Plus, whether Nvidia is a buy after earnings.
On this week’s episode of The Morning Filter podcast, Dave Sekera and Susan Dziubinski discuss why a Fed rate cut in December is starting to look unlikely. They also unpack new research about Palo Alto Networks PANW and Walmart WMT after earnings. And they cover whether Nvidia NVDA is a buy after another stunning quarter.
They take a deeper-than-usual dive into the audience mailbag, answering questions about AI and data center stocks, lithium and Albemarle ALB, and uncertainty and when to take profits. They wrap up the episode with six overvalued stocks to sell.
Episode Highlights
00:00:00 Welcome
00:01:32 Why The Fed Won’t Cut Rates in December
00:07:41 Is NVDA a Buy After Earnings?
00:16:30 Audience Q&A
00:45:42 Overvalued Stocks to Sell
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Read Dave’s new stock market outlook: November 2025 Stock Market Outlook: Where We See Investment Opportunities
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Susan Dziubinski: Hello, and welcome to a special Thanksgiving edition of 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 Dave and I are pretaping this week’s episode on Friday, Nov. 21. We have a short week ahead, thanks to the holiday. So Dave and I decided to spend most of this episode diving into our viewer mailbag, answering several questions that you, our audience, have been asking us. But before we do, let’s talk a little bit about what’s on Dave’s radar this week.
All right, Dave, we’re getting some mixed signals about what economic reports we will and we won’t be getting now that the government shutdown has ended. So what impact do you think that’ll have on the Fed’s rate decision next month?
David Sekera: Hey, well, first of all, good morning, Susan.
Dziubinski: Good morning, Dave.
Sekera: Before I jump into this, and happy Thanksgiving to you and your family. So let’s just cut to the chase. So Morningstar’s Chief US Economist did just change his forecast. So he is now looking for the Fed to skip cutting rates at the December meeting. However, he is expecting an ongoing downward trend in payrolls will end up forcing the Fed to resume cutting rates at the January meeting. The December meeting, of course, is Dec. 9 and 10. So look for the decision on the 10th. Then the meeting after that in January is Jan. 27 and 28. So as far as what has been reported, so we’ve got all the weekly initial jobless claims numbers. Personally, I ignore those. I think they’re really just more noise than anything else. And then we got the nonfarm payrolls report for September. Personally, I’m just not going to read all that much into it for a couple of different reasons. So first of all, between the government shutdown and the huge restatements that we often get in these reports in the past, I think these numbers on just a stand-alone basis are probably going to be kind of unreliable for September. And at this point, that September data is pretty old as it is. I mean, we’re already into the latter half of November.
And then lastly, they’re not going to publish the October nonfarm payrolls report. So they’re going to skip that one. So I can’t really get any kind of trend looking at what have happened from August to September to October. So in my mind, I don’t know. I don’t think it’s really necessarily going to sway the Fed one way or the other from what they’re already thinking coming into this meeting. So just to quickly review what the September payrolls were: They came in at 119,000. Now, that was significantly higher than the consensus estimate of 53,000. In fact, that was higher than even the highest street estimate that was out there. Now, while that was a pretty strong reading, I also have to note that revisions subtracted over 33,000 from payrolls for the preceding two months before that. Unemployment did edge up to 4.4%, although they attributed that to an increase in the labor force. Either way, when I look at what these numbers came in at compared to what they should be in a more normalized economic environment, it still tells us that labor demand is still weak, but it’s not necessarily collapsing.
The other thing that we’ve been watching for will be GDP. As you and I have talked about a couple times, I just find this economic environment to be one of the hardest really to try and gauge exactly what’s going on in the economy. As we’ve talked about, anything that’s related to artificial intelligence and the AI buildout boom is just going great guns ahead, whereas everything else seems to be pretty stagnant. And we really see kind of this lack of clarity and the dispersion of estimates that we see for GDP out there. So we’ve talked about the Atlanta Fed. They have their GDPNow cast that they put out. That’s currently running at 4.2%, which that would be a really strong GDP number in my mind. However, consensus is all the way down at 2.7%. And our estimate’s even lower than that. So the Morningstar US Economist is only looking for 2.2%, which wouldn’t be all that bad but we are looking for the rate of GDP to continue slowing. We’re looking for fourth-quarter GDP to only be 1.5%, slow even further in the first quarter and second quarter, bottoming out at only 1% in the second quarter of next year.
So I do think that, at this point, the Fed does have to be concerned about the slowing economy, relatively weak, although not collapsing jobs. So that all is what should be forcing them at the beginning of next year to cut rates again. And of course, this is all then predicated on where we see inflation. So we’re still waiting for that October 2025 PCE report. Last I saw was scheduled to come out on Dec. 3. That’s the one that I’m actually really going to be paying the most attention to. Of course, inflation, if that comes in higher than what’s expected, that really could put a damper on cutting rates. Whereas if it comes in line or better than expected, I think that’s the go-ahead signal.
Dziubinski: All right, well, let’s peek into earnings for the week ahead. It’s kind of a quiet week, as one would expect, though we do have some retailers reporting that you’re going to be keeping an eye on. So who’s reporting? Why are you watching them?
Sekera: Well, it sounds cynical, but as a former consumer analyst, I have learned long ago: Never underestimate the American consumer’s willingness to spend. Having said that, as hard as it is to try and figure out what’s going on with the economy overall, this is also, in my mind, one of the most difficult times to truly gain insight as to what’s going on with individual households and just what their balance sheet strength looks like and their spending habits. So we’ve been talking for a long time now, I mean, at least several years about how inflation that we had in 2021 and 2022 disproportionately negatively impacted low income households. And then after that, we started discussing how high inflation had also then started to hit middle-income households and they’re becoming increasingly stretched as well. But when I look at the commentary we’ve had that’s come out from some of the largest retailers already, it’s telling me two different things.
So Walmart WMT, they specifically noted that back-to-school and Halloween sales were both pretty solid. They think that bodes well for solid holiday sales for them. Whereas Target TGT came out and they said that, as far as they’re concerned, the consumer sentiment is at its worst levels over the past three years. You know, TJ Maxx TJX, according to them: “Q4 is off to a strong start.” They emphasized pretty high confidence in being able to execute above their plan for the holiday season. And then we had Home Depot HD come out. Home Depot saying ongoing consumer uncertainty paired with pressure in the housing market is dampening demand in the home improvement categories. We talked about that last week a bit. But then Lowe’s LOW noted that they’re seeing pretty healthy yet cautious homeowners. So, again, I’m hearing both sides of the story. This coming week, some of the names that are going to be reporting, Best Buy BBY, Dick’s Sporting Goods DKS, Kohl’s KSS, just any new or additional insights I can get into the consumer and holiday expectations, I think will be helpful. Not necessarily hoping for the best, but we’ll see what they have to say.
Dziubinski: All right. Well, let’s turn to some new research from Morningstar. Now, we had Nvidia, of course, ticker NVDA, reported stunning earnings once again. So what stood out most in the report to you, Dave?
Sekera: Yeah, anything to do with AI, the amount of growth is still just ridiculous. So just the sheer amount of growth that they’re putting up here still, even for me, with as large of a company as they already are, is still just amazing. So revenue is up 22% sequentially. It was up 62% on a year-over-year basis. Revenue forecast for the quarter ending in January is going to be up 65% on a year-over-year basis. So we’re still in the stage where we’re watching revenue accelerate at an accelerating rate. We’ve got reiterated expectations from the company that they’re going to plan on selling $500 billion worth of their Blackwell and Rubin products through the end of calendar-year 2026. Our analyst noted that he thinks that implies $300 billion worth of data center revenue in calendar 2026 that compares to $200 billion if you were to look at last quarter annualized numbers for data center revenue.
Now, as just a complete asides here, I had to teach some of the junior analysts yesterday what LQA is. So that stands for “last quarter annualized.” And to be honest, this isn’t a metric I’ve used, I think, since the late ’90s. Usually you talk TTM trailing 12 months, LTM last 12 months in order to get an idea of the run rate. But in this case, the run rate’s accelerating at such a high rate, you can’t even look at like trailing 12 months, so in that case you now use this last quarter annualized, but, like I said, it’s been a while since I’ve used that metric, so take that as you will. All right, getting back to Nvidia here—just the sheer demand for AI products and lack of enough supply helping them bolster gross margins, they’re looking for that to increase even more in the January quarter, up to 75 %, so of course that all begs the question: Well, why did the market sell off afterwards? Now, the prior week, we attributed the selloff in all the AI stocks to buyer fatigue, that there just wasn’t new news out there. Now that we’ve had Nvidia report, that in my mind is new news. So to some degree, it might be what we’ve talked about in the past.
So I don’t think anyone doubts the AI buildout boom here in the short run. Still running very hot. It’s going to run hot throughout at least all of 2026. There are enough plans in development that it’s going to run hot probably at least for another year or two thereafter, but I think what I’m hearing more and more about is the concern about what ultimately will be the use cases for AI when all of this data center capacity has been built and is available two, three, four years from now, and at the end of the day, AI will end up having to generate enough economic value by enhancing existing products and services, developing new and novel use cases, increasing efficiency and productivity to be able to pay for just the vast amount of capex spending. And when I look at the amount of capex spending over the past two years, the amount of expected capex spending over the next three years, these are just huge dollar amounts that need to get paid for. So just back of the envelope, using our model for Nvidia, the cumulative revenue from fiscal 2024 to 2028 is $1.1 trillion. Now, we estimate that one third of all capex spending is captured by Nvidia. So that’d be $3 trillion worth of capex that companies will need to end up earning a return on once we really start moving away from just AI training and actually going into those use cases.
Dziubinski: All right. So the market didn’t seem that excited about what were stunning results. So what did Morningstar think? Did Morningstar make any changes to Nvidia’s fair value estimate after the report came out? And then from a valuation standpoint, since the market wasn’t too excited, how’s the stock look? Is it a buy?
Sekera: We did. So we increased our fair value. It’s now $240 a share. That’s up from our prior fair value of $225. And following the combination of us increasing our fair value and the stock having sold off, it is now a 4-star-rated stock at a 25% discount. Again, lots of people out there talking about whether or not we’re in a bubble with artificial intelligence. Our team has specifically said that they don’t think that we’re in an AI bubble right now, something they’re concerned about in the future, but they don’t see it today. But I do have to reiterate that the stock is rated with a Very High Uncertainty Rating. So any investors in the stock, I think you have to be prepared for volatility ahead.
Dziubinski: All right, but it’s finally undervalued. So there you go for what that’s worth. All right, so Walmart ticker WMT rallied a bit after boosting its sales and earnings forecast. So Dave, what were your key takeaways from Walmart’s report? And were there any changes to Morningstar’s fair value estimate on the stock?
Sekera: So Walmart’s report, in my mind, is exactly what you’d want to see in an earnings report for this company. Total revenue growth is almost 6%. In fact, their online marketplace sales, their e-commerce was up 17%. So very good growth in that channel as well. Margin expansion at the top line, at the kind of overall company level as well. So we did increase our fair value up to $60 a share. That was really just based on increasing same store sales to 4.8% from our prior model of 4.2%. Having said all that, we still think the stock is significantly overvalued. It’s a 1-star stock, trades at over 70% premium to our fair value. Just as an aside, again, we don’t use PEs in our valuation metrics, but I think it does help to understand what the market is pricing in here. Company’s trading at, I think, like 40 times earnings, you know, at this point. So if you try to understand how the market is valuing the stock today, in our model, we would need to ratchet up our operating margins to new all-time highs from where they are today. So while we are forecasting improving margins over the next five years, getting to those all-time highs, we just don’t foresee Walmart being able to beat that and start exceeding those margins and hitting new all-time highs in the out year. So I think that’s really what the biggest difference is in our model versus what the market’s pricing in.
Dziubinski: All right. Palo Alto Networks, which is ticker PANW, reported as well. Stock pulled back a little bit. What do Morningstar think of the report? So
Sekera: I read through our note, and in my mind, it looked like a pretty strong quarter. Sales up 16%, adjusted operating margins expanding by 140 basis points. Once we incorporated slightly higher near-term sales expectations and higher profitability into our model, we increased our fair value to $225 from $210. Taking a quick look at our model, our five-year compound annual growth rate for revenue is 13%. We’re looking for earnings to grow by 27% on a compound annual growth rate once you add some additional operating margin expansion. So all looks good to me.
Our analysts specifically noted that we think our long-term investment thesis here is still intact. We’re expecting ongoing consolidation in the cybersecurity industry will continue. We expect this company to ultimately be like one of the longer-term consolidators. Customers want that consolidator, the vendor consolidation. So overall, really nothing in our mind has changed for the worse. Yet, as you mentioned, the stock did sell off 7% after earnings. I reached out to the analyst. He didn’t really know why. He thought maybe there was some concern here regarding some of the execution risk and some of the acquisitions that they’ve made recently. We’re not concerned about that. Maybe it was just a drawdown. All of the cyber stocks, I mean, the entire market was down a lot. But again, all the cyber stocks also fell a little bit more than the market, all of the comps here. So not necessarily sure why this one sold off the way it did. Now, at this point, it is trading at an 18% discount to fair value. That’s a 3-star-rated stock, but it puts it really close to that edge where it’s about to go 4-star, so if this one were to sell off any more from here I think this is one definitely to keep on your watchlist.
Dziubinski: Alrighty. Well, it is Thanksgiving week. So Dave and I would like to take a minute to thank someone who’s key to bringing The Morning Filter to you each week. And that’s our producer, Scott Halver. Scott is up early with Dave and I every Monday morning, troubleshooting our audio and video issues, getting that podcast stream live on time. And then of course, providing Dave and I with the occasional little kick in the caboose that we sometimes need first thing on a Monday. So thank you, Scott, for everything you do. We’d also like to thank the regular viewers of The Morning Filter. We appreciate your loyalty, your thoughtful feedback, and your questions.
And that’s a good segue to our next segment, which is our audience mailbag. So we’re going to get right to the questions. We’re going to start with some of our AI-related questions. Both Greg and Patrick are curious about whether AI and tech companies may be overstating earnings by using aggressive accounting to lengthen the depreciation schedules of their AI hardware. So they’re asking, does Morningstar consider this possibility when they’re valuing these companies? And what impact could this have on their future earnings?
Sekera: I think the genesis of this question is probably coming from some commentary that’s out there from Michael Burry. If you don’t know that name, he is one of the people that was kind of credited with seeing the housing bubble early on. And in fact, having a lot of shorts on prior to the global financial crisis in the CDS market. So I think that’s where this is coming from. If you’ve ever watched the movie, The Big Short, one of the characters, I believe, is modeled after him. But he has been out there publicly, and I think mostly on X or Twitter, whatever you want to call it, that he thinks that the hyperscalers are lengthening the estimated life of their AI chips in order to decrease depreciation, which, of course, then would have the effect of increasing reporting earnings here in the short term and doing that really to try and juice their stock prices up here for now. So, if it is true that they are lengthening the useful life in order to try and manipulate earnings here in the short term, and if investors were just using some sort of multiple on current earnings in order to value stocks, then yeah, investors could be overvaluing those stocks today.
So I’ve got a couple of different points to make from our point of view. So first of all, I did reach out to our team here that cover Nvidia, Taiwan Semi TSM, and the hyperscalers. And their expectation is that they all have very good estimates as to what the failure rates are and what the average life of AI semiconductors are going to be under different workloads. They’ve been using them for several years now. They’re going to have engineers going through exactly like what all the specs are from, all these chips, so we think they probably have a pretty good point of view as far as what the average lives here are going to be. Now thinking about the product lifecycle for AI chips, even when these newer chips are released that have crazy amounts of higher and better capacity, the existing ones still have value. So, for example, Google was out there the other day. They recently noted that even their seven-year-old TPUs are still being 100% utilized today. So when you think about the lifecycle of artificial intelligence semiconductors, our analyst teams expect what they call a “cascading workload strategy.” So in the first years, year one and two, you’re going to use it for training. Years three and five, you then use it for inference. And then from year six years and onward, you can still use these chips for things like offline or batch processing, other things where you’re not going to necessarily need the latest and greatest, but you can still use that computing power.
So what does that all mean, Dave? I know that’s a really long intro to the answer here, but let me just say this. So from our point of view, the depreciation schedule changes really will have minimal, if any, impact on our valuation. The reason being is that the way we think about what the stock is worth, what the intrinsic value is, it’s the present value of all the future free cash flow a company is going to generate over the course of its lifetime. So we use a DCF model based on trying to calculate what that free cash flow is. Depreciation expense is, of course, a non-cash expense. So if they are trying to have less depreciation here in the short term in order to increase earnings, that would actually increase taxes here in the short term as well, which in our model, because taxes are a cash expense, would actually decrease the valuation, but not enough by being meaningful. So overall, our valuations are not going to be swayed by changes in that depreciation schedule, of which we think is probably not being done to try and manipulate earnings here in the short term anyways.
Dziubinski: Ok. New topic.
Sekera: I know that was a long one, but I really wanted to get into it. And I have a lot of great info coming from our analyst team. So I just wanted to get all of that out there.
Dziubinski: Absolutely. I’m just teasing you. OK. Serdar wants to know what your outlook is for lithium and what your take is today on Albemarle, which is ticker ALB.
Sekera: I reached out to Seth, who covers it for us. He expects lithium prices to increase in 2026. Overall, when he just kind of looks at the supply/demand out there, he’s looking for demand to increase, looking for rising increases in EV sales, plus looking for the buildout of all the large-scale utility batteries in order to be able to power all the data centers. Should be enough demand to outpace the amount of supply that he’s projecting coming online next year as well. So overall, that should bring the supply/demand curve more in balance from being oversupplied in 2025. He thinks that supports his long-term price forecast of 20,000 per metric ton. That’s about double what the current spot rates are, which are about 10,000. And in fact, that 10,000 is up from 8,000 in July already. As far as our picks here, we do cover a wide number of lithium stocks. Albemarle has been our go-to pick for most investors. It’s a company we rate with a narrow economic moat based on its cost advantages. It’s a 4-star-rated stock at a 42% discount. It’s a stock, which is up a pretty good amount from its midyear lows, but I’d still note, it’s still a lot lower than where these stocks had peaked in January 2023.
Dziubinski: All right. Jim owns a few stocks in the meat producer industry, and he owns JBS, Smithfield Foods, which is ticker SFD, and Tyson Foods, which is ticker TSN. Jim wants to know what your thoughts are on these stocks and on the industry overall.
Sekera: Yeah, that’s a great question. So in order to dive deeper in this subject, I did reach out to Kristoffer Inton. He’s our senior equity analyst that covers these companies. I thought he could provide more detail than I would. So here’s what he had to say as of Tuesday, Nov. 18.
Kristoffer Inton: Thanks for the question, Jim. Of JBS, Smithfield, and Tyson, we only cover Tyson, which we assign no moat and have a 5-star rating on. Overall, proteins are enjoying tailwinds among the broader US packaged-food sector. Not only do people continue to enjoy meat, but it’s an appealing option for folks focusing on health like GLP-1 users, as well as consumers with stretched wallets trying to maximize their food budgets by cooking at home. But the food fortunes of various proteins, they differ greatly right now.
So looking at chicken, pork, and beef, these three markets are in different parts of the commodity cycle. Chicken’s at the top of the cycle right now, already the most popular protein by volume. It’s also benefiting from taste trends as well as switching. For example, with taste, chicken-focused QSRs and chicken menu items are very popular right now. Meanwhile, the high prices of other proteins are strengthening chicken’s relative value to consumers. Moreover, a lack of a disease outbreak as well as favorable input costs are pushing chicken margins to peak levels. And pork’s not at a peak like chicken, but it’s recovering strongly somewhere in the middle. Hog supply availability has generally improved, and demand has remained strong. So we’ve seen pork operator margins recovering nicely through this year.
But lastly, at the opposite end of the spectrum, beef is facing its most challenging situation that it has in decades, and it’s definitely at the bottom of the cycle. Cattle supply is extremely tight. with the US herd size shrinking to a level that we haven’t seen since the 1950s. The reason is that we had a couple years of extreme drought conditions that severely reduced the amount of pasture land, so that’s less feed for the cows. Meanwhile, beef has remained popular, and that’s what’s led to record-breaking prices at the grocery aisle. But we’re starting to see conditions improve, so a return to more normal pasture conditions and the high beef prices should incentivize a recovery in the cattle supply. There’s already signs that a rebuild is starting to happen in parts of the country, but I’d say we’re at a very, very early stage in that and there is still risks that could derail it. Still, it’s a when and not if in my view. So tying this back to Tyson, which produces all three of these proteins as well as some value-added products, essentially all of its segments are doing well, except for beef, which is Tyson’s biggest segment by revenue. It continues to generate massive operating losses because of those really high cattle prices. But as the herd size grows and supply improves, we’d expect those margins to recover to historical norms.
Dziubinski: All right. Well, let’s address a few company-specific questions we’ve received from viewers. Now, as a reminder, Dave can only comment on stocks that Morningstar’s analysts cover. All right, first up, Kathy is asking about Intuitive Surgical, which is ticker ISRG. Now, this was one of your stocks to sell in January, and Kathy notes that results, you know, since then have been pretty good. So she’s wondering if you have any updated thoughts on the valuation or the fundamentals of Intuitive Surgical, and if you still think the stock is overpriced.
Sekera: So, I mean, first of all, for those of you that don’t remember, ISRG is a company that makes robotic systems for assisting in minimally invasive surgeries and they’ve had pretty strong growth over the past couple years and in fact we actually forecast even further strong growth here in 2026. It is a company that we think is pretty high quality. We rate it with a wide economic moat based on network effect, switching costs, and intangible assets. However, for the most part, when I look at this stock versus our valuation, it’s typically traded pretty much well above our fair value for a multiple number of years. And I think the biggest difference here, and our analyst has written about it, that I think what has happened is we’ve underestimated the potential in the company’s products being used for benign, lower complexity procedures—things like gallbladder removal and appendectomies. Our analyst team didn’t necessarily see the economics in these procedures using their equipment. But as we’ve seen the adoption rate growth with hospitals over the past couple years, it suggests that the economics are there, and that hospitals are making it work.
Now, looking forward, we expect demand for these systems will be strong in 2026. We’re forecasting revenue growth next year of 23%. However, following that short-term boost in growth, we expect that that will suppress that system’s growth over 2027 and thereafter. So then we’re only looking for mid-single-digit growth rates thereafter. So in our model, if I look at our five-year compound annual growth rate for revenue. For the five years, that’s 11%. But of course, that’s all front-loaded in 2026. And then we’re looking for net income to be 18% over that five-year compound annual growth rate as well. But the company trades at 66 times our 2025 earnings estimate. Even one year out using our 2026 earnings estimate, it still trades at 49 times. So I think this is just a case where the market is expecting these high growth rates to last longer than what we’re currently modeling into our discounted cash flow model. So I would say on this stock, if this is one where you think that they’re going to have those ongoing growth rates last longer than just next year, then yeah, maybe that stock is closer to fairly valued or undervalued as compared to what our current valuation is.
Dziubinski: OK. Well, Manish points out that some smaller players in the data center industry have seen pretty good gains this year, while some of the more established players like Equinix, which is ticker EQIX, are down, so he wants to know if you think it’s better to invest in the emerging players in this space or the more established one, and what you think of Equinix, specifically?
Sekera: Let me just start off by noting so we do cover two data center REITs—Equinix and another one called Digital Realty. So just taking a look at the stock performance here over the past couple years, in 2024 both of these stocks ran up. In fact, they ran up well into overvalued territory. And that was because the market was just pricing in a huge amount of potential growth in AI data centers. But then at the beginning of this year, both of those stocks started to sell off. They got hit pretty hard after DeepSeek came to the forefront. They got hit as well when the “Liberation Day” tariffs were announced. Now, since then, it looks like Digital Realty has recovered some of its losses. It’s still down 13% year to date. Equinix really hasn’t come back. It’s still down 22% year to date. But at this point, with both of them down as much as they are, they are 3-star-rated stocks. I would note Equinix is close to tripping into that 4-star territory. So if you are invested or you’re interested in investing here, that’s one I would say keep your eye on here in the short term. So overall, I would say it’s just a matter of we think investors were probably overly enthusiastic and the stocks had rallied too far to the upside. They were both 2-star-rated stocks. In fact, they might have even like just briefly broken into 1-star territory. before they started to correct.
But, looking forward, I think we still expect pretty solid fundamental performance. But I think it’s just that the market’s realization that the lack of adequate power sources and the long lead times that it takes to build new data centers really dampened the amount of short-term growth that the market was pricing in. And then longer term, our analyst team also notes that they expect that the largest of the hyperscalers are building their own data centers. So actually, I think a lot of that data center growth is going to come directly from the hyperscalers as opposed to in the DC market. So I would just say if you’re looking to invest in emerging players in the data centers, we would say look for those where they have specific characteristics for those projects first. That the site needs to be in a strategic location, that they need to already have the zoning readiness or at least the permitting in place to be able to build on those sites. The sites have access to power supply and the required capacity because, of course, they require huge amounts of electricity. Double check the plans for cooling, including water access if it needs that water for cooling. Also look for high preleasing activity, specifically that they should have already signed up at least one of the larger hyperscalers to be able to take up some of that capacity when they open. And then lastly, and maybe this is my own personal opinion, but I would look for experienced operators of data centers. Yeah, I think there’s a lot of real estate developers that are trying to jump on the bandwagon who may not necessarily have that specific experience in DCs. I would probably steer clear of them as well.
Dziubinski: That’s a good checklist, Dave. Thank you for that. Bruce has a question about Berkshire Hathaway, which is ticker BRK.B. He asks, and this is directly from Bruce: “Dave had said recently that insurance companies are valued too high and that the market is overestimating how long the recent growth in insurance premiums will last. How is the situation likely to affect the stock price of Berkshire Hathaway in the next few quarters?”
Sekera: There’s really kind of two parts to the answer here. First of all, when I think about valuation of Berkshire, yes, insurance is a very large component of the valuation overall, but it is only just one part of the valuation. They own a lot of other private companies that they’ve bought over the years, and then they also do have their public stock portfolio as well. So the short answer is the normalization in insurance premiums over time won’t impact the valuation that we assign to Berkshire’s insurance business. Essentially, we never ratcheted our valuations up for their insurance business. We use the same assumptions that we use in our other insurance valuation models. So as those premiums normalize, there’s really no reason to bring that valuation down. I would just note that from a point of view of how it trades in the marketplace, I mean, it is currently a 3-star-rated stock right now, trades right at fair value. But if the selloff among the other insurance stocks does bring Berkshire down with it, that could lead to a good potential buying opportunity.
Dziubinski: All right, so put Berkshire on your watchlist if it’s not there already. Guillermo had a question about Morningstar’s Uncertainty Rating. Now, he observes that you often suggest that having a High Uncertainty Rating isn’t as good as having a Medium or a Low Uncertainty Rating, but he wants to know specifically about High Uncertainty 4- and 5-star-rated stocks. Is High Uncertainty here in these cases still a negative, and if so, why?
Sekera: Yeah, and I think this is probably my fault in that I haven’t necessarily communicated correctly to our audience what the Uncertainty Rating is and how it’s used. So I want to just kind of do maybe a quick little teach in here. So going into our definitions, Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company’s intrinsic value. So essentially, what we’re doing here is we’re describing the confidence that we have in being able to assign a fair value for a given stock. For example, for a company that we would rate with a Low Uncertainty, we have much higher confidence in our ability to be able to closely forecast the future free cash flow that that company is going to generate, whereas with a High Uncertainty rated stock, a much lower confidence in that forecast. So the rating then is used to assign the ranges that we use to derive the star rating. So for a lower uncertainty rated company, we require less margin of safety below the fair value before it becomes a 4-star or a 5-star-rated stock and conversely, we won’t let that stock trade too much above fair value before it starts to hit that 2-star, that 1-star territory.
Now for High Uncertainty, we of course are going to want a much greater margin of safety below our intrinsic valuation before we start to think that stock looks attractive, but the same point in time, we’ll also let that stock run well above our fair value in order to capture that additional upside before it hits 2 star or 1 star. So I would say what you really need to think about uncertainty is we’re trying to use as a risk-adjusted way to be able to assign our star ratings. As we’ve talked about in the past, one of the traders I used to work for, Jimmy the old Brooklyn trader, in his best accent used to say, “Hey, everything’s always got a price,” so it’s not that High Uncertainty in and of itself is bad; it’s just that you want to make sure that you’re getting paid for that additional risk, that you have much more margin of safety to be able to protect you to the downside if you hit those periods of more volatility in the marketplace or conversely, if we’re wrong with our valuations in our analysis and maybe we overvalued the stock. So at least having that wider margin of safety does help protect to the downside.
And then lastly, I’d also note, too, I think investors need to have a higher risk tolerance for investing in those stocks with higher Uncertainty Ratings because of course you’re going to just expect those stocks to have greater volatility, so while they certainly can provide greater upside, they also have more downside risk as well. So in my opinion, I think investors should always start off their portfolio have good diversification among stocks and fixed income, and then even within that equity portion of their portfolio, probably start off with a good basis of ETFs or mutual funds to get that broad diversification before you’re investing in individual stocks and especially those with the High and Very High Uncertainty Ratings.
Dziubinski: All right, fair enough. Dave, Nick is 25 years old with a 30-year investing horizon. Wouldn’t you like to be Nick? I’d like to be Nick. Now, Nick has two questions for you. So first, he wonders if putting most of your money in the current Mag Seven stocks for the next 25 years could be a good set-it-and-forget-it type of investment strategy.
Sekera: All right. Well, first of all, before I even address that specifically, when I think about what Morningstar’s kind of view is for being a successful long-term investor, it’s really all about trying to build a diversified portfolio of assets geared toward your own specific situation and risk tolerance, whether you’re 25 or on the older side like I am. But either way, once you have that good diversified portfolio, I think that you can enhance that portfolio by trying to overweight those areas that are either undervalued or at least fairly valued and then underweight those areas that are overvalued. So again, you can overweight the things that are undervalued and hopefully have more upside appreciation potential or at least move into those areas that are fairly valued and steering clear of the ones that are overvalued. So, for example, as we’ve talked a couple of times this year, like in the credit markets, I much prefer just investing in Treasury bonds in their fixed-income portfolio because I don’t think you’re getting paid enough for the risk in the corporate bond market. But investing, of course, is a very reiterative process. You always have to be consistently evaluating your own portfolio, and then you need to make adjustments as necessarily.
So, for example, a lot of times at year-end, people may need to go. They readjust their weightings based on the performance over the course of the year to get back to their targeted allocations. So in the past couple of years, if you’re a typical 60/40 investor with the market as much as it’s gone up the past couple of years, you might want to sell some of the stock, reinvest back into fixed income to get to that 60/40 target. Or when we have market disruption periods, like earlier this year when we thought investors should go to an overweight, maybe if you’re a 60/40 investor, you want to go to like 70 or higher exposure in equities after the equity market has sold off enough to start looking attractive. Or conversely, like back at the beginning of 2022, when we noted that you should be underweight equities, at that point in time, maybe you wanted to be 50/50 or even less than 50% of your equity allocation at that point in time. Now, even then within those equity allocations, I think that you can change your weightings by sectors, capitalization, or style in order to capture where we see the best value today. Long explanation.
Let me get back to what the actual question was. So. Looking at the Mag Seven today, a lot of these are undervalued, according to our equity analyst teams. Alphabet GOOGL, Microsoft MSFT, Amazon AMZN, Meta META are all 4-star-rated stocks today. Nvidia, 3-star rated stock, whereas Apple AAPL and Netflix NFLX, both two-star overvalued stocks. Now, I would expect that the stocks that are all tied to AI, Nvidia, Alphabet, Microsoft, Amazon, Meta, are all probably going to be very correlated here in the short to medium term. If any one of these are to sell off, I think it probably is a factor that causes all of them to sell off, so I think you have a lot of correlation risk between those stocks. As far as a 25-year set-and-forget strategy, I went back into January of 2000 and looked at what were the largest market-cap stocks back then. Those included names like GE GE, Cisco CSCO, Intel INTC, Nokia NOK, which at that point in time, I’m sure those stocks and their outlooks looked great. But I would just note that, over the past 25 years, those stocks have lagged the broad market pretty significantly over that time period.
So if you’re investing in individual stocks, you need to have the mindset that you need to consistently monitor these stocks in your portfolio. Ongoing, just determine if there are any changes in the outlook that are different from your investment thesis, and you need to monitor the valuation. So when do they become overvalued and overextended? Good time to take some profits off the table. And then conversely when you get some sort of selloff, whether it’s the entire market or in individual stocks, if your investment thesis hasn’t changed then that’s a good time to be able to dollar-cost average down.
Dziubinski: All right. Well, you just said the magic words: Take some profit. And that’s actually Nick’s second question is about that phrase. He’s wondering is that a certain percentage of the position when you say “take some profit.” Nick’s investing in a taxable account. And he said that he’d rather not give the government any more money than he needs to. We hear you on that. So how do you actually go about taking some profit?
Sekera: Yeah, I mean, I fully understand not wanting to pay the government anything more than you have to be. And yes, as an investor, you do need to be aware of the tax implications of what you’re doing in your account. But the same point time, I’d also say don’t let taxes sway what actually should be the right thing to do in your own portfolio. So, of course, I can’t give specific advice on any one investment or trading. I think everyone needs to have their own style for investing. So I can only speak to my own style. And I think it’s also going to be dependent on your individual situation and what your individual conviction is on any one individual stock. While we certainly do our best, we’re not always right. And there are certainly instances where our fair value maybe lags to the upside, lags to the downside, or maybe cases where we just didn’t get it right. So you need to have kind of your own investment thesis, I think based partially at least on Morningstar, but having done your own research and due diligence as well.
Personally, when I have a stock that I like, I’m going to start with a partial position size. I then set a target to the downside. If it hits that target, I’m going to reevaluate my investment thesis. And based on that reevaluation, if nothing’s changed, I’m going to dollar-cost average down. Or if it has changed and I think that this is no longer a good investment, I’m going to take my hit and I’m going to exit that position. You also need to set a target to your upside. Same thing. If it hits that target, evaluate whether or not anything has changed. If nothing has changed, sell partial position, set your next target level. Or maybe if something has changed, and you think that there’s a lot more upside at that point because of that change, Yeah, then maybe you go ahead and continue to keep owning it to the upside. Either way, you need to have your own strategy. Maybe it’s something as easy as buy a third position to start, set that target for the next third size position that gets hit. Then you set that next target for that next third size. Or if you want to be a little more aggressive, start with a half or larger size position. And then based on what your targets are, you can buy or sell another quarter-size position twice thereafter.
Dziubinski: Ed has a somewhat related question. He’s wondering how long he should hold any of your buy recommendations. In other words, how does he know when to sell?
Sekera: So, we do consider ourselves at Morningstar to be long-term investors. So then the question is, well, what is the long-term? So I think, first of all, when you think about the market, there’s oftentimes a lot of noise that gets caught up in the market that can change valuations in a stock as compared to what we think the long-term intrinsic valuation is. So we always start off with the assumption that it can take sometimes up to three years for the market to be able to properly assess that long-term intrinsic value as compared to how the noise in the market may push that stock around over those couple of years. Now, does that mean that you should hold a stock for three years? Again, it’s also going to just depend on the individual stock and the individual situation. So first of all, where is that stock trading as compared to fair value? Now, if it stays at a similar discount to fair value over those same three years and nothing’s really changed as far as our valuation or investment thesis, then yes I think you continue to keep holding it. Now, if that stock moves up into 2-star territory, probably a good time to take some profits. Moves into 1-star, good time to maybe think about selling the rest. And of course to the downside, if it sells off but your investment thesis hasn’t changed, a good time to dollar-cost average to the downside. But again, I think it’s going to just depend to some degree on how closely you’re monitoring your portfolio, and as stocks move up further and further away from fair value, that’s when you need to take greater and greater percent changes in your positions.
Dziubinski: All right. Our final question this week is from Howard. So Howard thanks Dave for talking about stocks to sell because according to Howard most financial podcasts and shows only focus on stocks to buy. So, thank you, Dave. Howard wants to know if Dave has any other stocks to sell, and yes he sure does. So this week, Dave has brought us six stocks to sell. And Dave, you’ve broken down these six stocks into two separate buckets. So what’s your first bucket?
Sekera: Well, the first bucket is going to be tax loss sale candidates. We’re getting to that time of year. We’re getting close to the end of the year. Good time to look through your portfolio. See if anything that you own is selling at a loss right now that you can capture that loss and use that to be able to offset some of the capital gains that you’ve maybe used this year. And of course, talk to your tax advisor first, but I think you can often use some of those losses to offset ordinary income as well if you don’t have those capital gains. So what I look for here specifically are and did a screen for stocks where, you know. you might have a loss in there from where you bought them, stocks that are down year to date or maybe down from where they were a couple of years ago that are still overvalued, still 1- or 2-star-rated stocks and have negative momentum here in the short term.
Dziubinski: OK, so you have two stocks that fall into this bucket. The first one is Wingstop WING. So tell us why it’s a good taxloss selling candidate. So
Sekera: Wingstop is down 20% year to date, and we do have a lot of negative momentum here. In fact, it’s down 10% just here, fourth quarter to date. This stock is way down from where it peaked in 2024. I think it was trading above $400 a share back then. It’s a two-star rated stock at a 26% premium. And of course, as the economy slows, I’d be very concerned that restaurants such as Wingstop will be under additional pressure for the next 12 to 18 months. And
Dziubinski: And then your second tax-loss selling candidate is Church & Dwight CHD. So give us the rationale for this one.
Sekera: Similar with the negative momentum, this one’s down 20% year to date. It’s down 5%, just here in the fourth quarter. This one is way down from where it peaked in November of 2024. It’s trading I think above $100 then. And in fact, the stock is actually at its lowest level since 2022. So this would be one where depending on when you own it, there might actually be a lot of capital losses here that you can capture. In fact, I think this is trading at some of the lowest levels for a long time. Now, it’s interesting. I looked at our price/fair value chart, which is available on Morningstar.com. This is one of the stocks that probably has one of the longest history as far as being a 1-star or 2-star rated stock. It’s still a 2-star-rated stock, still at a 15% premium. Overall, the investment portfolio thesis here is they just have a lot of different consumer branded goods, but we just don’t think that there’s an economic. moat here. We think the market is probably finally recognizing that the company overall, we think, is in a somewhat disadvantaged competitive position. Just the portfolio that they have falls short of the scale, resources, and negotiating power that a lot of their peers would have.
Dziubinski: OK, now your next four stocks to sell fall into sort of a second, slightly different bucket. Explain that.
Sekera: So to some degree, these are just overvalued stocks, 1- and 2-star-rated stocks, but also that we’ve seen look like they’re rolling over. Stocks that probably did pretty well for the first six to nine months of the year but have been falling fourth quarter to date, so overvalued stocks with negative momentum.
Dziubinski: So against that backdrop, we have Roblox RBLX as a sell. So support that one with some numbers.
Sekera: Roblox, of course, the online video game platform. It’s a differentiated view we’ve had on this one for a while. The stock is up 58% year to date, but a lot of negative momentum. In fact, it’s down 34% fourth quarter to date. Yet, it’s still at a 41% premium to our fair value. It puts it well into 2-star territory.
Dziubinski: Your next overvalued sell with negative momentum is Netflix. So run through your argument here.
Sekera: Netflix, I mean, long history of moving up and to the right. It’s still up 19% year to date, but we are seeing negative momentum. Looks like the stock might be rolling over. It’s down 12% fourth quarter to date, 2-star rated stock at a 37% premium.
Dziubinski: Now, it seems like just yesterday, Citigroup C was undervalued, but now it’s an overvalued stock to sell. So walk us through this sell rationale on Citi.
Sekera: Yeah, and this is just a good example of why you can’t have that set and forget type of mentality. As you mentioned, this was actually one of our top picks several years ago. We thought it was actually one of the best value plays in the marketplace. But at this point, with as much as it’s moved up, it’s just moved up too far, too fast. It’s up 40% year to date. Looks like maybe it’s kind of peaked, maybe starting to roll over. Little negative momentum, down 4% this quarter. 2-star-rated stock. So again, I think this is one where it’s probably a good time, if nothing else, at least take some of the profits off the table.
Dziubinski: And your last stock to sell is one I don’t think we’ve actually talked about before on The Morning Filter, and it’s Coinbase COIN. Walk through the rationale.
Sekera: So Coinbase, if you look at the long-term chart here, it’s up a lot. It’s up 570% since December of 2022. Now, it does look like it’s peaking out. Of course, it’s going to be very highly correlated with bitcoin, which, of course, bitcoin has had a rough couple of weeks here. But the stock is down 5% year to date. A lot of that has really come here in the fourth quarter, where it’s down 29% fourth quarter to date. Now, I would note this one actually fell just enough in the past couple of days with the market sell off. It is now a 3-star-rated stock but still at a 16% premium to fair value. And again, I think this is one that’s going to be highly correlated with bitcoin. So depending on your view of bitcoin, maybe this is one to sell. And if you really like bitcoin that much, maybe you just buy bitcoin directly. But again, a lot of negative momentum here in the short term.
Dziubinski: All right. Well, thank you for your time, Dave, and Happy Thanksgiving to you and to your family. 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 tune in next week for a special edition of The Morning Filter focused on dividend stocks. We’ll be streaming next Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Happy holidays.