Plus, what’s next for tariffs and new research on Nvidia.
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.
On This Week’s Episode:
What’s Next with Tariffs
Economic & Earnings Reports to Watch
New Research on NVDA, Cybersecurity Stocks, More
Oversold Stocks to Buy for Summer
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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. All right, well, good morning, Dave. Let’s kick off this week with Morningstar’s take on last week’s tariff news. Where do things stand on Monday morning, and what does Morningstar expect ahead?
David Sekera: Hey, good morning, Susan. Yeah, I have to admit, I had my daughter’s or one of my daughter’s graduation parties yesterday. So if I’m a little off my game this morning, I just want to kind of give you that heads up here.
As far as the trade negotiations and everything going on. So last week, the US Court of International Trade invalidated the Trump administration’s use of the Emergency Economic Powers Act in order to be able to impose these broad tariffs. That ruling then was subsequently paused by an appeals court. Overall, in my mind, I think this is just a good example of how hard it is in this market to try and separate noise from signal and why we started cautioning a while ago. I think investors are just going to have to be used to a lot of this on again, off again volatility for at least the next couple of months, if not even the next couple of quarters.
Now, it’s not like we’re sitting still on all of this. We are looking at the potential impacts. We’re doing some different scenario analysis on how this may impact stock valuations under a couple of different scenarios. But overall, I’d say we’re just steering clear of trying to speculate on what the outcome of these trade negotiations will ultimately end up being. In this case, even if the Trump administration ultimately does lose this case and the “liberation” tariffs were to be repealed, there are just numerous other ways to impose other different types of tariffs. Of course, it just then remains uncertain with these other opportunities that they can impose tariffs, how long it would take for them to be able to go through and actually get those tariffs implemented. In some cases, depending on what route they take, it may not be until later this year or even early 2026 that those get implemented. Then I’d also note, too, that depending on how this goes, those type of tariffs would likely be implemented more on specific products as opposed to by individual country. That would then change or reduce the effectiveness of the bilateral trade negotiations with individual countries or trading blocks. So again, in my mind, I think we just kind of have to wait and see how this all works out.
Dziubinski: All right, well, you have a couple of things on your radar this week. First, we have jobs numbers coming out. Talk about what you’ll be watching and why.
Sekera: There’s a couple of different economic metrics coming out I’ll keep my eye on. There are several different purchasing manager index reports coming out. I think we haven’t talked about those for a while. So as a reminder, those are diffusion indices where a reading above 50 indicates expansion, a reading below 50 indicates contraction. For the most part, I’m probably going to take a look at them, but really ignore them at the end of the day. I think you just kind of have to assume that whatever comes out is going to be skewed one way or the other by the trade war headlines. As you mentioned, we do have nonfarm payrolls coming out on Friday. Looks like consensus is for 130,000 jobs. That’s in contrast to last week, which was 177,000 jobs. Now, this number will be pretty closely watched by the Fed and the market. People try and understand what this means for the labor market, get a glimpse as far as what exactly is going on with the fundamentals of the economy. I think the takeaway likely here will be employment growth is slowing as you’d expect in an economy that’s also slowing, but not to the degree that we would expect any kind of near-term recession.
Dziubinski: All right, and on the earnings front, we have Dollar General DG and Dollar Tree DLTR reporting. So what could their reports tell us about consumer behavior?
Sekera: Yeah, I mean, these stocks are both kind of a similar but different story. Both of these stocks had fallen quite far in 2023 and 2024. The short story here is that high inflation, as it was pressuring low income households, forced them to change their spending habits and start spending more of their money on food because the food prices were going up, which left less money in their pockets to spend on discretionary items, which, of course, are higher margin items for Dollar General and Dollar Tree. So they saw their margins compress over the past couple of years, which, of course, the market didn’t like sending those stocks down. I’m going to be listening to hear if purchasing habits are continuing to normalize. We are looking for continued increases in foot traffic as more people trade down to the dollar stores and we did see that accelerate last quarter. I’m hoping that that trend still continues for these two companies.
Dziubinski: Now, the stocks of both Dollar Tree and Dollar General are doing pretty well this year. So how do they look from a valuation standpoint ahead of earnings?
Sekera: Yeah, it looks like these stocks have been on quite a run. I think they’re up about 30% and 20%, respectively, year to date. If you remember, we recommended Dollar General on The Morning Filter last October. According to our valuations, it looks like it still has room to run. It’s a 4-star-rated stock. It’s still at a 15% discount to our fair value.
Dziubinski: Pivoting over to some new research from Morningstar, Nvidia NVDA reported earnings last week. So what stood out in the report, Dave?
Sekera: Overall, we did increase our fair value to $140 a share. The basis for that is that Nvidia was able to increase the supply of its AI chips even faster than what we originally modeled into our financial forecasts. This company has been supply constrained. Demand has well outpaced supply, really throughout this entire cycle as everyone just has a huge demand to build out their artificial intelligence presence. First-quarter revenue was up a staggering 69%. I mean, that’s just a huge number for a company that’s already this large. They gave guidance for the second quarter. I think that’s up 50% year over year. All of this is despite the prohibition from selling those really high-end AI chips to China. So really still some phenomenal top line growth. When I take a look at our projections, we’re looking for revenue this year, revenue growth of 50%. That would take them up to $195 billion in top line. Over the next five years, we’re looking for a compound annual growth rate of 20%. So by 2030, that would take our revenue projection up to $322 billion.
Now, just to put that into some kind of context for comparison, if I look at our Microsoft model for our 2030 revenue expectation there, we’re at $450 billion. Microsoft being the largest company by market cap right now. It puts Nvidia up into the big leagues with the other Big Tech names. As far as earnings, our forecast this year is for $4.20 a share. That puts the company at a forward PE ratio of 33 times. May sound expensive, but it’s really not. We’re looking next year at earnings of $5.30 per share. That’d be 26 times our 2026 earnings estimate. So really not necessarily all that expensive for a company that’s growing this much.
Dziubinski: So now you mentioned that Morningstar raised its fair value estimate on Nvidia after earnings by $15. So that’s up to $140 per share. And then the stock rallied a bit after earnings. So is Nvidia stock a buy today from a valuation perspective, Dave?
Sekera: I think that’s going to depend on what you’re looking for as an investor. Now, from the point of view of buying a stock that trades at a deep discount to its long-term intrinsic valuation, I’d say no. It’s really only trading at a couple percent discount to our fair value. But I would say from the point of view of wanting to have exposure to artificial intelligence, yes, I mean, it’s still the bellwether for growth in artificial intelligence. While we prefer buying a stock when it’s 4 or 5 stars, there’s still nothing wrong with buying a 3-star stock close to fair value in order to start a position. I would just say leave some dry powder so that way if it does sell off, you’re in position to be able to dollar-cost averaging average to the downside.
Dziubinski: Now turning over to Salesforce CRM, the company reported earnings last week. Salesforce beat expectations and increased guidance, yet the stock slipped by I think about 6%. So what did Morningstar think of the report?
Sekera: Yeah, exactly. I’m not sure why the stock slipped in this case. When I look at our analyst’s note, first-quarter results were better than the top end of the company’s guidance. Both subscriptions and services were ahead of our expectations. According to our analyst, the management commentary he thought was pretty positive, especially on the strength in the small business customer segment. He noted that sales of AgentForce, which is its AI-powered platform, showed a lot of strength. I think the run rate for that business is already up to $100 million, even though it’s only been available for the past two quarters. Management raised their guidance for the full year beyond the quarterly upside. So the management is even expecting additional upside from here. Our analyst noted that given the momentum that he’s seeing, he sees the potential for results that track even better throughout the year. So again, I don’t know why the stock sold off in this case. Overall, I still think that this company is a good play on our theme this year that 2025 will be the year that investing in AI shifts away from the hardware companies to those companies that can utilize AI to drive top line growth and/or increase efficiency to be able to generate higher operating margins. And this company really fits with that play.
Dziubinski: Now, Salesforce also announced plans to acquire data management company Informatica INFA. So what’s Morningstar think of that news?
Sekera: Well, from a strategic point of view, we see the strategic rationale in that acquisition. We think it will bolster Salesforce’s AI platform over time. Our analyst noted that he was pretty glad to see that the price was less than some of the prior indications that were out there. There’s a downside here that Informatica has grown more slowly and does earn lower margins than Salesforce. There could be concern that that could result in some growth and margin dilution over time. But overall, at an $8 billion sales price, that’s only 3% of Salesforce’s market cap. In our view, not necessarily material. So net-net, no change to our fair value based on that acquisition.
Dziubinski: So then, Dave, what do you think of Salesforce today? Is it a buy?
Sekera: I think this is one of those companies you should just own it. It has the hallmarks of being a core holding in the tech sector. Within the technology sector, our equity analyst team has, for as long as I can remember, just highlighted this company as having one of the best combinations of top-line growth potential, margin expansion potential, a strong balance sheet. Right now, it trades at an 18% discount to our fair value, puts it in 4-star territory. Trades at 24 times this year’s earnings and only 21 times next year’s earnings.
Dziubinski: All right. That does sound like a buy. All right. We had cybersecurity companies Okta OKTA, Palo Alto PANW, and Zscaler ZS report earnings last week. Run through the results for us and whether Morningstar made any fair value estimate changes to the stocks.
Sekera: Sure. Let’s go ahead and start with Okta. Pretty solid results. Revenue up 12%. Margin increase of 520 basis points all the way up to 27%. With the guidance, they maintain their revenue and their increased profitability expectations. Now the stock did sell off a bit here. It was trading at a 26% premium to fair value prior to earnings. So at this point now it’s trading right almost at our $100 fair value estimate. Palo Alto also very strong results. Revenue up 15%. Margin expansion 180 basis points to get to 27.4%. Stock also pulled back a couple of percent. We maintained our $210 fair value estimate. So it’s still a 3-star stock, but at this point, I know if it falls any further, it would dip into that 4-star territory, which I think would be a pretty good entry point for a very high-quality cybersecurity company.
And then lastly was Zscaler. This was the outlier of the cybersecurity companies. So while the other cyber companies’ stocks did slump, investors were looking for improved guidance coming out of those companies. Zscaler surged almost 10%. So in this case, revenue was up 23%. Now their operating margin was flat at 22%, but they did raise their sales and profitability guidance. So I’d look for that operating margin to be to the upside, probably at some point getting back toward where Palo Alto and Okta trade. Yeah, and I’d also just remind here, we had mentioned this company on our Dec. 9 episode of The Morning Filter. At that point in time, we discussed how Zscaler had had slower billings growth in the second half of 2024. That is due to some turnover that they had on the sales team. The company did take steps to reinvigorate its sales efforts back then, and we forecasted that sales growth would rebound over the next three quarters. So in our view, it looks like that is coming to fruition at this point. That stock is now up 22% since that Dec. 9 episode. At this rally, the stock’s trading at about 14% above our $242 fair value estimate, though.
Dziubinski: We have another cybersecurity company, CrowdStrike CRWD, reporting this week. So given what we heard from other companies in the space last week, what do you think of CrowdStrike heading into earnings?
Sekera: I’d be cautious with this one. In my opinion, I think the setup right now is pretty similar as to what Okta look like coming into its earnings report. This one trades at a 40% premium to our fair value, puts in 2-star territory. I think in this case, the company would need to surprise to the upside. They’d probably need to materially increase their guidance. Otherwise, I could see this one selling off.
Dziubinski: So, Dave, what’s your favorite cybersecurity stack today and why?
Sekera: So at this point, I’d have to say it’s probably a Palo Alto, trades at a 9% discount. We rate the company with a wide economic moat. It does have a high uncertainty, but again, pretty much everything in the tech sector is going to have a high uncertainty. The company is just a very wide array of product offerings. It covers network security, cloud security, security operations, and so forth. We think the company is just very well positioned to be able to use artificial intelligence to be able to detect threats. It is the largest market cap of the group. So we do expect ongoing consolidation within the cybersecurity sector. So this really gives them the most ammunition to be able to make acquisitions out there.
Dziubinski: Two home improvement giants, Home Depot HD and Lowe’s LOW, reported since you and I had our last show. So what’s notable there?
Sekera: I wish I had something interesting to say, but in this case, I just really don’t. I mean, as far as our analyst notes, really no surprises here. Same store sales did fall. That’s really just because existing and new-home sales remain relatively subdued. That, of course, then dampens remodeling and construction spending. Both of them held their guidance for the full year, but I would just note that in my mind, I do think that they are at risk if the economy were to slow more than what we’re currently expecting.
Dziubinski: Then how do Home Depot and Lowe’s look from a valuation perspective? Is there any opportunity in either stock today?
Sekera: Not really. I mean, Home Depot, great name, but it’s a 2-star stock at a 20% premium. It trades at 25 times our 2025 estimates, which seems expensive to me for companies whose earnings are guided down 2% this year, and we’re only looking for 7.5% growth on average thereafter. Lowe’s, a little bit more reasonable. It is a 3-star-rated stock, trades only just a bit below our fair value estimate. Now, this one trades at 18 and a half times our 2025 estimate. That to me is a little bit more reasonable of a price. We’re looking for 2% earnings growth this year and 9.7% growth thereafter. So if you want to be in the space, if you already own Home Depot, this might be an opportunity to swap out of Home Depot and into Lowe’s instead.
Dziubinski: It’s time for the question of the week from one of our podcast listeners. He asks, Dave, can you recommend a few stocks to hold for long-term growth, please, not just for a particular month or a particular week?
Sekera: Yeah, and I get where this question is coming from, and I think this is a good opportunity maybe to clear up any misconceptions that our listeners have. Now, oftentimes when you and I are talking about our stock picks for the week, we try and talk about things that are going to be thematic in nature. I think that just makes it more interesting for the listeners and gives people something to think about. And that may come across as being more trading-oriented and not necessarily long-term investing.
At the end of the day, our intent is always to highlight those stocks whose characteristics, especially valuation and their economic moat, are intended to be long-term investments. Our preference is always looking for a company with a wide economic moat that indicates that we think the company has long-term durable competitive advantages. Those are companies where we expect the company to generate excess returns on invested capital well over the weighted average cost of capital for at least the next 20 years. And of course, we look for those that are trading at a deep risk-adjusted discount to our intrinsic valuation.
Now, having said that, when a stock price rises too far above its intrinsic valuation, at that point, even if you are looking at it as a long-term investment, I still think it’s prudent at that point to at least sell a portion of your investment, lock in those profits, and then when and if the stock sells off or retreats, that gives you the cash then to be able to reinvest as it trades back below its long-term intrinsic valuation. The end of the day, investing always comes down to valuation. In our view, the proper way to think about valuation for a stock is—it is the present value of the future free cash flow a company will generate over the course of its entire lifetime.
So in this case, I’d also note too that for investors that buy individual stocks as opposed to using ETFs or mutual funds, you need to keep up with the fundamentals of the company as its business evolves over time. However, competition in that space may change and whether or not that then changes the future free cash flow projections of the company. So in this case, I’d say a good example warning for people that are making kind of these long-term investments would be Intel INTC. Intel for decades was by far the number-one semiconductor manufacturer out there. It was seen by the market as really just being the poster child for a core long-term holding. But then a couple of years ago began to fall behind the curve in the semiconductor design. It missed the boat on artificial intelligence. Now the company is having to spend extra money in capex, I mean billions of dollars a year just to play catch up with the rest of the market. And they’re much less of a leader at this point in time. And in fact, they have to spend that money just to catch up to where the rest of the semiconductor industry was.
So in December of 2023, that stock was trading way too high above its long-term intrinsic valuation as a 2-star rated stock. At that point, would have been a great time to at least take some profits if not go ahead and sell out of that stock, which in hindsight that would have been a great time to sell. So again, yes we are always thinking about investing in individual stocks with that long-term mindset, but at the same point in time, depending how the valuation evolves, if it starts trading down too much and your investment thesis hasn’t changed, great time to start moving to an overweight position, and then similarly, as that stock moves up and if it moves up too far above that long-term intrinsic valuation—the old adage “no one ever went broke taking a profit.”
Dziubinski: Well, listeners, we hope you’ll keep sending us your questions. You can reach us at themorningfilter@morningstar.com. And speaking of picks for the long term, it’s time for the picks portion of today’s episode. Now today, Dave, you’ve brought us some oversold stocks to buy that fit into a summer theme. And your first pick this week is Clorox CLX.
Sekera: So tell us about it. Run through the numbers. So as just a little bit of a background here for the picks I picked out this week: There’s over 1,200 stocks that are in the Morningstar US Market Index, and the market always seems to really focus on whatever are the hottest stocks of the moment. And sometimes undervalued stocks just fall below the radar and you need some sort of theme or a catalyst really to catch the market’s eye to focus on it and bring those stocks back up to what we think are the long-term intrinsic valuation of that company. So in this case, I was just thinking about stocks that investors or the market may think about as they go about their summer and maybe that could be a catalyst here really to drive some interest in looking at their valuation.
As you mentioned, first one up is Clorox. You always start the summer with that deep spring cleaning in your household after the house has been locked up all winter, and you’re going to need, of course, plenty of Clorox wipes to do that. And I’d also note, too, that when you go into the backyard to fire up that barbecue, you’re going to need that Kingsford charcoal to fire up the grill. And that’s a product owned by Clorox. So a couple of different reasons to own this one for the summer.
Dziubinski: Now, Clorox stock is down about 17% this year. Why is the market sour on the stock, and why do you like it?
Sekera: Well, from just a pure valuation standpoint, it’s a 4-star-rated stock, 25% discount, 3.7% dividend yield. It’s a company we rate with a wide economic moat and a medium uncertainty. This is a stock that just skyrocketed higher at the beginning of the pandemic, well into 1-star territory. But the company just had never been able to match the type of growth that would have been required to be able to support what those valuations would have required it to support. So the stock sold off over the next couple of years. It bottomed out, tried to rebound in fall of 2023, and then unfortunately for the company, it did get hit by a very costly cyberattack that hampered their operations, took them quite a while to recover from. Just as a side note, that’s a perfect example of why I also like the fundamentals of the cybersecurity sector. So overall, to some degree, I would say this is a normalization play as we’ve gotten past kind of that a cyclical downturn that they went through with the market really just being disappointed with what the company was putting up because it couldn’t really support the valuations that it looked for. And again, now that we’re getting past and lapping that cybersecurity issue, I think this is one where it’s just back to basics at a very cheap valuation.
Dziubinski: Now, your second summer pick is Scott’s Miracle-Gro SMG. Explain how it fits your theme and what are some of the key metrics on it?
Sekera: Well, if you’re going to host that backyard barbecue, you’re going to want the lawn to look good. You’re going to need to fertilize it. You’re going to need to kill the weeds off. That takes it to Scott’s Miracle Gro, 4-star-rated stock, 34% discount, 4.4% dividend yield, narrow economic moat, although high uncertainty rating, but being in the basic material sector, I’d kind of expect that.
Dziubinski: Scott’s Miracle Gro stock is down about 34% since the start of November. What’s driving the negative market sentiment, and why is the stock a pick for you?
Sekera: Well, it’s a pick just really because of the selloff. I think the selloff is what’s providing the opportunity here. Taking a look at the chart, looks like maybe it is in that bottoming-out process right now. Now, last November, management did provide guidance that was significantly below the consensus expectations, and the reasons there were twofold. So on the supply side, the company had a lot of very high-cost inventory from when inflation was running high that they needed to burn through. Then on the demand side, with the pandemic far in the rearview mirror, the number of people that are doing home gardening has been declining, and that’s led to some inventory destocking. Now, more recently, management also alluded to a colder and slower start to the lawn year, the garden season this year. So that did drive lower volumes here in the short term as well. I’d say overall, these issues are probably more cyclical and not necessarily structural. We expect normalization as that high-cost inventory is used up. Over time, you’d expect weather patterns to normalize, so you would see better stabilization in demand.
Now, last quarter, the company did reaffirm its 2025 guidance. Companies trading at 14 times our 2025 earnings expectations, so not a very hard hurdle for it to be able to meet. Now, this one also maybe has another potential catalyst coming up. My understanding is that the company is presenting at a conference later this week. I’m hoping that that will also raise the visibility of the company in the marketplace when they do their presentation. Also hoping that maybe management could spread some good news here in the short term.
Dziubinski: Your next summer stock to buy is Kraft Heinz KHC. I get the summer connection on this one, Dave, but walk us through the metrics.
Sekera: That’s right. So once you got that grill fired up, you need the Oscar Mayer hot dogs to put out there. You need your cheese slices for the burgers, and you’re going to need your ketchup. And of course, what’s summer without s’mores and a campfire? So you’re going to need your Jet-Puffed marshmallows as well. The company is a 5-star-rated stock, trades at half of our fair value estimate, and provides a 6% dividend yield.
Dziubinski: Now, Kraft Heinz’s largest shareholder is Berkshire Hathaway BRK.A BRK.B, and Berkshire Hathaway’s directors recently stepped down from Kraft Heinz’s board, and the company is considering “strategic transactions” to boost shareholder value. So given that backdrop, why is Kraft Heinz a pick for you now?
Sekera: Yeah, and hindsight is always 20/20. So again, I’m not trying to throw any stones here, but I think this is a situation where Warren actually probably got this one wrong. So back all the way in 2013, Berkshire and 3G partners have bought Heinz. They then merged Heinz into Kraft in 2015. 3G partners then proceeded really to strip out as many costs as they could out of the business. And you know what? That actually worked for a while. It boosted margins. It boosted the stock price. But I think they went through and they just cut research and development, advertising and promotional spending just way too much, which over time then led to a deterioration in the brand value of the company, and it really started seeing the stock turn down really ever since 2018. Now, 3G ended up losing board seats in 2022, and in fact, it looks like they exited the last of their equity position in 2023.
Now, part of the reason we like it now is that since then, the company has really focused on beginning to reinvest back into its business, rebuild that brand equity, in turn, rebuild the intangible assets of the company, which we think will pay off in time. In fact, we increased our moat analysis to a narrow moat in mid-2024. And then as far as strategic transactions go, I never rely on strategic transaction as an investment thesis, but in this case, maybe that can be a catalyst if they are able to unlock shareholder value. Could this potentially be a breakup play? Is it cheap enough to be a buyout candidate, either strategic or LBO? I don’t know. In our view, the valuation here is just especially compelling. Only trades at 10 times our 2025 earnings estimate, 9 times our 2026 earnings estimate. We’re looking at 8.3% earnings compound annual growth rate thereafter. So in my mind, I think this one looks pretty cheap here.
Dziubinski: Your next pick this week is Hershey HSY. Run through the key numbers here and how it fits your summer theme.
Sekera: Can’t have s’mores without chocolate. Five-star rated stock at a 22% discount, 3.4% dividend yield, wide economic moat, low uncertainty. Just one of those stocks that over time, rarely are you able to buy at this much of a discount from its long-term intrinsic valuation.
Dziubinski: Now, cocoa inflation has taken a toll on Hershey’s and the stock is down about 16% during the past 12 months. So why do you like it anyway?
Sekera: And that’s really what’s bringing the opportunity here. This is definitely a story stock at this point in time. So my understanding is that 60% of global cocoa production comes from West Africa. They suffered droughts in 2023 and 2024 growing seasons. That then was also exacerbated by the cocoa swollen shoot virus. So cocoa prices just exploded higher. I think they’ve tripled over the past one and a half to two years. Now overall, depending on the type of chocolate, cocoa is 20% to 50% of the cost. So that did result in a lot of industrywide price increases, but they haven’t been able to push all of that added cost through. That has resulted in some margin squeeze here in the short term.
Now in the commodity markets, the old adage is “the cure for high prices is high prices.” We have started to see some demand destruction here in the short term as those higher prices reduce demand. But over time, we expect that new supply will emerge, which will bring normalization to the market. It’s just going to take a little while for that to really work itself out. My understanding is it takes three to five years to grow a cocoa tree from start until when it starts producing. But when I look at the stock valuation, I think all of this already incorporated into the price by the market. In fact, the stock is down over 40% from its May 2023 peak, which is also the same point in time when cocoa prices really began their run higher.
Just taking a look at the metrics here, the company’s adjusted earnings guidance for 2025 is $6 to $6.18 per share. Using the bid point of that puts it at 26 times earnings. That does seem a little bit high. I would just say that in context, the earnings for 2024 was $9.37, much higher than that $6 estimate right now. Taking a look at our model, we’re forecasting a growth to $8.50 in 2026. That brings your multiple down to 19 times. And by 2027, our forecast really gets back to more kind of that normalized level we saw before cocoa prices really started shooting up. So we’re looking for $9.61 in 2027. So that brings your PE ratio below 17 times.
Now, historically, just taking a look at the past 10 years, looks like your average PE ratio is somewhere in kind of that mid-20s area. So back of the envelope, if you were to use a 2025—I’m sorry—2027 earnings estimate, apply a 25 times multiple to it, that would bring the price up to $240 a share over the next couple of years, so in my mind, plenty of room for this one to rebound and start to run once cocoa prices roll over and begin to normalize. In the meantime, you’re clipping a 3.4% dividend yield.
Dziubinski: Your final summer pick this week is a stock we’ve talked about a few times during the past several months. It’s Constellation Brands STZ, so run through the key data points.
Sekera: Yeah, I mean, just a reminder, the company imports Corona and Modelo brands from Mexico. It’s a 5-star-rated stock at a 35% discount, 2.3% dividend yield. It is a company we rate with a wide economic moat just based on the brand strength of those two different beer brands. And then we also rate it with a medium uncertainty.
Dziubinski: Now, Constellation Brands is your second pick this week that Berkshire Hathaway also owns. In fact, Warren Buffett doubled down on his position in the stock during the first quarter. So, Dave, you’re in pretty good company on this one.
Sekera: Well, I think that just indicates that Warren must listen to The Morning Filter, Susan. So, hey, hi, Warren. Hey, after today’s episode, give me a call.
Dziubinski: Now, Constellation Brands, the stock is down about 18% this year and continues to look really undervalued from Morningstar’s point of view. How’s Morningstar’s take differ from that of the markets on this stock?
Sekera: Yeah, in fact, I mean, the stock was down even more in February. Looks like it’s bottomed out and it’s probably starting to rebound at this point in time. To some degree, I think a lot of this short-term pressure is because of concern about tariffs on goods imported from Mexico. We’ve noted before that beer should be exempt from additional tariffs under the USMCA agreement, so not necessarily a concern from our point of view. There’s also a lot of concern out there about changing consumption habits. Overall, we’re seeing consumption for alcohol decrease, especially as compared to the pandemic when consumption, especially consumption at home, had increased for a number of years. So a bit of normalization going on there. Overall, I think the market is probably overestimating the depth and the length of the decline in beer consumption overall. Lastly, the best part of buying the stock, you can feel good about supporting your own investments by enjoying a few Coronas either by the beach or by the pool this summer.
Dziubinski: And we will end there with that image. 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 Monday 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.