Plus, what we think of Nvidia ahead of earnings.
On this week’s episode of The Morning Filter, Dave Sekera and Susan Dziubinski catch up on Federal Reserve Chairman Jerome Powell’s remarks from Jackson Hole and the latest tariff news. A couple of economic reports bear watching this week, including the latest PCE figures. And while Nvidia’s NVDA upcoming results could move the market, a few less dominant but still interesting tech companies are reporting this week, too.
They provide Morningstar’s latest take on in-the-news stocks Intel INTC and Walmart WMT and discuss whether the stock of Unitedhealth Group UNH is appealing after Berkshire Hathaway’s BRK.A BRK.B sizable investment. And tune in to find out why now may be a good time to consider small cap stocks and which five stocks to buy before their big discounts vanish.
Episode highlights:
Fed Takeaways & Tariff Updates
Is NVDA a Buy Before Earnings?
New Research on PANW, AMAT, WMT
Stocks to Buy Trading at Big Discounts
Read about topics from this episode.
Follow Morningstar’s coverage of earnings season: Company Earnings
Learn more about Morningstar’s approach to stock investing: Morningstar’s Guide to Investing in Stocks
Going Into Earnings, Is Nvidia Stock a Buy, a Sell, or Fairly Valued?
Read the full earnings reports for UnitedHealth, Intel, and Walmart.
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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 new Morningstar research, and a few stock ideas.
Now, programming note for our audience, we will not be streaming a new episode of The Morningstar Filter. Next Monday, Sept. 1, due to the Labor Day holiday. But Dave and I will be back with a new episode on Monday, Sept. 8. All right, good morning, Dave. Let’s start off this week with your takeaways on Fed Chair Powell’s comments from Jackson Hole last week, as well as how likely it is that the Fed will cut rates at its September meeting in a few weeks.
David Sekera: Well, first of all, all I can say is I am glad I’m not in his shoes. I think he’s in a position where he’s damned if he does, damned if he doesn’t. When I look through the numbers here, the last payroll report and the restatements lower show that the labor market is a lot weaker than what people were previously thinking. And our own expectation here is that the rate of economic growth here in the US is going to slow for at least the next three to four quarters, which, of course, will pressure the labor market even further. That tells me he should be at the point where they should be cutting rates.
Now, however, on the other hand, and I’m sounding like an economist here, inflation is ticking higher, and it’s poised to head even higher over the next couple of quarters. We’ll just have the impact from the tariffs rolling through and get incorporated into the metrics, which actually means he should probably be raising rates in order to reduce inflation. Either way, in my mind, I think he’s going to get blamed for either the weak economy if he doesn’t cut the fed-funds rate. And he’s going to get blamed for higher inflation if he does get those cuts put through.
So, we’ll see what happens as far as what’s the market pricing in today. We went from a 90% probability of a cut after those payroll reports earlier this month, down to about a 70% probability just before his Jackson Hole commentary. Last I checked, it’s now back up. It’s about 87%. So, I think at this point the market is definitely pricing it in, definitely expects it. But when we listened to his commentary, he started off outlining his take on the labor markets and inflation. But to me, the real tell in his comments was when he said, “With policy and restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” So that, to me, is when he was indicating that he is leaning toward a cut in September.
Now, having said all that, we do have PCE on Friday. Payroll and CPI new reports coming out before the September meeting. And depending on how those come out, any one of those you know could change which way he’s leaning. Personally, if I was in his shoes, I’d be hoping that with whatever the data is that comes out, it’s either going to be strong enough or weak enough to be able to provide cover for whatever the Fed ends up doing.
Dziubinski: You mentioned tariffs, and we did receive some clarification on tariffs last week. Walk through some of the new developments and what they mean for investors.
Sekera: There were some additional details, and that really just follows, you know, the previously agreed-to framework. Nothing really all that new in my mind that changes our economic outlook. Most of the EU exports to the US, including cars, pharmaceuticals, semiconductors, and lumber, will end up facing a uniform 15% tariff. However, there is an exemption on those tariffs for generic pharmaceuticals and precursors. And there’s also a reduction in the auto tariff that’s conditioned on the EU removing its tariffs on seafood and agricultural products, which shouldn’t be a problem. There’s the restatement of several pledges for the amount of energy products the EU will purchase from the US. And some strategic investments the EU will also make in the US. But again, really nothing here that changes my mind, you know, thinking about the markets going forward.
Dziubinski: Looking ahead this week, you have a couple of things that you’re watching on the economic front. What and why?
Sekera: Well, the first and foremost will, of course, be PCE on Friday. That is the Fed’s preferred measure of inflation. Last I looked at consensus, it was calling for an increase of three-tenths of a percent on a month-over-month basis for both headline and core. So, of course, if it comes in at or below that consensus, that would then bolster the probability that the Fed will cut in the September meeting. Now, if it comes in higher, especially if it came in much higher than that, then I would say, “Look out below.” If inflation is surprising that much to the upside, that could bring Powell back to the area where maybe they don’t cut at that September meeting.
The other number I’ll probably be keeping a close eye on will be durable goods on Tuesday. Consensus there is for a 4% decline month over month. Now, in my mind, I think it’s still kind of a not-meaningful number. This number has swung back and forth. Since March, when importers first look to try and front-run the tariffs. And then, of course, after they front-run the tariffs and they reduce the imports, only to boost and back up again in May, and then fall in June. So, again, with this number, if it’s below consensus, maybe that indicates the economy is slowing more than expected, might bolster the case for rate cuts. If it’s higher, then maybe the economy is not doing that badly and doesn’t need to cut rates. However, I just think that there’s so much noise in this number over the past couple of months. It’s really going to be hard to use that in order to make a case one way or the other. Either way, I still think the market’s going to be watching it.
Dziubinski: We have some tech earnings on deck this week, and none is more highly anticipated than Nvidia. First, talk about Nvidia’s valuation as we’re heading into earnings. Is it a buy?
Sekera: From the perspective of wanting to buy at a reasonable margin of safety from intrinsic value, no, it’s not a buy at this point in time. But then again, on the other hand, it’s also not necessarily a sell. It only trades a little bit above our $170 fair value. So, we’ll see where the numbers are when they come out. And, of course, it’s going to be a potential market-moving event just for all of the AI stocks, depending on what the numbers are, what their guidance is, and of course, what they have to say on their conference call.
Dziubinski: Talk a little bit more about that, Dave. What are you going to want to hear about from management?
Sekera: First and foremost, the market will be focused on the earnings and the guidance. At the current valuation levels on the stock, they probably, again, as what we’ve seen for this company for quite a while, need to beat the earnings consensus. And then provide guidance that’s higher in order to keep that stock elevated. The market’s going to want details on the status of the H2O chips that were being sold to China. We had the resumption of those sales earlier this quarter, that was the catalyst that led to our fair value increase a couple of months ago.
But there are reports out there that Nvidia is halting production of those chipsets, as the Chinese government has concerns about cybersecurity on those chipsets. If that report is correct, then we’re going to want to hear a lot more detail from Nvidia. As they’re reportedly about to introduce a newer chip, the B30A, that’s intended to replace the H2O. So again, if they can give us a lot more confidence that that’s coming out in the near term, then maybe if that report is correct, it won’t be as much of a downside pressure.
Either way, from a valuation point of view, we’re currently forecasting $4.54 in earnings this year, $6.32 per share next year. That means the stock’s trading at 38 times fiscal 2026 earnings and 28 times 2027 earnings. So, some pretty lofty multiples. They’re going to need to put up the numbers to be able to justify that.
Dziubinski: Now, Marvell Technology MRVL also reports this week, and this stock’s been a pick of yours in the past. Remind viewers why you like it.
Sekera: Most recently, it was a pick on the May 12 episode of The Morning Filter. And then we’ve been behind that stock a number of times ever since. So again, for those of you that don’t know the company, it is a chip designer focused on wired networking, has been a beneficiary of the build-out of all the data centers. Now, earlier this year, that stock had fallen, along with all of the AI stocks, after the DeepSeek news hit the headlines. But unlike a lot of the others, this one really didn’t recover. And part of the reason was that there were rumors out there that the company was losing market share for its custom chip portfolio of AI accelerators. Our equity analyst team didn’t that that was true, according to the analysis and what they’ve been hearing out there. And then, earlier this summer, the company hosted a webinar focusing on its custom AI accelerator. And I think there was enough good news there to give the market the comfort that they are maintaining their technological lead. So, it still looks attractive to us here.
Dziubinski: Let’s talk about that, Dave, how attractive it is from a valuation perspective. Would you say it’s still a pick?
Sekera: It is. I mean, it’s up 14% since May 12, but we still think it has further room to run. It’s a 4-star-rated stock at a 20% discount.
Dziubinski: Anything you want to hear about from Marvell management during the call?
Sekera: Well, earlier this month, the stock did move up. There was some competitor research out there. And within that research, that competing firm had some information with some bullish estimates regarding Microsoft’s next-gen AI chips, which Marvell is reported to be designing. So, any commentary they can provide regarding those chipsets could provide an upward catalyst on the stock. And I think the overhang on the stock as to the investor concerns about the pace and total addressable market size of data buildouts, that I think is something the market wants to get some clarity on as well. And then, lastly, if management is able to provide a positive outlook on each, I think that’s going to help allay some of the market concerns. I think any of that really could be some positive catalysts to help boost the stock up, like what we’ve seen with all the other AI chips.
Dziubinski: Two cybersecurity firms, Okta OKTA and CrowdStrike CRWD, report this week. How do both stocks look heading into earnings, and what will you be looking for here?
Sekera: Well, first of all, CrowdStrike, I’d say that stock is at risk in our mind. It’s a 2-star-rated stock at a 25% premium. So, I think they’re going to need to beat their earnings estimates and raise guidance in order to maintain the relatively high valuation. And we’ll be listening for commentary regarding their security tools. Taking a look at the other company, it’s a 3-star-rated stock at a slight discount to fair value. Now, our equity analyst thinks that it could surprise to the upside, has a relatively low market multiple compared to the other cybersecurity stocks. And I know specifically here, our analyst has written that he’s going to be listening for any discussion regarding opportunities and agentic identity for them.
Dziubinski: Now, Palo Alto PANW reported pretty good results recently, and the stock traded up afterward. Unpack those results and tell us if the stock looks attractive today.
Sekera: Well, first of all, you have to go back and look at the charts here. The stock did sell off at the end of July, and that’s when they announced their acquisition of CyberArk. Now, our analyst team said they saw strategic rationale. We held our fair value unchanged at that point in time. And it was enough in order to get that stock to dip into 4-star territory. So that, in our mind, was an opportunity. If you’re not already involved in cybersecurity, that was a good time to be able to make a couple of initial buys here. And cybersecurity overall has always been one of my favorite plays within the technology sector overall. Now, that company did beat earnings. The stock started to move up. Just edged back into 3-star territory. This is one that does not seem to stay undervalued for very long. Still at an 11% discount. So, again, it’s not as undervalued as it was before, but I still think it’s probably a pretty good entry point, even though it’s not as attractive as it was a couple of weeks ago.
Dziubinski: All right. Well, we’ll keep going with the new research from Morningstar theme, and let’s talk about Applied Materials AMAT. The stock sold off about 15% after earnings on a disappointing forecast. What did Morningstar think?
Sekera: From the earnings perspective, they met the management guidance, but they did guide down to an 8% sequential decline for fiscal 4Q. And when I take a look at the company, I just have to note they are one of the largest manufacturers of semiconductor wafer fabrication equipment. They have clients like Taiwan Semi TSM, Intel, and Samsung. So, it really begs the question, in my mind, is this specific to just them, or is this going to be more of an industrywide problem?
Of course, if it’s more of an industrywide problem, that’s going to be very concerning regarding the global economic outlook for the technology sector and for really just the entire economy overall. Now, reading through our notes here, I think that the takeaway is that it does appear to be more idiosyncratic to just this company. They did have weaker guidance than what their competitors were, such as KLA KLAC and Lam Research LRCX. Management here cited normalization of patterns from China after a strong period of overordering in 2023 and 2024. Now, we did expect that, but the reduction in guidance was worse than what had been modeled in for this next quarter. Now, having said all of that, our equity analyst team still has confidence in the medium- to long-term perspective of the story here. In fact, they said, “It’s just really a speed bump and a positive longer-term story for the company.”
Dziubinski: Walmart stock was down about 5% after earnings last week. Why the pullback in the stock, and what did Morningstar think of the report?
Sekera: Running through the numbers here, comp store sales were up 4.6%, a pretty good increase. That was a combination of a 1.5% increase in transactions and a 3.1% increase in average ticket size. And management also raised their fiscal 2026 guidance to 3.75% to 4.75% percent, from 3.00% to 4.00%. The problem here is that the company missed their consensus earnings estimates. My assumption is that Walmart is not pushing through all of its own cost increases, whether that’s from tariffs or whatever else. So, management raised their earnings guidance to $2.52 to $2.62, from $2.50 to $2.60 a share, but not nearly enough to satisfy the market. With the stock trading at a 38 times forward PE, it would need to have much higher earnings growth to be able to justify such an expensive valuation.
Dziubinski: Walmart’s stock is still really overvalued, right?
Sekera: Exactly. Even though the stock did slide a bit after earnings, we still think it’s a lot further that it could fall from here. It is a 1-star rated stock, trades, I don’t know, like maybe a 50% premium to our fair value. And just running through the numbers here, if the stock were to fall all the way down to our fair value, it’d still be trading at 25 times earnings, which for an everyday-low-price retailer, that’s still a really full valuation.
Dziubinski: Now, Intel announced last week that SoftBank was making a $2 billion investment. And then, of course, there were reports that the US government was acquiring a 10% stake in Intel. Now, Intel’s stock went up initially on the news, and then it pulled back. What do you make of it?
Sekera: It’s one of these things that kind of depends on how you want to look at it. From a national security perspective, I think it’s positive that the US government is actively trying to bolster semiconductor manufacturing within the US. Of course, it reduces our reliance on international semiconductor manufacturing. And I think it’s positive in that. I assume the government will work in order to reduce any kind of red tape and regulations in order to help Intel build out these new production facilities.
The other way that people are looking at it is the government stake might incentivize some of the large US fabless chip designers, such as Nvidia, AMD AMD, and Apple AAPL, to use Intel’s foundries going forward. Thinking about it from the perspective of the SoftBank stake, that could lead to some of their other holdings, such as Arm ARM, to use Intel’s foundry. We’re hearing reports that Arm might be out there trying to build its own line of semiconductors at some point in time in the future.
But I also think it highlights just how far Intel had fallen behind the rest of the industry that they need to spend billions of dollars to be able to catch up to where the rest of the industry is. And that’s much less being able to return back to its former days of being an industry leader. So, I think from that perspective, it’s a pretty negative indicator in the short term. Do you think there’s an opportunity here with Intel stock? I don’t think the stock looks all that attractive here. It is a 3-star-rated stock, trades a couple of dollars above our $21 fair value estimate. If anything, if the stock continues to move higher here in the short term, I’d actually be a better seller.
Dziubinski: Berkshire Hathaway revealed it picked up shares of UnitedHealth Group during the second quarter. And in many ways, it seems like a classic Buffett play. What are your thoughts on it?
Sekera: The stock did get the Buffett bounce, even though he’s no longer really in charge there. But I guess what I don’t know here is, I don’t really know what the dynamics are at Berkshire anymore. I assume that new positions are still going to get run past Warren, probably looking for his approval. But at the same point in time, he may be increasingly letting go of the reins. So, is this really a Buffett buy, or is it a buy from some of the other people managing the money at Berkshire? I don’t know. So, it’s not one that I’m necessarily going to rely just on their new position for me to get interested in it.
Dziubinski: And even after that Buffett bounce, the stock still looks really undervalued. How would you suggest investors be thinking about UnitedHealth stock today?
Sekera: This is really a tough one. The stock is down 39% year to date, down 50% from its April highs, which might provide a good opportunity to start some positions here.
But personally, I just don’t like the setup here. We’ve cut our fair value three times over the course of this year. We started at $590 per share. We’re now down to $400 per share, fair value. The company’s had a lot of problems. Medical utilization has surged. That’s reduced their profitability. In fact, they cut their operating margins in half. So the company’s going to have to boost future pricing in managed care in order to be able to get their margins anywhere back to near where they were before. I think the company’s going to be under a lot of close scrutiny over the next couple of quarters.
Taking a look at their guidance, their original earnings guidance was going to be $29.50 to $30 a share. Then, when they started announcing some of these different problems, they had reduced that earnings guidance to 26 to $26.50 per share. And then they ended up withdrawing guidance overall. Now, they recently reinstated that guidance at $16 a share. So, again, probably call it half of what the original guidance was. So, even at that $16 a share, it’s still trading at a 19 times PE ratio. Now, I think you kind of have to assume that that $16 estimate is really what I’m going to call like a kitchen-sink earnings guidance. They’re going to probably take as many charges and write-offs at once as they can, just trying to take the pain now and rip the Band-Aid off. That way, they can underpromise and overdeliver in the future. But I think a lot of the outlook here is also just going to depend on the regulatory environment.
So, with this one, I’m just going to say read through the research on Morningstar.com. But you’re just going to have to make your own decision on this one. Personally, I have no interest. It might very well be a great opportunity. So, I would just say, if this is one where you’re going to get involved, personally, I’d start with a smaller position size. And that way have the ability to dollar-cost average in if it does fall further from here. And, of course, that’s always assuming that there is no change to the current outlook and that we don’t see the situation get worse before it starts to bottom out.
Dziubinski: This week, your picks tie into our question of the week, actually. Now, The Morning Filter viewer, Jenny, asked, “Dave, which small-cap stocks would you buy?” Now, before you answer Jenny’s question, let’s take a step back and give us an update on small-cap stocks today. Have we seen any pickup in performance?
Sekera: If you remember, I mean, pretty much all year we have been talking about how we think that small caps have been undervalued compared to the broader market, both on an absolute value basis, as well as a relative value basis. But we always kind of caution people, “Hey, this is an investment, not a trade.” It probably won’t be until later in the year that small caps will start to outperform the broader part of the market. Now, we have seen small caps finally start to outperform large caps over the past couple of weeks.
And I would just say, in this case, individual small caps can be more volatile than large caps. So if you are investing in the small-cap space. I think you might want to start with a position in either an exchange-traded fund or mutual fund that specializes in small caps, which immediately provides you with diversification. And then from there, if you have an interest in small-cap stocks, you can start doing the due diligence and research and reading through on different stocks you might have an interest Morningstar.com. And then you can layer in those individual stock portfolio, those stock positions within that broader, more diversified portfolio of small caps.
Dziubinski: And as an aside for listeners and viewers, Morningstar’s director of ETF research will be joining us on an episode of the podcast in the next few weeks to talk more specifically about how to choose a small-cap ETF. In the meantime, Dave, what’s your overall take on small caps these days from a valuation perspective?
Sekera: The real question here is, with small caps over the past couple of weeks outperforming, is this it? Is this really the beginning of a real rally in small caps, or is it a head fake? Of course, only time will tell. But I do think it’s indicative of a few things.
So first, small caps have lagged all year. Investors are out scouring the market, looking for value in those areas of the market that have been left behind. And second, I think that it shows that the large-cap space, especially large-cap growth stocks as a category, have become increasingly expensive. So, when we look at large cap across the board, those stocks are trading at a 2% premium, not necessarily a huge premium to fair value, but again, trading above our fair value composite, where small-cap stocks are at a 17% discount. And every time we’ve talked about small caps this year, we’ve noted that, yes, they are significantly undervalued, but really you need to view them as a longer-term investment and not necessarily a trade. Because the small caps probably really don’t start to work until certain conditions were in place.
Now, historically, small caps do well when the rate of economic growth has bottomed out and it’s poised to rebound. The Fed is easing monetary policy. Long-term interest rates are declining. And for the most part, that really has not been the environment that we’ve been in all year. Now, when I look at all of those precursors today, two of those three are in place. So, the Fed is now expected to start cutting at the September meeting. Our estimate is that they’ll probably cut at least one more time by year-end.
And then our U.S. economics team is looking for another 100 basis points of cuts in 2026. Long-term interest rates have kind of been stuck in the middle of a trading range since the beginning of this year. But our US economics team is projecting the long-term, or the 10-year Treasury, to come down to 3.9% in 2026 and to 3.5% in 2027. So, it looks like that’s probably starting to fall into place as well. We did see the 10-year Treasury rally after the Fed meeting.
So, the real wild card here is going to be the economy. Morningstar’s US economics team is expecting a slowing rate of economic growth for the next three to four quarters, bottoming out at a little bit under 1% in the second quarter of 2026, and then starting to reaccelerate thereafter. If the economy does better than what we expect, then yes, this might be the beginning of a durable outperformance by the small-cap category. However, if the economy follows our projections or comes in worse than expected, then it’s possible that this short-term rally could have the legs cut out from underneath it.
Either way, that’s why we always focus on those stocks that trade at a significant margin of safety below their long-term intrinsic valuation. And ideally, I have been looking for those stocks that pay at least a somewhat decent dividend yield so you can get paid while you wait to see how this trade, well, I’m sorry, this investment works out over the next couple of months and the next couple of quarters.
Dziubinski: All right. Then let’s get to the viewer’s question: Which small-cap stocks do you like today? Your first pick this week is Mattel MAT. Walk us through some of the key stats on it.
Sekera: Mattel is a 4-star-rated stock. It trades at a 27% discount to fair value. Now, as much as I was talking about that I do prefer dividend stocks, this one does not pay a dividend, so maybe not necessarily appropriate for those investors that want that dividend yield. It’s a company we rate with a High Uncertainty Rating. And we do assign the company a narrow economic moat. That’s going to be based on its intangible assets. Those intangible assets are evidenced by the long-lived brands, which have very strong market share. They have good pricing power and good licensing partnerships.
Dziubinski: The stock had bounced back nicely from its April lows, but then it pulled back after reporting earnings in July. What happened there, and why do you like Mattel today?
Sekera: Well, part of the reason I like Mattel is because competitor Hasbro HAS has done so well thus far this year. Hasbro is a stock that we had recommended in the past. I believe it’s up, call it 50% or so year to date. So, with that up as much as it is and trading in fair value territory, I could see a lot of investors in that stock maybe looking to Mattel, looking for an undervalued stock after they’ve ridden that one up. Maybe a swap opportunity there. Now, with Mattel itself, what I think what’s happening is retailers have been increasingly cautious ahead of the holiday season this year. They’ve been holding off on purchases until we get closer to the holiday season.
Talking to our equity analyst that covers the company, she expects that these delayed sales in the first half will still occur, but they’ll occur here in the second half. When she looks at like point of sale metrics, the company has both risen on the second quarter and year to date. We think that implies demand has remained relatively resilient for their brands as their brands resonate with consumers. Overall, the stock is only trading at 11 times the midpoint of guidance, so it looks pretty attractive here.
Dziubinski: Now, your second pick this week is actually a repick from not too long ago, Scotts Miracle-Gro SMG. Give us the highlights.
Sekera: Scotts is still 4-star-rated stock, trades at a 30% discount, has a good yield at 4.3%. It’s a company we rate with a High Uncertainty and assign a narrow economic mode.
Dziubinski: Now, the stock is down about 10% since reporting earnings. What happened here? And why do you like Scotts Miracle-Gro today?
Sekera: The earnings report in and of itself was just fine. Revenue is up year over year. Operating margins are improving. And, in fact, the stock opened up 4% in the after hours following its earnings release. But then, as you mentioned, the stock did sell off. And it really started selling off during the conference call. We had a huge swing after management was talking about their business. And in some cases, this really just seems like a self-inflicted error on management’s part.
So, on the call, my understanding is that management was highlighting an analyst who opined that the company was going to start losing market share to private-label penetration. Now, this is nothing new. Companies have been competing with private label for decades. They know how to compete. They know the pricing that they need to do. Yet, management never really gave a reason on the call that as far as why they didn’t think that they would lose share, and kind of talk about how they’ve competed against private label in the past. I think that started kind of a worry among a lot of the investor base here. And as that stock then started to sink, it kind of became like a self-fulfilling prophecy that I think reinforced that concern and caused the stock to sell off pretty steadily, now to the downside.
Overall, our analyst team did hold our fair value steady. There was nothing new that came out on the earnings call or the guidance to change our long-term assumptions. When we look at the steady growth of the company here over the next couple of years, it’s trading at 17 times this year’s earnings, but only 15 times next year’s earnings.
Dziubinski: Sealed Air SEE is your next small-cap pick. Tell us about it.
Sekera: Sealed Air Stock is rated 4 stars, trades at a 35% discount to fair value. The company’s stock has about a 2.5% dividend yield. Another company that we rate with a High Uncertainty but assign a narrow economic moat based on switching costs. And I kind of really like the setup here with their economic moat. The company’s equipment is usually embedded within the customer’s production process. So, it’s one of those things. It’s very hard if a company wants to switch out to some of their competitors for them to be able to do so.
Dziubinski: That’s a pretty substantial discount to fair value. What does Morningstar see here that the market doesn’t?
Sekera: I think you have to take a longer-term perspective and look at how this company has panned out over the past five years. Really, I think this is just one of these examples of how the pandemic led to really large shifts in the individual company’s cycle. And in some ways, these effects are still being worked out. The stock initially ramped a lot higher in 2021. Customers saw a big increase in demand for their food packaging and the shift to goods for away from services. So, customers overordered, you know, a lot at that point in time, just because they saw that huge amount of growth.
And then, of course, we had a lot of shipping bottlenecks in the next six to 12 months thereafter. So, customers wanted to make sure that they had what they needed in stock to be able to satisfy that growth. That led to a lot of overordering. And then in 2022 and 2023, all these customers had all this excess inventory that they needed to work through, and of course, that pressured the company’s results. And we saw that stock fall off throughout all of that.
Now, we think the normalization in that inventory process really started in 2024, we’re seeing a lot more of that stabilization here in 2025. So just looking for more normal, ordinary, historically kind of average ordering process going forward. Taking a look to the company and the stock, it trades at less than 10 times our 2025 earnings forecast. Looks attractive to us here.
Dziubinski: Next up is Bath & Body Works BBWI. Run through the numbers on it.
Sekera: So, first of all, I just have to warn you, the company looks like they report earnings on Thursday, Aug. 28. In this case, I think you can probably wait until earnings come out before you decide whether or not this is a stock you want to get involved in. And the reason is that as a 5-star-rated stock, it trades at almost a 50% discount to fair value. It does have a 2.7% dividend yield, narrow economic moat. But I think there’s enough risk of consumer and economic uncertainty here that you may not necessarily want to get ahead of the earnings report here. I think you’re going to want to hear what management has to say as far as guidance for the holiday season. And with the stock trading at as much of a discount as it is, even if the stock pops here after earnings, I still think that there’s enough of upside that you could probably get involved at that point once you kind of take out some of this near-term uncertainty that you could still do pretty well thereafter. And of course, if they were to give you any kind of dour outlook for the earnings season, and the stock falls further from here, that’s probably just going to make it even that much more attractive.
Dziubinski: The stock’s down about 25% this year. What’s going on with Bath & Body Works? And why is it a pick today?
Sekera: And this is a pick we’ve made a number of times over the past couple of years. And what I found with this one is that with it being a seasonal business, it seems like the stock also trades very seasonally as well. Now, in an efficient market, it shouldn’t happen. But when I look at the way the stock is traded, it kind of seems to have worked out that way. Where often as you go into the holiday season and a lot of the analysts and portfolio managers kind of start to pay attention to the stock and take a look at the valuation, it seems to trade up at the beginning of the holiday season and during the holiday season. And then, after the company reports, it kind of seems to do pretty lackluster thereafter, until people start to kind of pay attention to it once again.
When we look at the company and think about its product portfolio, our analyst team notes that it does specialize in items that are affordable, very gift-worthy in most people’s minds. They have accessible price points for all different income levels, depending on if you’re looking for that $10 grab-bag gift that you’re doing for a holiday office party, or if you’re looking for something a little bit nicer for somebody else. When I look at the stock here, it trades at, I think, just under 9 times our 2025 earnings estimate.
Taking a look at our model, really, I mean, we’re not making any big, huge bet on the stock here as far as future earnings growth. We’re looking for 3% top-line growth, compound annual growth rate for revenue over the next five years. With some operating margin expansion over the next few years, yet still not even getting back to where they were in 2022, we get 9% earnings growth. I think the company even has some upside potential here. They are doing some line extensions into the beauty segment, so I like the setup here. It’s a very undervalued stock, which when people start paying attention to it and see how undervalued it is, a lot of upside opportunity over time.
Dziubinski: And your final pick this week is Albemarle ALB. Give us the pitch.
Sekera: And so this one, I have to warn, this is going to be a lot more speculative. I think this is really just for those kinds of investors who can accept a little bit higher risk in their overall portfolio. But it is a 5-star-rated stock, trades at well over a 50% discount to our fair value, even pays a 2% dividend yield. We rate the company with a narrow economic moat based on their cost advantage.
Dziubinski: We haven’t really talked much about lithium prices lately, so tell us about what’s been going on with prices, what Morningstar’s forecast is, and then why Albemarle is your pick among the lithium names.
Sekera: The long-term investment thesis overall is that lithium demand is expected to exceed lithium supply over the course of the next decade or so. Just as the demand for electric vehicles and storage batteries continues to keep rising, in fact, with electric vehicles, I know our forecast there is that two-thirds of global auto production will be electrified over time, whether that’s a battery electric vehicle or a hybrid vehicle. So, again, we have a very positive outlook for the amount of lithium that’s going to be needed over the course of the next decade.
But when you look at how much lithium is being mined today, and how much is expected to come online over the course of the next decade, we think it’s going to be undersupplied. Now, when you look at lithium prices and you look at the lithium stocks, they rallied way too high in 2021 and 2022. And then they’ve fallen over, really about the past two and a half years as the hype surrounding the growth in electric vehicles kind of ran into reality. So, what we’re seeing with lithium prices now, they’re just starting to bottom out. In fact, it looks like they’re starting to catch a bid. The reason there is a lot of these lithium miners that are not profitable at these prices have been closing down mines and taking that supply in the short term offline now.
This year, we expect that lithium prices will still remain near their cyclical lows for most of 2025. We still see oversupply here. In the short term, however, we are forecasting demand will grow faster than supply. We expect the market will return to balance in 2026. Which, of course, then should drive prices higher and producer prices higher over the next three to five years.
Dziubinski: Well, thank you for your time this morning, Dave. Those who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. We hope you’ll join us two weeks from now, on Monday, Sept. 8, for our next episode of 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 and happy Labor Day.