Plus, whether US stocks are overpriced today.
On this week’s episode of The Morning Filter podcast, David Sekera and Susan Dziubinski chat about whether U.S. stocks are overvalued, which types of stocks—growth or value—look more attractive right now, and if it might be time for investors to ease up on buying stocks.
They also cover where things stand on tariffs and which economic and earnings reports to watch this week, unpack new Morningstar research about high-profile companies like Palantir and Eli Lilly after earnings, and revisit a few former stock picks, identifying which ones are still stocks to buy today.
This week’s picks are all undervalued stocks from sectors that look overpriced.
Episode highlights:
On Radar: Inflation & Earnings
New Research on PLTR, LLY, Others
Is the Stock Market Overpriced Today?
Undervalued Stocks to Buy
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
Read Dave’s new stock market outlook: August 2025 Stock Market Outlook: Where We See Investing Opportunities
Got a question for Dave? Send it to themorningfilter@morningstar.com.
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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, a programming note for our audience, Dave and I are pretaping this episode of The Morning Filter on Friday, Aug. 8, so our comments don’t reflect anything that might have happened after the markets opened on Friday. All right, Dave, let’s start off with a tariff update, at least where we stand on tariffs as you and I are taping this.
David Sekera: Hey, good morning, Susan. Yeah, as you mentioned, this is, of course, all subject to change on a daily basis, but for now, what we’ve seen is new tariffs being instituted on semiconductors being manufactured outside the United States. Now, Apple AAPL did announce that they do have an exemption from that as they committed to spend another $100 billion in developing new semi manufacturing capability inside the United States, and that’s on top of the other commitments that they’ve already made. Now that just tells me that all the other semi manufacturers are probably making those same negotiations in order to commit to build more facilities in the US as well to get that same exemption.
Now, we also have more tariffs threatened on Big Pharma, and again, I think this is pretty much the same tactic to get them to commit to build more manufacturing facilities for their drugs here in the United States as well. We know that large pharma’s already taking some actions in order to try and placate the Trump administration, so they are trying to mitigate those government reimbursement cuts that they’ve also talked about as well. So we’ve seen some plans being announced in order to onshore that manufacturing, and they’ve also been setting up some direct to consumer programs as well.
Now, as far as what’s going on with some of our larger trading partners, discussions with Mexico, as we’ve talked about, seem to be going pretty well. They received a 90-day extension. Whereas discussions with Canada, which we had talked about, we did not hear were going very well, must not be. They have additional tariffs imposed there, and then same thing with India, additional tariffs being imposed on India in order to try and sway them toward what we’re looking for.
But really, the biggest thing to me is still going to be what those tariff negotiations are with China. From what we’re hearing, we’re still in pretty early innings. That deadline coming up here shortly on Aug. 12. And it’s not just tariffs. There’s a lot of different items that are being discussed, a lot of nontariff trade restrictions that we’re looking to get lifted as well. So what we’re hearing is that we’re not very close to any kind of trade deal at this point, but it is still progressing. So my assumption is that there will be another extension there with China. If we don’t get an extension with China, I think the market would not be very happy about that. That probably would lead to a pretty swift selloff if that were to happen.
Dziubinski: All right, on the economic front this week, we have the CPI and PPI numbers coming out. Now, we saw June PCE came out a little higher than expected. So what are the expectations for the inflation readings coming out this week, and would you expect much market response to them?
Sekera: Yeah, so the big question with the CPI and the PPI numbers are: Are those tariffs finally starting to show up in the reported inflation yet? And if so, how much, and where specifically are they showing up?
Now, I know our US Morningstar economics team has said for a while now that they’re expecting those tariffs to start showing up in the inflation metrics here in the next couple of months. Taking a look at where the market is headline year-over-year consensus is 2.7% on CPI. That’d be unchanged from 2.7% last month, but for core to tick up to 3% on a year-over-year basis, so up slightly from the 2.9% reported last. And then for PPI, on a month-over-month basis, the consensus is looking for an increase of two-tenths of a percent. That’d be up from being flat.
Now, as far as the market response, that’s really just going to depend on how much inflation rises. So if the numbers come in better than expected, I don’t think there’s going to be a market response. The market’s already pricing in the Fed to start easing monetary policy with a cut in September and at least one, if not two, cuts coming thereafter. If the numbers come in line to only slightly worse, I don’t think that should be that big of a deal as well, but if the numbers were to come in much higher than expectations, I think that could lead to a pretty significant selloff. The reason being that if inflation is rising too fast to let the Fed start cutting rates at the September meeting, I think the market would sell off on that news.
Dziubinski: Let’s turn to earnings. Are there companies reporting this week that are on your radar, and if so, why?
Sekera: Yeah, there’s a couple, but I would say this week after the deluge of earnings we’ve had the past couple weeks, it’s really just going to be much more of a week for me to take a breath and catch up on all the reading that I’ve been stacking up over the past two weeks, just going through all those other stock analyst notes that have been published over earnings season that I just haven’t had time to get to yet.
So the first one I’ll probably keep an eye on is gonna be Applied Materials AMAT. I don’t think there’s anything to do from a trading perspective. It’s a 3-star-rated stock, trades at a slight discount to fair value. The company, of course, is the largest manufacturer of semi wafer fabrication equipment. Clients of theirs include Taiwan Semi TSM, Intel INTC, and Samsung, so really just going to be listening for whatever commentary they have on the semi industry.
What we’ve seen is that performance within the semiconductors has been pretty bifurcated. More commodity-oriented semiconductors still under a lot of pressure, have yet to really get the legs underneath them and rebound just yet. Whereas, of course, anything to do with artificial intelligence still surging much, much higher. So if there were any kind of hint of a slowdown in AI, I think that would lead to a selloff in AI stocks, more globally.
And then the other one’s going to be Deere DE. Again, nothing really to do from a stock perspective. It’s a 3-star-rated stock, again, at a slight discount. But Deere is the leading manufacturer of agricultural equipment, also a major producer of construction machinery. More than anything else, I’m going to be listening for signs that the agricultural equipment part of their business has bottomed out. That’s been an area that’s been under some pressure for a while now. And really listening to see if they give any kind of indication as far as when they expect a recovery in the ag equipment part of their business.
Dziubinski: All right. On to some new research from Morningstar about quite a few companies that reported earnings last week. Let’s start with Palantir PLTR. Now the stock had a really good week after reporting robust revenue growth. What did Morningstar think of what Palantir had to show?
Sekera: Palantir, of course, just being the poster child for a firm whose business is focused on using artificial intelligence to analyze both structured and unstructured data for their clients. The company really started off mainly as a contractor for the US government, but it’s really been growing leaps and bounds in its US commercial segment as well. The company’s revenue surged 48%. I believe that was its largest revenue growth in years. Once we updated our model with the new numbers, we did bump up our fair value estimate 15% to $115 per share.
Dziubinski: Now, Palantir isn’t a stock we talk about very often on The Morning Filter, and it seems to be one of those stocks that’s perennially overvalued. So talk about the stock’s valuation today.
Sekera: Yeah. So that fair value, of course, is going to be based on our discounted cash flow model. So let me just run through a couple of numbers here of what that fair value estimate is based on, and what the projections are. So when I look at our revenue line, our five-year compound annual growth estimate is for over 40%. So that would mean that revenue would grow from 4.2 billion that we project this year to almost 16 billion by 2029. And as such, when we look at our five-year compound annual growth rate for earnings, that’s 61%. So essentially, earnings would go from 63 cents a share that we projected this year up to $2.20 in 2029.
So when you look at the market valuation here, the market is paying just huge valuation multiples for the amount of growth that we’re looking for here. It trades at 100 times this year’s earnings estimate, trades at 289 times our 2025 earnings estimate, and if our base case is right and the company is able to generate $2.20 per share in 2029, based on where the stock is trading today, you’re paying 83 times our 2029 earnings estimate.
So this is just one of those situations where momentum can certainly keep the stock moving up higher from here. But if you’re buying that stock today, you really have to believe in a much higher growth story than what we’re currently modeling in. And I would just caution that, from a trading perspective, this could at some point just be like, if you remember the disruptive technology stocks, back in 2020, that all soared much higher, then they all came crashing down in 2021 and 2022. So my concern here is that whenever this company has some sort of catalyst that causes the stock to start to sell off, for whatever reason that is, once that stock starts to sell off, I think it could gap down pretty hard.
Dziubinski: Now speaking of another stock that’s been kind of a highflyer from a valuation perspective until recently, Eli Lilly LLY. The stock fell 14% after the company reported last week. So what happened there?
Sekera: Yeah, I mean, earnings came in actually above consensus expectations. Revenue growth of 38%. Earnings growth of 61%. They even raised their 2025 guidance to 60 to 62 billion in revenue and for earnings to come in a range of 21 and three-quarter to $23 per share. Now following that little bit of a selloff we have, the stock is trading at 28.6 times earnings. So really the problem here wasn’t necessarily the earnings in and of themselves, but they reported what we consider to be pretty weak data for the oral version of their weight loss drug. It led to less weight loss during these trials than Novo Nordisk NVO weight loss drugs, and they also had higher discontinuations due to adverse events. So again, that’s really what caused the stock to sell off. It wasn’t the earnings, but it was just a concern about those drug trials.
Dziubinski: So then how does the valuation look after the pullback, Dave? Is Lilly stock still overpriced?
Sekera: So it’s now down about 30% from where the stock peaked in, I think, mid-August of 2024. So it’s finally fallen enough now to trade near our fair value estimate, puts it in 3-star territory. That’s after being a 2-star for quite a while, and I think even a 1-star stock over the past 18 months, so fairly valued now that it’s fallen enough.
Dziubinski: Now one of your prior picks, Devon Energy DVN, reported earnings last week. What did Morningstar think of the results?
Sekera: Results were solid, not necessarily anything to shoot out the lights about, but came in well enough. Devon increased total daily production by 3%. That was ahead of the range that they guided to and actually ahead of our expectations as well.
Now the thing is that they did lower their 2025 capex plan by 100 million, but at the same point in time, they raised their production forecast. So what that tells me is if they’re spending less on it but still producing as much or more, that’s going to result in much higher free cash flow over the next couple years. And of course, they’ve been using that free cash flow to repurchase shares.
We also bumped up our fair value to $42 a share, up from $40. Not necessarily a huge increase, but you know me—I always like to see the fair value moving in the right direction on a buy.
Dziubinski: So is the stock a buy after earnings?
Sekera: It is. It’s a 4-star-rated stock, still at a 23% discount to that updated fair value, has a 3% dividend yield. In fact, it still remains one of our top picks among the US shale producers.
Dziubinski: Now another pick of yours from the past, International Flavors and Fragrances IFF, reported last week, and the stock pulled back a little bit afterwards. What did Morningstar think of the results, and is IFF still a pick today?
Sekera: Yeah, this one’s going to take a little bit of explaining here. So earnings report looked just fine to our equity analyst team. Second-quarter EBITDA was up, year over year. They reported higher volumes and higher prices. Management maintained its guidance, and they even announced plans to restart share repurchases. Now originally when the stock opened up, it started trading up when the market opened.
However, the stock just got pummeled after the CEO mentioned on the conference call that they may come in at the low end of their guidance range. So I think what happened here is the market took that as an indication that the business was weakening and that management may not necessarily have as much confidence in the guidance as what they have previously had.
Now, in our view, we think that’s probably an overreaction, but this is certainly an unforced error by management nonetheless. In my opinion, I think either the CEO shouldn’t have said anything at all about coming in at the low end of guidance, or if they’re actually that concerned about it, they should’ve just gone ahead and officially lowered their guidance to the range that they have higher confidence in. I think if they did that, the stock would’ve actually been down less than how much it fell, but it is still a 4-star-rated stock at a 32% discount, but I think people are going to be a little unhappy with management for right now, and I think that’s a stock where you’re going to need people to get that confidence back before it really starts moving back up.
Dziubinski: Now, Fluor FLR was one of your picks back in May, and it was one of your Trump trade deal plays, but by mid-July, you were suggesting viewers take some profits because the stock had jumped so much. And then the stock just tanked last week. So what’s going on, Dave?
Sekera: Yeah, for the most part, when you and I give stock recommendations, they’re long-term investment ideas. In this case, the Trump trade episode we had on May 19, were really more trading-oriented in that they were based on a specific catalyst, that catalyst being the commitments that President Trump had secured while he was visiting several countries on one of his international trips. Now, Fluor did trade up and on the July 14 show, we did recommend taking some profits there. At that point, the stock had traded up 42%.
Now what happened here is that the stock fell after management slashed its 2025 outlook. They lowered their earnings guidance to $1.95 to $2.15 per share. It was two and a quarter to two and three-quarter before that. Just reading through our note, the second quarter is just full of all kinds of bad news. They’re experiencing cost overruns, they curtailed work in a joint venture in Mexico, they’re seeing a slowdown in customers’ capex spending, among kind of the global trade policy uncertainty, so we actually cut our fair value here down to $55 a share from $60.
Dziubinski: So, given the pullback, the news, the fair value change, what do you think of the stock today, Dave?
Sekera: So it is still a 4-star-rated stock, trading at about a 20% discount, but in my opinion, I think the stock is going to take some time if not a while to probably recuperate. I think now, management’s reputation is going to be a bit tarnished a while for those of us on Wall Street. I think you’re going to need to see multiple quarters in a row that’s going to be needed of the company saying what they’re going to do and then meet those expectations before investors are going to be willing to come back on this one.
Dziubinski: Now, pivoting over to your new stock market outlook, which published on Morningstar.com last week, let’s unpack some of it. Let’s start with overall, the market valuation. How does the market look today?
Sekera: I mean, overall at the end of July, the stock market was trading right at our fair value. Just a quick reminder how we come up with fair value. We cover over 700 stocks that trade on US exchanges, so our price/fair value metric is a composite of the market capitalization of where all those companies are currently trading in the marketplace divided by a composite of all of those companies that we cover’s intrinsic valuation. And that came out at 1.00 at the end of July, so right at our fair value.
Dziubinski: Now, I’m a little surprised to hear you say that the market looks fairly valued rather than overvalued, because about a month ago when we were talking about your July market outlook, you said that the market was overvalued at that point, and stocks have just gone up since then. So what’s going on here with the math?
Sekera: Yeah, so with the math here, over the course of July, the number of stocks that we upgraded our fair value estimates versus those that we downgraded our fair value estimates, it was a four-to-one ratio. So a lot more upgrades than downgrades. But the amount of those upgrades was more in terms of market cap or intrinsic valuation than the amount of market capitalization went up over the same time.
So when you come up with the math here that, we ended up seeing our valuations, for lack of a better word, kind of catch up to what the market valuations were. But I have to say, though, even though we’ve had a very good breadth of the upgrades, it’s still all about the mega-cap stocks.
Dziubinski: Yeah. Now we talked about a few of those significant fair value changes on The Morning Filter already. I think we covered Microsoft MSFT and Meta META a couple weeks ago, and those were pretty big increases. So what were some of the other fair value changes that had a big impact on our overall market valuation?
Sekera: Yeah, I’m just going to run through the five largest ones real quick here for you. So we increased our fair value on Nvidia NVDA by 20%. That was after the US government allowed Nvidia to start resuming its H2O AI chips to China. Now when you think about it, considering Nvidia is a $4.3 trillion market cap, that’s equal to an increase of about $900 billion worth of market capitalization. Just putting that in context, that’s like adding almost the entire market capitalization of Tesla, which is the 10th-largest company by market cap, into the index. As you mentioned, we increased our fair value on Microsoft after earnings. We bumped that up by 20%.
Again, Microsoft being a $4 trillion market cap company, that’s another $800 billion in market cap. That’s the same as adding the market cap of, like, JPMorgan or Walmart, which are the 11th- and 12th-largest companies by market cap to the index. We increased our fair value in Meta by 10%. That’s another 200 billion. We increased our fair value on Taiwan Semi and JPMorgan JPM by about 170 billion each. So in total when you take our valuation increases on just these five companies, that equates to $2.2 trillion of intrinsic valuation increase.
Now to put that in context, that’s equivalent, when you think about it, to 22 companies of $100 billion in market cap each. Now let’s put that even into further context. There’s only 140 companies in our index with a market cap of 100 billion or more, so again, it was really these five companies that were the preponderance of all of our intrinsic valuation increases over the course of last month.
Dziubinski: So Dave, so we’re dealing with a fairly valued market. So talk through some of the risks that our investors are facing in today’s market.
Sekera: Well, at fair value, that just means the market’s not providing any kind of margin of safety for investors to account for a lot of these risks that we see here in the nearer term. We still have the ongoing trade and tariff negotiations with the US largest partners. That’s still outstanding and needs to get resolved. The rate of economic growth here in the US, we expect to slow on a sequential basis through the end of this year, and we’re only looking for sluggish reacceleration beginning next year.
Looking more globally, China, Japan, it appears their economies are also sluggish, if not decelerating, as well. EU starts to reaccelerate, but that’s coming off of a pretty low base, so really not getting much of an economic tailwind globally either, and we expect inflation will probably start to accelerate over the next couple months as those tariffs flow through the inflation metrics.
Now just as a personal aside, I have started becoming increasingly more concerned about the US economy over really the past couple weeks than what I had expected earlier this year. Just starting to see a lot more anecdotal evidence of companies that are more economically sensitive, for example, we’ve talked about some of the chemical commodity companies, some of the construction firms that just had terrible results this past quarter.
It’s making me think that maybe the economy might’ve just hit the brakes here in the past month or two, especially because it seems like the amount that these companies missed earnings by surprised even their management teams, and of course those management teams should have the best view for visibility in those sectors. So those early cyclical companies, having those bad results, is really something that’s starting to concern me today.
Dziubinski: So given those risks, Dave, and given the fact that the market is fairly valued, do you think investors should pull back in equities today?
Sekera: So the total market valuation at fair value is telling me no, that you should stay invested at whatever your targeted equity allocation is. However, if you want to go out there, take some profits here and there, raise a little bit of cash, I’m not going to argue with you, with that as well. When I just think about kind of the upside/downside scenario here, I do think there’s probably a slightly higher probability of stocks experiencing some sort of slight selloff here as opposed to continuing to keep trading higher and higher and further and further into new highs every day.
Dziubinski: So then, given that, how would you suggest investors tilt their equity allocations today based on valuations?
Sekera: So based on valuations, the value category is still trading at a 7% discount, so that’s probably a good area to overweight in your portfolio. Core stocks, those are those stocks that have some attributes of value, some attributes of growth, but don’t necessarily fit into either category, are pretty close to fairly valued, so those would be a market weight.
And I think you just need to underweight growth. Growth stocks, still trading at a 16% premium. When I look back, historically, rarely do they trade that high of a premium. In fact, the last time they were at this much of a premium was early this year before all those overvalued and overextended AI stocks started to sell off in January and February, and then we were at this kind of premium, maybe even a little bit higher premium, at the beginning of 2022, before the total market sold off that year as well.
Taking a look at valuations by capitalization, small-cap stocks, and I know I’m a broken record on this one, but still significantly undervalued at a 16% discount. They’re undervalued on both the absolute valuation basis as well as a relative valuation basis. Lot of negative market sentiment on small-cap stocks. In fact, I think if you look at fund flows, we’ve seen more money coming out of that space than anywhere else, and again, I’m going to caution investors. Historically, these stocks do well in an environment where you’re about to exit a recession or at least the rate of economic growth is poised to start to reaccelerate in the near term.
It’s usually when the Fed is easing monetary policy and long-term interest rates are falling. That is not the environment that we’re in today. We think that maybe later this year or beginning of next year will be that kind of environment. It’s just that when you see small-cap stocks outperform in that type of environment, they usually rebound very quickly. Once that rotation starts coming out of large-cap stocks and into small-cap stocks, it doesn’t take a very large percentage moving from those large caps in the small caps to make those stocks move very fast. So my concern there is if you’re not already positioned in small caps, once they start to move, they could move very quickly, and then you might miss that rally.
Dziubinski: All right. This week’s question of the week ties nicely into your new outlook. One of our viewers, Mike, says, “Dave, it seems to me that oil, energy, defense, REITs, and homebuilders are undervalued stock sectors. Would you agree?” So Dave, answer Mike’s question, would you agree? And then give us a rundown of the most undervalued sectors today.
Sekera: Sure. I mean, for the most part, I do agree with most of the areas here that he pointed out. Energy and specifically oil within the energy sector is undervalued. The names that we’ve really focused on there have been Exxon XOM as far as the global majors and then Devon DVN as far as more the domestic oil companies.
Now industrials are overvalued as a sector, but within the industrials sector, we do find that defense is fairly valued to undervalued depending on which individual stock you’re looking at. So two of them like Lockheed Martin LMT and Huntington Ingalls HII are still both 4-star-rated stocks. Northrop NOC is one that we’ve highlighted a couple times. That one’s moved up. It’s a 3-star stock but still at a 6% discount.
Taking a look at the homebuilders, I would say they’re fairly valued to undervalued depending on which individual stock you’re looking at. Lennar LEN is a 4-star-rated stock, whereas D.R. Horton is now a 3-star-rated stock.
I’d just caution that with the homebuilders, I think it could be more volatile over the next couple of quarters before it really starts to bottom out, before the skies start to clear. I know specifically demand for new homes remains under pressure, and I think we expect it to remain under pressure just because of the affordability being pretty low for new home construction and still just a relatively uncertain economic backdrop.
Moving to the real estate sector, REITs are for the most part undervalued. Having said that, I still prefer REITs where the tenants are more defensive in nature. I’d still steer clear of urban office space. I don’t like the kind of risk/reward dynamics of urban office space today.
The one area Mike didn’t mention is going to be communications. That is still one of the most undervalued sectors today. Of course, it’s mostly undervalued because of Alphabet GOOGL, the parent of Google, is a 4-star-rated stock and being a mega-cap does skew the price/fair value metric down, but a lot of undervalued even more traditional communications names like Verizon VZ that we’ve highlighted a number of times.
Then lastly, healthcare. Now within healthcare, the sector has traded down much of this year. That’s what’s providing the opportunities. Personally, I still prefer more the med tech and the devices names. Pharma names have taken a beating within that pharma sector. I either prefer names like biotech, which aren’t seeing kind of that same pressure as the Big Pharma names from more of like that pricing and regulatory point of view. Biogen BIIB is a name that we’ve highlighted that we like there. Or among the Big Pharma names that have already been beaten up, those that have already a negative market sentiment and we think are already pricing in a downside scenario, Bristol-Myers BMY is our pick amongst that group.
Dziubinski: All right. Well then just a reminder to our audience that you can send Dave and I your questions at themorningfilter@morningstar.com. All right. It’s time for Dave’s Picks of the Week. This week, he’s brought us five undervalued stocks to buy in expensive overvalued sectors. Now your first pick is from the overvalued consumer defensive sector. The pick’s Clorox CLX. Run through the numbers on it.
Sekera: So Clorox is currently rated 4 stars, trades at a 29% discount to our intrinsic valuation, provides a 3.9% dividend yield. We rate the company with a medium uncertainty and a wide economic moat, that wide economic moat being based on the company’s cost advantages and intangible assets.
Dziubinski: Now Clorox has been a pick of yours in the past, and Morningstar continues to pound the table on this one even though it’s down about 20% this year. So what’s Morningstar think the market’s missing with Clorox?
Sekera: I think this one’s really just had a tough time getting institutional interest behind it, and there’s kind of a reason why when you think about how this stock has traded over the past five years and why I think there’s still kind of a negative sentiment on this name—and in fact on a lot of these companies that have that same kind of stock profile.
So the stock, of course, just surged higher in 2020 at the beginning of the pandemic. It rallied so much, it went well into 1-star territory, and then in 2021 and 2022, that stock sold off. I mean, the performance just couldn’t justify the kind of valuations that the market had put on it, and I think there’s still some negative sentiment left over. I mean, that stock was essentially cut in half from its peak, so I think a lot of institutional investors probably feel like they’re kind of burned on that one.
And then in mid-2023, the company was hit with a costly cyberattack that disrupted their operations, hitting their earnings pretty hard, and it took a bit of time for them to recover and normalize after that. So I think generally a lot of institutional investors are probably taking a bit of a wait-and-see attitude here in the short term.
I think fiscal first-quarter 2026, we think that actually will not look very good. In fact, it’ll probably look pretty bad, and I think people are going to want to wait until exactly that kind of flows through before they’re going to get involved.
So what happened here, if you read our last earnings note, which was the fiscal fourth quarter, we saw sales get pulled forward as retailers were building their inventory ahead of Clorox moving to an ERP system, an enterprise resource planning system. A lot of times when companies do that, what we’ve seen in the past is that it does cause some disruptions to their business. So in this case, I think retailers were just building that inventory as a precaution just in case that rollout does have some issues for the company.
Overall, from a longer-term perspective, I know our analyst thinks that this ERP upgrade will help bolster the operating margins in years ahead. So it’s one of those things where it could cause some short-term disruption but will be good for the company over the longer term.
When I look at our forecast, we’re only looking at modest top line growth, or revenue, really 2.5% five-year compound annual growth rate. I mean, if you think about it, I mean, if you expect inflation on average to be 2%, you’re only pricing in just a tiny little bit of volume increase and just a little bit of pricing increase to get to that 2.5%.
We are looking for operating margin improvement. We’re looking for that to expand to, I don’t know, up by 110 basis points, but again, that 110 basis points is just coming a little bit each year out through 2029. Company right now trades at 20 times the midpoint of this year’s guidance, but using next year’s earnings forecast, that falls to 16 times, which looks pretty attractive to us.
Dziubinski: Now your second pick this week is from another overpriced sector. It’s the utilities sector. The pick is Eversource Energy ES. Tell us about it.
Sekera: So Eversource stock is a 4-star-rated stock, trades at a 10% discount, 4.6% dividend yield. We rate the company with a low uncertainty rating. However, I have to highlight we also rate this company with no economic moat, which is pretty rare in the utilities sector, which is also probably one of the reasons that we do think this one is something that the market is missing out on because I think the market is probably overly concerned about the lack of the economic moat here. But as a utility and a 10% discount, as you mentioned, one of the very few out there that’s trading at a discount today.
Dziubinski: Yeah, there really aren’t many undervalued utility stocks this day, so why do you think Eversource Energy is one of them? Do you really think it’s the moat?
Sekera: Well, I reached out to Travis, and he’s the equity analyst that covers this company, and the couple of things that he pointed out that is also concerning to the marketplace today, they have had some regulatory issues in Connecticut. He thinks that their balance sheet is a little bit stretched, and it’s going to take another couple of quarters for them to pay down some debt and get that balance sheet to where it should be. And it’s also one of the very few utilities that probably doesn’t have, like, any upside from the increase in data center growth that we’re expecting.
When we look at the regulatory areas that it’s, providing electricity, we’re just not seeing data centers being built in that area. So it’s not getting the premium multiple that the other utilities are getting for those growth aspects. Currently, he noted that the company trades at a 14 times PE. The sector overall is 18 times PE. He thinks 16 is probably the right area that it should be trading.
Dziubinski: All right, your next stock is from the financial-services sector, which is also overvalued, and I don’t think this stock’s ever been a pick before. So, this is going to, this, we’re going to talk about this one. It’s Berkshire Hathaway BRK.B. So, give us the bird’s-eye view on this one, Dave.
Sekera: Yeah, I mean, we’ve certainly talked about Berkshire a lot over the past couple years, but yeah, I can’t remember. I’d have to look into my notes to see if it was a pick or not. So right now, Berkshire is a 3-star-rated stock, but it trades at a 5% discount. We rate the company with a low uncertainty, so that 5% discount really puts it right on that border between 3 star and 4 star. Of course, it’s a company that rarely trades at much of a discount to our fair value, so this is an opportunity to be able to get involved if you’re not involved there. We rate Berkshire with a narrow economic moat based on its cost advantages and intangible assets of its underlying investments.
Dziubinski: Now, this pick might surprise some in the audience. It certainly caught me off guard when you first mentioned it. Given that, the stock’s been selling off since Warren Buffett announced in early May that he was going to be stepping down at the end of this year, yet it’s a pick of yours. So, why is that?
Sekera: Yeah, a couple of different aspects. So first of all, with the market trading at fair value, it’s just getting especially harder and harder to find undervalued stocks that I can really get behind. When I think about growth stocks, as a group, they’re significantly overvalued. Looking for value stocks that I think are strong value stocks that aren’t too much of a story stock. Something like this with that low uncertainty in an environment where I am concerned that you could see a brief selloff in the marketplace, I think Berkshire would be one I would certainly expect to hold its value over time.
As I mentioned before, Berkshire typically does not trade at much of a discount to fair value, so you are able to get it at that 5% discount. And I’d also note here, yes, Berkshire does own some Apple stock, but other than that, it provides a lot of good natural diversification away from those other companies that make up the preponderance of the market valuation today. So when you think about, like, Apple, Nvidia, Microsoft, Amazon, Meta, those five stocks alone are over 25% of the market capitalization of the Morningstar US Market Index today. So owning Berkshire gives you a lot of diversification away from those five names, although you do still get some Apple there.
Taking a look at our earnings report here, in line with expectations. We maintained our fair value and overall, even with Warren retiring, we don’t think there’ll be that much of a change in the way that Berkshire portfolio is managed over the long term. We may see some other changes here. Maybe they end up instituting a dividend, which Warren has always been loath to do in the past. And, maybe we do see some moves in the portfolio from Greg Abel, but again, we’ll see what he does in order to unlock shareholder value. But again, is it necessarily a huge, pound-the-table buy at a big, huge discount? No, but at that 5% discount for kind of the natural diversification you get, I do like it here.
Dziubinski: All right. Now we have industrial stocks looking overvalued, which you mentioned earlier in the show. But your pick is not overvalued. It’s CNH Industrial CNH. Give us the highlights.
Sekera: So it’s a 5-star-rated stock at a 40% discount, provides a 2.2% dividend yield. We rate the company with a medium uncertainty and a narrow economic moat—that narrow economic moat being based on switching costs and intangible assets.
Dziubinski: Now CNH’s stock, it bounced back pretty nicely from its lows in April, but then it pulled back a little bit after earnings. So why the pullback, and why do you like the stock today?
Sekera: Yeah, I mean, this is a stock we actually recommended not quite a year ago, so I think we recommend it on the Oct. 7, 2024 episode of The Morning Filter, and the stock is up 12% since then. Eh, an OK return, but certainly not what I would have expected for something at this much of a discount.
Just recently our analyst team added the stock to our Best Ideas list after they reported earnings. Now this is a bit of a story stock. So what happened is revenue was down 16% and EBIT was cut in half, but that was in line with our expectations and our fair value was left unchanged. And the good news here is that management did reiterate its 2025 guidance.
So when I’m thinking about the stock valuation and looking at our model, I think the market already incorporates that the agricultural cycle remains depressed, and that we think that CNH as the number-two player in that market is well-positioned for the cyclical rebound when that comes.
So looking forward over the next five years, we forecast that the top line growth will only end up getting back to the same level it was prepandemic in 2019. We are looking for some steady operating margin expansion as revenue growth returns to normal. So again, a lot of the story is just getting back toward kind of more normalized operations, after we saw the big pull forward early in the pandemic and then everything kind of sell off thereafter, once everyone kind of went through the inventory that they had already pulled.
Now looking at earnings, I’ll note only 65 cents per share earnings forecast for this year. That grows to a dollar thirty in 2026. So right now the stock’s only trading at 10 times our 2026 earnings estimate, and we are modeling 20% average earnings growth from 2027 to 2029. So pretty strong earnings growth over that forecast period that we think the market isn’t currently pricing in.
Dziubinski: Now your final pick this week is from the consumer cyclical sector, which also looks overvalued. The stock is Polaris PII. Tell us about it.
Sekera: Yeah, another cyclical stock here. It’s a 4-star-rated stock at a 26% discount, has a 5.2% dividend yield. We rate the company with a wide economic moat, and that’s based on its cost advantages and intangible assets.
Dziubinski: Now it’s been a little while since we’ve talked about Polaris on The Morning Filter, so remind everyone what Morningstar’s thesis is on this one and why you like it.
Sekera: Yeah, and this is another one you got to go back toward the beginning of the pandemic and how that impacted the company’s business. So if you remember outdoor sports, one of the few things that we were able to do when everyone was social distancing in 2020, there’s a huge pull-forward effect, during the beginning of the pandemic, and of course then as people had already bought these items early in the pandemic, we saw revenue come crashing down over the course of the last year.
So we finally think we’re getting to the point where that fall off after that pull forward is starting to dwindle. So as an indication, reading through our earnings note from this last quarter, Polaris reported a sales decline of 6%, and that’s now the smallest decrease they’ve had since 2023.
Taking a look at our financial model, we are expecting a 20% pullback. I’m sorry, we did see a 20% pullback in 2024 and we’re looking for a slight pullback this year. We’re still projecting a 4.5% decline in the top line this year, and then we’re looking for a 2.9% increase in revenue next year and then averaging 3.5% thereafter. Essentially our long-term forecasts are looking for essentially kind of that 2% inflation rate plus a little bit of pricing and a little bit of volume growth, but nothing heroic that you have to price in in order to get to our valuation.
Looking at our operating margin, it’s going to be less than 1%. We’re looking at eight-tenths of a percent op margin this year, but then we are forecasting a gradual improvement thereafter, forecasting 2.9% in 2026, increasing to 6.2% in 2029, and then by the end of our explicit forecast period in 2034, getting up to 7.5%.
So just to put that in perspective, the average operating margin between 2010 and 2019 was 10.8%, and in fact the worst year that we saw prepandemic was 6.5%. So from an operating margin perspective, I think these numbers are probably pretty conservative and if the company’s top line is able to start growing again, I think there’s probably additional upside from there, but that’s just my own opinion.
Now from an earnings perspective, it’s going to look bad. We’re looking for a loss of 50 cents per share this year, but we’re forecasting two dollars and 19 cents per share next year. That’d be 24 times earnings, which sounds pretty high, but we’re looking for three dollars and 45 cents in earnings in 2027. That brings your P/E multiple down to 15 times. And then four dollars and 94 cents in 2028, so that takes you down to 10 times earnings. So it’s really those out years that it looks much more attractive from that earnings basis.
In my opinion, I think that our model here is probably pretty conservative. If we see additional upside, it’s going to come from that faster margin rebound. And I also got a couple notes from Jamie. She’s our equity analyst that covers it. A couple of things that she just wanted to highlight today was that the industry inventory levels are also much more improved from here. She thinks unit demand is at a trough at this point. And she also notes that the cost structure has been pruned over the past couple of years, so you will get that upside leverage when sales return to growth. Then lastly, as far as tariffs go, she doesn’t think it’ll be as bad as what the market is probably expecting at this point.
And lastly, I just think that this is one of these stories where the market has been so hyperfocused on the top line decreases that it can’t see the long-term forest for the trees.
Dziubinski: All right. 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 next Monday for a special episode of The Morning Filter. I’m sitting down with Morningstar’s Director of Personal Finance and Retirement Planning, Christine Benz, to talk about portfolio strategies, asset allocation, dividend stocks, and more. You won’t want to miss it. We’ll stream the podcast at 9 a.m. Eastern, 8 a.m. Central next Monday. In the meantime, please like this episode and subscribe. Have a great week.