2 Stocks to Buy, 1 Stock to Watch, and 2 Stocks to Sell After Earnings

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Every Monday morning, I sit down with Morningstar Research Services chief U.S. market strategist Dave Sekera to discuss what’s on his radar this week, some new Morningstar research, and a few stock picks or pans for the week ahead. So good morning, Dave. It looks like we have a lot of inflation numbers coming out this week, including the January CPI and PPI numbers.

So remind viewers about the difference between the two numbers and what you’re going to be listening for.

David Sekera: Hey, Susan, good morning. Actually, before we jump into it, I just want to remind everybody: Wednesday is Valentine’s Day. Don’t forget to do something for your significant other. So just a little public service advisory for everybody. So CPI is a measurement of prices on a basket of goods and services. And really, its intent is to try and track inflation at the consumer level.

Now, the thing is, I would note here is that with CPI, the weightings are different than the personal consumption expenditures index, which is the Fed’s favorite inflation gauge. So there is a little bit of a difference. But again, we will certainly be watching the CPI. And then PPI is a measurement of costs at the manufacturing level. And really the intent of that is to try and gauge what we might see in future changes in CPI.

You know, generally what I’m listening to hear for is for core inflation to be stable or even better on a month-over-month basis and really looking for core inflation to be declining on a year-over-year basis.

Dziubinski: So do you think the market is any more eager than usual for this reading, given that Fed Chairman Powell’s comments a couple of weeks ago suggested that the Fed is in no hurry to begin cutting interest rates? And what could higher than expected or lower than expected inflation numbers mean for the market this week?

Sekera: Well, I mean, both of these numbers are always highly anticipated by the market. In my opinion, I think CPI is probably more important to the market than PPI. But with the market expecting the Fed to start cutting here in May, it will be especially closely watched this week. I really think the question on everybody’s mind is: What does the Fed really still need to see in order to be confident enough that inflation is on a steady downward path toward its targeted inflation level?

And it may just be with the passage of time or it may be just looking for those lower numbers. And of course, it’s just one of those things where if the number were to come out higher than expected, the inflation isn’t moderating. I think that would definitely be a negative for the market. We could see a brief selloff.

And conversely, if the number comes in better than expected that could provide the market in a little bit of a tailwind in the short term.

Dziubinski: Well, let’s move on to some earnings reports you’re going to be watching for this week. And I’m pretty sure we’ve talked about all of these companies on the show before. First, there’s Energy Transfer ticker ET. What will you be listening for here?

Sekera: Yeah, I think we first mentioned Energy Transfer last August. Looking at the charts, the stock’s up about 7% since then. We’ve also collected some pretty hefty dividend payments since then. It’s a 4-star-rated stock, still trades at a 20% discount to our fair value, and provides a 9% dividend yield. So I think we’re just looking for more continued volume growth in its liquefied natural gas business.

And as a reminder: ET is an MLP, a master limited partnership. It does differ slightly from just a typical stock in that an MLP is a unit in a limited partnership, which in turn is then owned by the general partnership. And the general partnership manages the underlying business. And depending, for some investors, there are tax advantages here.

So I just warn, at the end of the year, instead of getting your typical 1099 div, in this case, you might actually get what’s called a Schedule K-1, which is reported slightly differently when you file your taxes.

Dziubinski: So we also have your favorite lithium company reporting this week, Dave. It’s Albemarle ticker ALB. The stock is down quite a bit this year. What do you think of the company and the stock heading into earnings?

Sekera: Yeah, Albemarle is one of the world’s largest lithium producers. And in fact, we think its lithium assets are among the lowest-cost sources of lithium globally. And that is the basis for our narrow economic moat rating on this company. The stock is a 5-star-rated stock, trades at a 60% discount to our long-term fair value, provides a 1.4% dividend yield.

So the back story here is that there was a bubble in lithium prices. They skyrocketed in 2021 and 2022, then came crashing down in 2023. At this point, we think lithium prices are too low and they should start to begin to recover. Yeah, we do forecast that lithium is going to be undersupplied over the course of the next decade, and we expect that shortage of lithium will keep prices above the marginal cost of production over the course of the next decade.

Dziubinski: Now, Kraft Heinz, which is ticker KHC, reports this week, too. Do you still like the stock today? And what will you want to hear about here?

Sekera: We do. I mean, this is another stock that will highlighted last August. Stocks up 7% since then, but it’s still rated 5 stars. It’s a 30% discount to fair value and provides a 4.5% dividend yield. Now, I would note here we rate the company with a no economic moat, but I think 26% of this company is owned by Berkshire, which is Warren Buffett’s investment vehicle.

Now, what we’re looking for here is really a combination of just ongoing organic sales growth and a stabilization in their market share. Last quarter, we had noted that the company had lost a little bit of market share. Its competitors were using promotions in order to move product, but we’re just not very concerned about the short-term fluctuation in that market share.

It’s not all that concerning to us. We do expect that margins will need to come back in the industry and in order for that to happen, the competitors are going to need to start bringing their prices back up again.

Dziubinski: We talked about Hasbro ticker HAS on the show just a couple of weeks ago. Remind viewers what you like about it and how it looks heading into earnings this week.

Sekera: Hasbro is a 5-star-rated stock, trades at a 42% discount to fair value, 5.5% percent dividend yield. And a company that we do rate with a narrow economic moat. I talked to our analyst on this one, and she thinks there’s just still just too much negative sentiment surrounding this name right now. Now, she acknowledges the company has been under some short-term pressure just from weak discretionary demand.

We had some entertainment strikes earlier, which have pressured some of the costs there as well as some inventory rightsizing in the channel. So I think at this point, investors are just overextrapolating these short-term pressures too far into the future. So I know one of the things that we’re really focused on this quarter is going to be their operating margin.

We want to hear if some of the cost-saving measures that they’ve been putting in place are paying off. We also want to see if the mix shift that we expected toward digital gaming products is bolstering its operating margin as well.

Dziubinski: And the last stock we’ve talked about that you’ll be keeping an eye on this week is WK Kellogg ticker KLG. The stock looks really undervalued heading it in earnings. Why?

Sekera: Yeah, we highlighted WK Kellogg last October, and the stock is up about 25% since then. But it’s still a 5-star-rated stock, trades at about half of our fair value, has a 5.5% dividend yield and is a company that we rate with a narrow economic moat. So the back story here is that Kellogg did break up into two businesses last year, and WK Kellogg is the legacy cereal business.

So our investment thesis here is that we think WK Kellogg is an orphan stock. The market cap here is only 1.1 billion. It falls under the radar of most institutional money managers. Yeah, I don’t think there’s really any sponsorship as this name isn’t really very well known by the small-cap managers just yet.

And I think what happened is that during that split up, a lot of the institutional managers that owned Kellogg sold this company off, irrespective of what the price was in the marketplace. And lastly it is in the cereal business. There’s a lot of negative sentiment about the long-term growth prospects for cereal.

So looking forward, we do forecast margins will improve. We’re looking for some supply chain enhancements to drive operational efficiencies. And I do think that now we are starting to see some institutional money really do some due diligence here and starting to take a deep dive and looking into this name.

Dziubinski: Well, let’s move on to some new research from Morningstar. We’re going to cover two separate buckets of new research this week. Let’s talk about Morningstar’s updated take on regional banks in light of what’s been going on with New York Community Bank, which is ticker NYCB. Now, the stock has plummeted. Update viewers on what the story is here.

Sekera: Sure. So at the end of January, New York Community Bank reported a very large net loss for the fourth quarter. And the loss was driven by a couple of things. First and foremost in everyone’s mind was an increase in provisions for loan losses, specifically for their office and their multifamily exposure. And as you would expect for a company called New York Community Bank, a lot of that exposure is concentrated in New York, but they also had to increase their capital levels in order to satisfy some higher regulatory levels.

And we also saw a decline in their core profitability as such between all of these. The bank did cut its dividend all the way down to $0.05 a share in order to help it be able to build up some capital over time. So in addition to the stock having just crashed since that earnings report, I also looked to see that the company’s bonds—so they have some November 2028 bonds outstanding—those have also fallen from trading in the mid-90s down to $0.77 on the dollar. Back of the envelope, that equates to about a 15.3% yield. So those bonds are also now trading well into distressed-debt territory. Now, for people that aren’t familiar with how bonds trade, to put this in context: These bonds are no longer trading on what I considered to be a yield basis, but really trading on a dollar basis.

So traders, when they’re thinking about how they trade these bonds, they’re thinking about it on a probability weighted average between whether or not the bank survives. And these bonds do get repaid at full at maturity, or if the bank fails and the bonds then trade to whatever the assumed recovery value is for this bank in bankruptcy.

Dziubinski: Morningstar’s equity analysts don’t officially cover NYCB, but can you give viewers some idea of what the possible outcomes could be for the bank?

Sekera: Sure. So really, I mean, there’s only three potential outcomes that I see here. First, maybe New York Community Bank is just able to limp along enough long enough to be able to earn enough income to cover its losses and rebuild the capital to where it needs to be. If it doesn’t lose a lot of deposits and it’s able to earn enough to cover up and build that capital to cover those commercial real estate losses, it could survive as an ongoing entity in its current shape.

Second, I do think there’s a good possibility we could see a large capital infusion here. We could see a large investor come in, make a big capital infusion through some sort of equity preferred or subordinated debt investment. The intent here really would be to instill enough confidence in depositors and investors to keep this bank going.

But depending on how that’s structured, it could be very dilutive to existing equityholders. And third, it could fail. So if we do see significant deposit flight here in the short term and it just loses the ability to fund itself, the FDIC could come in here and close it down and take control.

Dziubinski: So of the regional banks that Morningstar covers, which have the most exposure to commercial real estate? And do we think these banks are at risk?

Sekera: Well, as you mentioned, we don’t cover New York Community Bank, but our analyst team really did take a deep dive and looked into what was going on here to see if there are implications for the other regional banks under our coverage. And our view here is that we do think New York Community Bank was just really in that uniquely risky position.

It did have materially higher commercial real estate exposure than any other bank as compared to our coverage. And it also had a more severe deterioration in its core profitability than what we’ve seen versus the banks under our coverage. So while many of the banks under our coverage have seen some pressure on profits, it’s just a lot more pressure than what we’re seeing at New York Community Bank than the rest of our coverage.

So when I take a look at our coverage here of the banks that we cover, you know, two that I would highlight is going to be Zion and M&T bank. They have the highest amount of commercial real estate exposure as compared to the amount of capital that they have. They also have very high amounts of office space exposure.

Yet we’re not as concerned as we are with the commercial real estate exposure as what we see at New York Community Bank. When I look at the numbers here, their exposure is really about half as compared to their capital on a relative basis. And then when I look at the office loans, it’s a lot less as compared to their capital than what we saw at New York Community Bank.

Dziubinski: So to summarize, then, Morningstar thinks that this is largely a New York Community Bank issue and not something that we expect to spread to other regional banks we cover, even those that have maybe a little bit more exposure to commercial real estate. So then if that’s the case, Dave, is this a buying opportunity among regional banks today?

Sekera: We think so. Now, there certainly could be more volatility here in the short term just depending on how the situation at New York Community Bank plays out. But as you mentioned, a lot of the other regional banks did get pushed down over the course of the past two weeks as well. The one that actually has fallen the most, it’s down 10.8%, is Zion.

And that’s one where I might shy away from this one. It is a 4-star-rated stock, trades at a 28% discount to fair value, but doesn’t have an economic moat. This is the one that is still going to be the riskiest, does have the highest amount of exposure to commercial real estate with the high amount of office exposure.

So of the banks that we do like that have fallen, the one I would highlight first is going to be US Bank ticker UCB. That one did fall 6.5%. It’s a 4-star-rated stock, trades at a 23% discount. And this has really been kind of our go to stock in the regional bank space.

This is the only one that we do rate with a wide economic moat, and it’s one that we also rate with Medium Uncertainty. And then to others that investors might want to take a look at are going to be Comerica Ticker CMA and Truist Bank Ticker TFC. Those are both 4-star-rated stocks. Both banks that we rate with a narrow economic moat.

Now, Comerica does have high commercial real estate exposure, but I would say it has a pretty low exposure to the office space. And then Truist does have moderate commercial real estate exposure as well, but a low amount of office exposure. But that is one that does have a high amount of losses in its hold-to-maturity book. So, again, both of these do have maybe a little bit more risk to them.

But we do think that at 4-star levels, you are buying those at a pretty good margin of safety from their intrinsic value.

Dziubinski: So let’s pivot over to some other new research: what Morningstar’s analysts think about some notable companies that reported earnings last week. And I think, again, these are all companies that you’ve talked about on the show before. Let’s start out with Cognizant Technology Solutions, which is Ticker CTSH. No changes to our fair value estimate after earnings.

Do you still like the stock today?

Sekera: I do. Now, they reported pretty strong financial results, so we’re happy with that. But our analysts did note that their guidance was a little bit weaker than what we were expecting. And when he looked at their guidance, he just thinks that management is probably having a pretty healthy dose of conservativism in their numbers. And so this is one where he does think that they’re going to be able to outperform over the course of the year.

So between the higher earnings being offset slightly by the more conservative guidance, we did leave our fair value estimate unchanged at this point. But it is a 4-star-rated stock, trades at an 18% discount, 1.5% dividend yield, which kind of puts it near the average for the S&P 500.

But it is a company that we do rate with a narrow economic moat. And we still continue to think that over time, as companies build out their artificial intelligence capabilities, a lot of them don’t have the financial wherewithal to be able to do it themselves or have the expertise to do it. And so we do think they’re going to need to hire outside consultants.

And we do think that this company is well positioned to be able to capture that business over time.

Dziubinski: So next up is Simon Property Group, ticker SPG. That’s the largest mall REIT And we left our fair value estimate unchanged after earnings. The REIT is up quite a bit since you and I first talked about it. What do you think of it after earnings—still attractive?

Sekera: Well, at this point, I would say it’s fairly valued. Now, this was one of those companies that was a play on our reopening thesis. I think we recommended this one back in March of 2023. Stock’s up 19% since then. You’ve also captured a 5.8% dividend yield. So I would say pretty solid returns on this one. When we look at the earnings, pretty solid results.

Occupancy, rents, net operating income growth, all coming in yet slightly better than expected. They also raised its dividend. But at this point, with as much as the stock has gone up, it’s currently rated 3 stars, only trades at a slight discount to our fair value. So at this point, I think kind of the excess returns behind us is already gone.

I think at this point you really should be thinking about this stock as one that should be returning its cost of equity over time. But for investors looking for that relatively high dividend yield, I think it’s still probably worth a look.

Dziubinski: And then there’s Gilead Sciences ticker GILD. It looks like the stock drooped a bit after earnings, and we held our fair value estimate at $97. What do we think of the company and the stock after earnings?

Sekera: Yeah. So the stock did slide. I think it’s down 4% on the week last week. And we maintained that $97 fair value estimate. So our earnings results did actually come in in line with our expectations. So the stock is rated 4 stars, trades at a 24% discount to fair value, has a 4.2% dividend yield. And we do think it’s a high-quality company.

We do rate it with a wide economic moat. So I think the synopsis here is we just think investors underappreciate the stability of their HIV business as well as the growth potential of their oncology portfolio pipeline. Now, I personally like the stock for that high dividend yield. I think this is one where to some degree you get paid while you wait.

Our analyst Karen Andersen, she’s a very experienced analyst here in the healthcare sector. She noted she thinks that company’s pharmaceutical portfolio is poised for what she considers to be maintainable growth. So that payout ratio of 50%, they shouldn’t have a problem being able to maintain that dividend going forward.

Dziubinski: And you also mentioned on last week’s show that you’d be listening for what Alibaba ticker BABA would say. Morningstar slashed its fair value on the stock after earnings and raised its uncertainty rating on the stock. So what happened there?

Sekera: This is a story where I think we really took a knife to our estimates here, really cut our fair value estimate. I think it’s down 27% to $94 a share. So essentially, our analytical team kind of took a fresh look at the situation here. They cut their 10-year revenue, compound annual growth rate down to 4% from 6%, reflecting a couple of different things that they noted.

First, just intense industry competition, slower than expected retail sales recovery in China as well as deflationary risk in China as well. We also increased our uncertainty rating to Very High from a High that accounts for increased uncertainty in their strategy as the company tries to regain that market share, as well as the risk of further margin erosion here.

And we actually also downgraded our capital allocation rating to Standard from Exemplary. So where does that leave us here? At this point, it’s a 4-star-rated stock, trades at a 23% discount to that new fair value, does pay a 1.4% dividend yield. So I would note here, though, that for people interested in investing in some of these Chinese ADR so that you’re following this change, our team, it did make a change in the order of preference of their China e-commerce stocks.

So I think the one that they do think is probably the most interesting situation for investors is going to be PDD Holdings. Second is going to be JD.com, and then last of the three is now Alibaba.

Dziubinski: Got it. So let’s move on to the picks portion of our program this week. You’ve brought viewers two stocks to sell, one stock to watch, and two stocks to buy after earnings. A little bit of everything. But before we get to the picks, Dave, a viewer last week asked a question that I’d like to follow up on. Now, when you talk about stocks to sell, are you recommending that investors sell these stocks, even if the stocks are being held in taxable accounts and may therefore trigger capital gains taxes?

Sekera: That’s one of those questions that I really can’t answer. It’s going to depend on everyone’s own individual situation for their finances and their taxes. So, for example, if you have capital losses that you can use to offset capital gains is going to be different from everybody’s point of view.

When I’m looking at stocks and thinking about it really I’m just looking at it purely from a valuation perspective, really trying to help investors and provide them our view as far as where we think investors can buy stocks with enough margin of safety that we expect long-term investors would be able to generate long-term market gains and then also look to either sell or pare down positions where we think a stock is overvalued.

In those situations where we think stocks are overvalued, those are situations where we would expect that long-term investors will probably end up generating a below-market returns.

Dziubinski: So keeping that in mind, let’s move on to your stocks to sell after earnings. And you’ve been saying sell on this first one for a while. It’s Eli Lilly. Morningstar raised its fair value estimate on the stock by more than 10%. Explain why we boosted our fair value estimate and why, despite that increase, you think Lilly is a stock to sell?

Sekera: Yeah. And first, I just have to note, I mean, overall, we have a very positive view of Lilly. I mean, we do rate the company with a wide economic moat. We do think the company has a strong pipeline of new drug development that our team has noted in the past that management has executed very well on its business plan.

Sekera: But however, after doubling since the beginning of last year, we just think the stock has gotten ahead of itself. I mean, Lilly, to some degree, is being treated like a story stock in the market. So the back story here is Lilly makes Mounjaro, which is one of these new diabetes drugs that’s been used for weight loss apparently very successfully. And when we take a look at that class of drugs, we forecast that by 2031, total sales for drugs in this diabetes class of drugs, these GLP-1 drugs, they’re all going to end up having a total sales of about $180 billion in our forecast.

And the assumption behind here is that 25% of obese patients and 15% of overweight adults in the U.S., in the next 10 years are going to receive these drugs for treatment. And we break that down further: We’re looking at $60 billion a year for Lilly’s GLP-1 drugs. But yet even with that forecast, we still view that stock as being overvalued today.

So 2-star-rated stock, trades at a 50% premium to our fair value. And at this point, the dividend’s all the way down to less than 1%.

Dziubinski: So your second stock to sell after earnings is Chipotle. What do you have against Chipotle, Dave? It looks like the company had a strong quarter.

Sekera: We don’t have anything against the company. In fact, we rate Chipotle with a wide economic moat, which is really pretty rare to see a wide economic moat in the restaurant space. This is just a matter of: great company but overvalued stock. Two-star-rated stock, 35% premium, no dividend. But, as you mention, earnings were very strong this past quarter.

But when I spoke to our equity analyst Sean Dunlop on this one, he just really mentioned that, when he looks at that market valuation, he just can’t justify it without really making what he thinks would be unrealistic long-term growth assumptions in our model.

Dziubinski: So now next is a stock that you like after earnings, but that looks a little overvalued after running up quite a bit during the past couple of months. So you say that this is a stock to watch and perhaps buy on weakness. It’s Uber.

Sekera: Yeah. And Uber was one of our favorite reopening plays about a year ago. But since the end of 2022, that stock is now up 187%. So that does bring it into 3-star territory. It’s trading only a little below, right now, our fair value estimate. But again, another company that we do think has long-term sustainable competitive advantages, a company we rate with a narrow economic moat.

You know, following earnings, I talked to Ali Mogharabi. He’s our analyst who covers this name. And he just noted the company does continue to execute on all fronts. He’s seen growth in users, requests, frequency, better monetization, seeing an increase in some higher-margin advertising business. So, yeah, I think this was one to put on a watchlist.

If he were to see maybe a selloff, in conjunction with a slowing economy, that could be a good buy at that point in time.

Dziubinski: So let’s end this week’s show with two stocks you think are buys after earning. The first is Estee Lauder. Now, the stock had a tough 2023. Why do you like it after earnings?

Sekera: Yeah. So Estee is the global leader in the prestige beauty market. Its products include skincare, makeup, fragrances, and so forth. And the back story on this one: That stock really soared in 2020 and 2021, but at that point in time, we thought the stock was overvalued. I think it’s just barely touched a 1-star rating before it started to sell off.

And at this point the stock is really totally round-tripped. It’s all the way back toward prepandemic levels. Results have been under pressure here in the short term, specifically from the soft economy, weaker consumer spending, really in the Chinese market is where we’re seeing the softness the most. And that, of course, has pressured its top line and has compressed margins here in the short term.

Now, looking forward, we forecast pretty healthy sales growth of about 7% over the next decade. Looking for slightly over 16% operating margin. So when I take a look at this situation here, the stock actually had a pretty nice pop after this earnings report, but it is still pretty significantly undervalued. And for investors who might be looking for an interesting play in the recovery in China and when we look to see the Chinese consumers start to ramp up spending, this could be one that could benefit from that pretty significantly.

Stock’s rated 5 stars, trades at a 32% discount to fair value, wide economic moat, medium uncertainty, 1.8% dividend yield. So in my view a lot of things to like here.

Dziubinski: And then your second stock to buy after earnings is Tapestry. Why?

Sekera: Yeah. So we first highlighted Tapestry on our Nov. 27 show as one of our picks for the holiday season last year. That stock is up a pretty healthy 36% since then, but it is still undervalued. So stock is currently rated 4 stars, trades at about a 28% discount to our fair value. Also pays a 3.3% dividend yield. And we do rate Tapestry with a narrow economic moat.

So at this point, this is still a bit of a story stock. So last fall, Tapestry announced it was acquiring one of its competitors called Capri, and the market just did not like that deal, whereas our team actually thought the deal was pretty favorable. So what it does is that, in the handbag sector, combines a couple of pretty strong brands, including Coach, Kate Spade, and Michael Kors.

And when we look at some of its other luxury segments, we do think that Tapestry management might be able to better grow its Versace and Jimmy Choo brands better than Capri management had, So the stock did trade up after its recent earnings announcement. However, we still think it’s further to go. Now, I would caution this isn’t going to be an overnight story.

We do think it’s going to take at least several quarters after the acquisition closes before we start seeing a meaningful improvement in some of its results.

Dziubinski: Well, thanks for your time this morning, Dave. A couple of programing notes for viewers. First, Dave will be sharing some of his favorite undervalued Valentine’s Day-themed stocks in Morningstar’s Tuesday stock video segment that airs tomorrow. And we hope you’ll tune in for that. Also, note that Dave and I will be off next Monday for Presidents Day, but we hope you’ll join us on Monday, Feb. 26, at 9 a.m. Eastern, 8 a.m. Central for our next episode.

In the meantime, please like this channel and subscribe to Morningstar’s channel. Have a great week.