Plus, a look back at 2025.
On this week’s episode of The Morning Filter podcast, Dave Sekera and Susan Dziubinski recap volatile 2025 and preview what may lie ahead in 2026. They discuss what to watch this week, including the earnings report from stock pick Constellation Brands STZ. They unpack Morningstar’s recent 50% fair value increase on Micron Technology MU stock, review results from Darden Restaurants DRI and FedEx FDX, and discuss whether Novo Nordisk NVO or Eli Lilly LLY is the better obesity drug stock to buy today.
Dave shares some of his favorite resources for stock investors. They close with a discussion about stocks that make good core holdings: Tune in to learn which five core stocks look like attractive buys in the new year.
Episode Highlights
00:00 Welcome
01:16 2025 Market Recap
21:20 Micron’s Big Fair Value Increase
32:34 Top Resources for Stock Investors
39:05 Core Stocks to Buy and Hold
Read about topics from this episode.
December 2025 Stock Market Outlook: Where We See Investment Opportunities
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Susan Dziubinski: Hello, happy New Year 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. Dave, good morning, Happy New Year. Let’s kick off our first episode of the New Year by looking back at 2025. The economy held up better than some expected, inflation was pretty mild, and the Federal Reserve cut interest rates three times last year. Any surprises in any of that?
David Sekera: That’s a loaded question. Good morning, Susan. Happy New Year. Coming into 2025, Morningstar’s economics team projected that the real GDP rate for the year would be 2% even. Now, following DeepSeek and the Liberation Day tariffs, they dropped that GDP expectation all the way down to 1.2% in April of 2025. And as you mentioned the economy has really done a lot better than what we and pretty much everyone else had expected after that. At this point, it looks like GDP is going to come in pretty close to our original expectation. Right now, we’re looking for 2.1% for the full year. And in fact, I’d say, I think we see a pretty similar pattern and inflation as well. Coming into the year, our original projection was 2.5%. That was ratcheted all the way up to 3% following the Liberation Day tariffs in April. And it turns out, look, it’s like it’s going to be closer to 2.6%. And then, as far as monetary policy goes, we expected the fed-funds rate to end 2025 in a range of 3.25% to 3.5%. Right now, we’re right in that 3.5% to 3.75%. So pretty close to what the original expectations for the year were.
Dziubinski: We did experience some market shocks in 2025. You mentioned two of them, which was DeepSeek in January, and then again, the tariffs in April. And then, of course, we had the longest government shutdown in history last fall. Yet, US Stocks still did have a great year. They were up more than 17%. And that makes for three consecutive years of double-digit annual returns. What do you make of that, Dave?
Sekera: I think this is a perfect opportunity to use a Yogi Berra quote, “Projections are hard to make, especially about the future.” And I think when I look at what happened in 2025, I think this is really just a perfect example of why. We advocate for investors to take a long-term approach to investing and to take that long-term approach. You know, the first thing you need to do is starting off with understanding what your own risk tolerances are, what your own investment goals are. And using that, be able to set some target. Weighting between how much you want to have invested in fixed income, how much you want to have invested in equity. And then within the equity portion of your portfolio position that in order to be able to take advantage of. Where we see different areas in the market, that market that are underweighted, so you can that are undervalued, so that you can overweight those areas and then underweight those areas that are overvalued. And then as markets move around, you can adjust that positioning.
We started off 2025 with a market weight recommendation on equities overall. And then for positioning, we looked at overweight value stocks, underweight growth stocks, based on our valuations. Then we thought the market sold off too much to the downside early in the year. In fact, we changed to an overweight recommendation on equities on April 7, 2025 episode of The Morning Filter. And then, considering how much growth stocks had fallen at that point in time compared to the rest of the market, they fell further to the downside. At that point, we also advocated to moving to a market weight in growth stocks because they were so undervalued in relation to the rest of the market as well. And of course, then, once the market started moving back up over the next couple months toward fair value, we revised our recommendation back to market weight overall. Once again. Essentially, it was a good way to be able to move into equities as they became further and further undervalued, take profits on the way to get, take profits on the way back to the upside. And then now, at this point, you get back to those targeted equity allocations you know that you have as a long-term investor.
Dziubinski: The AI theme continued to drive the market in 2025. I was a little surprised when I saw that the Morningstar US Value Index actually outperformed the Morningstar US Growth Index last year. Walk us through what’s going on there.
Sekera: In this case, it gets to be a little complicated. You have to get a little bit deep into the weeds. As far as what the returns were and why. If you look at the Morningstar US Value Index, that was up 17.24% for the year, while outperforming the Morningstar US Growth Index, which was only up 14%. Now, from a valuation perspective, value stocks did enter the year at much more attractive valuations than growth stocks, according to our numbers. But I think you need to be very careful here in describing too much of a takeaway to the index returns. If you look at the broad market, which is the Morningstar US Market Index, that was up 17.35% for the full year, which is actually more than the value index or the growth index individually. So the question is, well, how can that be? The US market Index, which is our broadest measure of the market, is an unconstrained index. That means it doesn’t limit how large of a percentage the index can hold in any one stock, whereas the other indexes are constrained, meaning that they do limit the percent that a stock can become of the overall index. The reasoning for this is that it keeps the indexes diversified, prevents any one individual stock from dominating the performance of those indexes, which are used as benchmarks for different funds and ETFs. And we think it’s a better benchmark because the SEC has rules that limits diversified funds mutual funds and ETFs. Such that typically, no more than 5% of assets can be invested in any single issue or to be a diversified fund. What happens is, when our indexes are rebalanced, if a stock has risen to be too large of a percentage of the index of the fund, the index then reallocates out of that stock to lower its percentage.
Now, considering how concentrated the market has become in all of these top mega-cap AI names, The index returns, like the growth index, don’t fully reflect the total returns that the stocks made over the course of the year on a market-cap-weighted basis. For example, taking a look at Nvidia, that stock was up almost 40% last year. But the full market-cap impact of that gain would not have been included in the growth index returns, whereas it is fully reflected in the Morningstar US market. I think we have to be a little careful, truly talking about growth out, growth underperforming value for the full year. I think this is a case where the indexes may not necessarily tell you exactly what was going on in those individual categories.
Dziubinski: Let’s talk a little bit about market capitalization here. We did see large-cap stocks sort of continuing to dominate over small-cap stocks. In 2025. Why was it? Was it strictly the AI trade, or is there something else going on?
Sekera: I would say, for the most part, it was really the AI trade in the large-cap index. The large caps were up almost 18.5% for the year, small caps up about 10.5%. Not a bad return for small caps, but certainly lagged the broader market, and the large caps in particular. At the beginning of 2025, we did note that small caps were significantly undervalued compared to our valuations. However, as we talked about a couple times, in the first half of the year, we didn’t think small caps would outperform until the second half. Or even later in 2025. The reasoning for that being small caps do best. In an environment where the Fed’s easing monetary policy, long-term interest rates are falling, and the rate of economic growth is set to start reaccelerating again. And for much of the year, these conditions just weren’t present. The Fed didn’t start to ease until September. Long-term interest rates didn’t break through the bottom of their trading range until the fall. And for most of the year, our economics team had expected the rate of economic growth to slow sequentially over the course of 2025. Small caps did underperform for much of the year, and it wasn’t until the fall that they started to outperform. And they did outperform the broader market in August, November, and December.
Dziubinski: We’re going to talk at length about your 2026 market outlook on next week’s episode of the podcast. But, Dave, can you give us a little taste of what some of your expectations are for the year ahead, in terms of the economy, interest rates, and market performance?
Sekera: Sure. Our economic outlook for 2026 is we’re looking for a real GDP growth of 2% overall. For inflation, as measured by PCE, the Personal Consumption Expenditure Index, we’re looking for 2.7%. As far as our interest rate policy outlook, we’re looking for the Fed to ease the fed-funds rate to a range of three to three and a quarter percent by the end of 2026. And for long-term interest rates, specifically in this case, the 10-year Treasury, we’re looking for a real GDP growth of 2.6%. To fall to 3.6% by the end of 2026. Now, from a market performance perspective, I actually think 2026 is being set up to be an even more volatile year than 2025. In 2025? We had that huge volatility early in the year, but then, from my perspective, I didn’t really think it was that volatile over the course of the rest of the year. For 2026, of course, AI valuations are very high, yet we need to see the AI buildout. Boom continued the growth that we’ve been seeing in relation to our base case. Any miss there could be a big risk to the downside. Of course, there’s, as noted by our tech team, still even potentially more upside in the AI buildout boom over the next couple of years as well. In my opinion, I think the Fed is going to be on hold until the new chair takes over. So that means we might not see another cut by the Fed until the middle of the year.
And then, as far as economic activity goes, while we do have our forecast for the full year, in my mind, I think it’s just especially hard to forecast economic growth for the full year. With so much of that growth being tied to the AI buildout boom. From a perspective inflation, I think that could run hotter than expected. We still expect a lot of the impact of tariffs to continue to roll through this year, so that certainly could cause some disruption in the markets if CPI and PPI are coming out higher than expected. As far as the US political climate goes, I mean, it’s always hot, but in this case, I think as we approach midterms, it could heat up even more. Not only do we have the midterm elections. But the other question in my mind is whether or not. The current administration is going to try and push through more of their agenda while they still have control of Congress. And then, lastly, just a couple of global risks that I’m keeping a very close eye on. I’m watching the Japanese yen, watching how much that is depreciating versus the dollar, watching JGBs. To Japanese government bonds. The yields on their bonds have been steadily climbing. I think they’re at the highest rates that they’ve been since 1999. As those yields go up, the value of those bonds comes down. We could see a lot of weakening of the Japanese banks if the JGBs fall too far or too fast.
Taking a look at China, I think there’s a potential that it could be a lot weaker than what’s being currently contemplated. And that the rate of deceleration there could be quickening as well. When I think about the market this year, I do think to some degree, it’s a little bit similar of a setup as 2025. And that with the market being at a 4% discount overall right now, we’d still be market-weight equity at your targeted allocation overall. But I think you’re gonna need to be ready this year to be able to reallocate out of fixed income into equity. When we get those bouts of volatility that I’m expecting. When we have meaningful selloffs, that’s going to be the time to go ahead and move more money, higher percentage of your allocations into equities. And then, when the market recovers, you’ll be able to take profits. Conversely, if I’m wrong and stocks run too hot for too long and run too far above fair value, I think you should be ready to underweight stocks. We get too far above our fair value estimates. In that case, you then take the principal and put it into fixed income. And in the meantime, and we’ll talk about this next week, it’s really going to be a matter of positioning into those areas that we see the best undervalued opportunities and steer clear of those areas that are overvalued today.
Dziubinski: Viewers and listeners, be sure to tune into The Morning Filter next week, and we’ll do a deeper dive into Dave’s 2026 outlook. Let’s pivot now over to the shorter term, with what’s on your radar this week. Let’s start talking about the situation with Venezuela. What impact do you think, Dave, the United States’ action against Venezuela could have on markets this week.
Sekera: In the short term, it just doesn’t appear like it really should have much of an impact. When I think about the oil production in Venezuela, they’ve underinvested in that infrastructure for decades now. Yes, I’m sure that they will be working in order to move that production up, But it’s going to take years of being able to build that back up before. I think you get a really meaningful amount of new oil coming onto the markets. I did follow up with our equity analysts over the weekend. I think the main takeaway is, for now, no change to our long-term price assumptions for oil prices. You know, at this point, shouldn’t have a meaningful impact on individual stock valuations. I mean, overall, we’re not going to change our long-term view on the supply/demand characteristics for oil. In the medium term, I think it does probably provide a tailwind for oilfield services firms. It could certainly help the market sentiment there. Certainly, a number of those companies that we think are undervalued, probably worth taking a look as they rebuild the infrastructure in those Venezuelan oilfields.
Then, longer term, I think it can provide a tailwind for those firms that are already involved in Venezuela, such as Chevron. I think it could also be beneficial for those firms that had assets in Venezuela that had been nationalized in the past. Two companies there I’d highlight would be Exxon and Shell. Longer term, as Venezuela ramps up oil production, I think it could put Canadian oil at a bit of a disadvantage. I think that could be a headwind for Canadian oil producers and midstream that transports from Canada down to US refiners. But I think we’re still at least several years out before that impact could occur.
Dziubinski: Anything on the economic front this week you’re going to be watching?
Sekera: A couple of things, so we have the ISM PMI reports for both manufacturing and services. I watch those, but I don’t necessarily know if those are going to be market-moving. We do have the next jobs, or the nonfarm farm payrolls report covering December coming out. I think that’s scheduled for Friday. And we’ve talked at length in the past why I don’t put much stock into those reports. It looks like consensus is for 57,000 right now. That’s compared to 64,000 that was reported last month. I mean, generally those are pretty weak numbers compared to the historical averages. Historical averages are usually around 150,000 per month. But again, we’ll see where the numbers come out. Take a look at the underlying data. But unless there’s something really odd going on, that’s not something that’s really going to change my view of the markets here in the short term. I think much more meaningful will be next week when we get the CPI and the PPI reports and figure out what’s going on with inflation. I think the retail sales number will probably be one that we talk about again coming out of the holiday season.
But to some degree, all of these economic numbers are going to take a backseat to fourth-quarter earnings when they start coming out. Looks like the mega banks start reporting on Tuesday, Jan. 13. And then the last week of January is when we’re going to get all the big mega-cap AI stocks reporting. And, of course, the market will be mostly focused on those AI capex guidance numbers that they’re going to provide. I think the market will be looking for those capex numbers to come up. Depending on how much they come up, we’ll see whether or not that satisfies the market or might be a disappointment.
Dziubinski: We are sort of at a lull in earnings season, but we do have a former pick of yours, Constellation Brands, which is ticker STZ, reporting earnings this week. Now, the stock had a tough 2025. Shares were down more than 35%. And last quarter we saw sales fall, and management expecting the decline to continue. Given all of that, what are you going to want to hear about on the call this quarter?
Sekera: And I mean, I just have to admit, I do feel pretty disappointed on this one. The stock did sell off 30% from March 2024 through when we first recommended it on the May 5 episode of The Morning Filter. We, of course, then reiterated that recommendation on June 2nd. We had thought that the stock had already fallen enough to be able to account for the decline in alcoholic consumption. The stock is now down about another 20% on average from when we recommended it on those two episodes. Over the same time period, our analyst has lowered our fair value from $274 a share to 220. At this point, it’s trading at $141 per share. That’s still 36% discount from fair value. But I think the market at this point really needs to see evidence that the decline in alcoholic consumption is over, looking for consumption really to start stabilizing at the current levels. With the company’s constellation in particular, they’ve had some good success in new product launches. That is helping to offset some of the decline. But at this point, those new product launches aren’t enough to be able to offset just the general consumption decline overall.
Dziubinski: Then, do you think constellation brands, do you still like it heading into earnings?
Sekera: I think the outlook for this year and the guidance they provide is really going to be key at this juncture. In fact, I’m also very interested to hear from management whether or not they address if the World Cup being hosted in the US, Canada, and Mexico will have a significant impact on the results or not. Taking a look at our forecast, I opened up the model over this weekend. We’re only forecasting a half a percent increase in revenue for this year. Essentially, we’re looking for slightly lower volumes being offset by higher pricing. The stock only trades at 11.5 times our earnings forecast for this year, so a very low valuation. And in fact, with the valuation at this level, I think the market is really pricing in further deterioration in consumption for the next year or two before it bottoms out. I think any hint that the decline in alcoholic consumption is coming to an end could lead now. At this point, do you want to buy it? I don’t know. Considering how much the stock has fallen and how undervalued it is, I think you can probably wait until after earnings. Even if there’s good news, even if the stock pops a bit after earnings, there’s still a lot of upside left to come. However, if the outlook is disappointing, I could see a lot of other investors throwing in the towel on this one. I would say, hold off at this point, reevaluate when the numbers come out. And I think we’ll figure out from there whether or not. This still really looks as undervalued as our equity analyst thinks it is.
Dziubinski: We’ll talk about it after earnings. We have some new research for Morningstar to catch up on, and we’ll start with Micron Technology, which is Ticker MU. The company reported strong results and guidance in December, and at that time, Morningstar raised its fair value estimate on the stock by 50% to $225. Dave, walk through the results and the rationale behind the big fair value increase on Micron.
Sekera: I mean, essentially, the only way to categorize it, I mean, it really kind of looks like a catch-up valuation. And the impetus here is just to account for the huge increases in both revenue and just the really expansive margin expansion that they had. And, it’s all just due to the AI buildout boom. So, demand for building out AI, completely outstripping the ability for the sector to be able to supply enough memory chips in order to be able to support the AI Buildup boom and prices just skyrocketing higher. And, that’s also sending margins way up as well. Our analyst is now forecasting that he expects that the supply is going to remain tight well into 2027. Before we can get new supply coming on in order to be able to catch up to this current amount of demand. That’s just going to lead to elevated pricing and margins, much longer than what he had originally forecasted.
Dziubinski: Now, Micron’s stock was up almost 240% in 2025. How does it look from a valuation perspective in the new year?
Sekera: Even after our catch-up in valuation, we still think that the stock is overvalued. Currently trades at a 40% premium to our $225 fair value. And when I think about semiconductors and what’s going on, unlike AI, GPUs, and TPUs, we view memory semiconductors as really being a commodity-oriented type of product. While revenue and margins are skyrocketing higher right now, it’s benefiting from this insatiable demand for memory from AI. Over time, things will normalize as more supply ends up coming online. Take a look at the model here. I’d note, I mean, the company actually lost money in 2023. Their operating margin was only 5% in 2024. It’s 26% in 2025, and now we’re projecting it to rise all the way to 59% in 2026. But as more supply comes online over the next couple years, margins will normalize and fall. For fiscal 2026, yes, we’re looking for revenue to now double. We’re looking for earnings to quadruple to 34.37 per share, that’s up from 8.29. For fiscal 2027. We’re looking for revenue to increase another 27%, and that’ll take earnings all the way up to $46.66. By fiscal 2028, revenue at that point stabilizes. But that’s when we forecast margins to begin to start to contract, that’s going to bring earnings down, they’ll start to decline. We’re looking for earnings of $44 in 2028, and by fiscal 2029, we’re now forecasting revenue to start declining. And in fact, with operating margins also contracting, that’s going to cut their earnings in half, down to $19 a share. And then we have EPS falling even further in the years thereafter. I think this is just one of those instances in which the P/E ratio appears cheap based on current earnings. But it doesn’t tell you exactly what’s going on over a full business cycle. With this being a commodity-oriented type of product in our view, I think the P/E ratio is actually telling you the wrong thing at the wrong time.
Dziubinski: OK. Darden Restaurants, which is ticker DRI, reported earnings in mid-December, and Morningstar held its $160 fair value estimate on the stock. Did anything stand out in the results? And is Darden stock a buy today?
Sekera: No, it’s not a buy today. In fact, it’s still a 2-star rated stock at a 17% premium to fair value. Numbers overall from the top line perspective did look pretty good. The second quarter, the same store sales up 4.3%. That was really boosted by their Olive Garden brand that was up 4.7% and Longhorn Steakhouse, up 5.9%. But when you take a look at the margins, they did contract by about 100 basis points due to higher food costs. I think the good news here is, it appears that Darden is taking market share from its competitors. The LCM store sales on average for the industry was only up 1.3%. And some of that share gain was really coming from what they consider to be their value focused offerings, which is really helping offset a lot of the weaker consumer sentiment out there. And helping drive foot traffic to their different restaurants. Company also raised its 2026 guidance. They’re now forecasting sales growth of 8.5% to 9.3%. That’s up about 1% overall. It was 7.5% to 8,5% before that same store sales. They’re now looking for 3.5% to 4.3% growth. That was 2.5% to 3.5% prior to earnings. And overall, I think the problem with the story here is that we think the company isn’t going to be able to raise prices as fast as inflation this year and next. What’s going to happen is, even though we’re getting very good top-line growth, that’s going to lead to margin compression. And that’s going to keep its margins in line with the three-year historical running average.
At this point, I think the market is pricing in too much revenue growth but not taking it to account. What’s going to happen with the margins. Now, from the broader perspective, I always like looking at Darden. To try and figure out what’s going on with the consumer, really not seeing any big, broad changes in consumer behavior. I think it still shows that while consumer sentiment is weak, consumers certainly are still under pressure, especially in middle-income households. Deals that they consider to be value-oriented, or they’re willing to take advantage of promotions when they’re put out there. The other kind of shift that we’re seeing, too here, is an increase in off-premise consumption, we did see an increase in delivery orders from Uber. For now, I’d say the takeaway from the consumer point of view is consumers are still willing to spend overall. But they need more and more impetus in order to be able to do so.
Dziubinski: Morningstar edged up its fair value estimate on FedEx, which is ticker FDX, to $250 after earnings. What did you make of the results on FedEx, and is the stock attractive?
Sekera: The results looked pretty darn good. Revenue was up 7% year over year. Our analysts noted pretty resilient domestic ground volume. In my opinion, I still think that shows that things in the US Economy really aren’t as bad as I think you’re going to hear from a lot of other people out there. The economy may not necessarily be going great guns. But it’s certainly not falling off a cliff. Like a lot of other people out there might be saying. The weakness that we did see here was probably coming more from lower Asia to US package activity, a lot of that due to tariffs. And we are seeing just ongoing weakness in the industrial sector, we’re seeing some sluggish restocking from retailers. But in my mind that’s nothing new. I think that’s what we’ve been seeing for quite a while now. We did increase our fair value is really just a combination of just slightly higher revenue than what we previously expected, slightly better. You know, margins that led to a 4.6 increase in fair value, but you know. Currently, the stock is trading at a 17 premium to fair value, so that’s enough of a premium to put it into 2-star territory.
Dziubinski: Let’s talk about one of your former picks that got some good news a couple of weeks ago, and that’s Huntington Ingalls, which is Ticker HII. The stock shot up on reports of a new contract with the US Navy, and Morningstar inched up the stock’s fair value a little bit to $353. What do you think of Huntington today, Dave? Is it still a pick?
Sekera: So, not still a pick. We first recommended it back on the July 8, 2024, episode of The Morning Filter. Stock is now up 44% since then. It’s now trading almost right on top of our fair value, which, of course, puts it in the 3-star territory. I think that with the contract here, the most important aspect of them being assigned this new contract is the signal that it sends. That. The DOD still has confidence in the company, even though some of the other programs that they run might be behind schedule. I think it will be beneficial for the company, in that this new contract is utilizing some existing excess capacity. Maybe we can see some operating leverage from there, but we did make a slight increase to the fair value. We added two new frigates to our near-term forecasting. But these will still take a couple of years for the revenue to play out. Between this being a relatively modest increase in revenue overall being spread out over a couple of years, it was only a fair value increase by 1.5%. But I do like the positive signal that it is sending from the DOD and their confidence in the company.
Dziubinski: Novo Nordisk, which is ticker NVO, received FDA approval for its Wegovy pill as an obesity treatment. What’s Morningstar make of that news? Any changes to the fair value estimate on Novo?
Sekera: In my mind, I think this is really, very good news for Novo. I mean, this is the first oral version of the GLP-1 drug. I think you have a lot of people that will want to take advantage of that, as opposed to having to do the injections. Overall, we do think that the company will get a brief commercial advantage. We do expect the oral version of Lilly’s drug should be launching by the spring. But at least you have a couple of months of being able to capture that shift in market share and maybe bringing on new consumers online as well. Our analysts also did note that, based on the studies that were published, it appears that maybe Novo’s oral drug is slightly more effective than Eli Lilly’s drug. And may potentially also have a better safety profile. But having said all that, we did maintain our fair value on both of those stocks.
Dziubinski: Then, Dave, for an investor who might want to play that obesity drug thing theme, is Novo a better opportunity than Eli Lilly LLY right now?
Sekera: Definitely. According to our valuations Novo is rated 4 stars, trades at a 21% discount to fair value. And that’s after the stock popped, I think about 9% after that made that announcement. Whereas Eli Lilly is trading at a 40% premium to fair value. That’s a 2-star rated stock. This actually looks like a really good swap opportunity to me. If you’re involved in Eli Lilly, it might be worthwhile taking some profits there and reinvesting that into Novo instead.
Dziubinski: We’re going to answer a couple of questions from our audience this week. And as a reminder, you can send Dave and me your questions via our inbox, which is themorningfilteratmorningstar.com. All right, our first question this week, Dave, is from Kendall. Kendall wants to know what books are on your bookshelf.
Sekera: Honestly, these books are actually getting kind of old at this point. I think what I need to hear from our audience are some recommendations for some new books in 2026 for us to read. And if we get some good recommendations, maybe we can review them on some future podcasts. But I don’t know up on this side, it’s just a number of different books published by Christine Benz. Of course, if you don’t listen to The Long View, I highly recommend that podcast she runs; it’s just phenomenal. As far as learning how to be able to invest your own money and be a really good long-term personal investor. On this side, I’ve got a couple of old books written by Peter Lynch, the famed mutual fund manager back from the 1980s and early 1990s. I don’t know if you can see over here, but there’s a good book from Howard Marks, Mastering the Marketplace. Private debt—certainly, private debt being in the headlines today. Just a personal note, I’m getting very cautious on the private debt market. I think there’s going to be a lot that probably has to get worked out in that market. But, like I said, hopefully, our audience has some good recommendations for what I should be reading this year.
Dziubinski: You’ve talked about Howard Marks before on the podcast. Are there other researchers or other members in the financial media that you regularly follow?
Sekera: With Howard Marks, I think he publishes pretty regularly a monthly newsletter on his website. If you go in and just do a quick search on the name, Howard Marks and Oaktree, it will get you there pretty quickly. And I think there’s a way you can even subscribe and have that sent to your inbox every month. But honestly, other than that and a few other things, I have a hard time just keeping up with the voluminous amount of research published by our own equity analyst team. I regularly try and listen to Jeffrey Gundlach. He has conference calls, I don’t know, quarterly or maybe semiannually, where he espouses his views on the marketplace. Really appreciate his view on the fixed-income markets. Hedge fund manager, I try and read his investor letters when they come out. His name is David Einhorn. He’s the manager of Greenlight Capital. Some legendary figures, every time you see them out there on CNBC or doing other interviews, I’ll always stop and take a listen there. Stanley Druckenmiller would be one that I would highlight. I think it’s actually going to be interesting to see what changes are going to be coming out from Berkshire Hathaway. Of course, Warren Buffett’s annual letter was always a must-read. I’m looking forward to seeing how things might change under new management there. As far as traditional media goes, I’d say my go-to sources are, first of all, is going to be Bloomberg. Second, probably The Wall Street Journal, and then third would be CNBC.
Dziubinski: Our second question this week comes from George, who asks, “Dave often mentions the term core holding. What’s the definition of a core holding? And if there’s no formal definition, what are the major traits of a core holding?”
Sekera: There is no formal definition that I can really cite specifically. But first of all, I think as an investor morning kind of your own funds, or if you’re an advisor running funds, for others, you know. Before you even get into stocks that might be at core holdings. I think you should start off with just a well-diversified portfolio of equity and fixed income using broad market ETFs or mutual funds, especially those that have good Morningstar ratings, and once you have that good broad, diversified portfolio, you know. From there, you can start adding in your individual stocks. And when I think of core stocks, these are my ones. I’d say, like the ride or die type of stocks. These are the ones that you have the most confidence in the long-term potential for the company to grow. Ones that are priced at least reasonable valuations. Yes, ideally, I’d like to get 4- and 5-star-rated stocks there. But I’m fine with buying 3-star-rated stocks, too, when I’m talking about core stocks. Specifically, what am I looking for? I’d be looking for those that we rate with a wide economic moat, those that have long-term, durable competitive advantages.
From an uncertainty perspective, looking for those that have low or medium uncertainty ratings. Depending on the sector, I am willing to go up to high, but probably not very high and certainly not extreme. Looking for companies with at least relatively strong balance sheets, investment-grade, mid-BBB, or better. I want a company that has the ability to weather any type of downturns. From the management perspective, I want a company that has a history of making wise capital-allocation decisions. Those companies that have a proven history of being able to compound capital over multiple business cycles. I’m going to exclude companies that spend a lot of money on growth capex that hasn’t panned out over time, companies that seem to overpay for acquisitions in an attempt to get additional growth. Ideally, I like a stock that pays at least a reasonable dividend, but again, that’s not necessarily a deal-killer if it has a lot of these other attributes. These are the stocks that you’re going to have the confidence to be able to add to these positions when the market’s turning down, when things are feeling really bad, everyone’s really negative. These are the stocks that you can layer into kind of those targeted positions to be able to start moving to an overweight. These are the stocks you’re going to have the confidence in, to be able to ride the ups and downs of the economic cycles, stocks that you’re willing to hold through recessions.
Again, it’s once you have that portfolio of the broadly diversified ETFs and mutual funds, that’s when, I think, you can start layering in the core holdings. And then once you have those core holdings, then finally, I think that’s when you start adding in. Maybe the stocks are a little bit more fun to trade around. Those that are a little bit more speculative or story stocks. But at least still looking for those that are trading at significant margins of safety from long-term intrinsic valuation.
Dziubinski: For this week’s picks on The Morning Filter, Dave has brought us five core stocks to buy and hold in 2026. Your first pick this week is Microsoft MSFT. Dave, why is Microsoft a great core stock to buy and hold in the new year?
Sekera: I think Microsoft has been one of my go-to picks as far as talking about core holdings. I don’t know for as long as I can remember it, to be perfectly honest. So just running down the list of the attributes that we’re looking for here. I mean, the company does have a good, diversified portfolio of businesses. You have not only as traditional tech businesses, but also significant exposure to artificial intelligence. You have the Azure platform and its Copilot, has a wide economic moat, that’s going to be based on three moat sources: cost advantage, network effect, and switching costs. One of the few names in the tech sector we rate with a medium uncertainty rating. Fortress-strong balance sheet, if I remember correctly, I think it’s one of only a few companies that still has AAA ratings, coming from Moody’s, S&P, Fitch, and Morningstar DBRS. At that AAA level, from all of these rating agencies, it’s actually stronger rated than the US government. We have an exemplary capital allocation rating. Granted, it only has a three-quarter over a percent dividend yield. I’d love to see a higher dividend yield here, but they do have a pretty large stock buyback program. Even with a low dividend yield, your total yield ends up being higher. Because they do buy back stock, which, considering we think the stock is trading at a 20% discount to fair value, those type of stock buybacks accrete to the value of those stock buybacks, accrete to shareholders over time. At this point, at that 20% discount, it is a 4-star-rated stock
Dziubinski: Microsoft’s stock lagged the market in 2025, and as you pointed out, it’s trading at a pretty deep discount to Morningstar’s 600 fair value estimate. What’s the market missing here, Dave?
Sekera: Maybe it lagged a little bit last year, but it certainly performed very well, and it’s performed extremely well over the past three years. I don’t know if the market is actually quote unquote missing anything, I think it’s just more of a matter that I think. We have slightly higher long-term growth forecast than what you see in the marketplace. When we look at revenue growth, we’re really looking for it being driven by a couple of the different AI business lines like Azure, But again, good growth dynamics in Office 365, LinkedIn.
Overall, Azure, in particular, is really just the single most critical revenue driver for this company over the next 10 years. Huge total addressable markets still out there for this company to capture. We’re just looking for hybrid environments, continue getting larger and larger market share. This is an area where Microsoft excels. I think that with more and more of their business also going to some of these wider operating margin businesses. You’re also going to get positive mix shift, so you’re going to get increasing margins over time on top of that revenue. I think, in this case, it’s not that the market is missing anything per se. I think it’s just that we have slightly higher forecasts. And when we put that into our model, over time, I just expect that as Microsoft executes in line with our expectations, that you’ll see. The stock accrete at a combination of its cost of equity, plus that discount intrinsic value collapsing over time to its fair value.
Dziubinski: Your second core stock to buy and hold for 2026 is another technology name. It’s Palo Alto Networks PANW. Give us the highlights on this one.
Sekera: I think this one looks very attractive. It’s at a 20% discount to fair value. It’s a 4-star-rated stock. We rate the company with a wide economic moat, although it does have a high uncertainty rating.
Dziubinski: Talk a little bit about how Palo Alto qualifies as a core stock, and why you like it.
Sekera: Let’s just run down the exact same list again. Wide economic moat, in this case, that’s based on the network effect and switching costs. And, as I mentioned, it does have a high uncertainty rating. But to be honest, that’s really kind of par for the course in the technology sector. In my mind, when I think about technology, and in this case, cybersecurity in particular, I think cybersecurity probably is less uncertain over time than a lot of the other tech sectors. No debt on its balance sheet. I don’t think they have credit ratings because they don’t have any debt outstanding. Another one with an exemplary capital-allocation rating. Unfortunately, they don’t pay a dividend, but I’m willing to make an exception here. They’re using their free cash flow in order to be able to grow their business. It’s a sector that we expect to see ongoing consolidation. They’ll use that free cash flow in order to be able to fund the other consolidation as they acquire. Other businesses to leverage in with their own, so I’ll give this one a pass, as far as not paying a dividend.
Overall, the company is a leader in cybersecurity overall, and I don’t know. I mean, we’ve talked about cybersecurity a lot. I mean, ever since we really started the podcast, however many years ago, I’ve long been a fan of investing in cybersecurity. To some degree, I view this more as a core holding in the cybersecurity sector than necessarily this stock individually. We look at cybersecurity growing at double-digit rates for the foreseeable future. Cybercrime, in and of itself, is a very high severity issue. Yet, it’s only a small cost of protecting against it. Management teams aren’t going to skip on paying up for cybersecurity. I like this stock, but I really like making sure that you’re invested in cybersecurity overall. Palo Alto just looks to be the best of the investments there today.
Dziubinski: Your next pick is one of the largest US utilities. It’s Duke Energy DUK. Walk through some of the key metrics on it.
Sekera: It’s a stock currently trading at a 5% discount. Puts in the 4-star range, although just barely, but enough to get there. The 5% discount may not necessarily be all that attractive, but with the utility sector trading at a premium overall certainly attractive on a relative value perspective. And it’s also, I think, attractive, because, as you mentioned, it is one of the largest utilities overall. And it’s also going to be a good investment, I think, going forward, in an environment where we’re expecting long-term interest rates to fall.
Dziubinski: Then, Dave, why, specifically is Duke a core stock to buy?
Sekera: Running down the list here, it’s a narrow economic moat based on efficient scale. I would note that while we prefer looking for wide economic moat stocks, I think all of the regulated utilities are rated narrow. I don’t think we give any of them a wide moat. In this case, from that long-term durable competitive advantage expectation, that narrow moat is as good as you’re going to get. Low uncertainty rating, also that’s going to be standard a low uncertainty with all the regulated utilities. Relatively strong balance sheet, the rated BAA2/BBB+, standard capital-allocation rating, nice healthy dividend yield at 3.6%. I’d note, too, that, over the past five years, they regularly increase that dividend every year. For Duke, we expect that the company will be investing enough through 2029. That not only do we think that they’ll be able to grow enough to be in line with their own plan. But we think that they’re going to be at least at the high end of their 5%-7% annual earnings growth range expectations.
Dziubinski: Your next pick this week is from the energy sector. It’s Devon Energy DVN. What are some of the headlines on this one?
Sekera: Devon right now is trading at a 29.0% discount, enough of a discount to put it well into 4-star territory, pays a 2.6% dividend yield based on its current dividend. We rate it with a narrow economic moat, but a high uncertainty rating.
Dziubinski: Energy stocks as a group had kind of a tough go of it in 2025, but Devon performed relatively well. Walk us through that, and why you like it as a core stock pick.
Sekera: I mean, as far as core stock picks in energy go, ExxonMobil XOM has long been my go-to pick there, especially among the global majors. But that stock has risen enough. I really sense then that it’s now 3 stars. I won’t argue against Exxon as a core holding but looking for one that has a lot of the same attributes. But trading into fair value brings me to Devon. We rate Devon with a narrow economic moat based on its cost advantages. Has a high uncertainty rating. But that high uncertainty rating is going to be pretty standard for most oil producers, especially domestic oil producers, because oil prices are relatively volatile, strong enough balance sheet rated BAA2, BBB, exemplary capital allocation. The dividend is one here that you need to pay attention to, especially if you’re really relying on dividends for income. It has a 2.6% dividend right now, but they have what’s called a fixed plus variable dividend policy. Essentially, they pay a stable base dividend quarterly, but they have a variable dividend paid on top of that, which is up to 50% of excess free cash flow. In this case, if oil prices were to start to rise, you would see an increase in that dividend over time.
As far as our US Domestic producers, Devon has been our go-to pick. It’s among the lowest cost providers across the US Shale cost curve. And using even what I consider to be relatively modest, oil price projections still models out as significantly undervalued. I like oil, and energy is a good long-term inflation hedge. And then, lastly, I was talking to the analyst on this name the other week, and he did make one offhand comment to me that I found to be particularly interesting. He noted that if the stock here, in this case, were to sell off faster to the downside, as compared with other oil producers. Based on where it’s currently valued in the marketplace, he thought that that could be a takeover target by one of the global majors. In my mind, this actually provides a little bit of a floor to the downside. If the market were to sell off or the oil market were to sell off.
Dziubinski: Interesting. Your last core stock to buy and hold for 2026 is Colgate Palmolive CL. Give us the key metrics.
Sekera: Colgate, a 4-star-rated stock, trading at an 11.0% discount to fair value, has a 2.6% dividend yield. We rate the company with a wide economic moat and a low uncertainty rating.
Dziubinski: A lot of consumer defensive stocks qualify as what we call core stocks. Why is Colgate Palmolive kind of your pick of the litter?
Sekera: Let’s just run down the list here. Wide economic moat, that wide economic moat is relying on cost advantages and intangible assets. Low uncertainty rating, very strong balance sheet, in fact, it’s rated AA3 by Moody’s, A+ by Standard & Poor’s. Exemplary capital allocation rating, solid dividend at 2.6%. And I took a look, since 2021, it’s made regular annual increases to its dividend every year. Overall, I would say this one is just a rare opportunity to be able to buy at a 4-star rating. I mean, this was a 1-star stock as recently as September 2024. It’s fallen about 30% since then. Taking a look at our price/fair value. Over the past decade, it’s only been 4 stars, a few other times in the past. And mainly is all the way back in 2018 that it was trading undervalued levels. Like I said, overall hits everything that we’re looking for here. Not often you can buy this one at much of a discount. I think this is a good opportunity for investors to start layering in today.
Dziubinski: 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 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.