Plus new research on Nvidia, Alphabet, and Kraft Heinz.
On this week’s episode of The Morning Filter, Dave Sekera and Susan Dziubinski catch up on tons of economic news, covering everything from tariffs to inflation to jobs—and whether the Federal Reserve will cut interest rates at its September meeting.
They unpack Morningstar’s fair value increase on Nvidia’s NVDA stock after earnings, whether Marvell Technology MRVL is still a buy after issuing so-so guidance, and if it’s time to throw in the towel or back up the truck on Bath & Body Works BBWI stock. They share Morningstar’s take on stocks in the news, including whether Kraft Heinz KHC stock is a buy ahead of the company’s split and if Alphabet’s GOOGL stock still looks attractive after the company skirts a breakup in its antitrust case.
They’ll also discuss Dave’s latest stock market outlook and his stocks to buy before the next Fed meeting.
Episode highlights:
Tariffs, Inflation, Jobs & The Fed
New Research on NVDA, KHC, GOOGL, More
Updated Stock Market Outlook
Stocks to Buy Before the Fed Meeting
Read about topics from this episode.
Read Dave’s stock market outlook: Stock Market Outlook: Where We See Investing Opportunities in September
Learn more about Morningstar’s approach to stock investing: Morningstar’s Guide to Investing in Stocks
Read the full earnings reports for Kraft Heinz, Alphabet, Nvidia, and Marvell.
Got a question for Dave? Send it to themorningfilter@morningstar.com.
Follow us on social media.
Dave Sekera on X: @MstarMarkets
Dave Sekera on LinkedIn: https://www.linkedin.com/in/davesekera
Facebook: https://www.facebook.com/MorningstarInc/
X: https://x.com/MorningstarInc
Instagram: https://www.instagram.com/morningstar...
LinkedIn: https://www.linkedin.com/company/5161/
Viewers who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. Read more from Susan Dziubinski and Dave Sekera.
Subscribe to The Morning Filter to get notified when we post. We’ll see you next Monday!
Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday before market open, Morningstar chief US market strategist Dave Sekera and I sit down to talk about what investors should have on their radars for the week, some Morningstar research, and a few stock ideas. Well, hi Dave. It’s been a couple of weeks since our last episode of the podcast, so we’ve got a lot of catching up to do. But before we do, how was your Labor Day weekend?
David Sekera: Good morning, Susan. It was great. It was actually really just emblematic of my entire summer, where it seems like I was hardly home any of the weekends this summer. I was just always traveling and on the road. So, Labor Day weekend, traveled to go visit my son, went to the University of Illinois football game, back home to do some yard work, went to go visit my parents to go celebrate my birthday. Long weekend, a lot of travel time, but great weekend overall. How about yourself?
Dziubinski: It was pretty good. It was pretty chill for me because I then had to head out midweek last week to help my son, who’s a student in Savannah, move into his first apartment. So, I’m feeling a little rusty after the move-in. This could be interesting today. Fair warning to everyone. All right, so let’s recap some of the economic highlights from the past couple of weeks. A federal appeals court ruled that many of President Trump’s global economic tariffs are illegal. What are the implications, Dave?
Sekera: Well, from here, of course, it’s now going to go to the Supreme Court. But for the most part, the market just ignored it. I really didn’t see any reaction out there whatsoever. At this point, I think the market’s looking at it that even if the appeals court ruling were to hold, the administration has a lot of other options that they can do to try and get done what they want to get done. Just using some other different areas within the law. I’m not exactly sure what the section numbers are. I think it’s like section 301 covers unfair trade practices, section 232 for national security implications. So again, these would all take longer for them to be able to implement. They’ve got to do the investigations, do some write-ups behind it. But again, you can get things done using some of these. Plus, there’s also just a lot of nontariff regulatory actions that can be taken. You can put in import quotas, licensing restrictions, or other things that could still have somewhat of the same impact as tariffs. At this point, I don’t think the market was really paying that much attention to that whatsoever.
Dziubinski: The PCE number for July came in as expected, which was higher than June. What do you make of it, and what does it mean for the market?
Sekera: As you noted, it did tick higher. It shows inflation is, of course, still going the wrong way right now, but it just doesn’t seem like it was high enough to dissuade the markets from pricing. In that the Fed will start easing monetary policy by starting to cut the fed-funds rate later this month.
Dziubinski: Now, the jobs number that came out this past Friday looked pretty awful. What’s your take on it?
Sekera: When we talk payrolls, I just need to remind everybody, as you and I have talked multiple times in the past, yes, I do watch the payroll numbers. I will talk about and comment on them, but I really only just do that because the market puts so much emphasis on this report, not necessarily because I personally put that much reliance on it. These numbers are very difficult to put a lot of confidence into any one reading. I think on prior episodes of The Morning Filter, we’ve already covered how the 2024 numbers were revised down and how much they were revised down. And then last month, they revised the three months prior significantly lower as well. Now, having said that, this month’s payroll numbers were just awful. They came in at 22,000 versus consensus of 75,000. Although, to be honest, I have no idea how the economists even come up with that 75,000 number. I think that was just more of a guess on their part than it was really any specific analysis. And then we also had June revised down to now a negative 13,000 print. That’s down from 27,000. That’s the first negative print since December 2020. So, a pretty ugly report overall.
Dziubinski: Given all that’s transpired in the past couple of weeks, where do we stand today when it comes to the expectations for an interest rate cut at the Fed’s September meeting?
Sekera: Yeah, I mean, I think this really just solidified the reasoning for the Fed to start easing monetary policy. I mean, the only wild card here is with CPI and PPI coming out. Now, if those were shockingly higher, then maybe that could cause the Fed to not necessarily start cutting rates, but those would have to be a lot higher for that to happen. Looks like right now the market’s pricing in 100% probability of a cut this month. What’s new that we didn’t see before is that now there’s probably, I don’t know, like an 8% to 10% probability that they may cut by 50 basis points instead of 25 basis points. And then this Tuesday, we now have another report coming out, the current employment statistics preliminary benchmark that’s coming out of the BLS. Now that’s an annual adjustment made in order to help them improve the accuracy of those monthly payroll estimates. I don’t think I’ve ever even heard about or even watched anything like that in the past. But with what’s going on with the payroll numbers, that’s actually going to get a lot of attention that it probably never ever got in the past, other than by the economists.
Looking forward from here, almost an 80% probability of another cut in October, a little bit over 70% probability of another cut then in December. Going out to January 2026, a little bit over a 40% probability. That would be a total of four cuts for 100 basis points in total. That would mean that by January of next year, the federal-funds rate would be at the 3.25%-3.50% range, down from the current 4.25%-4.50% range.
Dziubinski: You mentioned CPI and PPI, and we have those numbers coming up this week. What’s the market expecting on the inflation front, and what are you looking for?
Sekera: Well, I would say that while we do have consensus numbers out there, I don’t know, I kind of think that these are a little bit of guesstimates as well. Looks like a pretty wide range of what the consensus numbers are across the banner from high to low. So PPI, the headline, consensus up three-tenths of a percent on a month-over-month basis. Now that would look pretty good compared to last month, which was up nine-tenths of a percent. And then similar for PPI core, consensus up three-tenths of a percent versus being up nine-tenths of a percent last month. But again, we’ll see where these numbers come out. Really a big divergence on the consensus numbers.
Let’s take a look here at CPI. So, CPI headline year over year is now looking for a 2.9% increase. It’s been increased from a 2.7% annualized last month and then core. Instead of a consensus-specific number, I just note most of the range here is kind of in the 3% to 3.2% range. Now that kind of cuffs where it came in last month at 3.1%. We’ll see if it ticks in right at the same, maybe a little bit higher, maybe A little bit lower. I don’t think it really matters as long as it comes in kind of within that range. If it’s below consensus, definitely going to have, you know, the Fed easing. If it comes in a lot below consensus, maybe that does, you know, prompt the Fed to cut by 50 basis points. Now personally, I doubt they cut by 50 basis points, but then again, I was totally wrong. I was shocked when they cut by 50 basis points in September 2024. Just looking at the numbers back then, the economy was actually running at a stronger rate than it is now, and depending on how you look at inflation was either at or higher than it is now. Payroll growth back then, of course, now we know the numbers are all different, but payroll growth that they were looking at back then was stronger than it is now. I think unemployment was kind of in the same area that it was right now. S&P again it’s now back up to all-time highs. S&P 500 at that point in time was near historical highs. The 10-year was a lot lower at around 3.00% to 3.25%. Money supply, as measured by M2, was growing at a pretty steady rate.
Having said all that, while I don’t think that they cut by 50, there’s also really no reason why they can’t cut by 50 right now. So, we’ll see where PPI and CPI come out and whether that changes the market’s expectation.
Dziubinski: Earnings season is winding down. Are there any earnings reports coming out this week that you’re watching for?
Sekera: Well, certainly Adobe ADBE, that’s a name that we’ve talked about several times, and it’s been pretty disappointing every time they’ve reported over the past year. And I just took a look at the charts. Of the four past earnings reports, Adobe stock has traded down 5%, 14%, 15%, and over 8% for each of those reports. I think Adobe needs to bring some positive news to the marketplace. If they don’t, I think they’re at risk of some of the institutional investors in that name maybe just throwing in the towel and just trying to get out. Now, having said that, I think that with market sentiment being so negative here, after having traded down four quarters in a row, if you do have some positive sentiment, you could actually see a spike in this stock price. So, it could be pretty volatile this earnings season. Looking at the chart longer term, the stock did peak in early 2024. It’s been on a downward slide ever since. We do have a differentiated view on this company from the marketplace. We recommended the stock a couple of times on The Morning Filter. Now obviously we were too early to that call. What’s going on is the market is just very concerned that artificial intelligence could displace Adobe’s solutions. Our analytical team doesn’t think so. They point to Firefly as a product that over time with AI would be able to create images, videos, audio, and so forth, which will help the company offset some of the losses that they may have and some of their traditional products. The stock is only trading at 17 times earnings. I think essentially the market’s already kind of pricing in a somewhat low-growth period going forward.
And then in the small-cap stock space, Chewy CHWY is coming out again. I’ll take a look. Not necessarily anything to do at this point. This was a stock that we recommended, I think back in November 2023 as one of our small-cap stock picks. Back then, we reiterated that buy a couple of times, I think most recently in June 2024. Now we’ve increased our fair value on that stock a number of times over that time period. But the stock price just appreciated too far, too fast. I think it’s up a total of 124%. So, while personally I’m kind of a big fan of the company, the stock’s just risen too far too fast. It’s at a 28% premium. That’s enough to put it in 2-star category. Again, it’s just a matter of I think the market’s just paying too much for the earnings growth. You really have to go out into the out years to see multiples that make a lot more sense. I think it’s trading at 78 times our earnings estimate this year, 47 times next year’s earnings. You have to go out to 2029, where it’s trading at 19 times our 2029 earnings estimate. I think for the stock really to do anything to the upside here, you would need to even price in even faster growth. You’d really have to see the company come out with some really strong guidance numbers to get that stock to move up further.
Dziubinski: All right, well, let’s turn to some new research from Morningstar. Now, the market didn’t seem too impressed by Nvidia’s earnings report. In fact, the stock is down up about 7% since the company reported. Dave, run through the results for us and what Morningstar thought of them.
Sekera: I think to some degree it’s just been much the same story it has been for the past nine quarters. Where they beat consensus revenue, they raise their forward guidance. It’s just a victim of its own success at this point. I think it’s just a matter of Nvidia has beaten consensus and raised guidance just so many times, the market just wanted increasingly higher beats, increasingly higher guidance lifts, which we didn’t necessarily get. Plus, I think to some degree, you’re just running up against the law of large numbers. With a market cap of over $4 trillion, it’s really hard to keep a lot of upward momentum going here in the short term. From our point of view, we think the stock is pretty fully valued. Looking at our updated model here, we’re still projecting a five-year compound annual growth rate of 25%. Looking at this year’s earnings estimate of $4.44 per share, the stock’s now trading at 38 times this year’s earnings. We’re looking at $6.58 for next year’s earnings. So again, 26 times earnings, which is much more reasonable, looking at 2029 earnings of $9.32, 18 times. But again, the market’s already pricing in that five years’ worth of 25% type compound annual growth rate. So definitely, the stock has lost a lot of momentum here in the short term.
Dziubinski: After earnings, Morningstar did raise its fair value estimate on Nvidia by $20. How does the stock look after that fair value increase and the pullback in price? I think you said it was about fairly valued. Is there any opportunity here right now?
Sekera: Depends on what you’re looking for. It is still trading at a 12% discount, really not necessarily all that much from our intrinsic valuation. So based on the range that we use, based on the Uncertainty Rating, it is still in that 3-star category. And I think from here, if you’re a long-term investor, if you’re looking to buy that stock today, if it performs within our base-case estimates, you should look for a cost-of-equity-type return. In our model, we’re using 9% within our weighted average cost of capital for the cost of equity. I would note there is still some potential upside from here. Our analytical team does anticipate that Nvidia, at some point in time, we’ll get the approvals both from the US and China to be able to sell some of its lower-powered products into China, like the H20 chip. We just don’t know exactly when that’s going to happen.
Now, to put that into context, our team did note that if those restrictions were lifted, and they started selling the H20 chip this quarter, that they’d be able to generate an extra $2 billion to $5 billion worth of revenue. To put that in perspective, revenue guidance for this quarter is $54 billion. Overall, we think the opportunity of selling those types of lower-powered chips into China could be a $50 billion annual revenue opportunity. Again, putting that in perspective, our revenue forecast for this year is $200 billion. So, when this happens, we do think this could provide upside to our current valuation, as our current estimate doesn’t include that in our financial model.
Dziubinski: Marvell Technology stock is down about 18% since it reported in late August. What happened with this one, Dave?
Sekera: Unfortunately, this has been a pretty disappointing situation as compared to our valuation. Taking a look at earnings and reading our note, I mean it did seem actually kind of lackluster to me, personally, especially considering how well all the other AI names have performed this past quarter. Now, they did meet the midpoint of their guidance, but they missed our expectation. Our analyst did attribute the miss here to what he considers to be relatively lumpy orders for custom artificial intelligence accelerators, which he thinks is common for these types of products. Overall, we maintained our fair value. We did not see a reason to change our longer-term forecasts and projections.
Taking a look at our model, as far as top-line revenue growth, we’re looking at 43% overall this year, 25% more next year, that then steps down to a 13% annualized growth rate by 2030. So, essentially still doubling revenue over our five-year forecast period. As far as earnings, we’re looking for $2.79 this year, $3.95 next year, and then still increasing up to $6.94 by 2030. So, overall, our analytical team does still have a lot of confidence in this name, even though here in the short term, it hasn’t been performing as we would have liked to have seen it perform.
Dziubinski: Marvell has been a pick of yours. Do you think this is a good opportunity to buy on weakness?
Sekera: Well, I just have to note, Will Kerwin, he’s the analyst that covers this stock, in his write-up, I mean, the title of his stock analyst note was “Buy the Dip and Focus on Fundamentals.” Within the note, he specifically wrote that he thought that the selloff this quarter was overblown. So, the stock does trade at a 30% discount, puts it well into 4-star range. When I look at our AI stock coverage at this point, with as much as everything has bounced back up, this is just one of the few 4-star-rated stocks that are out there. Trades it only 23 times this year’s earnings estimate. So, a lot lower multiple than what we see across that space. But I think this has just turned into a bit of a show-me story. I think the market’s just increasingly concerned that Marvell’s position in the custom AI accelerator business is weakening. Will remains confident that their business is still strong over the long term, but I think the company’s just gonna need to have a couple of quarters in a row where they’re able to prove to the marketplace that they have kept their competitive position, that we’ll see strengthening in that specific part of their business. Once that happens, then I would assume that stock should start kind of that up-and-to-the-right chart pattern once again. In this case, I think if you’re interested in the stock, looking for an AI play, this is definitely one to go to Morningstar.com or whichever Morningstar platform you use and read through the full analysis on this one.
Dziubinski: Well, another pick of yours got some good news last week. Alphabet stock rallied pretty hard after a federal judge overseeing the Google search antitrust case ruled that the company would not have to break up. And that’s kind of what Morningstar was expecting all along, right?
Sekera: Our investment thesis here overall was that Google, in and of itself, was not going to get broken up. Now, of course, we also had a sum-of-the-parts analysis, which in our mind, even if the company were broken up, we still think the stock was trading worth at least a level it had been trading beforehand. But no, this is a nice one to finally see this one rally and really kind of play out as what we had thought it was going to do.
Dziubinski: Alphabet stock is up about 60% since its April lows. How does it look today from a valuation perspective? Is this one still a pick?
Sekera: I mean, as far as being a pick? No, I’d say it’s no longer a pick. It’s a 3-star rated stock at this point. It trades pretty much right on top of our fair value estimate of $237 a share. So, kind of similar to Nvidia that we talked about before for long-term investors. If you’re buying this stock here today, I would expect, over the long term, you should expect cost-of-equity-type of returns.
Dziubinski: As a side note for our audience, Dave was recently a guest on another Morningstar podcast called Investing Insights. And if you want to hear more from Dave about investing in AI along with his top picks for playing the theme, listen or watch that Sept. 5 episode of Investing Insights. You’ll find it wherever you get your podcasts. All right, back to new research. We’re going to stick with the technology theme. We had a trio of cybersecurity firms report recently: Okta OKTA, CrowdStrike CRWD, and Zscaler ZS. So, anything stand out to you with these three companies, and do any of them look attractive after earnings?
Sekera: Well, you know me, I’m a huge fan of investing in the cybersecurity space from a long-term perspective, but I don’t know. I kind of read through all the write-ups over the course of the weekend. I’d say really not necessarily much to talk about. Solid to strong results generally in line with our expectations. Taking a look at our valuations here, Zscaler, we did increase our fair value by 9% to $264 a share, but that’s still a 3-star-rated stock. Okta, we maintained our fair value here at 3 stars. CrowdStrike. Now that’s a 2-star stock. We did maintain our fair value there, but I’d say there’s really nothing wrong with the story. It’s just a matter that the stock is overvalued at this point. And then looking across the rest of the space, I think a couple of weeks ago we had talked about Palo Alto PANW, that there was an opportunity there, maybe in early August. But again, that stock has rallied right back up to the 3-star territory. That’s just another one of those where you have to keep it on your radar because when it dips into 4-star territory, it rarely stays at 4 stars for very long.
Dziubinski: Let’s pivot away from tech, but we’re going to continue to talk about some new research on some of your recent stock picks. In the last episode of The Morning Filter, Bath and Body Works was a pick of yours, but you did suggest that investors wait until after earnings to take a position. Seems like that was a smart move. Talk about what happened.
Sekera: The reason I said that was because this is so undervalued. But it’s also such a volatile situation. Yeah. Especially in this economic environment where consumer spending has been volatile. It’s been under a lot of pressure. Yeah. I just didn’t see a reason to try and get ahead of earnings on this one. Again, if they did well and that stock moved up, there was still so much more upside that you could get into the stock even after a bit of a run and still play to the upside. And of course, in this case be able to avoid any potential downside here in the short term, and now that you just have an opportunity to buy that stock at an even lower price. Again, I think this is a stock, as a long-term investor, you’re just going to have to have a lot of intestinal fortitude to be able to live through the short-term ups and downs on this one. Because I think we’re still going to see that. Taking a read of our note, there’s really nothing here that causes us to change our long-term assumptions.
Taking a look at what management provided, they did tighten their revenue guidance to 1.5% to 2.7%. It was 1% to 3% beforehand. So, not increasing guidance, just tightening it up. But they did raise the low end of their EPS guidance to $3.35 a share from $3.25 per share. But they did leave you the top end steady at $3.60. Now, the stock sold off pretty hard immediately after earnings. It was down about 8% that day. I think the market was disappointed with the tightening of the guidance but not necessarily raising the top end. In my mind, I think it’s just nice to see that the management still has the confidence in their guidance and actually be able to tighten that up going into the holiday season. Stock then rallied back up. So, by Sept. 4, it was actually back to where it was pre-earnings. Then it sold off again on Friday. So again, just going to be a very volatile story. You’re going to see a lot of movement in that stock. I think it’s gonna be a while before it really plays out and can get all the way up to its long-term intrinsic valuation. But with where it’s trading today. I kind of still like this one as a small-cap play.
Dziubinski: OK, so it’s safe to say this is still a pick of yours today.
Sekera: Yeah, it trades at over 50% discount to fair value. That, of course, puts it well into 5-star territory. 2.7% dividend yield. So you’re getting paid a little bit while you wait. We rate the company with a narrow economic moat. Looking through our top-line growth estimates here, we’re looking at 3% top-line growth on average, with a little bit of operating margin improvement over the next three years, we get to 9% five-year compound annual growth rate. So, I don’t really see these as being any really kind of crazy expectations to the upside. Company has pretty strong free cash flow. Debt leverage is reasonable at 2.7 times debt/EBITDA. I understand the concern going into the holiday season with the economic environment that we’re in. But considering the stock’s only trading at 8 times our earnings forecast, I think this is a pretty deep-value play here.
Dziubinski: Let’s talk about another pick of yours, Constellation Brands STZ. The stock fell further after earnings. What did Morningstar think of the report?
Sekera: Yeah, now this one, I mean, there’s no other way to say it: It’s really just been disappointing as compared to our analyst expectations. Now, in fact, in her note, she wrote that as she’s updating her model and her assumptions here, she does expect that she’ll end up lowering the fair value by a high-single-digit percentage. Management did lower their 2026 outlook. They cut their organic sales guidance to a decline of 4% to 6%. That’s down from a decline of 2% to growth of 1% in their prior guidance. They also cut their adjusted EPS guidance to $11.30 to $11.60 a share. That’s down pretty substantially from $12.60 to $12.90 a share. So, at that point, with where the stock is trading in the marketplace today, that leaves it trading at 13 times in the midpoint of that updated guidance.
Dziubinski: Now, of course, Constellation brand stock is having a terrible year. It’s down more than 30%. But interestingly, Warren Buffett’s Berkshire Hathaway BRK.B was a buyer of the stock during the first half of the year. So, Dave, what do you think? Is this one a falling knife or more of a blood in the streets buying opportunity?
Sekera: To be honest, I think it’s kind of neither. I mean, when I look at the valuation and look at the chart, I don’t think it’s down so much off this earnings estimate compared to where it’s been and where the valuation is to call it a blood on the streets opportunity. But I think this is a situation where it’s just becoming increasingly difficult to discern how much and for how long is consumer behavior toward alcohol consumption changing. Overall, alcohol consumption has been declining. We’ve seen that decline really concentrated among a lot of the younger generations. I think the question for investors is, “Is it going to rebound? Is it gonna stabilize? Is there still further that it could fall?” If it rebounds or stabilizes, the stock is probably pretty significantly undervalued here. However, if it falls further, then I think we’d have to reevaluate our assumptions once again. Taking a look at our model, what our analyst is currently forecasting today is a five-year compound annual growth rate of revenue growth of 3%, essentially inflation, plus just a tiny little bit of market-share gain. And with a little bit of operating margin performance, you get earnings growth of 5% as a compound annual growth rate. So again, not necessarily up and to the right or any kind of historical growth patterns here. I’d say probably pretty conservative, but with the changes going on with consumer behavior, probably in the right kind of area.
Dziubinski: Let’s talk about another pick that you and Warren Buffett have in common, and that’s Kraft Heinz KHC. Now, the company announced that it’ll be splitting its business into two. Walk us through the breakup plan and the timeline.
Sekera: The company, as you mentioned, is gonna split up into two different public companies. So, you’ll have the North America grocery business. Looks like that’ll be a little bit over $10 billion in top-line revenue after the split-up. And then the rest of their businesses, the sauces, the spreads, the seasonings, and so forth, that will be the other public company that’s going to have a little bit over $15 billion in revenue, and it’s expected to close or really to concur with that split-up in the second half of next year. So, still a bit of a ways away before that actually happens.
Dziubinski: Now, media reports are indicating that Buffett doesn’t think splitting up the company will actually solve Kraft Heinz’s problems. Those comments aren’t really all that surprising when you consider that the split will undo the merger that Buffett played a big role in a decade ago. And he’s also said that in the past that Berkshire overpaid for Kraft Heinz. What do you think, Dave? Is there an opportunity with Kraft Heinz stock today ahead of that breakup?
Sekera: Well, I’d say the opportunity isn’t because of the breakup. When we think about, like, exactly what’s happening here, we don’t think any new economic value will be created by splitting the company into two. So overall, we didn’t change our fair value. Both entities here will still probably be large enough. I spoke to Erin Lash. She doesn’t think that they would be buyout candidates from private equity sponsors here or maybe even like strategic sponsors. So again, we’re not necessarily saying that the company here will be bought out after it gets split up. But having said that, if Warren Buffett still thinks that this company is undervalued, and he doesn’t agree with the split-up. I don’t see why he wouldn’t just go and buy the rest of the company for himself. Taking a look at the numbers, it looks like Berkshire already owns 27% of the equity. The rest of the company’s only gonna cost him, call it $24 billion plus the premium they’d have to pay to buy it out. When I look at how much cash Berkshire has on their balance sheet, I think that’s like less than 10% of their cash pile. Once he buys the company, he can put in place whoever he wants to run it. And I think this does kind of fit with Berkshire’s kind of longer-term strategy of when they see value, kind of preferring to be able to buy out the entire company. So Warren, if you’re listening, why don’t you just go buy the rest of it? That’s what I would do.
Dziubinski: Bold commentary there, Dave. Bold commentary. Time will tell. Activist investor Elliott Investment Management took a position in one of your other picks, and that’s Pepsi PEP. What do you think of the news, and is Pepsi stock still attractive?
Sekera: Well, Elliot, why don’t you just go partner with Warren, and the two of you can go buy out Kraft? No, as far as Pepsi goes, I mean this stock is up 11% since the May 5 episode of The Morning Filter, which is when we talked about the stock and recommended it. I mean, it’s still attractive. It’s still 11% undervalued. Kind of barely puts it into that 4-star territory. Still clipping a nice 4% dividend yield company that we rate with a wide economic moat, Low Uncertainty for the stock. Now, looking at what Elliot has recommended here, you have a couple of different types of actions. Nothing really all that surprising here. I think he’s talking that the company should either spin or sell its bottling assets, should rationalize their portfolio, divest some of their noncore brands. Again, nothing really all that surprising that you’d expect. I was actually kind of hoping to see something a little bit more interesting here. Hopefully, this will help you unlock shareholder value. But overall, nothing that led us to change our fair value estimate.
Dziubinski: Let’s broaden things out and talk about your new stock market outlook, and our audience can find a link to your outlook in the show notes. How does the market look from a valuation perspective today?
Sekera: Let’s kind of break it up into two different ways to think about it. Personally, I’m finding it this is a very difficult time to have a lot of conviction in the market outlook. As we talked about at the beginning of the show, labor markets are just especially ugly. Inflation continues to keep you ticking upward. Our economist is still forecasting that the rate of economic growth is going to slow over the next four quarters and not bottom out until the second quarter of 2026. When I look at earnings and the economy, I mean both have been bolstered by spending on artificial intelligence. That’s kind of what’s really kept things going here over the past couple of quarters. All of that kind of makes me kind of really concerned about where we should think about the market going here. But offsetting that, we’re still looking for the economy to grow. We’re still looking for no recession. Long-term interest rates are decreasing. That helps make a lot of the other parts of the market now look better. We expect the Fed’s going to start easing monetary policy here. That will help bolster the economy. They’ll be going over the next couple of quarters. While my gut might be telling me it’s a good time to sell, certainly a good time, you have to take some profits. Valuations overall are telling me, “You know what, Dave, you still have to hold here.” Valuation of the overall market is trading at fair value, trading equal to a composite of our fair value estimates across the broad market. But considering some of the areas that are overvalued, some of the areas that are undervalued, I think positioning, while it’s always important, is especially important today, especially if we’re to have any kind of historical market selloff that oftentimes we see in September.
Dziubinski: Let’s talk a little bit about positioning, but starting out by talking about market valuations by investment style.
Sekera: Value stocks definitely caught a bid last month. I think they’re up 5%, well outpacing the, I don’t know, maybe four-tenths of a percent increase that we saw in growth stocks. So, as much as they moved up, value stocks still remain the most attractive by style. Trading at a 3% discount. Core stocks, essentially fairly valued at a 1% discount. Growth stocks are not as much of a premium as they had been. When we bumped up our Nvidia fair value, that helped make them look a little bit less overvalued, but still at an 8% premium. Taking a look at valuations by market cap, large cap, mid-caps, both essentially fairly valued. But small-cap stocks, even as much as they rose last month in August, still significantly undervalued at a 15% discount to our fair values.
Dziubinski: Were there any sector shifts this month in terms of valuations that stand out? Any new opportunities?
Sekera: Well, first of all, I just have to note with the communications sector, now that had actually been either the most undervalued or one of the most undervalued sectors really going all the way back since 2021. Now, at the end of August in our chart here, you’ll see it was trading at a 7% discount to a composite of our fair values. But I note that after month-end, we did have the news come out on Alphabet. So, Google stock did rise pretty substantially. That’s a very large, large position within that specific sector. If I were to go back and kind of redo those valuations and pull that out, you the rest of the sector is now only a couple percent undervalued, so much closer to fair value than where it’s been over the past couple of years. So still a lot of individual stock opportunities there. But as a sector no longer as undervalued as it had been in the past. Among some of the rest of the sectors we think are attractive, real estate still at a 7% discount. Now that’s a sector that should benefit from the Fed lowering the federal-funds rate and from our expectations that long-term rates will come down. So, a lot of attractive opportunities there, both in individual stocks and that sector perspective.
Healthcare is the next most undervalued at a 6% discount. Now, health insurance stocks have just gotten decimated this year. They’re suffering from higher-than-expected medical costs and utilization rates. Global pharmaceutical stocks have been under a lot of pressure, a lot of scrutiny from the government as far as government reimbursement rates. A lot of concern about how that might impact pricing there. So within the healthcare sector, while the healthcare sector overall is very undervalued, in my mind, I think it’s going to be much more idiosyncratic looking for value among the medical-device makers, some of the medtech companies, maybe the medical consumable products. Those are the areas that I would prefer within healthcare today.
Energy is still attractive at a 4% discount. Then, on the flip side of the coin, among the overvalued sectors, I just want to highlight utilities. Utilities still are overvalued, but what we saw last month is that while utilities were coming down a little bit, they actually should have been going up. Utilities stocks historically do well in environments where interest rates are falling. We saw the 10-year come down. We expect the Fed to start cutting rates, but yet the utilities actually traded down. I think that just indicates the market kind of realizing just how overvalued that sector had become.
Dziubinski: Given market valuations today, how should investors be thinking about their stock portfolios in September?
Sekera: Within kind of that broad market weight, within kind of the equity position of your portfolio, valuations are really telling me the same thing they’ve told me for the past couple of months. You want to be overweight value, probably market-weight core, and then underweight growth. You want to be overweight those small-cap stocks, market-weight mid-cap stocks, and underweight large-cap stocks, and then just maybe just a highlight within the note. I do have a pretty good discussion on there with historically small-cap stocks seem to do well and kind of what the environment for small caps looks like today. So, for people who are interested in maybe overweighting small caps, just take a quick read through there and just make sure that that is something that you agree with, kind of my argument there, and whether that’s right for your portfolio.
Dziubinski: And again, we have a link to Dave’s outlook in the show notes. Well, I warned everyone I was a little rusty today, so I apologize. All right, now it’s time for our question of the week from Vincent, who asks, “Dave, can you let me know your take on McKesson Corp MCK? Is it a buy at the current price level and a hold for the next 12 months?"
Sekera: I did a quick review of the stock over the weekend. It is a 3-star-rated stock, trades at a 7% premium to our fair value. So, a little bit high but not necessarily enough to move it into that 2-star category. For a stock we rate with a Medium Uncertainty, it only pays a 0.50% dividend yield. So, it kind of depends on what you need in your portfolio as far as dividend payments. We rate the company with a narrow economic moat based on their switching costs. Opened up the model here. So, let’s take a look through our assumptions. We’re looking at 13% top-line growth this year. So, pretty decent top-line growth for a company in this sector. They’re getting a lot of benefits from distribution of the GLP-1, but after this year, we’re looking for the top line to slow to a little bit over 6% on average thereafter. Now this is a business where operating margins are very thin. We’re only looking at a 1.2% operating margin this year. We are expecting that to kind of rebound, go back more toward historical averages over time, getting toward 1.6% in 2029. That gives us a five-year average earnings growth of about 11%. Balance sheet looks pretty strong here. Very modest debt leverage. Our cost of equity and our weighted average cost of capital is 9%. I don’t know, trades at 18 times this year’s earnings. That seems pretty reasonable. A little bit above our fair value. So, probably not necessarily something I’d recommend as a new buy today. But it’s also not so high over intrinsic valuation to make it really a sell. If you’re involved in this stock, maybe what you want to do is look into swapping into some of the other healthcare stocks. Maybe look to swap into something with a wide moat, maybe something that’s a higher dividend payer. Either way, maybe one of the healthcare stocks that’s trading at a much larger discount to our intrinsic valuation from where this one is today. Again, if this is a stock that maybe plays a specific part in your portfolio, I’m not going to argue about holding it for the next 12 months or so.
Dziubinski: All right, well, just a reminder to our audience that you can send us your questions via our email address, which is themorningfilter@morningstar.com. We’re going to move on to this week’s picks. This week, Dave, you’ve brought us five stocks to buy before the Fed cuts interest rates. Now, before you name names, let’s back up a minute and talk about the types of stocks that tend to do well when the Fed begins cutting rates.
Sekera: I just did a quick review of those sectors that you historically typically do well when monetary policy is easing, looking for those that are correlated to short-term interest rates and to yield-curve steepening. First and foremost is going to be real estate. Now that’s directly tied to financing costs from lower interest rates you both in the short term and the longer term. They’ll benefit from lowering borrowing costs, and not only will that boost earnings, but with cap rates coming down, that should increase the present value as well. Within industrials, specifically looking at the home builders and the building products. So again, those lower rates should help the homebuilders finance their land purchases and their inventory, keeping financing fees down while they are their inventory is up for sale. Typically, you would expect in that sector companies like Home Depot HD and Lowe’s LOW to do well as you have more and more turnover, existing home price or existing home sales and new homes. But again, both of those stocks are overvalued. So, we had to look elsewhere within that sector. The energy sector. Now, theoretically, lower rates should bolster economic activity over time, which in course would then increase demand for energy, specifically oil. Financials should do well in an environment of lower short-term rates, especially as we expect short-term rates to fall faster than long-term rates. So that would then steepen the yield curve, helping them bolster net interest income margins. And then lastly, the utilities sector should benefit from lower interest rates. That makes their financing cheaper, makes their relatively high dividends more attractive. But we think that that sector is already overvalued here today. Very few opportunities that I see among the utilities stocks, and of those utility stocks that are undervalued, I’d say they’re story stocks. You, they’re ones where you really kind of have to dig into the story, be willing to take on probably a little bit more risk than you would typically take on with the utilities stock. So those that are in the utilities sector are undervalued, are undervalued for a reason.
Dziubinski: Your first pick this week is from the real estate sector. It’s Realty Income O. Tell us about it.
Sekera: Realty Income stock is a 5-star-rated stock, trades at a 21% discount to our fair value, has a dividend yield of a little over 5.4%. A stock that we rate with a Low Uncertainty rating. But I do note this is a stock that we write or a company we rate with no economic moat. Now, having said that, within the real estate sector, we never really see too many economic modes. There are a couple of companies here and there that have specific things that give them a moat. But in this case, it is a no-moat stock.
Dziubinski: A lot of the REITs are undervalued today. Why is Realty Income your pick?
Sekera: When I look across all of the real estate or real estate investment trust stocks, Kevin Brown, who covers the sector, has noted this one historically has been the most correlated to movements in interest rates. And in fact, this was a stock we highlighted back in June 2024 in our show titled “5 Stocks to Buy Before the Fed Cuts Interest Rates.” Now, what happened back then is that stock did rise 16% through October 2024. But then what happened is that stock then started to slide back down thereafter because the 10-year Treasury started to rise, and then it bottomed out once the yield on the 10-year started to fall again. So again, this is one that is very sensitive to interest rates, and we saw that happen when we recommended it first, moving up as rates were coming down. But then, as longer-term rates moved up, then the stock sold off. So this is one that I think you need to watch pretty closely. Now we do have a positive view on long-term interest rates coming down in 2026 and 2027. Hopefully, this one will be a little bit longer-term of a play than what we saw last time. The company, in my mind, has pretty defensive characteristics. It’s what’s considered a triple-net-lease provider. So, within those leases, they are able to directly pass through all of their own inflationary increases to tenants. So that kind of strips the inflation risk out of this one. They have pretty long leases. So you have lower risk of near-term lease reductions as those leases come due. Tenants are generally very defensive sectors. And lastly, I would just note this is one of the best ideas from our real estate equity analyst team this past month.
Dziubinski: Now your next pick is a homebuilder, Lennar LEN. Give us the details on it.
Sekera: Yeah, well, this one actually has been on a pretty strong upward trend for the past couple of months. Unfortunately, it just moved into 3-star territory. Having said that, based on where it closed last Friday, it’s still trading at an 11% discount to of fair value. So still a little bit of margin left in here. But this is another one that is a no-moat stock.
Dziubinski: Now we’re talking a lot about Warren Buffett in this episode, but I do wanna add here that Berkshire Hathaway was a buyer of Lennar’s stock during the first half of the year. Why are you with Warren on this one?
Sekera: I mean, to be honest, it’s really just as simple as longer interest rates should spur a lot of new homebuilders or a lot of new home demand. This company is the second-largest homebuilder, has a good mixture of entry-level and move-up homes now in its construction base. So really, I mean, that’s it on this one. It’s really just looking for that rebound in new-home demand.
Dziubinski: Now, your third pick this week is a stock I don’t think we’ve talked about before, or if we have, it’s been quite a while. It’s Fortune Brands Innovations FBIN. Fill us in about it.
Sekera: The stock is rated 4 stars at a 26% discount to fair value, 1.6% dividend yield. A stock we have a Medium Uncertainty Rating on. This one does have a narrow economic moat. That narrow economic moat being based on intangible assets from its brands. Brands such as Moen and Master Lock.
Dziubinski: All right, so talk about why you like Fortune Brands and then specifically comment on the impact tariffs may have here on the business.
Sekera: Not only will lower interest rates spur new-home demand, but that also should help spur existing home sales as well. Those had stagnated. Prices on existing homes have stayed relatively high. But with mortgage rates coming down, that’s going to make a lot of these houses that were maybe unaffordable to many, more affordable. So we should see a pickup there. Now, higher existing home sales will spur remodeling as well. Typically, you’d expect companies like Home Depot and Lowe’s to do well. Unfortunately, we think both of those stocks are overvalued today. When I look at Fortune Brands, you know, two-thirds of its business is repair and remodel, another one-third from new homes. So it should benefit from you an increase in both existing and new-home sales. From a margin perspective, we only model in an 18% average operating margin. I know the management’s goal here is to get to 20% to 22%. So that actually provides you some additional upside to our valuation here. If they’re able to start you seeing that operating margin expand over time, as you noted, you know there is, you know, some Chinese tariff exposure here. We expect overall that should be manageable. We think that they’ll either just be able to reduce that exposure shifted over time into different geographic areas if needed. It’s not something that our team is concerned about at this point in time. And I’d also note this is another one that our equity analyst team just added to their September best ideas list.
Dziubinski: Your next pick this week is a familiar one for our longtime podcast listeners and viewers. The pick is U.S. Bancorp USB. Run through the key metrics on this one.
Sekera: The stock’s still at a 9% discount. Just enough to put it in 4-star territory. Attracted dividend yield at 4.1%. The stock is rated with a Medium Uncertainty. We rate the company with a wide economic moat based on cost advantages and switching costs.
Dziubinski: Now, US Bank, of course, isn’t one of the mega banks. Talk a little bit about what you might expect from net interest income margins. Are we still going to see improvement here if rates fall?
Sekera: Yeah. When I look at the forecast from our economics team, we expect short-term rates to fall faster than where long-term rates are coming down. So that then causes the yield curve to steepen. Pretty much anyone that borrows short and lends long should do well in that kind of environment. Now, when I take a look at kind of the Big Four mega banks in the US, they’re all overvalued. So, JPMorgan’s trading at a 25% premium, Citi at a 16% premium, Wells at a 10% premium. Bank of America at an 8% premium. Those are already pricing in probably too much net interest margin expansion. Taking a look at some of the smaller regional banks. There are a number of them that are undervalued. It’s just U.S. Bank kind of fits into the segment in which it’s larger than a regional bank but not necessarily big enough to be a mega bank. I think it’s overlooked by a lot of you bank analysts. Because usually they’re either just focused on like the Big Four or looking at the small regionals. Our team in the past has noted that compared to the other regional banks, U.S. Bank has better revenue coming from corporate trust fees, a very strong deposit franchise. One of the best operating efficiency ratios out there, strong returns on tangible equity compared to the other regionals. So again, we think this is one that’s just being overlooked by the marketplace today.
Dziubinski: All right, and your last pick this week is from the energy sector. It’s ExxonMobil XOM. Give us the highlights.
Sekera: The stock is still at a 19% discount, 4 stars, you have 3.6% dividend yield. Now in the energy sector, of course, it does have a High Uncertainty Rating for the stock, but it is a company we rate with a wide economic moat.
Dziubinski: If you look at the other major oil companies, names like Chevron and BP and Shell, they all look fairly valued. But Exxon looks undervalued. Why is that, and why do you like it?
Sekera: As you know, this has long been our pick among all the major global oil companies. When I look at our forecasts here, production, we expect that to grow modestly through 2027. We’re looking for an increase in profitability based on some mix shift and the higher-margin-producing fields. Overall, when I think about the company’s investment strategy versus what we’ve seen from the other global majors. Exxon has trimmed spending, really focused on moat-enhancing activities. Really focused on low-cost, high-margin upstream projects. Downstream projects that they have are improving refining yields of high-value products, seeing an increase in high-value chemical production as well. The acquisitions that they’ve made over time, according to our analyst team, make strategic sense that they were made at pretty fair valuations. Lastly, Exxon, to a large degree and especially compared to the others, avoided investing in a lot of renewable generation where it lacks really kind of that expertise that it needs to be able to carve out a competitive advantage. So they really focused much more on their core competencies than what we saw among a lot of the other global majors. So, overall, when you compare it to the other global majors, our analyst team specifically said they think Exxon is in the best position to deliver on earnings growth through 2030.
Dziubinski: All right. Well, thanks for your time this morning, Dave. Those who would 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.