Plus, our take Nvidia ahead of earnings and what we think of REITs today.
Hello, and welcome to The Morning Filter. Every Monday, Susan Dziubinski sits down with Morningstar Chief U.S. markets strategist Dave Sekera to discuss one thing that’s on his radar this week, one new piece of Morningstar research, and a few stock picks or pans for the week ahead.
Key Takeaways:
Our Read on Inflation
Watching NVDA, HD, Others Ahead of Earnings
Should You Buy REITs Today?
Stock Picks of the Week
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Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services Chief US Market Strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or pans for the week ahead.
Now, before we get started, we have a programming note. We will not be streaming a new episode of The Morning Filter next Monday, May 26, because that will be Memorial Day. So today, Dave and I are going to cram two weeks’ worth of content into one show. Good morning, Dave.
Now, Friday after market close, Moody’s downgraded the United States credit rating by one notch to AA1. And as we’re streaming this on Monday morning, stock futures look down, so what should investors make of the downgrade?
David Sekera: Hey, good morning, Susan. I hate starting off the show on a cynical note, but to be perfectly honest, I think that that downgrade is totally nonmeaningful at this point and I don’t think that that’s what’s impacting stock futures this morning. Realistically, when I think about credit ratings, what is the difference between a AAA and AA1? Especially for sovereign debt. It’s really just more symbolic than anything else. When you think about the risks in US Treasuries, the only real risk is whether or not at some point Congress can’t pass a debt ceiling resolution and you could have some kind of short-term payment default.
But even if that were to ever occur, that wouldn’t last very long, you wouldn’t have any loss of principle. I would assume the US government would probably even pay interest, over that time period, before anything that came due was going to get paid. So, I just don’t think that’s impacting stocks. I don’t think it’s meaningful. And in fact, when I look at the credit ratings from the other agencies, S&P downgraded the US government all the way back in 2011. Fitch had downgraded in 2023.
So, why did Moody’s downgrade now? I mean, honestly, what’s different now versus a year ago, two years ago, 10 years ago? I don’t know. I couldn’t tell you. But what I can tell you is, I don’t think there’s anyone out there selling US Treasuries today because it’s now AA1 at Moody’s instead of AAA.
Dziubinski: Well, let’s talk inflation. Now, on the surface, last week’s CPI and PPI numbers indicated that inflation is cooling, but did these numbers include any impact from tariffs yet?
Sekera: It’s just very hard to know in any one monthly report whether or not tariffs are or are not and how much they may be or may not be impacting inflation. Now, in this case, I know Preston Caldwell, Morningstar’s Chief US Economist, noted that within the numbers, he highlighted that housing inflation, that had been the biggest driver overall for inflation in 2024, has continued to trend downward. I think he expects that to continue to trend downward over the rest of this year and into next year. Although he did note there were some early signs of tariffs impacting durable goods, ex-autos. I think the prices there increased by a cumulative 1% over the past two months.
And on the other hand, because of course he’s an economist and that’s what they always do, he noted that new vehicle prices had been flat for the past two months despite projections being out there that autos will rise by 5% on average due to the tariffs. So yes, there might be some tariff-related price impact in some of the different categories, however that’s been offset by some of the larger, more heavily weighted categories. I just don’t think the tariffs have really been meaningful enough yet or really shown up in the numbers yet to really try and read too much into it or really identify any specific trend.
Dziubinski: So then, tariffs aside, what did you make of the inflation numbers?
Sekera: As we’ve talked about the last couple weeks, I’m still in the camp of mainly just ignoring the numbers here in the short term. I think there’s just going to be a lot more noise in these numbers than signal for at least the next couple months. Overall, I think until we get clarity as far as how the trade negotiations are going to work out, these numbers really don’t tell us what the market’s going to be pricing in over the long term and what the Fed’s going to be doing.
So for now, if you’re trying to keep an eye on what you think the Fed may or may not be doing over the next couple months, I’d recommend keeping a close eye on inflation expectations. So, a couple different things that you can monitor would be five-year and 10-year breakevens or maybe the five-year/five-year forward. That’s the one that personally I look at the most. What that tries to do is that measures what the market is implying inflation will be four or five years, beginning five years from now. If you have an interest looking those up, just go to whatever search engine you use, just type in the word Fred, which is the site that the Fed has for all of its data. Just type in “five-year/five-year forward inflation expectations,” and that’ll take you right there. And I think that’s probably one of the gauges the Fed’s gonna be pretty closely watching to discern whether or not inflationary pressures are really starting to impact inflation expectations.
Dziubinski: Now, another data point that the Fed puts a good deal of weight on is the PCE number, and we’re going to be getting one more PCE number during the last week of May before the June Fed meeting. So, any thoughts on what the June meeting is going to look like, what the Fed might do, or is there just not enough clarity at this point?
Sekera: Just taking a look at the readings that we’ve had for inflation for the past couple of months, I think it’s enough that it takes the pressure off the Fed to feel like they need to lower or change the federal-funds rate anytime soon. Personally, I think they’re gonna wait and see where the hard data takes them, specifically what their view is going to be for the longer-term impact of whatever the tariff negotiations turn out to be, as well as the inflation expectations that they see being priced into the marketplace. So as long as there’s really no huge change in either of those, I think that if they can, they’re going to try and wait out the negotiations, see where those come out and what the conclusions are before they start making any moves as far as the federal-funds rate goes.
Dziubinski: On the earnings front, we have both Home Depot HD and Lowe’s LOW reporting this week. So what does Morningstar think of both companies’ prospects as we head into earnings?
Sekera: So I actually touched base with Jamie Katz. She’s our equity analyst that covers both of these companies, and in her opinion, she thinks Lowe’s will outperform Home Depot here in the short term. Specifically, she noted that Lowe’s caters toward those people who do smaller home-improvement projects. She hasn’t seen any disruptions or changes in consumer behavior or activity in those areas. However, Home Depot, she notes, does cater to larger home-improvement projects, much larger price points, a lot more expensive. And so in this case, with the economy slowing, we think it keeps the growth in those large projects in check here over the next couple quarters. And then lastly, she noted that tariffs probably will impact Lowe’s slightly less than it will Home Depot over time.
Dziubinski: Now does either Home Depot or Lowe’s stock look attractive from a valuation perspective today?
Sekera: So both of them are wide-moat-rated companies, but I’d say neither are particularly attractive right now. Lowe’s is a 3-star-rated stock, trades pretty much right at our fair value, pays a 2% dividend yield. Home Depot looking a little pricey at a 25% premium. That’s enough to put it in 2-star territory, and they pay a 2.4% dividend yield. So neither of them in my mind are really necessarily a buy today.
Dziubinski: Sticking with the retail theme, Walmart WMT reported earnings last week. The report itself seemed fine, but management did suggest that prices would rise due to tariffs. So unpack the results for us.
Sekera: I mean, Walmart numbers, it looks like they really just barely beat consensus expectations. Overall revenue did increase 2.5% for the quarter, but really when you break the numbers down, it’s really been kind of the same story as it has been for quite a while now. So same-store sales were up 4.5% at its domestic stores. A lot of that is really just due to the growth that they’ve been getting and people trading down from traditional supermarkets to Walmart, so I know their grocery business was up mid-single-digit percentages as well. As you noted, management did acknowledge that tariffs will end up resulting in higher prices for different types of product categories and that those higher prices and some weakening consumer sentiment will likely weigh on near-term demand over the next couple quarters.
Dziubinski: Walmart stock still looks really overvalued after earnings. So talk a little bit about how Morningstar’s thesis on Walmart differs from that of the markets.
Sekera: The stock trades at a 50% premium to our fair value, puts it well into 1-star territory. Now overall, the results were in line with our forecast. Our analysts noted that they don’t plan to make any real adjustments to their fiscal 2026 projections, so we’re still looking for top line sales growth of 4%, looking for $2.68 in EPS. Longer term, we still project kind of that mid-single-digit pace over the longer run. We just don’t see the kind of growth that would justify its current valuation in the marketplace today when you really think about the long-term outlook for the company. And just as an indication of just how highly valued this stock is, it trades at almost 37 times forward earnings right now. I mean, that’s a lot higher than a lot of those tech companies that we cover.
Dziubinski: All right. Well, speaking of tech, let’s talk about some tech companies, starting with Nvidia NVDA, which reports earnings shortly after Memorial Day. The stock seems to be recovering from its April lows, but it’s still off its all-time high. From a valuation perspective, how does the stock look today?
Sekera: From our point of view, I think it might be getting a little bit ahead of itself here in the short term after we had this rally for the past couple weeks. Looks like it closed last Friday at about $135 a share, so that’s above our $125 fair value estimate but still keeps it in that 3-star range. So we’ll see where earnings come out and where that stock might trade afterward.
Dziubibski: Now Nvidia announced in April that it was incurring $5.5 billion of write-offs due to new restrictions on China. So what will you be listening for at the earnings call at the end of this month?
Sekera: For the most part, I think it’s just really the same thing that we’ve been listening to for the past four to six quarters for now, just what kind of guidance they’re going to give as far as future growth, any comments they may have on long-term growth dynamics for AI, any changes in usage patterns that they’re seeing for AI and how that may affect the hyperscalers’ capex spending plans, and maybe if they have any hints as to other new product development that’s going on out there. Also going to be listening to hear if the trade deals that have been struck with foreign governments recently will make any real difference to Nvidia overall. I mean, generally our investment thesis here in the short term is the company’s been able to sell everything that they make at pretty much whatever price they want to charge, so I’m just not necessarily sure that those new trade deals really end up making a difference as far as what their guidance is going to be for the next couple quarters.
Dziubinski: Couple of cybersecurity firms, Palo Alto PANW and Zscaler ZS will report earnings over the next couple of weeks. Give us the highlights on both of these stocks. Does either look attractive, Dave?
Sekera: So Palo Alto’s a 3-star rated stock at a 8% discount. It is a wide economic moat but a high uncertainty rating. This is a stock we highlighted on our April 14 episode of The Morning Filter, as it was trading at 4 stars at that point in time. We thought it looked pretty attractive, especially because—you know me—I’m a big fan of the cybersecurity space. Zscaler was actually a 4-star rated stock a year ago. It’s now all the way up to the point where it’s trading at an 18% premium, so that’s a 2-star-rated stock. Stock’s been on fire thus far this year. It’s up 39% year-to-date. So overall, I think it’s just keep an eye on these stocks. Really looking to be able to buy on any kind of pullbacks. For example, after Fortinet FTNT recently reported, that stock did have a pretty modest pullback. The market was looking for an increase in guidance, which they didn’t get, but that pullback, it didn’t last very long, and it really started moving right back up afterward. So, these are stocks if you want to get involved in, got to look for those opportunities where the market gives you the entry points.
Dziubinski: When we talked with Morningstar’s tech director, Eric Compton, on The Morning Filter couple weeks ago, I pointed out that the cybersecurity firms wouldn’t be impacted very much by tariffs. So if that’s not going to be a topic of conversation during earnings, what are you going to want to hear about from these two companies?
Sekera: Yeah, it’s just the same thing that we listen to for every quarter, really just what the ongoing business trends are, what the growth prospects are going to be, any kind of new product development that they may be rolling out, maybe how artificial intelligence may or may not be impacting their business here in the short term. But really nothing specific or any different than what we typically listen for in this space.
Dziubinski: And then lastly, Salesforce CRM reports earnings after Memorial Day. Company has been a favorite of Morningstar’s, so why does Morningstar like the company and how does the stock look from a valuation perspective heading into earnings?
Sekera: Yeah, from a valuation perspective, it is a 3-star rated stock, does trade at a 7% discount, so not necessarily hugely attractive, but as you noted, this is a stock that has been a favorite tech name for our team for quite a while. So while it may not necessarily be 4 stars, if you’re looking for something in the tech sector and want to get involved, this would be one that I would say, even at that 3-star territory, is certainly worth a look, maybe to start a small entry-level position and then add to if it does move to the downside.
But overall, when we look at the tech sector, this is pretty much always one of the names that comes up at the highest end of our screens. Just has the best combination of top-line growth, potential for additional margin expansion over time, and a strong balance sheet, which, if we are going into, a downturn in the economy, certainly would, provide a lot of downside cushion for that company.
Dziubinski: Time for our viewer question of the week. One of our podcast viewers from YouTube, Ozzy, wants to know what you think about REITs and why they seem stuck from a valuation perspective.
Sekera: Yeah, there’s just been a lot of negative market sentiment on the REITs sector for quite a while. The sector’s significantly underperformed the market in 2023 as interest rates were rising, which, of course, makes sense because it’s so correlated with the underlying funding costs for the companies.
In 2024, they were still one of the more hated asset classes in the marketplace, and when I think about what’s going on in 2024, to some degree, the market was just so focused on and chasing AI stocks that I think REIT stocks just got left behind.
Now of course, still a lot of concern about urban office space, in particular, how much extra space is still out there that needs to get absorbed, the question that the market still struggles with, and I think we do to some degree as well, how much office space and how much growth office space we’ll have in the next couple years just in a world of hybrid work schedules. But in the REITs, there’s also a lot of retail square footage out there, probably more than what’s needed, so there’s probably some restructuring that needs to go on in those areas as well.
So I think the market is looking to see kind of how those shake out over the next couple of years. Most real estate, for the tenants, are going to be three-to-five-year if not longer contracts, so we’d expect to see some of those contracts start coming up for renewal over the next couple years, so there may be some that get set aside or might not get renewed, so we’re looking for the renewals and just how much pricing management is able to take in the REITs.
Taking a look at the sector overall, it is attractive from a sector point of view, trades at a 10% discount to fair value, so much bigger discount than the market, which is only trading probably at a couple percent discount at this point in time. When we look at our REIT coverage overall, I’d note, of the stocks we cover, there’s only three that are overvalued and rated 2 stars, and those are stocks that have specific reasons why we think the market’s overvaluing them here in the short term. So for example, one of those 2-star rated stocks is Digital Realty, that’s a data center REIT, so that got caught up as a second derivative play on artificial intelligence.
The remainder of the stocks in the sector are 3 to 5 stars, meaning that they’re fairly valued or attractive at this point, and I still prefer sticking with those REITs whose tenants are going to be more defensive-oriented, so looking for those REITs that are going to be in the healthcare sector, maybe storage REITs and the wireless towers also look attractive.
Dziubinski: Well, viewers and listeners, please keep sending Dave and I your questions. You can reach us at themorningfilter@morningstar.com. And as a reminder, Dave and I will be taping a special episode of The Morning Filter at the Morningstar Investment Conference in Chicago on June 24 and 25. We hope to see some of you there, and you can find out more about the Morningstar conference in the show notes.
The time has come. It’s time for the picks portion of today’s episode of The Morning Filter. Now this week, Dave, you’ve brought viewers five stocks to buy following some of President Trump’s trade deals. Explain what you mean by that.
Sekera: Yeah, and first of all, I probably just also need to make sure I caution investors, these are investments, they are not necessarily stocks that we’re looking for for a quick, short-term trade here. But these are stocks where I did a screen, I looked for those companies that the stocks were already undervalued even before any of these trade deals were announced. And looking for those then within that bucket that are going to be a beneficiary of other countries either pledging to buy more American goods and/or foreign companies who have pledged to invest more in building out new manufacturing capacity in the United States.
So I think that that gives you a combination of one, both being able to bolster the top-line growth, and with that top-line growth you should be able to get some margin improvement as they’re able to leverage fixed costs on those higher sales numbers. But also from a trading point of view, where the news should act as a soft catalyst to help those stocks move up toward our fair value over the next couple of quarters or next several years.
Dziubinski: Your first stock pick this week is Boeing BA. Give us some of the key metrics.
Sekera: Yeah, it’s a 4-star rated stock, trades at a 15% discount. It is a company we rate with a wide economic moat, although it does have a High Uncertainty Rating.
Dziubinski: Last week, Morningstar raised its fair value estimate on Boeing by 20% after a large order from Qatar Airways. So walk us through this rationale for the fair value increase and then why the stock is a pick this week.
Sekera: Yeah, I mean it’s been a beneficiary of not just that deal but a number of different trade deals. We are seeing a lot more companies and a lot more governments pledging to buy more planes from Boeing. It’s also going to be a beneficiary, too, of a lot of other countries who are now increasing their spending on defense, so I think it gets the benefit from both of those different catalysts. But the planes and just the increases that we’re seeing and the number of contracts and pledges to buy those planes just increases their multiyear backlog, and specifically it’s that higher backlog over the next several years that increases the earnings stream, which resulted in the 20% increase in our fair value. And I think the other thing that’s going on here is I think investors are just becoming more comfortable investing in Boeing. It’s really been the beneficiary of bringing in a new management team who’s really been able to help clean up some of the production and safety issues that the company had struggled with the past several years.
Dziubinski: Your next pick this week is a stock you recommended not long ago on the show, Lockheed Martin LMT. Run through the numbers.
Sekera: So Lockheed is a 4-star-rated stock currently at a 13% discount, pretty attractive yield at 2.8% for their dividend, a company we rate with a wide economic moat and has a medium uncertainty.
Dziubinski: Talk a little bit, Dave, about how Lockheed Martin fits in with the trade deal theme. So there’s actually been a number of different examples of increases in defense spending going on globally, but I think the most specific recent example would be the trade deal that was announced with Saudi Arabia, which includes an increase in defense spending. So they’re looking at increasing spending on equipment such as military transport aircraft, antiballistic missile systems, missile defense systems, drones, all things that should be a benefit to the company over time. Europe itself also bolstering its spending on defense equipment, and then lastly, it looks like in the US budget, we are also increasing defense spending as well, so just a long-term tailwind for the defense sector, and Lockheed is one of the ones that we think is undervalued today.
Dziubinski: Your third stock pick this week is Fluor FLR, which is a smaller-cap stock. Tell us about it.
Sekera: 4-star rated stock, 26% discount. Not one of my typical picks in that it does not have an economic moat, it also has a high uncertainty, but I think with kind of this catalyst behind it and trading at this much of a margin of safety that it does look like an interesting investment to me today.
Dziubinski: Now for those not familiar, Fluor provides engineering, procurement, construction, fabrication, operations, and maintenance services. So how do those businesses fit in with that Trump trade deal theme?
Sekera: Yeah, it’s just a matter of all these trade deals and pledges, including commitments to build out new manufacturing facilities in the US and that’s across a lot of different sectors: technology, automotive, pharmaceutical, energy, and infrastructure. So when I’m thinking about all this new building that’s going on, all this new infrastructure that needs to be built surrounding those new manufacturing capacity, if you’re going to be building all of this out, you’re going to need someone in order to manage all the engineering and construction of these projects of which we think Fluor will be a beneficiary.
Dziubinski: And your next pick this week is Wesco International WCC which is another smaller company. Fill us in on this one.
Sekera: So Wesco’s rated 4 stars, trades at a 20% discount, not much of a dividend yield, only about 1%, but the company is rated with a narrow economic moat and a medium uncertainty.
Dziubinski: Now does Wesco fill the Trump trade deal theme the same way that Fluor does?
Sekera: Yeah, I mean it’s kind of one of those similar but different type of investment thesis. The company distributes electrical networking, security, and utility equipment, so all the different types of things that are going to be used in construction of offices, data centers, power transmission lines, manufacturing plants, and so forth. And the other good thing here that I do think will end up benefiting the company is that the majority of the revenue is all here in the US.
Dziubinski: And your final pick this week is a larger tech name that’s done pretty OK this year: ASML.
Sekera: Yeah, 4-star rated stock, it’s still at a 22% discount, only a 1.1% dividend yield, but that’s kind of the right area for a tech stock. Company with a wide economic moat although high uncertainty, but as with most tech stocks, they’re all going to have that high uncertainty anyway.
Dziubinski: So then why is ASML a pick this week, Dave?
Sekera: So ASML is the company that makes the equipment that’s actually then used to make the semiconductors, especially the higher-end semiconductors such as those that are used in artificial intelligence. Specifically, ASML we consider as the leader in photolithography systems, which are used to make the really high-end semiconductors. When I look at all of these trade deals, they just include tens of billions of dollars to build out new semiconductor fabs in the United States whether that’s Nvidia, Taiwan Semi, GlobalWafers. But either way, I think this just provides a much bigger backlog for this company as they build out all those new fabs over the next couple 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 in two weeks on Monday, June 2 for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a super week and a happy Memorial Day.