Plus, earnings reports to watch this week.
On this week’s episode of The Morning Filter podcast, Dave Sekera and Susan Dziubinski discuss what’s next after the Federal Reserves 25-basis-point interest rate cut and which economic reports could move the market this week. Tune in to find out why to keep an eye on the earnings reports from Micron Technology MU, FedEx FDX, and Darden Restaurants DRI and whether Marvell Technology MRVL remains a stock to buy after a tough week.
They unpack new earnings reports from Oracle ORCL, Adobe ADBE, and Costco COST, among others. And this week’s picks are stocks to put on a watch list to buy on weakness.
Episode Highlights
00:00 Welcome
01:07 Fed Meeting Recap
04:35 On Radar: Economic Reports, Earnings
12:05 Updates on ORCL, MRVL, ADBE, COST
29:00 Stocks to Buy on Weakness
Read about topics from this episode.
December 2025 Stock Market Outlook: Where We See Investment 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 podcast. 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 few notes before we get started today. First, on next week’s episode of The Morning Filter, we’ll be reviewing Dave’s stock picks from 2025, talking about which picks have worked out and which picks haven’t worked out, at least not yet. So be sure to tune in for that. Also, viewers and listeners have been asking about how they can access Dave’s prior stock market outlooks. And to make that easier, we’re now including a link to Dave’s content archive in our show notes. All right, well, good morning Dave. As expected, the Federal Reserve cut interest rates by 25 basis points last week. So what stood out to you from the meeting?
David Sekera: Hey, good morning, Susan. I’ve seen it hailed out in the media now as the cut that saved Christmas. So, of course, the real question, though, is, Are there more rate cuts yet to come? And, if so, when? So, if you take a look at the CME FedWatch tool, it shows that the futures market is currently pricing in a probability of only 26% of a cut at the January meeting. And then if we look at the March probabilities of a cut to 3.25% to 3.5% range, looks like it’s a bit of a coin flip right now, about a 50% probability of a cut by March. Now, when I look at the projections that come out of the Fed, looks to me like they’re almost kind of projecting a little bit of a goldilocks outlook here. In fact, I’d say it seems to me they’re a lot more bullish than Morningstar’s US Economics team. So their 2026 GDP forecast is 2.3%. It’s actually up from 1.8% they’re projecting at the September meeting. I know that they said there’s a little bit of an increase in that number just because you had the government shutdown here, which will be back open again next year in their projections. But that’s still a pretty big step up to go to 2.3% from 1.8%. Our own projections for 2026 GDP are only 1.7%. Taking a look at inflation, the Fed decreased their PCE to 2.4%. That’s down from 2.6%, whereas we are still looking at inflation of 2.9% in 2026.
But I tell you what, the thing that really stood out to me was some new language in their statement. So, “The committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter term Treasury securities as needed to maintain ample supply of reserves on an ongoing basis.” So, of course, the question is, what does that word salad mean? If you look, the New York Fed said they’re going to start buying 40 billion worth of short-term US Treasuries over the course of this next month, and then some amount on an ongoing monthly basis thereafter. So if you take that 40 billion and annualize it, that’s equivalent to about a half of a trillion dollars worth of purchases per year. Now, when you start getting into what they call the plumbing of the markets into liquidity, repos, reverse repos, bank reserves, all that kind of stuff, that’s a part of the financial world that, honestly, I’ve never been involved in, and really, I just don’t know it. So at this point, the Fed was very adamant in their language and during the press conference that this was not quantitative easing. But I’ll be honest, I really don’t know what’s going on to force them to start doing this. And in my opinion, I thought their answer is really kind of evasive.
Dziubinski: Interesting. Well, we’ll have to keep an eye on that. So then, Dave, you talked a little bit about this goldilocks expectation on the part of the Fed. So then, what are Morningstar’s expectations in terms of what rate cuts we’ll see in 2026?
Sekera: Right now, Morningstar’s US Economics team is looking for two rate cuts over the course of 2026, most likely in the second quarter and fourth quarter. Now, of course, it always just depends on the data and where the numbers and the metrics are coming out and how the economy and jobs are evolving. But for now, I think there’s really a pretty good probability we might be on hold until the next Federal Reserve chair takes over. I believe that’s in May. So the next cut might not be until that June meeting.
Dziubinski: All right. Well, let’s pivot over to what’s on your radar this week on the economic and earnings front. So first, we have November nonfarm payroll numbers on deck. Dave, what could these numbers mean for the market this week?
Sekera: When I think about it, I mean, the Fed cut rates under the pretense that the risks were greater to the downside in the labor market and the economy. And that was greater than the risk of inflation heating back up. So I think if payrolls come out to be too strong, I think that would cause a lot of doubt as to why the Fed cut rates here. I think it could also lead to the worry that if the labor market was going too hot, the economy then is also probably running better than expected, which could cause inflation to kick back up again. Now, having said all of that, as we’ve talked about a lot of times over the past, I caution investors from reading too much into payroll numbers. We’ve talked about how the big restatements in the past have really made big changes in what those numbers would have been. I think the last annual restatement removed 800,000 jobs from last year. And even during the press conference, Federal Reserve Chair Powell noted that he thought that the Fed thought there was a systematic overcount in payroll figures. Specifically, he said the Bureau of Labor Stats Birth and Death Model potentially overstated job creation by 60,000 jobs per month. So, given that the reported average gain has been in the 40,000 per month area, Powell warned that, in reality, there could have been negative payroll growth of around 20,000 jobs per month. So again, while the market focuses a lot on that payrolls number. I watch it really more for, like, the trend and the sentiment, than I do exactly what that number is and how it may or may not be talking about what’s going on with the underlying economy.
Dziubinski: Well, and in addition to jobs, we also have inflation numbers. The November CPI number comes out this week. So same sort of question here, Dave. What are the expectations, and what impact could this number have on the market this week?
Sekera: I think it’s just going to be very similar to the payrolls number. It’s either confirming the Fed’s action and support its updated economic forecast or it could call them into doubt. So the Fed did lower its inflation forecast for 2026. So if CPI is coming in hotter than expected, I think that would be a very clear negative for the markets. If it’s in line with expectations, maybe that gives us a little bit of a tailwind for the ongoing Santa Claus rally. And if it’s lower than expected, then I think that it actually allows the Fed to make further cuts in 2026. If the labor markets or the economy were to weaken more than expected.
Dziubinski: And on the earnings front, we have Micron Technology, which is ticker MU, reporting. Now, the stock looks really overvalued, according to Morningstar. Our fair value estimate on the stock is just $150. So what are you going to be watching on this one?
Sekera: Well, first of all, just for background, so for people that don’t know this company, Micron specializes in memory and storage chips. We consider that to be very commodity-oriented type of semiconductors. As such, we don’t assign the company an economic moat. Now, when you think about artificial intelligence and that it requires huge amounts of data and memory storage, Micron has been able to ride this AI buildout boom to the upside. Specifically, they produce high bandwidth memory semis. Those have been soaring higher. But I’d note that over time, because this is something that we have no economic moat, we’d expect more competition and cyclicality to be able to hit their results in the ongoing future. So this is one where I think, as we saw with Oracle ORCL and Broadcom AVGO, it’s a matter of not just whether or not that short-term growth is still running as high as it had been, But whether or not they’re able to get even more short-term growth over the next couple of years. So in this case, at such a high valuation, I think any kind of disappointment here could lead to a pretty significant selloff in the marketplace. I think the market, or I think, in this case, the company, is going to need to provide the market with some reasoning as to why it should be priced more as an AI play than necessarily a commodity play. And I think that if they don’t, then this reverts back to being considered by the market more of a commodity-oriented semiconductor manufacturer, which again leads to more downside.
Dziubinski: Well, FedEx, which is ticker FDX, also reports this week. Now, Morningstar thinks FedEx stock is worth $239 ahead of earnings. So what are you going to want to hear about during the call?
Sekera: I think they’re going to need to put up some pretty good numbers and guidance to keep that premium that that stock’s trading at today. It is currently a 2-star-rated stock, trading at about a 20% premium to our fair value. But more than not, actually, what I’m most interested in when I read the commentary from FedEx, I look at them as really having some of the best real-time economic viewpoints out there. So I really want to see what they think about what’s going on and what they’re seeing in global and international shipping, what their commentary is on the rate of global economic growth, whether or not tariffs are still having any kind of impacts, specifically with Chinese imports. I think the Chinese economy, while it’s softening, we saw some metrics come out overnight showing that it may actually be getting a lot softer than what people were even expecting. And, of course, I just want to hear any US- specific commentary that they have, B2B shipping, business to business, as an indicator of economic activity. I want to hear about shipping ahead of the holiday season and then also shipping to individual households over the course of the holidays as well.
Dziubinski: And then, lastly, we have Darden Restaurants, which is ticker DRI, reporting this week. Stock’s having a tough year, looks a little pricey relative to our fair value estimate of $160. So what are your expectations here?
Sekera: So, similar to FedEx, I’m going to be listening to two different aspects of the call. So, of course, what’s going on with Darden specifically, but really, what I think is more important is to hear what they say, or at least what they’re seeing with the consumer. I think it’s a very good indicator of consumer sentiment. There’s a whole bunch of different consumer sentiment surveys out there. Honestly, I don’t pay attention to any of them. There’s always a huge difference between what consumers say versus what they actually do. Now, of course, eating out is a very discretionary activity. So any contraction or expansion here shows what consumers are actually doing versus what they’re saying. So Darden is, of course, the largest full-service restaurant operator in the US. I think they have about 11 different restaurant brands, anywhere from the Olive Garden all the way up to the Capital Grille. So I think it helps you get a sense as to what’s going on, anywhere from kind of that middle-income consumer level, all the way up to upper-income consumers. Getting back to the stock here, from a price/fair value point of view, the stock had rallied way too much in the second half of 2024 and the first half of 2025. Traded up into 1-star territory. It has fallen a bit; it’s now in that 2-star territory. But I am concerned here, just in the fact that, last quarter, the results, when I went through them, actually weren’t all that bad. Yet the stock did pull back, so I think you’re going to need better than expected results here to hold this valuation. Otherwise, I think there’s downside risk in this one as well.
Dziubinski: All right. Well, moving on to some new research from Morningstar about companies that were in the news last week. We’ll start with Oracle ORCL. Stock was down more than 10% after earnings, and Morningstar cut its fair value to $286. So walk through the results, Dave, and Morningstar’s take on them.
Sekera: Yeah. So when I think about Oracle and also another company called CoreWeave CRWV, I’m looking at these as really being two prime examples of what we’re seeing and calling “AI exhaustion” in the marketplace. Now, for now, when I look at the Oracle results and our write-up, yeah, we’re looking at this as being more of an idiosyncratic issue as opposed to being emblematic of the overall AI buildout boom. I would just say, and we’ve talked about this a couple of times, I think the market has some very serious doubts about the company’s ability to be able to transform itself into becoming a major AI player. The stock is now well below where it was trading before they made that first announcement, really talking about the huge data center buildout that they were going to conduct. And I’d also note that their financing costs are rapidly increasing. If you look at their five-year credit default swap spreads, those are all widening out. CDS is essentially an insurance company on a company filing for bankruptcy. Their bonds are now trading at levels that are more consistent with BB rated junk bonds, as opposed to investment-grade bonds. So in this case, talking about what the company is looking for, they did reaffirm guidance, but our analysts noted they’re going to need to see pretty significant revenue acceleration in the second half of 2026 for their fiscal year to be able to meet that guidance.
Dziubinski: So then what about an opportunity? Is there one with Oracle after that pullback?
Sekera: In my opinion, I don’t think this is just a one-off earnings miss that can be written off as “eh, just one bad quarter.” I think the market is seriously questioning its ability to transform itself into an artificial intelligence data center provider. I think this is going to be a “show me” story for quite a while. In order to regain that market confidence, I think the management needs to provide a much more detailed road map as far as how they’re going to finance their buildouts, what their free cash flow forecasts are for the next couple of years, and what the return on invested capital projections are going to be. And then they’re going to have to regularly execute on that guidance to get that market sentiment back.
Dziubinski: Now, Marvell Technology, which is ticker MRVL, was a pick of yours on last week’s episode of The Morning Filter. And the stock fell last week on news that it could be losing business with Microsoft. So what does Morningstar make of that?
Sekera: Yeah, and I would highly recommend going to Morningstar.com or whichever Morningstar platform you use and read through the stock analyst note. He noted that he remains confident in Marvell’s design capabilities. He thinks this is just much more of a natural multisourcing activity, rather than an indication of competitive weakness. And he also noted the valuation here is not necessarily contingent on Marvell being a sole source to Microsoft’s chips. Marvell’s AI chip business is pretty diversified. He’s noted that they’ve had six AI chip design wins thus far this year and pretty strong leadership in optical connectivity. So in the short term, we don’t expect that this would impact the next two years of the revenue anyways. Longer term, we’ve just noted, our revenue forecast for Marvell is pretty diversified, a couple across multiple custom chip opportunities. Overall, he maintained our $120 fair value estimate.
Dziubinski: So then, would you still consider Marvell a buy today?
Sekera: Well, again, the analysts called the company out specifically as attractive, given very robust and diversified AI opportunities ahead. So in this one, I think it just got caught up with the AI downdraft last week. When I look at AI stocks, it’s still one of the few that we think is significantly undervalued at a 30% discount to fair value. So I’d say this is probably a good one that maybe now’s the time you could look for an entry point. Start with some sort of small position. I think this is a stock that’s going to remain pretty volatile for quite a while as confidence in their technology ebbs and flows. So I’d say if this is a stock you’re involved in or interested in, make sure you leave enough dry powder here so that way you can dollar-cost average in to the downside.
Dziubinski: All right. Well, Morningstar raised Broadcom’s fair value estimate to $480 per share after earnings. And this one’s ticker AVGO. So, Dave, what drove that increase? And does the stock look undervalued after the fair value boost?
Sekera: Yeah, our analysts noted that fourth-quarter results were above guidance and that guidance for the January quarter for AI revenue was “impressive.” They’ve got $11 billion in AI chip orders from Anthropic for the second half of 2026. They announced a new custom chip customer for 2026. Now, Google is Broadcom’s lead AI customer. The latest generation of Google’s TPU chips have been exhibiting strong performance. That’s driving significant orders from Google. And, of course, Broadcom is the supplier there. So I think that all put together is what led to the fair value increase. Yet as good as all of this news was, it wasn’t good enough for the market. The stock sold off pretty hard afterwards. The market is concerned about some gross margin dilution. The AI backlog might have missed some of the investor targets. So I think the greater concern here is, Is all of the revenue acceleration already more than priced in? Of course, we won’t know that until we see fourth-quarter results and 2026 capex guidance from all the hyperscalers. So really, when I’m thinking about artificial intelligence, the biggest catalysts going forward at this point are going to be when the hyperscalers release and announce their capex guidance for next year. That’s really going to set the tone for 2026. So I think Amazon reports Jan. 29. Alphabet reports Feb. 3. Then, on Feb. 4, we have Microsoft and Meta. So those will be the ones really to keep an eye on, trying to figure out where AI is going for at least the first half of next year.
Dziubinski: Now, Adobe, which is ticker ADBE, was up after earnings last week. Morningstar held its $560 fair value estimate on the stock. And again, Adobe’s been a pick of yours in the past, so walk us through the results.
Sekera: So both revenue and margins beat guidance. 2026 revenue guidance was better than expected. Profitability was a little bit light, but overall nothing that really changed our longer-term assumptions. I think this is still just a story about how the market’s assumption is that AI is going to end up eroding the value of the product over time. Our analyst team thinks otherwise. This is now the sixth quarter in a row of beating on the top line. Their average revenue, their RPOs, both outgrowing revenues. I think that’s going to be a positive for the company’s results for at least the next year. So, from our point of view, we’re just looking at Adobe incorporating artificial intelligence into their services, bringing more economic value for their customers. So I think this is one where management just really needs to figure out what can they do to go out there to sway the market opinion that their business will not be overcome by AI, but that AI is actually going to be a tool they can use in order to improve their products and bring new economic value. So, again, it’s a long story. This is a good one to read through the write-up and the Stock Analyst Notes, not only those notes that cover earnings, but also those notes that highlight some of the innovations that Adobe has highlighted at some of the conferences they’ve had over the past six to nine months.
Dziubinski: Then do you still like Adobe as a pick today?
Sekera: Yeah, our analyst is still sticking to his guns. on this one. He maintained our $560 fair value estimate. We’re looking for 13.6 earnings growth compound annual growth rate over the next five years. Yet the stock is trading under 17 times earnings.
Dziubinski: All right, well, looks like Costco, which is ticker COST, did it again, reporting solid results. Now, what did Morningstar think of the numbers, and any changes to the fair value estimate on Costco after earnings?
Sekera: Yeah, I mean, the results were strong once again, especially as compared to a lot of other retailers. Top line revenue is up 8.2, largely driven by an increase in same-store sales of 6.4. They talked about 14 membership growth now that was partially offset by some renewal softness. The market pulled back a little bit on this stock, really not necessarily all that much, especially compared to how high of a valuation the market has on this stock. In our view, we think it’s just too far ahead of itself. It trades at 45 times our 2026 earnings estimates. It’s a 1-star-rated stock at a 38% premium.
Dziubinski: Now, Campbell’s, which is ticker CPB, was down after reporting, but Morningstar held its $60 fair value estimate. Run through the report, what Morningstar thought of it, and tell us if Campbell’s is still a buy from your perspective after earnings.
Sekera: Yeah, these food companies just can’t seem to catch a break here. In this case, organic sales were down 1% on lower volumes. Gross margin contracted by 150 basis points to 29.9% based on some impacts from tariffs and some supply chain costs. But the good news here is that their full-year guidance was unchanged. Our analyst noted she thinks the company’s doing all the right things. It’s doing what it should do. They’re cutting costs. They’re still reinvesting in their brands. They spend a lot of money on research and development for new product innovation. When I look at the story here, I just think the market is pricing in just no top line growth whatsoever. The market’s pricing in operating margins being permanently below what the historical averages have been. When I look at our valuation forecast, we’re looking for top line growth of only 2%. Essentially just in line with inflation. So you don’t even really have to expect any real new volume growth. And then I’d say, when I look at our forecast all the way out to 2029, the operating margin we have to return towards those historically normalized levels, so between getting back to those normalized operating margin levels and only 2% top line growth, we’re looking at this as a 5-star-rated stock, trades at half of our fair value. Has a 5.5% dividend yield. That dividend yield is high enough now, it kind of puts you in between where investment-grade and high-yield bonds trade right now. Overall, it only trades at 11.6 times earnings, so from our perspective, it looks very attractive.
Dziubinski: All right, well, it is time for our question of the week. If you’d like to ask Dave a question, you can reach out to us via our inbox, which is themorningfilter@morningstar.com. All right, Dave, we’ve gotten a, this is sort of a question we’ve received from a lot of viewers, which is, we have AI stocks up one day, down the next, up again, down again. So, are we in an AI bubble? We’re getting a lot of questions around that. So what’s your take?
Sekera: Yeah. And I mean, not only up again and down again, but yet still seems to be going up a lot more than it’s gone down. So I would just say, when I’m thinking about artificial intelligence and whether or not we’re in a bubble, talking to our tech team, our base case is still we’re not in a bubble yet. Although they do think that with the way things are evolving, there’s a pretty high probability that we will end up being in an AI bubble at some point in time. So I think what you need to do is really kind of take a step back and look at what we incorporate into our discounted cash flow models as our projections. And really just kind of put on top of that your own thoughts as just as far as how fast AI can grow and how much growth can really get up there before it starts to top out.
So if I just pull up like our Nvidia NVDA model here, the company generated $130 billion worth of revenue last year. That was double what they produced the year before that, which was double even on top of the year before that. For our projections, we’re looking for 65% growth this year, getting up to $214 billion in revenue, another 58% of growth next year, getting up to $337 billion of revenue. Such that we’re looking for a total 26% compound annual growth rate from fiscal-year ’26 to fiscal-year 2029, in which case, at that point, our revenue projections are $540 billion. Now, using all that, our base case for Nvidia, the fair value is $240 a share. Now that sounds like just a ridiculously huge amount of growth, but the CEO from Nvidia, he’s talked about how he thought that AI spending in total could be $3 to $4 trillion in 2030. Now, Nvidia typically captures anywhere from a quarter to a third of total AI spending, which means that in that case, if he’s right, Nvidia revenue in 2030 would be about a trillion dollars. So if that comes to fruition, our Nvidia projection is way too low, and our fair value is also probably too low at this point in time. Now, is it possible for AI spending to be that high? Well, I would just note US GDP is about 30 trillion, but global GDP is 120 trillion. So a lot of that AI spending is all captured here in the US right now, but there’s still a huge total addressable market from more of that global point of view.
Now, I always talk about and highlight Morningstar’s research, but I just got to tell people the best thing I think I’ve read on whether or not we’re in an AI bubble right now was published recently, on Dec. 9, by Howard Marks of Oaktree. You can just go online, quickly search for Howard Marks and Oaktree, and you’ll find it. For those of you that haven’t heard his name before, he’s one of the largest global investors in the distressed debt and alternative assets out there. Personally, someone that I always try and follow what he writes, very famous investor. So just a quick synopsis of what he’s written here. So he has talked about how AI enthusiasm does mirror past bubbles. Specifically, he goes through transformative technology, and how historically they do attract excessive optimism and investment. Seems to always end up leading the overbuilding infrastructure and inflated asset prices. He talks about industry behavior, and specifically industry behavior right now. Kind of highlights the amount of aggressive spending. And now these circular deals among AI firms and how that’s compared to past behavior. He talks about investor behavior, how the exuberant valuations and speculative bets are really certainly made on an uncertain outcome at this point in time.
And then, lastly, you’ll have some discussion about AI infrastructure buildout and how that’s now increasingly relying on debt. First of all, that started by the major hyperscalers using free cash flow. But we’re getting to the point where we’re seeing more and more of these companies go to the debt markets, and he just warns that debt is appropriate when it’s used for funding something with a predictable cash flow, not speculation, which is certainly not where we are with AI today. So, of course, the unknowns today include which companies will end up dominating at the end of the day. Will AI be able to generate sustainable profits to be able to fund not only the debt out there, but still be able to provide return on invested capital? And then, how long will these assets remain productive amid rapid obsolescence that we see in this area? So I would just say, kind of wrapping all of that up, I think his point of view is really the same as what our point of view has been here, talking about AI as well. You don’t want to necessarily go all in with your portfolio on a bet against—or bet FOR AI. But at the same point in time, I think you need to be in it. I don’t think you want to be all out of AI. I don’t think you can risk missing still more of the potential upside here. But I think you also have to be able to manage the potential downside risk. So I think you just need to undertake specific, relatively moderate, selective positions, and have to balance both that upside potential against that downside risk.
Dziubinski: And also for viewers who are interested in that AI topic, our colleague Ivanna Hampton, on her podcast, Investing Insights, recently talked with Brian Colello, who’s our analyst on Nvidia. And the title of this episode of Investing Insights is “Why Betting Against Nvidia in the AI Arms Race Could Be a Mistake.” So tune in. It’s a great interview with Brian. All right. Time for the picks portion of this week’s program.
Now, Dave’s doing a little something different this week. He’s brought us a few stocks to keep on your watch list and to consider buying on further pullback. So there aren’t buys right now, but these are ones to definitely keep an eye on. They’re all stocks from companies with economic moats, pretty reliable cash flows, and they’re all around fairly valued today. And two of the picks are actually brand-new this week that Dave hasn’t talked about before. So your first pick this week is Thermo Fisher Scientific TMO. Run through the key metrics on it.
Sekera: And even before I get into Thermo, I just want to highlight it’s getting increasingly harder and harder to find good, high-quality companies that are trading at attractive levels. And, of course, with the marketplace, I just want to say it is trading at a couple percent discount to fair value, looking for a good run into the end of this year. But with the way things are out there, valuations as high as they are, growth expectations as high as they are, always different political, exogenous events that can come in and cause market selloffs. Just want to make sure that investors kind of always are thinking about, OK, if we get that next 20% downturn, like we saw in April of this year, what am I going to be out there buying? What is going to be the things that I’m going to be confident enough to be able to buy and hold these things through any kind of downturn? Which is why we wanted to highlight some of the companies here this week. So getting into Thermo specifically, it is a 3-star-rated stock, trades at a 9% discount to fair value, only three-tenths of a percent dividend yield, so if you’re a dividend investor, maybe not necessarily the right stock for you. We rate the company with a medium uncertainty, assign a wide economic moat, that wide economic moat being based on switching costs and intangible assets.
Dziubinski: Now, Thermo has been a pick in the past, and it’s up about 47% off its lows this year. So why do you think the stock is one to watch and buy if it does pull back?
Sekera: So Thermo itself sells scientific instruments, lab equipment, diagnostics, consumables, life science reagents, things that are what I consider to be pretty defensive in nature. We actually saw some dislocations over the past couple of years in those markets, which is really what had provided the opportunity In this name in the first place. We were really looking at it as a normalization play, as those dislocations worked their way through. Now, of course, this company had just very abnormally high revenue growth during the early pandemic years that led to a large expansion in operating margins. Then you had revenue contract in 2023, which, of course, then also brought margins down. Revenue and margins were essentially flat in 2024. So, looking forward in our model, we are expecting long-term growth to get back to more of a normalized 5% top line compound annual growth rate. We’re looking for our operating margins to rebound over that same time period as well. But we’re still looking for them to get back to a level that would still be less than what the peak was in 2020 and 2021, when they had that huge amount of growth. Overall, we’re looking for 10% earnings growth on the next five-year compound annual growth rate basis. It’s now trading at 22 times earnings, which is why we think it’s probably pretty full here. It was only 16 times earnings when we had recommended it. So, again, if you do get much of a pullback from here, it does start to look increasingly attractive once again.
Dziubinski: All right. Well, Gilead Sciences GILD is your second stock to buy this week on pullback. Give us the highlights.
Sekera: Yeah, this one’s also come off of its recent November highs. It’s a 3-star-rated stock at a 4% discount, 2.6% dividend yield. We assign a medium uncertainty to this company as well, as well as a wide economic moat. And that wide moat being based on intangible assets, which, of course, really is the patents on their pharmaceuticals.
Dziubinski: Now, Gilead’s been a pick of yours a couple, at least a couple times in the past. I was going through some old show notes. Looks like first in 2023 and then again in 2024. So why do you continue to like Gilead and think it’s a stock to buy on weakness?
Sekera: I think Gilead just has a good combination of steady, outstanding drugs that still have generally pretty long patent protection on them. We’re looking for new growth from new launches. And I think we think that their pipeline of research and development looks pretty attractive as well. Now, their main portfolio is focused on HIV, HEP B, and HEP C, but they are also expanding into other areas like pulmonary and cardiovascular diseases, as well as cancer. Now, the US launch of Gilead’s twice-yearly HIV prevention therapy, Yeztugo, probably mispronouncing that, it does now have 75% insurance coverage. So that’s helping that launch. We’re seeing pretty strong uptakes in their liver disease drug. I’m not even going to even try and pronounce that one, some oncology drugs we think are poised for growth as we’re looking for some approval to extend to cover more cancer indications. And they were also waiting for updates from phase three clinical trials and a couple of other treatments as well. They’ve got a number of things in phase 2. So we’re looking for some data for some of their cancer cell therapy as well. So I think this is one where if you get much of a pullback, you can start really buying a company that’s got that strong research and development pipeline at a discount.
Dziubinski: Your next pick is from the utility sector. It’s FirstEnergy FE. Tell us about it.
Sekera: So this is one we first recommended earlier this year, on the Feb. 24 and the March 10 episodes of The Morning Filter. Now, this stock is off of its highs from the beginning of December as well. In fact, it actually just moved back into the four star range. It’s an 8% discount, narrow economic moat, low uncertainty. Of course, with a low uncertainty rating, you really don’t need to get that far away from the intrinsic valuation—in this case, that 8% discount—to put you in that 4-star range. And you get a nice, healthy utility dividend yield of 4%.
Dziubinski: So when I looked late last week, the utility sector was overvalued, according to Morningstar. So it’s interesting that FirstEnergy trades a bit below fair value, right?
Sekera: Yeah. And I think this is just more of the story here than it is necessarily what’s going on with the utility sector overall. Utility sector overall, of course, really just being focused on being a second-derivative play on AI. In this case, our analysts has noted that we think that the focus on accelerating investments that they’re making right now will lead to solid earning growth that we don’t think the market is giving them enough credit for at this point. In our model, we’re looking for the company to invest $32 billion in new capital through 2029. That was a big increase from their previous five-year capital plan. And that supports our expectation that they will be able to meet management’s annual earning targets over time. It’s a company that serves Ohio, Pennsylvania, and New Jersey. And when we think about new data center buildouts, we think Ohio and Pennsylvania also have pretty good probabilities of seeing some of those new locations being put there. Those states have a relatively strategic location, kind of in the center, or more in the center of the US. Those states have some specific economic incentives. They have the infrastructure, somewhat similar to Wisconsin, being in the northern states, they are easier to keep those cool in the colder months than down in the south. So, at this point, management is forecasting a near 50% increase in demand by 2035, up from 2025. And so we think that their build out story is going to support that type of growth. So this is one that I would say take a look at in the utility sector if you’re looking for utility pick today.
Dziubinski: All right, well, Dave, your last two picks this week are brand-new. These aren’t stocks that you’ve had as picks in the past, so let’s start with Procter & Gamble PG. Why should investors keep this stock on their watchlists and buy it on weakness?
Sekera: So if I look back over the past decade, and I look at our price/fair value metric for PNG, it looks like it’s really gone through two long cycles. Now, from 2015 to 2018, it was very undervalued much of that time. I think it was even 5 star for a good amount of that time. Then, in 2019, it looks like the market started coming around to our point of view, it rallied for much of the year, but then, in our view, it actually overshot to the upside. And it’s really been a 1- or 2-star stock ever since. Now, over that same time period, our fair value has generally increased in line with the cost of energy. I’m sorry, cost of equity, not energy. And when I look at what’s going on here, it peaked almost exactly a year ago. And that stock, at that point in time, was kind of right around the 1- to 2-star border. Now, it’s dropped 21% ever since. It’s currently a 4-star-rated stock at a 4% discount. Nice, healthy dividend yield at 3%. We rate P&G with a low uncertainty. We assign a wide economic moat based on cost advantage as intangibles. So, in my mind, if you can buy this one at an attractive discount to fair value, this is the type of company, type of stock I’d consider as a core holding in any portfolio.
Dziubinski: Now, Procter & Gamble, it’s down quite a bit from its highs this year. So talk a little bit about what’s going on and why you think the stock is one to have on your watchlist.
Sekera: It’s two things. I mean, to some degree, it was just the valuation was way too high. But I also think it’s being pulled down by the broader negative sentiment we’re seeing across the entire Consumer Packaged Goods and Food Company space. Now, this is one of the ones that has held up the best to that downside. But it’s just all the others trading at such low valuations as compared to P&G. I think this is one where people are probably swapping out of P&G into others, being able to pick up that cheaper valuation. Or it just could be a matter of that the market just isn’t willing to pay that much of a premium right now compared to other comps out there.
Dziubinski: All right, Dave, your final pick this week is another new name from the consumer defensive sector. It’s McCormick MKC. Give us the bird’s-eye view.
Sekera: I mean, this one’s already bouncing off of its low from last week. This is a stock that historically does not stay very undervalued for very long, so it’s trading right at fair value. Three-star rated stock, 2.9% dividend yield. We assign the company a medium uncertainty, as well as assign a wide economic moat, that wide economic moat being based on its cost advantages and intangibles.
Dziubinski: All right, Dave, McCormick is also down quite a bit from its highs earlier this year. So same question, why is the stock down, and why is it one to buy on any further weakness?
Sekera: Yeah, I mean, honestly, this is a stock I’ve had my eye on for a long time, but it’s long been overvalued. In fact, if I look at the charts here, it’s spent almost all of the past decade in 1- and 2-star territory. Whereas over the past decade, our fair value has kind of chugged along, increasing pretty much in line with the company’s cost of equity. Now, the stock peaked as long ago as August of 2020. It’s been on a downward trend ever since then. In fact, it’s down 35% from that peak. So it’s now at the point where it’s finally converged towards what we think fair value is. When I look at the attributes of this company, I really like the way that it’s positioned. It’s the leading player in the global spice market, has nearly 20% market share. That’s 4 times larger than their next largest competitor. 60% of their business is to the consumer. The other 40% is institutional. So if you have an increase in eating at home, they’re going to capture volume that way. If you see an increase in people eating out, they still get the volume coming from their institutional business. Now there have been concerns about consumers. We’re all under a lot of pressure, no one’s really quite recovered from inflation just yet. Yes, you do see some people trading down, but they’re still the leading provider in private-label spices as well. So even if people are trading down from branded to private label, they’re still getting the volume that way. And I would say, even though the company is pretty entrenched market share, it’s not sitting on its laurels. They spend 5% of sales every year on research and development towards new products, working on new flavor profiles. They spend money on marketing as well to maintain their brand strength. So this is one, I expect it to keep being the leader in that space. So this is definitely one that if it trades at much of a discount, I would look to buy this one too.
Dziubinski: All right. Well, thanks for your time, Dave. Viewers and listeners 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. And don’t forget, it’ll be a special episode where we’ll review Dave’s picks from 2025. In the meantime, please like this episode and subscribe. Have a great week.