Plus, our stock market outlook for the quarter ahead.
In this episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss what economic and earnings reports to keep an eye on during this shortened trading week. Chewy’s stock skyrocketed after earnings last week; tune in to find out if the stock is a buy after the runup. They examine market valuations heading into the second quarter, revealing whether now is the time for investors to increase their exposure to US stocks. They also unpack which investment styles look most attractive today, as well as which sectors to take profits in and which sectors to invest the proceeds in.
They explain why Crowdstrike isn’t a top pick among cybersecurity stocks today. This week’s stock picks feature five undervalued stocks that Morningstar’s analysts like at the start of the second quarter.
Episode Highlights
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Susan Dziubinski: 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 investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.
Now we want our audience to know that we’re actually taping this episode on Friday, March 27, because Dave will be out on spring break, starting on Monday, March 30. But because we’re taping this week’s episode in advance, we won’t be covering anything related to the conflict in Iran, given the uncertainty. And all of our comments reflect what’s going on in the market as of Friday before market open.
All right, Dave, well, you’ll be on spring break, but the rest of us have a shortened trading week ahead with Good Friday and the US stock markets closed that day. But of course, we still have some economic reports and earnings on radar to talk about. So first, let’s start with what you’re going to be watching on the economic front.
David Sekera: As far as the economic front goes, I mean, we have retail sales, we have nonfarm payrolls, but honestly, I don’t think either of them are going to be all that meaningful. As far as payrolls go, we’ve talked a number of times. The revisions on payrolls end up being so large that I think whatever number they publish on a monthly basis ends up being somewhat meaningless at the end of the day. And then as far as retail sales, I mean, with everything going on, what’s happening with oil prices and gasoline prices, I just don’t think whatever number ends up getting reported here is really going to be reflective of how consumers are going to behave in the months ahead. So to be honest, any economic metric, whether it’s next week, this week, last week, the month ahead, I don’t think any of them are really going to be all that significant because I just don’t think they’re going to reflect the economic trend over the next couple months.
Dziubinski: All right. Well, let’s pivot over to earnings then. Now, Nike NKE reports earnings this week. Stock’s trading way below Morningstar’s $102 fair value heading into earnings. Why are you watching this one?
Sekera: Well, first of all, I mean, I’ve gotten a lot of questions from viewers over the past couple years as far as why I haven’t recommended this one in the past. As you mentioned, it is at a very deep discount, trades at half of our fair value estimate at this point, 5-star-rated stock, 3% dividend yield. We rate the company with a wide economic moat, but it’s just that stock price just keeps falling. In fact, it’s actually at the point now it’s fallen to the lowest level on a dollar basis that it’s traded at since 2017. Now, I don’t think management has given any kind of guidance for 2026 just yet. So we’ll certainly be listening to see what kind of guidance they can give to the Street. I looked up yesterday, the Street consensus for earnings for next year is $2.35. So the stock’s still trading at 22 times that consensus estimate, which isn’t necessarily cheap for a company whose top line has contracted in 2023, 2024, and again, in 2025.
Fundamentally, I still think the company is weakening. I mean, there’s a lot of noise going as far as the tariffs and other short-term issues, but I think they’re still losing market share to competitors like On Cloud and Hoka. I mean, they’ve had pretty lackluster product development. They’re still struggling in China. I think the market’s really just going to be listening for any kind of indication that Nike has started righting the ship. When that happens, I think there’s a lot of room to run. It’s just that for the past couple years, I just haven’t wanted to get involved in the downdraft of this value trap.
Dziubinski: All right. Well, McCormick MCK also reports this week. Now, here we have a company that’s in talks actually with Unilever combined with the latter’s food brands. Now, Morningstar assigns McCormick a $68 fair value estimate. So what are you going to want to hear about here?
Sekera: This, I think, is going to be a really interesting situation to pay attention to. Now, it’s a 4-star-rated stock, trades at a 24% discount now that the stock has fallen year to date by 24%, has a 3.6% dividend yield and a wide economic moat. In fact, this stock has traded off enough over the past year, so it’s actually trading all the way down to where it traded back in 2018. And I looked at our numbers. This is actually the first time this stock has traded at the 4-star level over the past decade. So this is a stock that rarely ever gets into this kind of valuation range according to our intrinsic valuations. Now, I did take a quick read of Aaron’s stock analyst note after the last quarter earnings. They were a little bit disappointing, but they really didn’t seem to be all that disastrous.
The top line was still growing at a 2% organic growth rate, but they did note that because of inflationary pressures, the operating margin did end up contracting. And as far as guidance for 2026, I think it was pretty modest. They’re only looking for 1% to 4% growth in earnings. At this point, stock trades at 16 and a half times our 2026 earnings estimate. Now, I will caution that is above a lot of the other food names that we follow, a lot of other food names that we think are also very undervalued. So I just don’t know if this is a case of maybe this is being pulled down with all the other food names because all the other ones are even more attractive on a P/E basis. So at this point, I just want to see whether or not McCormick is going to be kind of the next food name to suffer the same fate that we’ve seen with a lot of other food names that have been suffering from top-line erosion and negative fixed-cost leverage. I think this is one that if they can hold their own here this quarter and this year is certainly something that investors should take a look at.
Dziubinski: All right. Well, we’ll move on to some new research from Morningstar, and we’re going to start with an update on a former stock pick of yours, and that’s Chewy CHWY. The stock was up 13% after reporting earnings, and Morningstar maintained its $35 fair value estimate on the stock. What got the market so excited about Chewy, and do you think the stock’s still attractive today?
Sekera: It’s kind of funny. I actually kind of forgot about Chewy. As you mentioned, this was a pick long ago. I think the first time we highlighted it was in November of 2023. We had reiterated that pick a couple of times, but then it kept going up, got into 3-star territory and actually hit 2-star in mid-2025, and it really just fell off of my radar when it was no longer an interesting story. Since then, the stock has fallen 44% from where it peaked in June 2025, now trades at a 24% discount, 4-star-rated stock. It’s a company we rate with a narrow economic moat, but I do have to caution it does have a Very High Uncertainty Rating. Taking a look at Jaime’s last note, they had a pretty good quarter, 8% top line growth, getting good volume gains. We think that’s indicative of them taking market share from their competitors.
Their margin guidance was pretty good. Guidance for 2026 for revenue is in line with our forecast. We’re looking for further margin expansion. Now, it does trade at a pretty high multiple. It trades at 30 times this year’s earnings estimate, but we are forecasting a 19% five-year compound annual growth rate. So this is one that if you believe the growth story here is once again, starting to look pretty attractive, 4 stars. Maybe because of the Very High Uncertainty, you might want to keep an eye on it. This might be one to keep on a short list if it trades down to a greater margin of safety to account for that Very High Uncertainty. Maybe that’s the point you dip your toe into this one.
Dziubinski: All right. Put Chewy on that watchlist. All right. Now, March is winding down, which means we’re closing the books on the first quarter and looking ahead to the second quarter. So Dave, as we’re heading into the new quarter, how does the US stock market look from a valuation perspective?
Sekera: We ran our numbers as of close on Monday, March 23. And at that point, the price/fair value of the market overall was 0.88. So that means the market’s essentially trading at a 12% discount to a composite of our fair values. So for people that haven’t listened to us or listened to our podcast in the past, I just want to explain how we think about market valuation and how that differs from a lot of other strategists. We really, truly do a bottom-up analysis. We cover over 700 stocks that trade on US exchanges. Our equity team calculates the intrinsic valuation for each one of those individual companies. So we put a composite of that together, and we divide that into a composite of where it’s trading in the marketplace, their market capitalization, and that gives us that price/fair value metric. So to me, that’s really truly the way you should be thinking about the market valuation.
I know a lot of other strategists I’ve always found over the course of my career have some way that they calculate S&P 500 earnings for the year. They slap some sort of forward multiple on that, and it always seems like they’re telling you the market’s 8% to 10% undervalued. But in that case, I think that’s more an exercise in goal-seeking than it is necessarily a true market valuation, which is what we do here at Morningstar.
Dziubinski: All right. Given that the market looks, according to Morningstar, about 12% undervalued, would that indicate that it’s time to overweight stocks?
Sekera: It’s really going to depend on your risk tolerance and your own outlook as far as what happens over the next couple weeks. Personally, I’m not at this point. I think, at this point, even an undervalued market can get more undervalued. And with everything going on in the world today, I’d actually prefer a much greater margin of safety before I were to start overweighting my equity allocation. Unfortunately, when it just comes to military conflict, I think there’s just too wide of a range of potential negative outcomes that could occur to really start putting new money into the market yet. And even when I look at how the market’s been trading, it actually still feels more like it wants to trade up because it is trading at that discount. I don’t think we really have enough negative market sentiment yet, really, to make it feel like it’s more like a bottom at this point.
Now, of course, as far as the impact of oil goes, yes, the consumer, the economy can survive high oil prices for a brief period of time, but if oil prices stay elevated here for much longer, another couple of months or so, I think it starts to increase the probability of a recession pretty high. So just the last thing I want to talk about is, I think now is a better time to be making readjustments into your portfolio as opposed to really trying to time the market to go to an overweight. If you remember at the beginning of the year in our 2026 outlook, we talked about how we thought 2026 was going to be a much more volatile year over the course of the full year than 2025. And we recommended a barbell-shaped portfolio. Essentially, we wanted to still be able to capture the upside volatility from AI and technology.
A lot of those stocks are undervalued, so we thought half of your exposure should be in those type of names, but then the other half should be in high-quality stocks, especially those with wide economic moats. The reasoning being that if we had upside volatility, the market runs higher. Those AI tech stocks, the growth stocks, would outperform to the upside. And then if we suffered downside volatility, the value stocks would at least hold their value, if not benefit, as you would have the rotation into value, which is what we’re seeing. So I think right now is the time to look at your portfolio, look at valuations, and readjust as needed. I think it’s a good time to actually look at some of those areas where you can take profits, where we’ve seen that upside volatility, and reinvest into some of those positions that might’ve gotten beaten up pretty hard where you can dollar-cost average down. But for now, I’d still save any dry powder that you have in case we get much more of a washout in the marketplace overall.
Dziubinski: All right. Well, then let’s dive a little bit beneath the surface of what’s been going on in the market. So we’ve seen a decline in growth stocks this year and that rotation into value sort of aligning with what you were saying about a barbell strategy at the start of the year. So given that rotation, give us a sense of where valuations are from a style perspective and where there is opportunity today.
Sekera: Sure. So value stocks are currently trading at the least discount. They’re only trading at a 6% discount compared to that composite of our valuations. Core stocks are kind of splitting the difference. Also, not as much of a discount as what you see in growth stocks. Core is currently at a 10% discount, but core stocks … it’s interesting. I mean, it’s a combination of two things. One, growth stocks have been hit the hardest thus far this year, but because of what’s going on with the hyperscalers and still the AI buildout boom going on, we increased our fair value on a couple of different AI growth stocks this year, year to date. So between the markets selling off and our valuations going up on a couple of them, growth stocks are very undervalued right now, trading at a 21% discount to our composite of fair values.
Dziubinski: All right. Let’s then get into some sectors beneath that. Technology, specifically, which ties in with the growth, as you mentioned. It’s been a tough quarter for tech stocks. So talk about that and about how the sector looks from a valuation perspective.
Sekera: Technology as a sector is currently trading at a 23% discount to fair value. Again, it’s a combination that we did increase our fair values on a number of different AI stocks, but at the same point in time, the sector had been hit pretty hard. Now, as far as how much of a discount that is at 23%, to put that into perspective, really only twice since 2011 has the sector traded at that much of a discount or more. So it was really when the market bottomed out most recently in fall of 2022 that we got to that type of discount. Then you have to go all the way back to 2011, back during the height of the sovereign debt crisis and the European banking crisis, to see technology trading at this much of a discount.
Dziubinski: Now, financials had a pretty bad performance in the first quarter, too, but unpack that a little bit, and then tell us whether the sector is more attractive from a valuation standpoint after that pullback.
Sekera: Well, if you remember coming into the year in our 2026 outlook, we noted that financials were the most overvalued sector coming into the year. I mean, essentially, we just thought the market was overextrapolating how much net interest income growth there was going to be. Thought the market was pricing that into the valuations for too long. And of course, what we’ve seen thus far this year, short-term interest rates have been increasing, really accounting for the inflation that we’re going to see at least over the next couple of months. And so with the yield curve then flattening out, that took those valuations out of or those growth assumptions out of the valuations for the financials. So it has sold off a pretty good amount. At this point, it’s now trading at a 6% discount, but it’s really not that much of a discount relative to the broader market. It’s only half the market discount. So I would say we still see a lot of better opportunities away from financials.
Dziubinski: Well then talk a little bit, Dave, about some other undervalued sectors as we’re heading into the second quarter.
Sekera: Communications is currently trading at a 14% discount. Now, I would note with communications because it is so heavily weighted toward Meta and Alphabet, with Meta being at a 30% discount, that’s going to be a big portion of why the communication sector overall is at a 14% discount. Alphabet itself is also at a 14% discount. So really, Meta is probably the biggest reason why it’s trading down there. Real estate’s still attractive at a 12% discount. You’ve heard us talking about that one for several years now at this point. And then lastly, consumer cyclicals, after that got hit, that’s now trading at an 11% discount.
Dziubinski: All right. Let’s flip it now, talk about the other side. Let’s talk about overvalued sectors. Now, first and foremost, energy very likely looks overvalued, I would guess, given the performance we’ve seen from energy stocks in the first quarter. So tell us about that.
Sekera: I mean, when I think about energy, for those that have been listening to the show for a while, throughout all of 2025, we kept recommending energy stocks. And I think some people were actually kind of getting tired of hearing us talking about it. But again, at that point in time, they were one of the most undervalued sectors. They had pretty high dividend yields. So fundamentally, they looked pretty attractive, but we also noted that the energy stocks will act as a natural hedge in your portfolio if inflation were to rebound or if there were any other geopolitical issues.
Now, thus far this year, energy is up well over 34%, so it is working as intended as that hedge in your portfolio. So as we talked about last week on The Morning Filter, I think now’s a good time to start using that hedge. I think it’s time to at least lock in, harvest some of the profits that you have in those stocks. I don’t think you sell the entire position, but if nothing else, at least lock in some of that, and then you can use those proceeds in order to reinvest in some of these other areas that have gotten hit really hard thus far this year.
Dziubinski: So then Dave, from a sector perspective, what else looks overpriced today?
Sekera: The next most overpriced is going to be the consumer defensive sector. That trades at a 14% premium. Now I’d just note, we’ve talked about this a couple times, Walmart WMT and Costco COST are by far the two largest positions within that index. Those are both heavily overvalued in our mind—great companies, wide economic moats—we just think they’re overvalued. So that skews the overall sector premium up to that 14%. Once you get away from those two stocks, we actually see a lot of opportunities for investors there, so don’t overlook that sector. You just have to be much more stock-specific. Utilities still overvalued, currently trading at a 7% premium. And then lastly, industrials also trading at a 5% premium. What I’d note there, though, is that there’s a lot of concentration in the defense names, those tied to the AI buildout, that are really bringing that premium up. And again, defense names are things that we had recommended a couple years ago. So those are some good names that I think is also a good place to look at taking some profits today.
Dziubinski: Let’s pan back out, Dave. Given valuations across style, market capitalization, and sectors, how do you think investors should be thinking about positioning their stock portfolio at the start of the new quarter?
Sekera: I’m still thinking a market weight overall, be it whatever your targeted allocation is based on your own risk style and preferences. So whatever your percentage of equity is as a percent of your overall portfolio, I’d still be right in that same neighborhood. But I think that with as much market volatility as we’ve seen, as much movement as we’ve seen in growth and value stocks or individual sectors, it’s a good time—take a look at your portfolio and figure out where you should be readjusting those individual positions to take advantage of that. So again, it’s a good time to take some profit in that value sector and some good times to take some profits in the energy sector and look then where to redeploy it, wherever in your portfolio that you are comfortable in the long-term investment thesis in those names but have been hit especially hard, whether that’s growth, AI technology, software stocks, but those stocks that are now trading at much wider margins of safety, you can now dollar-cost average in to the downside.
Dziubinski: All right. Dave’s going to be hosting his quarterly stock market outlook webinar on Wednesday, April 8. So mark your calendars, and you can register for this free event via the link that we are providing in the show notes. Dave, not to give too much away ahead of your webinar, but what would you say are maybe three things you’re going to be watching closely during the second quarter, and why?
Sekera: Well, I mean, first and far away, it just has to be what’s going on in the oil markets. I mean, granted, the US economy is less reliant on oil than it’s been in the past, but it still is just going to have huge implications on the economy. And in fact, when I think about oil prices, oil prices have been actually a tailwind for the economy. They had peaked in mid-2022, generally falling ever since. So now we’re not only losing this tailwind, but it’s now going to be a headwind, much more going forward.
Number two, interest rates. As far as short-term rates, those have been heading higher due to higher inflation expectations. And in fact, if I specifically look at the two-year, that yield has risen enough now that not only is the market saying that they don’t see the Fed being able to cut anytime in the foreseeable future, but if you look at the Fed fund futures rates, the market’s now pricing in a 50% probability that the market—or that the Fed may end up hiking those rates before year-end. And of course, long-term interest rates are going to have an impact on mortgage rates. Those are going higher, so that will reduce the demand for single-family and multifamily homes. That of course has a very large and negative multiplier effect for the economy overall. And those longer-term rates, as they go higher, that just increases the cost of capital overall. When you have a higher cost of capital overall and those higher discount rates, that’s going to lower the present value of assets generally today. And of course, corporations with those higher rates are going to want higher rates of return before they reinvest money back into their business.
And then lastly, we’ve touched on this a couple of times, I think, private credit. And I think that’s one of those areas in the market we’ve talked about a number of times that has been fundamentally weakening. Now, I don’t think this is a systemic issue. I don’t think private credit weakness is going to cause global financial crisis part two. It’s much different than what happened back then, i.e., we don’t have CDO squares that end up being worth zero at the end of the day that blow up bank balance sheets, but I think there are a lot of losses in private credit that are going to need to get recognized before all is said and done there.
Dziubinski: All right. Well, it is time for our question of the week. This week’s question comes actually from a comment that someone made on the bonus episode of The Morning Filter that Dave did recently about cybersecurity stocks. And this viewer wants to know: Why is CrowdStrike CRWD not a top pick? Valuation?
Sekera: Exactly. I mean, there’s absolutely nothing wrong with CrowdStrike from a fundamental point of view. I would say this is one of those situations where, for the most part, it kind of has everything that we would be looking for in an investment, especially in the cybersecurity industry. It’s one of the larger cybersecurity providers, has a good portfolio of products and services. We rate the company with a wide economic moat. We think it’ll be a consolidator in a consolidating industry. So fundamentally, everything looks great as far as that goes. But if you look at our price/fair value chart since we started covering this stock, our valuations never really have differed all that much from where it was trading in the marketplace. There’s a couple of brief instances here and there where it did drop enough to get into 4-star territory, but it never lasted very long in that 4-star territory.
If anything, if I look at the chart, it’s actually probably traded up too much to the upside, got ahead of itself in November, went into 2-star territory. It’s retreated now 30% from that peak, but it’s only at a 12% discount, puts it in that 3-star range. So this is one I would put it on your watchlist. If it were to drop from here, it could be a buying opportunity. But when I look at the relative value of the other cybersecurity providers like Palo Alto PANW or Fortinet FTNT, they’re just much more attractive on a valuation basis. For example, while we do forecast faster growth at CrowdStrike as compared to Palo Alto over our five-year forecast period, CrowdStrike trades at 80 times this year’s earnings forecast, whereas Palo Alto is only trading at 40 times. We think that’s too much of a differential for the growth dynamics, the difference in the growth dynamics between those two companies today.
Dziubinski: All right. So good company, just not cheap enough. Keep sending us your questions. The best way to reach us is via our inbox, and our email address is themorningfilter@morningstar.com.
All right. Well, speaking of picks, it’s time for this week’s stock picks. Dave’s brought us five ideas from the quarterly Morningstar Analyst Picks list that he likes best, and we’re going to be posting that full list of our analyst picks on morningstar.com later in the week, so keep an eye out for it. Dave, your first pick this week is GE Healthcare GEHC. Give us the highlights.
Sekera: So it’s a 4-star-rated stock, trades at a 27% discount, not much of a dividend yield, only two-tenths of a percent. So if you’re a dividend investor, maybe not necessarily the one for you, but we rate it with a medium uncertainty and a wide economic moat, that wide economic moat being based on its switching costs and intangible assets.
Dziubinski: Now, we haven’t talked a lot on the podcast about GE Healthcare, but it was a pick, I think at least once before in October of 2025, and stock’s having a little bit of a tough year. So, what do you like about it?
Sekera: Yeah, I mean, originally it did pretty well after we recommended it. In fact, it just started to trade into 3-star range, but I think generally it’s just gotten caught up in kind of the broad market downdraft that we had thus far this year. I did take a quick read through the last quarter earnings note. Now, I think top-line guidance was maybe a little bit below what the market had hoped for, but I think the real big drag here had been the sales decline in China. Anecdotally, this is just another example of why I think the economy in China is not doing nearly as well as I think a lot of other people think is going on there. But getting back to this one, I think the bigger and more important part to the valuation story here is margin expansion. And we saw that last quarter, so I think that’s encouraging to our equity analyst team.
I opened up the model to take a quick look through our assumptions. They look pretty conservative to me. Our top-line forecast is only 3.9% on a five-year compound annual growth rate. We are looking for the margin to rebound as the company works through some of the short-term tariff issues. Between that, it gets us to an 8.6% earnings-growth rate. So good earnings-growth rate, I mean, nothing heroic, but at this point it only trades at 14 times our earnings estimate for this year.
Dziubinski: Well, next you’re reiterating LPL Financial LPLA as a pick. Remind us about this one.
Sekera: It’s currently trading at a 44% discount, more than enough to put it well into 5-star territory. Another one that doesn’t have a huge dividend yield, only four-tenths of a percent. Another one that we rate with a high uncertainty. So again, put this in your more risky part of your portfolio, but we do rate the company with a wide economic moat based on cost advantages and switching costs.
Dziubinski: Now, as we talked about earlier in the show, the financial sector has really struggled this year. So of course, there are a number of undervalued financial-services stocks out there today. Why do you like LPL specifically?
Sekera: It’s really all the same reasons that we’ve talked about on the show beforehand. So if you’ve missed those past shows, the company’s the largest independent broker/dealer. They have, I think, 29,000 advisors already on their platform, over 10 million accounts. We first recommended it last October. Stock initially did pretty well, but again, when the market rolled over earlier this year, the stock got pulled down with it. Just thinking through our original investment thesis, we thought it’d benefit from a combination of increasing assets under management as stock markets generally over time increase as well. But more importantly, we thought it’d benefit from asset under management growth because more and more people are using investment advisors as opposed to just doing it on their own. And LPL is still bringing new investment advisors onto their platform. So it’s a good growth as far as organic growth from people using investment advisors and those advisors coming onto their platform.
Generally, I’d say there’s really no change to the story. Yes, assets under management will have pulled back with the market overall. To me, that’s just the natural ebb and flow of the asset management business. We still expect those other two trends to continue going forward. Our forecast, we’re looking for a 12% compound annual growth rate for revenue. This type of company has a lot of operating leverage to the upside. We’re looking at a 26% five-year compound annual growth rate, yet only trades at 11 times our 2026 earnings estimate.
Dziubinski: Well, your next name this week is a new pick, something we haven’t talked about before, Invitation Homes INVH. So tell us about this one.
Sekera: So it’s currently rated 5 stars, trades at a 35% discount, has a pretty healthy dividend yield at 4.8%. We rate the company with a medium uncertainty. Now, of course, like a lot of other real estate deals, we rate it with no economic moat. That’s not a concern to me. It’s very hard to develop a real estate economic moat, so that’s not necessarily a drawback in my mind.
Dziubinski: Now, like with financial services, there are a lot of undervalued REITs out there. So why is Invitation Homes the one you’re picking today?
Sekera: Honestly, it’s because our analyst team just added it to the best picks list for our second-quarter outlook. I hadn’t really even paid attention to this stock in the past. The company is the largest single-family rental REIT out there. Their portfolio consists mostly of starter homes and move-up homes. So I’d just say generally what the investment thesis is here, right now it costs less to rent than to own. Home prices generally are just too high. So we think that’s going to support relatively high occupancy levels, allow the company to generate pretty good rent increases really until you start seeing home prices fall, and being the largest provider of single-family home rentals, they’re very efficient with their costs at this point.
Taking a look at our model, our revenue growth assumption is only 3.3% on a five-year compound annual growth rate. Instead of earnings, we look at what’s called funds from operations. The growth rate there is 4.5%. So on a price to FFO, or price to funds from operation basis, it’s only trading at 13 times, which, when I talked to Kevin Brown, our analyst covering it, he noted that he thinks that’s the lowest all- time multiple that it’s traded at. Historically, he says it’s usually much closer to 20 times.
Dziubinski: Your next pick is another dividend-rich idea. It’s Energy Transfer ET. So give us the highlights.
Sekera: Not as much of a discount as you see in some of these other ones, but it’s a medium uncertainty. So you need that narrow band in order to get to a 4-star stock, which it currently is today at a 13% discount. Again, another one with a very healthy dividend yield at 6.8%, but it is a company we rate with no economic moat, but I’m not that concerned about it, with it being a pipeline kind of company.
Dziubinski: Now, as one might imagine, Energy Transfer is having a pretty good year. So why do you think it has more room to run?
Sekera: Well, it’s still just one of the very few undervalued energy names at this point in time. And this actually isn’t the first time we’ve recommended this one. We recommended it last November. It’s up 13% since then. So it has lagged a lot of the skyrocketing we’ve seen in some of the other energy names that we’ve recommended. So I still think this one still has some room to run. I also like it because I think it’s a bit of a secondary play on artificial intelligence. So data centers, of course, are being built. They require huge amounts of electricity. And in order to provide that electricity, we’re building out a lot of new power plants, and of course, power plants that are fueled by natural gas, quickest and easiest to build. According to our equity analyst team, this company is one of the better-positioned pipelines to benefit from the data center growth, especially those data centers that are going to be located anywhere near the Permian Basin.
The only thing I do want to note for investors is that this stock is an MLP, a master limited partnership. So at the end of the year, you don’t get a 1099, you get what’s called a Schedule K1. And then the distributions here often include like tax-deferred return on capital. So that ends up lowering the cost basis of where you own this stock over time. So depending on what your own personal investment situation is, maybe talk to a tax advisor or financial advisor on this one before investing. So I think those are just some of the things you need to consider when investing in this one, other than just necessarily its valuation.
Dziubinski: All right. And then your final pick this week is another new name. It’s Masco MAS. So give us some of the key metrics on this one.
Sekera: So Masco currently trades at a 30% discount. It’s a 5-star-rated stock. OK dividend yield, 2.1%. We rate the company with a medium uncertainty and a wide economic moat. The sources of the wide economic moat are based on cost advantages and intangibles.
Dziubinski: All right. Now we’ve got a pretty slow housing market today, Dave. So why is Masco in your mind a stock to buy?
Sekera: Yeah, this is another one that we just added to our best picks list. So the company, of course, sells home improvement and building products. Specifically, a lot of that is going to be plumbing fixtures and paint. And I think this might be an interesting play on the housing market. Now, typically the company does well when there’s a lot of turnover in the housing market. So when you put your house up for sale, a lot of people are going to prep it by painting it, maybe replacing some of the fixtures. Or conversely, when new owners move in, they’re going to want to paint it whatever color they want. They might replace the fixtures to what they want as well. So of course this company saw great results in 2020 and 2021. Pandemic, of course, led to a lot of people moving at that point in time.
And then as that turnover fell in the housing market, revenue here fell as well from 2022 into 2023. And at this point, the housing market is pretty lackluster. Mortgage rates are high, prices are too high. Potential sellers are stuck in their house because their mortgage rates that they have are so low they don’t want to take on new higher rates. So you would think this wouldn’t necessarily be a good buy at this point, but I think what’s going on or what we’re kind of pricing in at this point, I think a lot of would be move up buyers are probably considering that they might end up being in their current house for longer. And so I think if they’re thinking that, they might end up thinking that, “Hey, if I’m going to be here, let’s make it the way that I want it to be if we’re here for a longer period of time.” So we think Masco is poised for a rebound in the home-improvement demand as those new and move-up houses just remain out of range or out of reach for many people.
Taking a look at our model, revenue here declined for the past three years. We’re only looking for a 2% rebound this year. With that rebound, we’d look for a little bit better fixed-cost leverage, plus we’d allow for the operating margin to slowly rebound over our forecast time period. We’re looking for kind of like that 5% top-line growth over the next couple of years, operating margin normalization that gets us to a 12% five-year compound annual growth rate for earnings, yet it only trades at 14 times our earnings estimate for this year.
Dziubinski: All right. Well, thank you for your time, Dave, and have a relaxing spring break. Viewers and listeners who’d like more information about any of the stocks Dave talked about today can visit morningstar.com for more details. We hope you’ll join us next Monday for The Morning Filter podcast at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.