Walk us through Amazon’s basics.
Sekera: Yeah, I mean through last Friday, Amazon’s stock was down 12% year to date, much greater than their overall negative market performance, but at the same point in time, after earnings, we increased our fair value to $240 a share from $200 so between the market moving down too much and us increasing our fair value, it now trades at a 20% discount, so it’s a 4-star-rated stock. I do have to note it does not pay a dividend so maybe not necessarily appropriate for people looking for a dividend. A stock we rate with a medium uncertainty and a stock with a wide economic moat, and not only a wide moat, but it does have four of the five moat sources supporting that economic moat.
Dziubinski: Now, you mentioned Amazon stock is, I think you said 20% undervalued, which is pretty sizable so how does Morningstar’s thesis for Amazon differ from that of the market?
Sekera: I think there’s a couple of different things that the market is probably overly concerned about here in the short term. The first, of course, is the potential impact of tariffs on Chinese products. In my mind, I think Amazon, just based on its size and scale, will probably be in a better position than most retailers. I think that would allow them to be able to get better pricing concessions from their suppliers than what you would see from smaller retailers.
I think after earnings last quarter there was a lot of concern that growth in AWS, Amazon Web Services—that’s their AI hosting platform—is slower than the growth we saw at Microsoft Azure—that’s their AI platform. Amazon has been capacity-constrained, so that has kept their growth back here in the short term, but we think that growth will accelerate in the second half as more capacity comes online.
And then lastly, I know there was also concern that guidance for the operating margin was below expectations. We think that was really due to the launch costs of their satellite system as well as spending on capacity for AWS, which again, both of those will just end up adding to the revenue and the earnings growth streams for the company over time. Overall, we had already incorporated pretty flat margins this year into our model, so there’s no change as far as that goes, and there’s no change to our overall long-term assumptions.
Dziubinski: All right, your second stock to buy is Ingersoll Rand IR. Tell us about it.
Sekera: So it’s a 2-star-rated stock at the beginning of the year. Through last Friday, the stock was down 14% year to date. We actually increased our fair value slightly up to $84 a share from $80, so it’s one of these ones, it just kind of edged back into 3 stars, it was four stars a little while ago. But overall still trades at a 6% discount for a company with a narrow economic moat and a medium uncertainty. Pays a small dividend. I’d like to see a little bit larger dividend here, but at least you’re getting paid something while you wait for this one to continue to keep correcting to the upside.
Dziubinski: And as you mentioned, it’s been kind of an up and down year for Ingersoll Rand. So why specifically do you like this stock?
Sekera: Yeah, as you mentioned, a lot of stock volatility here based on everything going on with the tariffs. Down 12.3% year to date, so certainly a lot more than what the broad market was down.
What I like here was kind of the price action that we saw after the last earnings announcement. So the stock actually traded up even after management lowered their guidance for the year, so in my mind I think the market had already reset its expectations for the year even before management officially guided down. So they’re looking for earnings of $328 to $340 a share.
I’ve got to assume that that’s probably a pretty conservative estimate for earnings this year. I doubt management would want to take the risk of having to lower again if they weren’t going to meet those numbers and then management also said on the call that order trends had remained relatively stable into April, so again I think that’s also a good indication that the potential tariff impact here might be less than what the market was pricing in and even so I think on the call, management specifically stated that they think they have enough different countermeasures between price increases, supply chain optimization, and changing their manufacturing to more-localized areas, that really should be able to mitigate most of the impact from any potential tariffs that come through anyways.
Dziubinski: All right. And your final stock to buy is Marvell Technology MRVL. Now this one’s really trading at a deep discount. Run through the numbers here.
Sekera: Yeah, I mean, this was a 2-star-rated stock at the beginning of the year. Last I checked, it was down 46% year to date, and over that same time period, we held our fair value unchanged. At this point, it is a 4-star-rated stock. Trades at a 34% discount. Only a small dividend here, I think it’s about four-tenths of a percent, but a company we rate with a narrow economic moat, although being a tech stock like this, it does have a high uncertainty rating.
Dziubinski: You talked about performance. Marvell stock is really having a terrible, horrible, really bad 2025. So unpack the challenges that the company’s facing, Dave. Is it a matter of first DeepSeek then tariffs?
Sekera: So tariffs are definitely a concern here, and our analyst has wrote about it in his notes. And I think we’re going to see—need to see—more clarity before this stock really makes any kind of substantial comeback, so maybe this is a story more for after the tariff negotiations are concluded. But, yeah, more than anything else when I look at the price action on this stock, it’s very similar to what we saw with a lot of AI stocks.
So DeepSeek was definitely the catalyst earlier this year that forced the markets to reevaluate the valuations that they were paying on AI stocks overall. In this case, this stock was trading at a 40% premium above our fair value estimate before the DeepSeek news really hit the headlines.
And then, if you look at the chart here, the stock decline, it really occurred all before even the “Liberation Day” tariffs were announced. So I think it was really much more due to the market reevaluating the long-term valuations that they were paying on these AI stocks, even more than kind of any potential implications that the tariffs might have.
Dziubinski: So then, despite all that, Dave, why is Morningstar bullish on Marvell?
Sekera: So I read through the note over the weekend, and our analyst noted that specifically there are two areas that he is more bullish than what we see across other consensus forecasts for this company. Specifically, he called out custom AI accelerators and optical connectivity for data centers as being the two areas that he has higher growth than I think what the market is currently pricing in. So his forecast for the firm is still to exceed its revenue guidance for AI. I think the company right now is looking for fiscal-year 2026 of 2.5 billion in sales in the AI products, whereas we currently project 3.4 billion. So we’re looking for a lot of upside in the AI there, which really drives, I think, a big differential in how we value this stock than where the market currently is today.
Dziubinski: All right. Well, thanks for your time this morning, Dave. Those who’d like more information about any of the stocks Dave talked about today can visit morningstar.com for more details. We hope you’ll join us next week for The Morning Filter on Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe—and have a great week.