Plus, a preview of bank earnings.
In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss which economic reports to watch this week. Earnings season kicks off with the big banks reporting; tune in to find out what to listen for. Both ASML ASML and Taiwan Semiconductor TSM report this week, too, providing investors with an early read into what to expect from semiconductor and AI companies in the weeks ahead. They cover whether Johnson & Johnson JNJ stock is attractive ahead of earnings and if Nike’s stock is a buy after.
They unpack what Meta Platforms’ move to rent excess AI compute capacity to external customers may be suggesting more broadly and they tackle an audience question about Verizon Communications. They wrap up with a list of undervalued high-conviction stocks to buy this quarter.
Episode Highlights
What to expect in this week’s inflation reports
Earnings season kicks off with the big banks: Here’s what to watch for
Which non-bank earnings reports to have on radar
Our take on stocks in the news including Nike NKE, Meta Platforms META, and Comcast CMCSA
Will SpaceX SPCX eat Verizon Communications’ VZ lunch?
Undervalued stocks we like a lot
Read about topics from this episode.
Q3 Stock Market Outlook: Investors Face Balanced Risks, Selective Opportunities
Read Dave’s complete archive.
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Susan Dziubinski: Thank you. Hello, 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's been going on in the market, what investors should have on their radars for the week, some Morningstar research, and a few stock ideas. Now we have one programming note to share. We will be dropping a bonus episode of The Morning Filter on Thursday focused on dividend stocks. Dave and I will be talking about how dividend stocks have done this year and what's driven that performance, and then Dave will share his top dividend stock picks for the rest of the year. Be sure to tune in. Good morning, Dave. You keeping cool in these dog days of summer?
David Sekera: Good morning, Susan. I'm doing great. How about yourself?
Dziubinski: Doing as best as we can in the middle of July.
Sekera: True enough.
Dziubinski: Let's start off this week talking about an update on the war and oil prices.
Sekera: Well, unfortunately, there's still more military exchanges going on between the US and Iran. Overall, it just seems to me, the US and Iran continue to disagree on whatever it was that each of them thinks that they agreed to in the first place in the truce. In my mind, as far as the status of the Strait of Hormuz, it's still especially unclear as to how open it is or isn't at this point in time. Now, having said all of that, the markets are taking this recent military action in stride. What we're just seeing is that there's less and less of a market reaction every time we have some of these military exchanges. I think it's just the expectation that this is going to be a limited exchange. The strait will open back up, and oil will start flowing again. Just looking at the preopen in the markets this morning, oil, it's only up a couple of dollars.
It looks like we're around $74 a barrel last I checked, and stocks taking it in stride premarket. S&P 500 futures down a little bit in the red, but I don't think it's really all that much about the stock market. If you take a look at the Korean stock market, now that's one that we've highlighted before, has just skyrocketed over the past year. It's just up huge, huge amounts really based on two stocks, both memory semiconductor stocks. The ADRs of SK Hynix were down 9%. Now, that's a company that just issued those ADRs here in the US last week, and the Korean stock market overall, because of that one and then the other memory stock is down 9% overnight. I think that's really taking a lot of air out of the market this morning.
Dziubinski: All right. Let's look to the week ahead. On radar, we have inflation numbers coming out. Dave, what are the expectations here when it comes to inflation? Do you think these reports will move the market this week or not?
Sekera: I doubt that they're going to move the market all that much unless they come out really far from consensus in one direction or the other. Now, of course, you have to remember with inflation, there's two different ways that they report it. You have your headline inflation and then your core inflation. Headline inflation measures total inflation across the board versus core inflation, in which they strip out the most volatile components of inflation, such as food and gasoline. Now, the economists consider core inflation to be a better picture of what's going on with long-term inflation trends just because it doesn't get swung as rapidly back and forth as what you see with gasoline and food prices. As far as expectations for the week for CPI, the month-over-month consensus is looking for down 0.1%, which would be a big improvement versus the prior month in which it was up a half of a percent.
On a year-over-year basis, the consensus is looking for it to drop slightly to 3.9% versus 4.2%, so the right direction, still way too high at this point. Now, core, unfortunately, looks like it's going the wrong way. On a month-over-month basis, consensus is looking for an increase of 0.3%, slightly faster than last month, in which it registered up 0.2%. The core year-over-year consensus is up 2.9%. That's essentially the same as where it was last month. I think the takeaway here, unfortunately, is that while headline looks like it's slowing, probably because oil prices had been coming down over the past month, that core inflation is still way too high, and unfortunately, it looks like it might be rising even faster. If that core inflation number comes out too high, I think the market reaction could be a negative just because it could mean that the Fed does have to increase rates, and not only increase rates, but pulls forward the probability of when they increase rates, as well as how much they may have to raise rates overall.
Dziubinski: All right. Well, we also have earnings season kicking off this week with the big banks reporting. What are you going to be listening for from the banks, and could there be any surprises?
Sekera: I don't think there's going to be any surprises. I think overall just expect a very solid earning reports coming out of the banks. Just a few things I think that if you're an investor in the banks, you really need to be listening for. The first would be just how much would net interest margins be under pressure if short-term rates raise much further? We are expecting that the Fed will have to raise rates later this year. If you look at the short end of the yield curve, we've seen that anywhere from six-month to two-year T-bills are falling in price, meaning rates are going up. I'm also listening for if there's any meaningful impact on consumer health from the higher oil prices, any change in the rate of defaults or bankruptcies. Is that increasing for more normalized rates? Want to hear what's going on with the outlook for fee income and trading income; both of those should look pretty good this past quarter as well. But I'm also really curious if there's going to be any color that they're going to give for investment banking income for the rest of the year. Of course, we've already had the SpaceX IPO, but you have a lot of these other AI companies also talking about coming public in the second half of the year. If so, that should be a big boost for their investment banking income.
Dziubinski: Talk about big banks from a valuation perspective, Dave, as we head into earnings. Is there anything attractive?
Sekera: Not really. I mean, they're mostly fairly valued. Bank of America is just cheap enough to be a 4-star-rated stock. Personally, I'm not a big fan of Bank America. There's other banks I'd rather invest in if I want to put some money there. Outside of banks, looking at the rest of the financial sector, if you look at the investment banks, Morgan Stanley, Goldman Sachs, they're a little overvalued at this point, trading within 2-star territory. If you're looking for somewhere to put new money to work out, highlight names like LPL Financial; that's one that we've recommended in the past. That's a 5-star-rated stock. Lastly, we've cautioned people in the past about the traditional insurance companies, that we think those valuations are too high. Those still are, depending on which insurance company, 2-star or 1-star-rated stocks.
Dziubinski: All right. Well, we have a couple of semiconductor companies reporting this week, ASML and Taiwan Semiconductor. Now, both stocks are up quite a bit this year, and neither looks like a bargain. What are you going to be listening for here?
Sekera: I look at these companies as just being early reads in the reporting season for what's going on with semiconductors. In this case, what's going on with AI specifically. Now, of course, revenue and earnings for both of these companies should be especially strong. What we've seen is, over the past quarter or two, the AI buildout boom has led to a shortage in, of course, GPUs and other semiconductors that are used for artificial intelligence, but it's really no longer just the memory stocks that we've seen skyrocket this year. Even the CPUs that are used to manage AI workloads are also in shortages as well. That's a big reason why we've seen stocks like AMD and Intel also do as well as they have. I think that what's going on is we're expecting, and we're already seeing to some degree, a significant increase in semiconductor manufacturing companies just trying to add additional capacity, whether that's building additional lines in existing facilities or even building out entirely new facilities altogether.
I know companies like Micron are already out there doing greenfield projects, building new fabs. I think that the companies that provide the manufacturing equipment that makes the semiconductors look pretty good here. Of course, the question is, especially with these stocks already being slightly overvalued, how much and for how long are we going to see this excess demand for that manufacturing and building out those facilities? How much visibility do we have, and how long is this going to last until we get to the point that there's enough new manufacturing capacity in semiconductors before that spending slows?
Dziubinski: Johnson & Johnson reports earnings this week. Now, this is one that's been one of your favorite core stocks, but today it's trading pretty far above Morningstar's fair value estimate of $190. Dave, get us up to date on what's been going on with the stock, and if there's anything in particular you're going to be watching for on the earnings front.
Sekera: In my mind, this is a core holding type of stock, one that I think works for pretty much anyone's portfolio when you're putting together that core base of your portfolio. Specifically with J&J, we rate the company with a low uncertainty, a wide economic moat, has a somewhat attractive dividend yield. It's in the defensive sector and it used to trade at a pretty attractive margin of safety below fair value. This is one that we recommended four times back in 2024. For a while, it was really just a coupon clipper. The stock went nowhere really until the fall of last year. And then all of a sudden, the stock really started to work. I don't know what the specific catalyst was that really started to get J&J to move up and to the right, but it's up 62% over just the past 52 weeks. It's up 24% just this year alone.
At this point, it's now trading at a 36% premium to fair value, puts it well into 1-star territory. I guess when I'm really thinking about this earnings call, I want to listen and compare it to our own write-ups. I just don't know if we're missing something that's going on here or if this is just one of those cases that, sometimes a stock starts to work, you get some upward momentum, and the market just ends up taking it too far to the upside. Just trying to understand if there's really something here that we should be reevaluating our fair value on this stock or if this is one where even though I think it's a core holding type of stock, now might be a pretty good time to at least lock in some of those profits so that way you've got some dry powder and if you do get a pullback in this stock, you can go ahead and reload at lower levels.
Dziubinski: Just as an aside, doesn't it seem crazy that a core stock is up 60% in eight or nine months? What world are we living in? That seems really crazy. Anyway.
Sekera: I don't know. I mean, like I said, is there something that we're missing? I don't know. I mean, the analyst who covers it, she's a great analyst. I mean, she's probably one of the better analysts on our team, but at the same point in time, maybe there's something that comes out on the earnings call that was below the radar that maybe we need to incorporate. Or, like you said, sometimes stocks just end up moving, and they just move too far, and it's just like a pendulum.
Dziubinski: That's crazy. 60% is crazy for a core stock. Anyway, moving on. Let's talk about some new research for Morningstar. We're going to start with Nike's earnings. Now, Morningstar trimmed its fair value estimate by a few dollars and now assigns it a fair value of $94 per share. Unpack Nike's results and tell us what you think of the stock today.
Sekera: It was an interesting reaction after earnings. You got a little pop after earnings, but then it quickly ran out of steam. And I would say it's within a range of where it's been since the first initial pop. Now, if you look at that short-term chart, that stock has not been able to break through that recent June high on that longer downward trend. From a technical point of view, that's not a great look in my mind. Now, as far as the fundamentals of the company, we did lower our fair value. That's just to account for weaker-than-expected short-term performance. Unfortunately, the fundamentals are still going the wrong way here. Now, Nike provided updated guidance. They brought their revenue down to a low to mid single-digit decline for the first quarter of fiscal '27 and for the first half of fiscal '27.
As a reminder, their fiscal year ends in, I think it's May 31. We're just at the beginning of their fiscal year for 2027. Now, I'm guessing that this probably wasn't as bad as what the market was prepared for, which is why we got that slight pop. But when I look at the stock here, it's not cheap. It's currently trading at 26 times our fiscal year 2027 estimate. In my mind, I think the market is already giving Nike the benefit of the doubt; it's trading at 14 times our 2028 earnings estimate, which is much more attractive on that valuation basis compared to the 2027 earnings valuation. Now, to get to that 2028 earnings estimate, we're modeling in 5% revenue growth for next year. We're looking for the operating margin to expand at 12.3%. That's a significant increase for what we're looking for this year, which is only 6.8%.
In fact, that 12.3% would get you much closer to normalized historical operating margins. For me, I'm still looking for evidence of that long-term turnaround and for that normalization to occur. Once you start to see that happen, I think there is a lot of upside potential in this stock. Until then, it seems like the market, maybe the market's getting comfortable with the valuation here, but again, you've got to believe in the fiscal year 2028 story for the valuation to make sense.
Dziubinski: A report surfaced last week that Meta Platforms will be renting its excess artificial intelligence compute capacity to external customers. What do you make of that, Dave?
Sekera: This was a really interesting development, and I think the market's still trying to wrap its arms around what exactly it means. From the investors I've spoken with and the analysts on the street, I think there's really two camps of thought. The first camp is that investors had been concerned about Meta's ability to really generate long-term returns on all of the capex spending that they're making today. People thought there was a bit of a lack of clarity as far as how they're going to monetize all this infrastructure spending. In this case, what the company is doing is just selling that excess capacity they have here in the short term until they end up using that capacity themselves over the long term and monetize it. The second camp out there is that this is just indicative of too much excess capacity in AI compute already today. And thus far, maybe this is actually a harbinger that there's just enough capacity out there already. This could indicate that they're going to have to start slowing that capex spending because you can't build too much excess compute. Now, in and of itself, our analysts didn't think that this was meaningful to Meta's evaluation. We still think that Meta has a long way to go to be able to match the capabilities of the other hyperscalers. So, we didn't change our valuation on this. In our view, we think this is probably more that first camp where they're just selling off some of that short-term excess capacity until they start using it up themselves over the next couple of years.
Dziubinski: So, we didn't change the fair value on Meta on this news, but does the stock still look undervalued?
Sekera: Well, not as undervalued as it was. The stock, I mean, it's up 18% since they made just that announcement. It's still at a 21% discount, still enough to put it in 4-star territory, but not anywhere near that margin of safety we thought that stock was trading at prior to the announcement.
Dziubinski: OK. Well, let's talk about Scotts Miracle-Gro. This was a former pick of yours, and the company announced that its CEO was stepping down immediately. What could this CEO change mean here? And do you still like Scotts Miracle-Gro as an investment?
Sekera: I found that this was odd compared to how most companies usually announce when they have changes in management at the CEO level. The headlines say this was a preplanned succession event that the COO is now taking over. I was surprised that it took effect immediately. Usually, when this happens, there's a transition period, a couple of months where they've made the announcement, the old CEO is still there, and hands over the reins to whoever's taking control, as opposed to it occurring immediately. Now, looking at the COO, he originally joined the company in April of 2023 as an executive vice president and was then quickly promoted to COO in 2024. Then, they added the president title to him back in 2025. It appears as though he has been groomed to take over, so this may not necessarily be nefarious as far as the timing and something else going on there.
We'll see exactly what comes of it. Now, I think what's going to be most important here is, I talked to Seth—he's the analyst that covered it—and I think there's an analyst day that comes up here on August 4. This is a stock where, at this point, I think it's going to be especially instructive to either listen to that analyst day, read the transcript thereafter, go through the PowerPoint slides, and really listen for what the new CEO is going to be focused on. One of the things about this company is that we did have a poor capital allocation rating on the company. The reason is that the prior CEO, a lot of times, he just took big swings at trying new and different business lines in order to try and diversify their revenue sources. Was never very successful at that, and that was that poor capital allocation rating because he ended up burning through capital on those unsuccessful ventures. In this case, we think that the company has a very good lawncare business. If the new CEO is focused on really just the execution of that business in and of itself, it might be pretty good for their margins, might be pretty good for their valuation for the long term.
Dziubinski: Now, Comcast announced that it's separating its media and its broadband businesses. What do you make of the split and of the stock?
Sekera: Now, this is interesting in that I'm pretty sure this is the first time you and I have ever talked about Comcast. Comcast stock is currently a 5-star-rated stock, trades at over a 40% discount to fair value. We rate the company with a medium uncertainty and we assign a narrow economic moat. In fact, this has been a 4- or 5-star-rated stock, I think, since 2021, but the stock has been on really just a long-term downward trend over the past four or five years. We've also lowered our fair value estimate a couple of times over that same time period as well. I'm just wondering, thinking about this catalyst here, is now really the time to start taking a second look at this company? Has it finally fallen enough that it's getting to the point that it's cheap? And of course, the question here is, will separating the business really be the catalyst that's needed to unlock the shareholder value that our analyst team sees here?
I just kind of want to quickly go through the story here. There's still going to be a lot yet to come, but if I look at the top line, it's gone nowhere for the past five years. Our forecast is for it to fall 2.5% this year, another 1.5% the year thereafter. We're looking for earnings this year of only two and a half dollars, looking for that to fall a couple of cents next year. But the company's only trading at 9.5 times earnings, has a high dividend yield at 5.6%, and it also still has enough free cash flow after that to still buy back stock. Now, another multiple we don't talk about very often is EV to EBITDA. Essentially, what's the enterprise value of the company as compared to the amount of free cash flow that it can generate? In this case, based on where it's trading in the stock market, it's under 6 times.
Now, typically, when I see something like that, that indicates to me that private equity should be taking a look at the company because they could easily leverage that company up. I mean, there's a lot of debt there. It's maybe 2 or 3 times levered, but they could still add a couple of turns to that, buy out the company for very little equity, and then just be able to suck all that cash out of the company. Perfect setup for private equity shops. Unfortunately, in this case, Brian Roberts owns a very small percentage of the company, but has 33% of the voting rights. You'd really have to have a large activist investor come in here, take a very large position in the company, and be able to get other shareholders on board to be able to force any kind of sale to a private equity shop.
As you remember, I did do a short stint early in my career doing investment banking. Purely a size, I hate to do investment banking. It was an awful job, but it did teach me a lot of things about how private equity looks at these types of things. In this case, when I look at the valuation of the company, it's just too cheap and it's just too low for nothing to happen at this point. Personally, I'm working on sharpening my pencil right now. I do want to talk to Mike Hodel. I'll interview him and we'll put that up on The Morning Filter. Probably not until after earnings season, but I do think this will be a good one that we can really dig into what's going on, what the future competition's going to be, what SpaceX might be doing as far as broadband service and Starlink and how that may or may not interrupt the company's business. We'll get to a much longer in -depth conversation on this one. Not a stock I'm necessarily willing to put out there as a pick just yet, but certainly one that, based on the valuation, you need to do a much deeper dive today.
Dziubinski: All right. Well, more to come on Comcast then. All right, time for our question of the week. Now, as a reminder, if you have a question for Dave, send it to our inbox. You can reach us at themorningfilter@morningstar.com. This week's question is from Jeff, who wants an update on one of your prior picks, Verizon. Jeff is asking if you still like the stock after it got dropped from the Dow Jones Industrial Average, and as it faces new competition from SpaceX.
Sekera: Yeah. I mean, it's still a pick. It's a 4-star-rated stock, trades at just over a 20% discount to fair value. We rate the company with a medium uncertainty. We assign it a narrow economic moat. I quickly spoke with Mike Hodel last Friday. He's our communications analyst who covers Verizon. It's interesting if you look at the stock performance this year is actually doing very well, earlier this year, right up until the point that SpaceX filed its S-1. Now, we don't think that SpaceX will end up becoming a direct competitor to Verizon in the traditional wireless business. Mike outlined a number of different reasons why he didn't think that that's going to occur. A couple of different things, like they just don't have the spectrum to be able to do it today. There's a lot of upfront costs that they would have to spend on it in order to be able to get themselves prepared to do traditional wireless. We don't think that's going to happen. In fact, the government just had a spectrum auction out there, and the company didn't bid very aggressively at all. It doesn't look like they're trying to buy that spectrum today. Now, as far as their technology goes, in our view, the satellites just can't match the kind of capacity that you can see that the cell phone towers or the terrestrial towers provide. The attributes that you need to be competitive in traditional wireless, you have to be efficient. Those cell phone towers, I mean, you can have the fiber backhaul and reuse spectrum. You have especially high density for the amount of spectrum that you have. A lot of different things that you just don't see in the current satellite technology today. For the foreseeable future, we think that the satellite technology is probably more of what they have as a coverage layer provider.
For example, I think T-Mobile has partnered with SpaceX, with the satellite provider there, provides internet coverage for those areas where you don't have terrestrial coverage. I think the risk here to Verizon is really more about customer coverage in those rural areas. Historically, Verizon was always known as having the best geographical coverage. But now, if you have that satellite coverage in some of those areas where you didn't have coverage by the other wireless providers, you don't have that same kind of competitive advantage, but it's probably not a large enough percentage of Verizon's overall business to be meaningful to the valuation.
Dziubinski: All right. Well, it's time for the stock picks portion of our program. Now, Dave's picks this week are stocks that he has high conviction in, meaning that these are stocks we've talked about before that Dave continues to pound the table on. All of these stocks also appear on Morningstar analyst's new list of top stocks for the third quarter. Dave's first pick this week will surprise no one. It's Microsoft. It's Microsoft, Dave. Give us the highlights.
Sekera: It's not just me, Susan. It's not just me. I mean, it's a high-conviction pick from our technology team. As you noted, I mean, it's still on our quarterly best picks list, so it's not just me. The overall team still has a lot of conviction in Microsoft for the long term. Valuation still remains very low, trades at a 36% discount to fair value. It's a 5-star-rated stock, medium uncertainty, wide economic moat. In fact, it has three of the five moat sources, being cost advantage, network effect, and switching costs.
Dziubinski: Now we've talked about Microsoft a lot in the past, and you even did a bonus episode of The Morning Filter about Microsoft with Morningstar's analyst who covers the company. Remind us anyway why you like it and what we think the market's missing here.
Sekera: Sure. I mean, I'll provide a quick synopsis here, but I would really recommend it if you have an interest in Microsoft, if you haven't watched it already. I did a deep-dive interview with Dan Romanoff. I think it was about a 45-minute-long interview. It was on May 27, so you can find that on whichever platform you use to pull up our podcast. We just went through each of Microsoft's different business lines and its competitive advantages. We discussed at length their capex spending on AI and how it'll benefit the company over time, and went through a number of different forecasts for his company view, whether it was the revenue, margin, earnings, and so forth. I mean, overall, when I look at Microsoft, I think that the company has a lot of different ways that they'll be able to benefit from artificial intelligence, both to the upside if artificial intelligence is everything, everything that everyone claims that it is.
I also think it has a lot of different parts of their businesses that are natural hedges to the downside if AI doesn't develop the way that people thinks that it does. As far as our forecast, our five-year compound annual growth rate for revenue, 15%. Looking at an earnings compound annual growth rate of over 16%. The company trades at only 22 times our 2026 earnings estimate, which falls to just under 20 times the 2027 earnings estimate. If you look at, historically, that P/E multiple or that forward multiple over time, I would say right now it's either at the bottom of the range that it's traded in or even below the bottom of the range that it's traded in over the past. Definitely one to take a look at.
Dziubinski: OK. Your second high conviction stock pick this week is Charles Schwab. Run through the key metrics.
Sekera: It's only a 12% discount right now, but it is a high-conviction pick. Unfortunately, the stock just popped here over the past couple of weeks, but still 4-star-rated stock, medium uncertainty, wide economic moat, with that wide economic moat being based on cost advantage.
Dziubinski: The stock's having kind of a sluggish year. Given that, why is it a high-conviction pick today?
Sekera: Well, it was just added to the third quarter best pick list. In fact, this isn't the first time that we've highlighted Schwab as a pick. It was a pick a couple of times back in 2023 when it was really trading at a much bigger discount. I would say, since then, over the past three years, I mean, the trend here has been pretty much solid and steady growth, both the stock price moving up over that time period as well as moving up our fair value as well. The stock did sell off earlier this year, in February. I think the reason it probably slid is because you saw the probability of the Fed increasing the fed-funds rate for the second half of this year. Of course, Schwab makes a lot of the money on the float, that they're able to pay relatively low deposit rates. Again, it's like a bank. They don't have to pay that much for deposit rates and then they can reinvest in higher-yielding short-term assets. The concern here is that if they have to pay higher deposit rates, that lowers the net interest margin. But we think the market overly penalized the stock too far to the downside. In fact, it's coming back pretty quickly. I think it was up 6% just last week alone. Again, just a quick synopsis of the company. They're not just a retail brokerage. I mean, they've really grown. They've expanded into a lot of other areas over the past couple of years. They have a big mutual fund distribution arm. They have proprietary low-cost asset management products. They do lending, they have retirement accounts. They do wealth management now as well. As far as the wealth management business, they've been one of the premier asset gatherers over the past couple of years.
We're already taking into consideration a reduction in that interest income this year. As a result, we brought our earnings down to 595 from 611, not necessarily a huge decrease. And then we're looking for it to start growing again thereafter. Even taking into consideration that reduction in earnings, the stock model's out relatively cheap. Long term, we're looking for a 15% annual earnings growth rate from 2028 to 2029. Stocks only trading at 17 times our 2027 earnings estimate.
Dziubinski: All right. Your next high-conviction pick is Broadcom. Give us the rundown on this one.
Sekera: Broadcom trades at a 38% discount to fair value, 5-star-rated stock. It is one we rate with a high uncertainty, but that's really just a factor of being in the technology sector. We assigned a company a wide economic moat being based on switching costs and its intangible assets.
Dziubinski: Why do you have high conviction on Broadcom stock today, Dave?
Sekera: This one remained on the quarterly best picks list. When I think about their business overall, I think they're really in a good position today. Broadcom makes custom AI accelerators, which are called XPUs. XPUs are used to optimize AI workloads, which, of course, everyone's trying to make AI as efficient as possible today. Generally, our analyst thinks that the market is underestimating the amount of growth in XPUs over the next couple of years. In fact, he thinks the company's guidance is pretty conservative. They're looking for over $100 billion in AI revenue in fiscal 2027. Our forecast is higher. In fact, if we go to 2028, we're modeling in 200 billion in AI revenue in fiscal 2028. He thinks he has a very high visibility of that forecast based on what's coming out of Anthropic and OpenAI and the amount of XPUs that they're going to be ordering from the company.
More recently, I also pointed out that Apple and Broadcom recently announced a renewed chip supply agreement through 2031 as well. This is a stock I really consider to be what's called GARP, that's growth at a reasonable price. Looking at our forecast here, our five-year compound annual growth rate for revenue, 40%. Looking for our five-year compound annual growth rate for earnings, 46%. Stocks trading at 35 times our 2026 earnings estimate. That may sound high, but that drops all the way down to 21 times our 2027 earnings estimate based on the amount of growth that we see here.
Dziubinski: All right. Clorox is your next pick. Tell us about it.
Sekera: Clorox stock is still rated 5 stars, trades at almost a 40% discount to fair value, and has over a 5% dividend yield. We rate the company with a medium uncertainty. We assign a wide economic moat, that wide moat being based on cost advantages and intangible assets.
Dziubinski: Now, Dave, there are plenty of undervalued stocks in the consumer space. Why is Clorox your high-conviction pick here?
Sekera: I mean, it's one of the highest conviction picks from our consumer analyst team. In general, it's been on the best picks list. We're continuing to keep it on the best picks list. Got a little tongue-tied here. I think the biggest reason that we have a lot of conviction on this one is I think that this one is being overly penalized by the market because of just how much noise there's been over the past five years. But we do think it's really more noise than signal. In this case, the company has suffered several setbacks, but when I look at what those setbacks are, it's nothing that really changes the long-term earnings potential for the company. First of all, we had the pandemic; volumes skyrocketed, margins expanded, but then, of course, once the pandemic peaked and started coming back down, you had that postpandemic pullback because everyone loaded up on all of the Clorox products in their pantry and used them up for the next couple of years.
We're just really getting to the point where we see much more normalized household inventories. Then, like a lot of these other consumer product companies, 2021, 2022, we had very high inflation, and they weren't able to raise prices as fast as inflation was going up, so that also put pressure on their margins. Unfortunately, the company did suffer a cybersecurity breach as well. As an aside, good example of why I like cybersecurity stocks. But again, just another thing that really ended up putting pressure on the company in the short term. Most recently, the CEO announced a resignation due to health issues, so we have some management turnover going on as well.
Now, let's just kind of run through the numbers here. First of all, Clorox fiscal year end is June 30th. So we are in fiscal year 2027 right now. So last year for fiscal 2026, revenue declined 9%. That's not as much of a concern as you think it is. Part of the decline in revenue is because they rolled out a new ERP platform in 2025. That's an enterprise resource planning platform. I'm sorry, they rolled that out in fiscal 2026, which pulled sales forward into fiscal 2025. We're looking for those sales to rebound this year as inventory levels normalize. And then we're looking for revenue to grow 4% thereafter. We're also looking for the operating margin to start improving this year as well based on that normalization. Taking a look at valuation here, the company's only trading at 13 times our fiscal 2027 earnings estimate. That tells me that the market is looking for either earnings decline or for earnings over the longer term to be stagnant at best. In this case, any kind of sign that the company's earnings are going back to more of that normalized type of growth, really, I think, can cause this stock to rally quickly.
Dziubinski: All right. Your final high conviction pick this week is Devon Energy. Give us the bird's-eye view.
Sekera: Devon is back to trading at a 23% discount to fair value, having sold off a little bit with oil prices when they came down. It's enough to keep it in 4-star territory, pays 2.5% dividend yield. Again, it's another one with a high uncertainty, but of course, the high uncertainty is really because it is a commodity-oriented company. We assign the company with a narrow economic moat based on its cost advantages.
Dziubinski: Why do you have high conviction in Devon Energy's stock today, Dave?
Sekera: I mean, Devon has long been one of the picks from our energy team for domestic oil exploration and production. Of course, we've talked about Exxon a lot over the years and why that's kind of my favorite pick for energy overall. But with Exxon trading at fair value, I'm looking for a stock trading at a margin of safety. Devon is really the one that probably has the best combination we see of valuation and dividend potential. It's one of the lowest-cost producers in the US along the shale cost curve. In fact, our analyst team noted that they think the breakeven cost for the company is only $44 per barrel. They've got 17 years remaining of drilling inventory in what we consider to be very high-quality acreage, has a pretty strong balance sheet overall. Management has been disciplined with its capital allocation over the years. This is one where even using what I consider pretty modest oil price projections.
We do expect, over the long term, oil prices to come down. This still models out as being very undervalued. Lastly, one of the things I like about it too is that I think that you do have a bit of a downside hedge here that if the stock were to sell off any faster than the rest of the EMP stock market, I think this is one that would be a buyout target from some of the large global majors.
Dziubinski: All right. Well, thanks 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 again 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. Have a great week.