Plus, an early read on Q3’s winners and losers.
On this week’s episode of The Morning Filter, Dave Sekera and Susan Dziubinski discuss what a government shutdown would mean for investors; they parse the latest PCE and revised GDP data, too. Tune in to find out if Costco COST or AutoZone AZO looks like a stock to buy after earnings, whether Marvell Technology MRVL and Lithium Americas LAC have any gas left in the tank after their respective rallies last week, and what to make of Nvidia’s NVDA new partnership with OpenAI.
As Q4 2025 approaches, they take a look back at Q3’s market trends, surprises, and winners and losers. This week’s picks are stocks to buy that we think have more room to run.
Episode Highlights
Latest on Inflation, GDP & Jobs
Updates on COST, NVDA, MRVL, LAC, More
Q3 2025 Market Recap
Stocks to Buy at Market Highs
Read about topics from this episode.
Read Dave’s latest stock market outlook: https://www.morningstar.com/markets/stock-market-outlook-where-we-see-investing-opportunities-september
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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. Well, good morning, Dave. Before we get to the week ahead, let’s touch on the possible government shutdown. Now, if you were a gambling man, where would you place your bet this week? Shutdown or no shutdown?
David Sekera: Oh, we’re having to go through this again. No. All kidding aside. Yeah, no, I fully expect that we’ll end up having to go through another shutdown. I think neither side is going to want to be seen as acquiescing to the other side. So will go through some sort of shutdown and then have to live through each side blaming it on one another while they go through their negotiations.
Dziubinski: So what about from an investment standpoint? Should investors be concerned about a shutdown? What are the ramifications for the economy and the stock market?
Sekera: Yeah, I don’t think a shutdown is going to be a surprise to anybody. In fact, last I checked this morning, the futures were in the green. I think at the end of the day, the market view right now is just going to be, I’ve seen this movie before. I know how it ends. So my own personal expectations are we’ll have a shutdown for some short period of time. Now, historically, the government employees are furloughed until there’s a deal struck, and then they end up getting paid back pay. So from an economic point of view, really, it’s not going to be very meaningful unless the shutdown were to really last an extended period of time.
Question then being, “Well, hey, Dave, what’s an extended period of time?” So I took a quick look over the weekend. It looks like the longest shutdown we had was 35 days. That was the end of 2018, beginning of 2019. I talked to Preston. From an economic point of view, he didn’t think that that was all that meaningful back then. So it would definitely have to last longer before that would end up impacting our US economic outlook.
So I think right now, the market really is just still focused on the same things it’s been focused on for the past week or two. Just looking at the strength in AI spending, trying to understand just how much more and how much longer it’s going to last before you have any kind of slowdown there. And then also just taking a look at the economy with some of the numbers that have been coming out stronger than expected. I think the market’s trying to digest that and try and figure out if a stronger than expected economy could preclude the Fed from making additional cuts later this month.
Dziubinski: Well, let’s talk a little more about the economy, unpack some economic news, and let’s start with last week’s PCE number, which of course is the Fed’s favorite inflation metric. How’d the number look?
Sekera: Came in in line with expectations. I don’t think it’s going to have any kind of impact on the Fed’s view or the individual voting members at this point. Looking at the specific numbers, core PCE year-over-year basis, last month it came in at 2.9%, forecast was for 2.9%. The print 2.9%. From a headline perspective, on a year-over-year basis, PCE the prior month came in at 2.6%, forecast was one tick up at 2.7%, and it came in at 2.7%. So in line with expectations. So really no change as far as what people are thinking as far as inflation, at least here in the short term.
Dziubinski: Also last week we saw second-quarter GDP numbers revised higher. So what’s that mean for investors?
Sekera: Yeah, and first of all, I don’t think you and I ever even bother talking about the revisions to the GDP. I think we’ll talk about the first GDP when it comes out. But, in this case, the second revision is usually so far after the fact from the prior quarter, that it’s just not relevant in trying to consider what might be going on with the economy today. Now in this case, the original estimate, when it was first printed for second-quarter GDP, was 3%. The first revision came out—it was revised higher to 3.3%. A pretty good increase, but not something that’s kind of outside the historical band of how much it gets revised. Now this next revision came out at 3.8%, so a whole heck of a lot higher than that original estimate print.
So why is this important today? Why are we talking about it? So I think the market’s just trying to digest, if the economy is running at this strong of a rate, do we really need more rate cuts at this point in time? So when that number first came out, if you looked at the CME FedWatch tool, where you look at the probability or the market-implied probability of the Fed cutting, that dropped all the way down to an 80% probability for an October cut. Market has kind of dismissed the GDP print. It’s now back up to a 90% probability once again. And when I looked at the December probabilities, it was the same thing. It had dropped as low as only a 60% probability of another cut in December. That’s now back up to 70%. So looks like the market is still expecting that rate cut, but again with that stronger than expected number, I think it probably puts more volatility in, as far as what the Fed’s going to do here in October.
Dziubinski: All right, well now looking ahead to this week, we have jobs numbers coming out on Friday. Now, longtime viewers of The Morning Filter know you’re not particularly fond of this metric, but we kind of have to talk about it because it affects the market, right?
Sekera: Yeah, I mean, we have to talk about it. At the end of the day, the payroll numbers, I mean, yeah, I can’t remember like when you and I first started talking about why we don’t necessarily think they’re really all that meaningful from a long-term investment point of view, why we don’t put that much emphasis in the numbers. The restatements have been so large in the past, I think to some degree almost make these numbers a little bit irrelevant at this point in time. But yes, we have to talk about it. So overall, the reason the Fed has been cutting, or at least the reason they’ve been giving anyways, is that the weak labor market has been the reason to cut Fed rates here. So the Fed and the market will be hyperfocused on this report. It’s the only payroll report they’re going to see between now and the next FOMC meeting later this month.
Now to put this into perspective—now, historically in what I consider more of like a nonrecessionary environment, you’d look for payroll numbers to be somewhere in kind of that 150,000 to 200,000 area. Looking for this month, the consensus is for 39,000 payroll growth. That compares to only 22,000 last month. So at the end of the day, if the number comes in higher than expected, I think that could lower the probability once again that the Fed may not cut here in October. Which of course, if that happens, that could send stocks a lot lower cause everyone’s now pricing in that cut. But if it comes in weaker than expected, it continues to increase the probability of the cut. And that would support stocks as we’re going through this short term melt up in the markets.
Dziubinski: All right, time to get caught up on a couple of companies that reported earnings last week that you were watching. Starting with Costco. Costco’s ticker is COST. How’d the results look, and any changes to Morningstar’s fair value estimate on the stock?
Sekera: Once again they came in with pretty strong results. Top line was up 8%. That’s based on same-store sales increasing 5.7%. And we saw a pretty good combination of an increase in foot traffic as well as an increase in average ticket sizes. There was a slight decrease in renewal rates, but that was more than offset by new membership growth. The only drawback this quarter was the operating margin contracted by 10 basis points. Not necessarily much of a hit, but a tiny little hit. Overall adjusted earnings per share growth still came in at 11%. So a pretty good quarter overall.
Dziubinski: I think the stock pulled back a little bit after earnings. But Costco stock’s still really overpriced today, right?
Sekera: Exactly. I think it was down maybe not quite 3% after earnings, but it’s still a 1-star stock, trades at a 48% premium to fair value. Taking a look at our model, we’re still looking for strong performance going forward. Our five-year compound annual growth rate for the top line for revenue is 8%. We’re looking for some operating margin expansion over that same time period. So we’re looking for earnings growth of 11.2%. But the stock trades at 50 times 2025 earnings. Even if you look at our earnings forecast for next year for 2026, it still trades at 45 times you forward earnings. So I think the stock is expensive. And just taking a quick look at the chart over the weekend, kind of looks like we almost have like a double top this year in the stock. So maybe with the stock selling off after earnings here and a double top might indicate maybe the stock has lost its momentum at this point.
Dziubinski: All right, well, let’s talk about AutoZone, ticker AZO. Company also reported last week. What did Morningstar think of the report, and how does the stock look after earnings? This one’s still overvalued, too?
Sekera: So from a top line perspective looked fine. It came in at consensus expectations. However, earnings did miss expectations likely because the operating margin contracted by 150 basis points over the quarter. Now initially the stock did sell off, but it quickly rebounded the next day. In fact, I think it ended up the week—at the end of the week—in the green, above where it was trading. Taking a look at our investment thesis here and what the market is pricing in, I think the market is pricing in very significant long-term growth in its efforts to build out its professional channel.
Now overall we agree it has a lot of long-term growth potential there, but I think we already incorporate that into our expectations. So from a top line perspective, our five-year compound annual growth rate for revenue is 6%. So it’s a couple percent increase on average in same-store sales and increase in some new store, new store openings every year. We’re looking for margin expansion over that same time period. That gets you to 9% compound annual earnings growth. But the stock’s trading at 25 times forecasted earnings. Our analyst as noted that’s really kind of the peak of the historical range it’s traded in. So overall it gets to be a 1-star stock at a 45% premium.
Dziubinski: Now Kenvue stock, which is ticker KVUE, is down about 10% last week after US Department of Health and Human Services released a statement about a potential link between acetaminophen use during pregnancy and autism. So did the news have any impact on Morningstar’s fair value estimate of the stock?
Sekera: So I think this is a really good one to go to Morningstar.com or whichever Morningstar platform you use and read through his note overall. But what I would highlight here in his note that he really pointed out is this actually isn’t the first time this issue has arisen. In fact, there was some lawsuits a number of years ago. But he noted that the judge ended up dismissing those lawsuits against Tylenol. The ruling essentially stated that the plaintiff’s expert witnesses did not meet the standards for admissible scientific evidence. The judge cited what he considered to be methodological flaws and a lack of consensus in the scientific community. So for now, from our point of view, there’s really nothing new or different from a scientific point of view. So our fair value is unchanged at this point. And based on the fundamentals and the long-term intrinsic discounted cash flow evaluation of the model, we still think that this stock is probably undervalued here from that fundamental point of view.
Dziubinski: OK so, as you mentioned, Kenvue does look undervalued, has been a stock pick of yours in the past. But what are your thoughts about it right now as an investment?
Sekera: Yeah. So I think from an investment you can’t really only look at it from what the fundamental point of view is. So just to put things in perspective and how I think the market is probably trading this right now from a catalyst perspective is when you look at the company, Tylenol sales are its single largest product, it’s about a billion dollars in sales. Our analyst has estimated he thinks that accounts for somewhere in the high-single-digit percentage of their revenue overall. So let’s just assume sales there were to go to zero. And I also assume that it’s probably a higher-margin product. So that overall, if you took that to zero, would lower the fair value by, call it, 15% to 20%. But the stock trading at $16 and change right now, I don’t think this really is trading with the fundamental point of view of whether or not they’ll sell Tylenol to women that are pregnant or just sell Tylenol over all.
But I think the market is trying to cuff any kind of liability the company could have if it was found to be a contributing factor to autism or ADHD. So I think when you think about this stock, it’s really trading on what I consider to be a probability-adjusted basis. So I think the market is coming up with some sort of long-term fundamental intrinsic valuation and then multiplying that by a probability that Tylenol could be found to be a contributing factor, and if so, just how much that liability could cost the company. So using our 24.50 fair value estimate for the stock, I’d say right now the market is probably estimating about a 35% probability that Tylenol could be found liable. So I think over time, I think this stock is really going to just trade on that probability-weighted basis. I think we’re just going to have to see more research and studies come out. But again, this is something that’s probably going to take years for that to come out to really get to a substantive answer one way or the other.
Dziubinski: All right, well, let’s talk tech for a bit. Nvidia, which is of course ticker NVDA, announced a strategic partnership with OpenAI. The stock was up on the news, but Morningstar didn’t make a change to the fair value estimate. So, Dave, unpack the impact here, and tell us whether Nvidia stock looks attractive today.
Sekera: Yeah, as you mentioned, our fair values unched at $190 per share. So with where the stock closed, it’s in that 3-star territory. So I think at the end of the day, Nvidia has a very high-quality problem right now. I mean, they’re just generating huge amount of cash and they need to figure out what to do with it. So they did announce the strategic partnership to invest $100 billion into OpenAI. But like you said, it didn’t change our fair value, but our analyst noted that he thinks this actually helps support his long-term growth forecasts, which are still relatively aggressive.
I mean, when you think about just how much this company’s revenue has grown over the next couple of years and that we still expect revenue to double from $200 billion this year to $400 billion in revenue by the end of our five-year forecast period, but I don’t think there was enough specific detail in what the partnership announcement was in order to change our long-term assumptions. I think when you think about this from Nvidia’s point of view, this is really just a way to make sure that they keep themselves at the forefront of development for artificial intelligence hardware. I think it gives them very specific insight as to exactly how GPUs are being utilized, and then they can use that in order to help them improve or redesign chips or the chip architecture for those use cases going forward.
Dziubinski: And I think it’s fairly value today. Nvidia, right?
Sekera: Yeah, it’s a 3-star-rated stock.
Dziubinski: All right. Marvell Technology, which is ticker [MRVL], rose double digits last week after the company’s CEO made some bullish comments at a conference. So what got the market so excited and did Morningstar make any changes to its valuation on the stock?
Sekera: So at the conference, my understanding is the CEO provided minimum guidance of 18% revenue growth for their fiscal-year 2027, which is actually calendar-year 2026, and I think that helped to alleviate a lot of the negative market sentiment. A lot of people in the market thought Marvell was losing market share in their custom AI accelerators, which, from our point of view, we didn’t think was happening. So again, this is actually just a way to help bolster our view. We think we’re correct overall in this stock, but no change to our assumptions. So we did leave our fair value at $90 a share.
Dziubinski: Now, earlier this year, Marvell was a pick of yours. Is it still a buy after last week’s runup?
Sekera: Yeah. We initially recommended this stock on the May 12 episode of The Morning Filter, and then we reiterated that call in June, on June 23. And that was in relation to a webinar that affirmed our view at that point in time that we didn’t think that the company was losing that market share. From our first pick, the stock’s up 27%. From June 23, it’s up 17%. So at this point looks like the stock traded last Friday at $83 and change. That’s only 8% below our $90 fair value. So one of the few AI stocks still trading at much of a discount. But it does put it now in the bottom of the 3-star range.
Dziubinski: Well, Marvell had a good week, but Lithium Americas had a phenomenal week. The stock, which is ticker LAC, finished the week up 95% on media reports that the Trump administration would like to take a 10% stake in the company. So what’s Morningstar’s take on this possibility? And then, in general, Dave, what do we think about lithium stocks today?
Sekera: Yeah, that was just some crazy price action. I mean, it’s not often that you ever see a 4-star-rated stock. And I think not only was it 4-star-rated stock, I think it was like in the very, very bottom of the 4-star category, probably pretty close to being a 5-star stock. And that rallied so much it went up into the 2- star range really just after that announcement. So net-net, what happened here? The government is looking for a 10% equity participation as they renegotiate a broader contract with the company. They’re renegotiating a $2.3 billion loan from the US Department of Energy, which has been used to construct or help them build out the Thacker Pass lithium project.
Now I’d note, too, this is now the second equity stake the US government has made in the US critical materials provider. The other deal that they had announced earlier was a rare earths deal with MP Materials MP. So definitely looks like a theme going on with the US government making some investments here into those companies that they think have national security implications for the US. So as it applies here, if the deal is similar to the deal they did with MP Materials, it may come with price guarantees. So those price guarantees could make this project profitable even if lithium prices were to remain lower for longer.
Now, overall we maintained our $5 fair value per share. Of course we will reevaluate once and if a deal does end up getting negotiating here, overall, no change in our long-term outlook for lithium, which still is, we think lithium in and of itself will be undersupplied over the course of the next decade. And that’s what’s going to end up supporting price increasing over the next five to 10 years.
Dziubinski: Now you mentioned of course that Lithium America with this rally has moved into overvalued territory. What about other lithium stocks though? Are there still any buying opportunities in the space?
Sekera: There is. I mean of course all the lithium stocks popped on the news as well. Overall, our go-to pick is still the one that we recommended, and I can’t even remember when we recommended Albemarle ALB, but that’s still our go-to stock. It’s a 5-star-rated stock, and it’s still at about a 50% discount to fair value.
Dziubinski: All right, let’s talk about UPS. The Morningstar analyst who covers the company issued a new stock analyst note last week, and he shaved a little bit off the stock’s fair value estimate and he commented on the dividend. So here’s a stock that still looks undervalued after the fair value change. So walk us through the note, Dave, and what investors should make of it.
Sekera: Yeah, I mean, the takeaway here in the note that Matt published is that he still thinks that if they want to, UPS can maintain the dividend, but he thinks that at this point the company probably should actually look at cutting that dividend in order to be able to preserve cash. So at the end of the day, the question for investors here is, Is this stock cheap? When I look at what’s going on here, the answer is yes, it’s probably still cheap, But it is cheap for a reason. It’s been disappointing from both a fundamental point of view as well as a sentiment point of view this year.
And I think looking forward, this is probably more of a story stock for next year at this point, and I would say well into next year. I mean, the company just is going to need to work through lowering its fixed costs to account for lower Amazon AMZN deliveries. They announced earlier this year the decrease that they’re seeing in volume. And I think you’re just going to need some more clarity as far as like their market share versus FedEx FDX. Our analysts noted he thinks that maybe UPS has been losing some market share to FedEx as well. And with the economy being somewhat in the doldrums for the next couple quarters, Morningstar’s US Economics team is not looking for a recession, but we are looking for the rate of economic growth to slow the next couple quarters. You’re probably not going to necessarily see an uplift in volumes until the economy rebounds in the second half of next year. And of course, lastly, who knows what happens with the final trade negotiations with China. Company’s already noted that they’re seeing slower volume package coming in from China. So if that were to get worse, that also could put a lot more pressure on the stock.
Dziubinski: Yeah, sounds like it could get worse before it gets better,
Sekera: right? Exactly.
Dziubinski: OK, well, it’s time for our question of the week. The question’s from Boris, who owns Barrick Mining, which is ticker B. And you’ve recommended this stock in the past. Boris says he’s done well with the investment and wants to know what you think of the stock today, whether it’s a hold or a sell.
Sekera: Yeah, and you did mention that the ticker here is letter B as in bravo. So I just have to note, I think earlier this year the ticker back then was still gold GOLD. So they have changed that ticker, and I think to some degree it was just trying, the company, get more away from being tied only to gold and to get people to think of it more as like a broader mining company. But yeah, this has really just been a gold pick. It was a pick on Jan. 27 episode of The Morning Filter, and it’s up 112% since then. We actually had reiterated this as a pick on the June 16 episode of The Morning Filter. It’s up 60% since then as well.
So before we talk about like what we think of the stock today, let me just take a little bit of a step back and walk you through how we forecast mining companies intrinsic valuation. So this is true for all of our gold-mining coverage, not just necessarily Barrick. So it’s almost similar to how we look at oil companies. So in our model, we’re going to use the market’s forward curve for gold prices. So from 2025 to 2027, we’re assuming gold averages a spot price of $3,460 per ounce. But our analyst assumes gold prices come down over the longer term. His midcycle price forecast for gold is $2,000 an ounce. So essentially he thinks that over time the price of gold will fall toward what his estimate for marginal cost of production. So based on his expectation for more normalized central bank buying patterns over time, ETF flows to moderate, he expects to see an increase in demand destruction because a lot of gold is used for jewelry and of course as prices go up higher, you’ll have less jewelry-buying. So his model would assume lower prices from 2027 to 2029 to get down to his midcycle price forecast.
So when you put that into our model, using those forecasts, the stock is currently trading at a 35% premium to fair value, which puts it in 2-star category. So if you agree with his assumption that over time gold prices will subside coming down to the marginal cost of production, now is probably a good time to at least take some profits off the table with as much as those stocks have rallied thus far this year. However, if you think gold is staying here or going even higher, then these stocks have a lot further upside potential. Now Newmont NEM in and of itself does have—I’m sorry. So this company in and of itself does have some fundamental issues. I think you need to read through the note here. Initially, I think you need to understand some of the fundamental issues in relation to those gold prices. Now I don’t have time to get into all the individual idiosyncratic problems with some of their gold-mining operations. So this is one I’d highly recommend going and reading through the full note online.
Dziubinski: Well, Boris, thank you for the question and a reminder to viewers and listeners, if you have a question for Dave, you can reach us through our inbox at the TheMorningFilter@Morningstar.com. We’re approaching the end of the third quarter.
So Dave, let’s get reflective on the quarter that was. Now, at the start of the quarter, you thought that volatility would return to the market. Given that we had the deadline for tariffs approaching, we had second-quarter earnings on deck, and then of course at that point, the beginning of July, the market looked fairly valued. But stocks have had a pretty good run this quarter. So does that surprise you?
Sekera: Yeah, it does. But I would also note too that those tariff deadlines for both Mexico and China were both pushed back. And the market just remains just all about growth and buildout in artificial intelligence. That’s everything that we really saw the market move up on this past quarter. In fact, a lot of what I would consider to be more real economy stocks have struggled. So I went through, I did a quick attribution analysis at the end of last week. Quarter to date, I’d note that Apple AAPL accounts for about 20% of the total market return in and of itself. That stock was up 25% quarter to date in the third quarter.
Now overall that just takes that stock back. It had fallen about 18% in the first half of the year. So essentially that’s a stock that started the year at 2 stars. It fell enough to go down into 3 star. It’s now back up again enough to go back into 2-star territory. Otherwise, it’s all been about artificial intelligence. Alphabet GOOGL was up 40% quarter to date. That’s 19% of the total market return for the third quarter. That was just spurred by that court ruling, in which they’re not going to force the company to have to split up. So that took the risk off the table there.
Nvidia NVDA stock continues to keep moving up. That was up 12 and a half percent quarter to date. So that’s about 12% of the total market return there. It just continues to keep growing at an astronomical rate. Tesla TSLA was up 33%. I think a lot of that was due to just excitement surrounding full self-driving and robotaxi rollout. Broadcom AVGO also up 22%. That just continues to keep riding the AI wave higher. Oracle ORCL up 34%. The announcement of their cloud business that they expected to grow that by a factor of 14 times from a $10 billion business last year to a $144 billion business by 2030.
And then lastly of course is just the poster child for AI utilization is Palantir PLTR. Now that stock was up 31% just this past quarter. Overall when I roll all of these together, I mean these companies end up accounting for over 70% of the market return. So when I look at these stocks today, Alphabet, Nvidia, Broadcom, Oracle are all 3- star-rated stocks. Apple, Tesla, Palantir are all 2-star-rated stocks, meaning that we think that those are getting to be overextended here in the short term. So yes, very very strong quarter overall. But really it’s going to be based on mostly just the returns from those individual stocks.
Dziubinski: So give us an overview of performance kind of maybe beyond those stocks. What stood out to you either in terms of themes or sector performance?
Sekera: I think the things that really stood out to me the most that was really surprising were some of the downside surprises, specifically among real economy stocks. So, for example, the commodity chemical companies got hit really hard. I mean that’s already after being down pretty hard. EBITDA on some of these companies for this past quarter were down 50% year over year. That to me was really an eye-opener. So some of these stocks like Celanese CE, Eastman EMN, Dow DOW, I mean those were down 15% to 28%. A lot of the transportation stocks also down 11 to 13%. Companies like Old Dominion ODFL, Landstar LSTR, Knight-Swift KNX, and a number of the industrial stocks also down double-digit percentages. Honeywell HON, Carrier CAHI, Allison Transmission ALSN, Lennox LII, all down as well. We saw a number of stocks that we thought were very overvalued, that had too much market sentiment behind them, correct downwards as well. Chipotle CMG and Wingstop WING, a couple of stocks we’ve highlighted on the show a couple times as being overvalued. Those were down 30% and 26%, respectively.
So overall when I look at like the Morningstar Style Box, I just note that to the upside. core stocks led. They’re up 7.1%. Growth and value actually lagged behind at 5.2% and 5.1%. But the core category really was all based on Apple and Alphabet. Those were 60% of the return in the core category group. By sector, some of the ones that stood out were communication services. That was up 13.6%. But of course that was really all due to Alphabet with its overweighting in that sector. Technology, as you’d expect with Apple, Nvidia, Broadcom, Oracle, that was two thirds of the technology sector. That was up almost 11%. And then lastly we saw a nice rebound in the energy sector, up 8% after dropping 7.7% last quarter.
Dziubinski: So then from the downside from a sector perspective, what struggled?
Sekera: Consumer defensive probably struggled the most. That was down 3.1% quarter to date. Philip Morris PM sold off. We saw a bit of a selloff in Costco COST, COKE, and Procter & Gamble PG as well. The healthcare sector continues to really struggle. That was only up 7/10 of a percent. And then real estate also lagged the market. It only rose 1.6%.
Dziubinski: Now what about the split between large caps and small caps? We did see a bit of a revival in small cap stocks this quarter, right?
Sekera: We did. I mean, large caps still, on a quarter to date basis, continue to be the driving force. They were up 7.8%. Mid-caps were only up 3% for the quarter. Small caps, some pretty good performance. They’re up 6.7%. They had a great August. I mean, I think the returns in August were doubled what we saw in the large- and mid-cap category. But then small caps essentially took a breather here in September and that’s when, once again, large caps with all the AI stocks kind of took over leadership once again.
Dziubinski: All right, well, on next week’s episode of The Morning Filter, Dave will be sharing with us his outlook for the fourth quarter. So be sure to tune in for that. All right, we’ve arrived at our picks portion of the program. Now, Dave titled this one, “With stocks at record highs, what’s left to buy?” That’s a pretty good headline there, Dave. So what’s your thinking behind this week’s set of picks?
Sekera: Yeah, I’ve got to admit, I mean, just taking a look at what’s still undervalued out there, it’s just harder and harder every week for me to find stocks that I can kind of get behind to bring to the viewers. So to some degree with the market kind of still in this melt-up stage where overall I think, when I look at our fair values, the market is trading at a slight premium to fair value. But I don’t know, it just feels like we don’t have anything that’s really going to cause it to sell off. We don’t have earnings next quarter coming out for a few more weeks yet. So I think right now it’s just kind of a “what’s working now?” So in a rising market, you don’t want to fight the tape. To some degree, I think you want to look for those stocks that are rising faster than the market but still remain undervalued and have further room to run and ideally tied to some sort of investment catalyst. Whether that’s stock that should perform well in the easing monetary policy environment, tied to AI or maybe undervalued small-cap stocks that we still think that category has further room to run.
Dziubinski: All right, so your first pick this week is Taiwan Semiconductor. This one’s ticker is TSM. Give us the highlights.
Sekera: Yeah, so of course this one is directly tied to the AI theme. Stocks up 38% year to date. They of course manufacture the highest end of the semiconductors, specifically those made for Nvidia’s GPUs. It’s a 4-star-rated stock, still trades at 11% discount to fair value. It’s a company we rate with a medium uncertainty and assign a wide economic moat.
Dziubinski: Now Taiwan Semi is up more than 90% from its April lows, yet it still looks reasonably priced. So run through Morningstar’s thesis on this one.
Sekera: In fact, this is one we recommended on the July 31, 2023, episode of The Morning Filter. It’s up 170% since then. I mean we’ve reiterated this recommendation multiple times ever since then. Yeah, to some degree. I mean the easy money probably has been made on this one. It is one of the few undervalued AI stocks left. For those of you that don’t know the company, it is the world’s largest dedicated chip manufacturer. Their most famous client of course is going to be Nvidia. Overall, the company is the most technologically advanced equipment, it has the most expertise to manufacture the highest- end semiconductors, specifically those made for AI. So yeah, as we talked about, one of the few AI stocks that still undervalued today even though at this point it’s only 11% discount to fair value.
Dziubinski: All right, well your second pick this week is another AI-themed play. It’s Microsoft ticker MSFT. Hit some key metrics here.
Sekera: Yeah, I mean as large as this company is, I mean they’re still up 21% year to date. So that’s much higher than the market being up about 14% year to date. Still a 4-star-rated stock, trading a 15% discount to fair value. We assign a medium uncertainty rating and a wide economic moat. That wide economic moat primarily being from switching costs, but they also have network effects as well. And we also note that they have cost advantages as a secondary moat source.
Dziubinski: You mentioned how much the stock is up year to date and it’s actually up 43% since it’s April lows, yet somehow still looks undervalued. So what’s the market missing on this one, Dave?
Sekera: Yeah, I think that actually our most recent recommendation was on the April 14 episode of The Morning Filter. But yeah, we’ve recommended this one multiple times and I think almost going back to when you and I first started this podcast a couple of years ago. I mean I think it has a pretty good diversified combination of what I consider to be some steady-Eddie types of businesses, which would cushion the company in a downside if there were to be a recession. Yet it also has a lot of earnings growth potential in some of their higher growth businesses, specifically its cloud business.
So when we look at their businesses overall in personal computing, you’ve got the Microsoft operating system and Xbox. From a productivity and business process point of view, you have Microsoft Office, Teams, LinkedIn, but it’s all about Azure. That’s just a huge total addressable market. You they’ve been building out additional capacity in their cloud business. We think that’s going to give them the ability to accelerate growth overall here in the second half of the year. So overall, company with probably one of the most solid balance sheets out there with a lot of cash. In fact, I think’s one of the only two companies still rated AAA today. And overall it shouldn’t be impacted by tariffs. We think there’s really low or no exposure there. So overall this is still one that I think probably should be a core holding of pretty much anybody’s portfolio.
Dziubinski: Your next pick this week is Hershey HSY. Run through the numbers.
Sekera: Yeah, Hershey’s had some pretty good performance here over the past couple of months after it bottomed out. It’s still a four-star-rated stock. It’s only a 10% discount to fair value, but that puts it in 4-star category because it is a stock we rate with a low uncertainty. And of course with Hershey and its brand, we do rate it with a wide economic moat.
Dziubinski: So why do you like this one today? Why does it have more room to run, do you think?
Sekera: Yeah, our first recommendation on this one was probably a little too early. We recommended it on the Feb. 24 episode of The Morning Filter. It’s only up 6% plus your dividend payment since then. But we did reiterate the recommendation on the June 2 show after the stock had sold off, and it’s now up I think over 16% since then. You could go back and listen to those prior episodes. Kind of the long and the short of it here is they’ve had a lot of increases in their costs from global cocoa production. A lot of that comes from West Africa. You had some droughts there last year in 2023 and 2024 growing seasons. So that really ended up shooting prices up significantly higher. And of course depending on the type of chocolate, that’s anywhere from 20% to 50% of their cost. But the old adage in the commodity markets, the cure for high prices are high prices. So in this case, seeing some demand destruction.
Overall, they are getting some of the price increases pushed through. Over time, we expect new supply will emerge as new cocoa plants start developing into production. So overall cocoa prices are still on the high side, but they have been steadily declining this year. Now the stock will look expensive if you only look at it on an earnings guidance basis for this year. I think the company’s guidance for 2025 is like $5.80 to $6 a share. So at the midpoint, puts it above 30 times earnings this year.
So when I have to look at this company, you need to look at it on a little bit more of a normalized longer-term basis. In our model, we’re forecasting about eight and a half dollars per share in 2026, nine and a half dollars per share in 2027. So that brings your forward PE in ’27 back down to just under 19 times. On average, your average PE is somewhere in the mid-20s. So if you were to take a look at our nine and a half dollars per share, $9.57 to be specific, put that at your average P/E multiple of 25. That takes the fair value then to $240 a share in 2027. So overall we think there’s plenty of room for this one to rebound once those cocoa prices continue to keep normalizing over the next couple years. And in the meantime, you’re also clipping a very nice dividend yield—about 3%.
Dziubinski: All right. Your last two picks this week are smaller-cap stocks. The first one is Ionis Pharmaceuticals. Ticker here is IONS. I’m not sure we’ve talked about this one before. So fill us in on the basics.
Sekera: Yeah, this is one we have not talked about before. I mean, the stock has been screaming this year. It’s up 83% year to date, but even after that return, it’s still a 4-star-rated stock at a 13% discount to fair value. Now this is something we rate with a high uncertainty being a biotech company, but we do assign this one a narrow economic moat.
Dziubinski: So then, Dave, what’s been driving that performance this year, because that’s pretty extraordinary, and then why do you think it has more room to run?
Sekera: Well, I think it benefits from a couple of things. So one, it is a small-cap stock, and small-cap stocks have seen a good rotation in there over the past month or two. So I think as people are looking for small-cap stock picks, this one stands out. It’s also a healthcare stock. So I think this is one of the ones that will benefit from healthcare overall being undervalued.
Now, it is a biotech company, but they actually have a pretty good track record of successfully coming up with and launching multiple new treatments. We think that the pipeline here looks pretty attractive. It’s relatively large. A lot of new promising drug candidates in there that are probably going to rapidly move through different phases of development. They actually recently announced a positive phase 3 data for one of the new drugs in development. We think that one has a potential to be a blockbuster, and it could launch as soon as the second half of 2026.
Now, of course, this is a biotech stock. It’s definitely going to be much more on the speculative side. So I think this is one of these stocks that is probably more suited for investors that can take some higher-risk positions within a diversified portfolio. And of course, I would recommend taking a read through our broader analysis of this stock.
Dziubinski: Then your final pick this week is Crispr Therapeutics. The ticker here is CRSP. Give us the rundown.
Sekera: Yeah, I mean this one has some huge momentum behind it as well. It’s up 57% year to date, but even after that run, it’s still at a 42% discount to our fair value. Puts it in 4-star territory. We do rate this stock as a very high uncertainty and no economic moat. So I will recommend that again, this one is probably more for investors that can take some additional risk in their portfolio.
Dziubinski: All right. So walk us through the case on Crispr.
Sekera: So it’s another biotech company. This one specifically is a pure play on novel gene editing technology, which is used to treat genetically defined variety of diseases. They target, I think, three separate different categories, cardiovascular, solid tumors, and type 1 diabetes. They had a recent global launch of a drug. I’m not going to try and pronounce it—it’s something like Casgevy. I don’t know how you pronounce these things, but they’ve opened 75 global treatment centers already. This one treats sickle cell disease. They also have a combination of a couple of other drugs. It going after a few other different indications. We think this one could be a blockbuster drug.
Overall, looking through some of their next generation candidates that are in clinical trials and have multiple indications, we think a lot of the things in their pipeline will end up coming to fruition. But it will take a number of years for them to get through the different phases of the drug discovery process. So it’ll probably be until 2028. Some of these other indications are approved. But to be honest, a lot of what they’re working on, I don’t really understand overall. So I really have to rely on our healthcare analysts on this one. So another one I would say, “Go through, read our analysis.” It is a speculative stock.
Overall, they do have 1.9 billion of cash on the balance sheet. We think that’s more than enough to fund their research in new product launches over the next couple of years. But I will caution in our model, this one probably doesn’t achieve positive net income until 2029, but a very attractive pipeline of new candidates in our view.
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 morning for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe, and have a great week.
Susan Dziubinski mistakenly refers to the ticker for the company Marvell Technology as MVRL. The correct ticker, MRVL, is written in transcript.