3 Stocks to Sell and 3 Stocks to Buy in November

Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services chief US market strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or plans for the week ahead. So good morning, Dave. We have lots to cover this week.

Going to be a full show, including the election, the Fed meeting, and some key earnings. So let’s start with the election. What are your thoughts on the various possible outcomes here?

David Sekera: Good morning, Susan. The election, really? We’ve successfully avoided talking about the election for weeks now. And today you want to bring it up? All right, so the only thing I have to say about the election, first of all, to start off with, is just this: Good grief. Let’s just get through it and move on from here.

But, from an investing point of view, I just caution people, no matter who your preferred candidate is, that if the other side wins, don’t panic. Depending on who wins, there’s going to be a lot of negative headlines that come out from the other side, a lot of scaremongering that’s going on in order to generate views and clicks.

But from our point of view, as far as the markets and the economy go, it’s just probably not going to be as significant of an event as I think it’s going to get portrayed out in the media. And right now, our base case, I’ve spoken with our policy analyst in Washington, D.C., He thinks it’s probably too close to be able to call the presidential race presidential race, but he does expect that Congress will be divided between the two parties.

Dziubinski: So, Dave, talk a little bit more. Why you aren’t more worried about potential outcomes from the election?

Sekera: Well, there’s really three main aspects as to why I’m not as concerned as I think you’re going to hear from a lot of other people. So first of all, our base case is that there will be a split Congress. So that’s just going to limit any real significant fiscal policies that a president would be able to push through.

Yes, executive orders can have some impacts, but in my mind, I think it’s probably too speculative to try and guesstimate what those executive orders are, exactly how they would end up fleshing out in the markets as well as the economy in a broader sense. And, of course, it also depends, too, on what the president is going to first focus on when they’re in office and what those potential impacts are.

Second, as famously said, yes, elections do have consequences, but I’d caution those consequences: It may not necessarily always be what you expect them to be. And even when they are what you expect, valuations at the market level and as well at the individual stock level may have already incorporated a lot of those consequences in already.

And then lastly, the end of the day, valuations at both the market level and the individual stock level—they are always the key to long-term performance. So you may have a lot of noise in the short term. But for long-term investors, it’s always going to be all about valuation. And there’s a really good article that John Rekenthaler published a couple weeks ago. And he really noted in that article and gave some examples about how renewable energy stocks versus oil stocks both performed well during the Trump administration and the Biden administration. And it ended up being really a perfect example of the opposite happening of what you would expect.

And again, lastly, campaign promises are unlikely to be whatever the final policy is that gets pushed through. And of course, exogenous geopolitical events always occur and always seem to take a lot of oxygen out of the room and pulls the president’s time away from other domestic policies that they might be trying to push through.

Dziubinski: All right. Well, then, given all that, Dave, any advice for investors around the election?

Sekera: As always, just keep your focus on your overall risk tolerance and your investment objectives. Don’t let a lot of dire headlines just scare you into any short-term actions. And I’d say at the end of the day, only make changes to your portfolio when the situation and outlook warrants and really only make those changes if it’s based on informed analysis.

Lastly, just don’t react to the scaremongering. Take a breath, think about what you’re doing before you do it, and only do it on really informed research.

Dziubinski: And Morningstar has an election package that we’ve put together, and we link to beneath this video if anyone wants to take a look at that. And that package does include John Rekenthaler’s article, which Dave just referred to.

All right. Let’s pivot to the Fed meeting, which also conveniently is happening this week. Now, given that in the past few weeks we’ve seen in inflation numbers that might have been a touch higher than expected, we saw some decent GDP numbers. And then last week we saw those lower than expected kind of messy jobs numbers. What’s Morningstar expecting the Fed to do this week?

Sekera: Yeah. And a lot of those numbers, it’s really difficult to try and understand what those numbers might necessarily be telling us because you always have to remember, just one economic report does not necessarily signify a trend or a change in trend. So at this point, the Morningstar US economic team is holding their forecasting relatively steady.

We are looking for the Fed to cut the federal-funds rate by another 25 basis points, taking us to a range of 4.50% to 4.75%. And that’s certainly what the market is baking in. I just checked a little while ago: The market-implied probability of that 25-basis-point cut is 98.3%. So I would actually caution that if they do anything other than that, we would certainly see some big volatility in the marketplace.

Dziubinski: Now remind viewers, Dave, what Morningstar’s forecast is in terms of rate cuts a little longer out into 2025, and what might derail that forecast?

Sekera: Yeah. So our base case for 2025 is we are looking for a slowing rate of economic growth in the first two quarters of the year. We are in the soft economic landing camp. We’re not looking for recession, just a slowing in the rate of economic growth. And we are still looking for inflation to continue to moderate, even though it has been sticky for the past couple of months.

But really, the combination of slowing inflation as well as a slowing economy does allow the Fed to cut multiple times next year. We’re looking for the fed-funds rate to get to a 3.00% to 3.25% range by December 2025.

Now, as far as what could derail that, really, if the economy stays as hot as it’s actually been the past couple of quarters. So better than expected economy could derail it as well as if there were to be any kind of rebound in inflation. And I would caution, the economy has been better than expected. Third-quarter GDP came in at 2.8%, certainly much higher than anyone would have expected at the beginning of the quarter. And as you’ve noted, kind of the decline in inflation has become kind of stuck at current levels.

Dziubinski: All right. On to earnings then. So first let’s talk about a few overpriced stocks whose companies are reporting this week. And the first is Palantir, which reports today, the day we’re taping this. And actually a viewer was asking for Morningstar’s take on the stock just a couple of weeks ago. Stock’s up about 180% during the past 12 months.

So, just how overvalued does this stock look, Dave?

Sekera: Yeah. In fact, it’s actually one of the more overvalued stocks under coverage according to our analyst team. It’s a 1-star-rated stock, trades at 120% premium over our fair value. Our fair value is $19 per share. And the market looks like it closed last Friday at about $42 a share.

Dziubinski: So why does Morningstar’s valuation for Palantir differ so much from what investors are actually willing to pay for the stock? Is this an example of a name that’s caught up in AI frenzy?

Sekera: I think it’s just a matter of really trying to understand what the long-term growth prospects of the company are. So they are growing very quickly here in the short term. We actually have a very positive view on the company overall. Thinking about AI, we expect the company will be a large beneficiary of the growth, adoption, and utilization of artificial intelligence to help their clients be able to make better business decisions.

I pulled up our model last night. We’ve got a compound annual growth rate for revenue over the next five years of 22%. So essentially, that means that the revenue would be growing from 2.2 billion last year in 2023, all the way up to 6.1 billion in 2028. Over that same time period, we’re looking for the operating margin to expand quite significantly.

Op margin in 2023 was 4.9. We’re forecasting it to be 12.6% this year, growing all the way to 26.6% by 2028. But when you look at the valuation of the stock, this year’s PE based on our expected earnings is 117 times. And in fact, even by 2028, it’s still trading over 50 times earnings for 2028.

So again if you’re buying the stock here, you’re just inherently making assumptions that are much greater than what we’re making for revenue and earnings over that next five-year period.

Dziubinski: And we also have ARM Holdings reporting this week. ARM stock is up about as much as Palantir’s during the past 12 months. And it too looks overpriced. So talk about this one there.

Sekera: Yeah another one of those stocks that’s one of the more overvalued under our coverage. Again a 1-star-rated stock, trades at 114% premium over our fair value. Our fair value is $66 a share. It looks like it closed last Friday almost 140 per share. Running through those same numbers again, our compound annual growth rate for the next five years is 20%.

So again, revenue would be growing from 3.2 billion in 2023, all the way to 8.1 billion in 2028. And again, we’re also forecasting the operating margin to expand pretty substantially. So our fiscal year or fiscal 2025 forecast for the margin is 28.4%. Forecasting that to go up to 40.4% by 2028. I’m sorry actually by 2029. Our PE, again, taking a look at that is really high by 2025.

We’re looking at 93 times our forecasted earnings for next year. And it still trades at 43 times our forecasted earnings for 2029. So very high valuations that in order to justify those valuations not only has to grow that fast but even faster. And then also maintain those kind of growth rates even from there on out.

Dziubinski: Now we also have Novo Nordisk reporting this week. And Morningstar thinks Novo is overvalued. And investors are going to be listening here for updates around the drugmakers diabetes and obesity drugs. Right?

Sekera: So there’s going to be a couple things. You know I’m going to be listening for here. … You know it’s really the same as what we’re listening for when we were listening for earnings at Lilly. Now the stock here is a 2-star-rated stock. Trades at a 30% premium to fair value.

It’s going to be all about growth and guidance on their weight loss drugs. Of course the most well known being of Ozempic. Now the competition between Novo weight loss drugs and Lilly’s weight loss drugs is really very strong. And we’re seeing it become even more competitive. Now the total addressable market for these drugs is large enough, no pun intended, that we expect both franchises to see double-digit growth for years to come.

But really, I want to listen for your new information coming out on other indications for use for these GLP-1 drugs, just to get a better sense of just how much more of these can grow over the next couple of years, but not even just the next couple of years. And really what those growth rates could potentially be five to 10 years out.

Dziubinski: All right. So let’s pivot and talk a little bit about some companies that are reporting this week that have been recent picks of yours on The Morning Filter, the first being International Flavors and Fragrances. Tell us how the stock looks heading into earnings and then what you want to hear about from the company.

Sekera: Yeah it’s a 4-star-rated stock, trades at a 24% discount to our fair value. Now it’s not for dividend investors; only has about a 1.6% dividend yield. But it is a company that we rate with a wide economic moat. Now over the past couple of years, the company has suffered from what we consider to be both self-inflicted wounds, as well as some industry volatility that we saw over the past four years, caused by the pandemic.

The company made a number of acquisitions that didn’t turn out necessarily as planned. We’ve seen then some management turnover thereafter. But the company really is going through, really cleaning things up, divesting some of those business lines in order to focus on their core competencies. They’ll use proceeds to repay debt in order to help fix the balance sheet.

So again, I like the story, essentially kind of the synopsis here is that the consumer food packaging companies, really saw, huge excess demand in 2021 and 2022, and that’s really not only just from the pandemic, but we also had those supply issues and the supply chain bottlenecks back in 2022 as well.

Now in 2023, these same companies had a very large reduction. Households used up what they had in their pantry. Consumption patterns normalize. People are going back out to eat more often. So that led to destocking. Now that destocking we expect comes to an end by the end of 2024. This year, we’re looking for more modest growth in the latter months of 2024 and a much more normalized growth pattern in 2025.

So as we see that growth pattern normalized, that’s going to show up both on the top line as well as in their margins.

Dziubinski: And we also have Devon Energy reporting this week. And this one was a pick of yours just a couple of weeks ago. So remind viewers why you like it and what you’ll be looking for in the earnings release.

Sekera: And for those of you that don’t know the company, Devon is an oil and gas producer. They’ve got acreage in several different US shale plays. It’s rated 4 stars, trades at a 20% discount to fair value. Nice healthy dividend yield at 5.2%. Company we rate with a narrow economic moat and a medium uncertainty. Now, overall, the energy sector trades at about the 9% discount to fair value.

It’s the second most undervalued sector today, and I just think energy just deserves a place in everyone’s portfolio. I think it provides a good, natural hedge against any increase in geopolitical risk, specifically in the Middle East, as well as a hedge in your portfolio if inflation, for whatever reason, were to start to rebound.

Dziubinski: Now Kenvue was another recent pick of yours that’s reporting this week. So start by reminding viewers why you like the stock.

Sekera: Rated 4 stars. 13% discount to fair value. 3.6 yield. Wide economic moat. Medium uncertainty. So for those of you that don’t know the company, it’s the consumer business that was spun out from Johnson & Johnson back in May of 2023. Now, they did have some difficulties originally when they were spun off. But our analysts is looking at the situation. They think the fundamentals are improving. We’re looking at margins beginning to expand. They put a number of different cost-saving programs in place earlier this year.

So when I take a look at the company our long-term forecast for compound annual growth rate for the top line. It’s in those kind of midsingle digits. So just a little bit better than inflation over time. But we are looking for that operating margin to expand, increasing to 20% by 2028. Comparatively it was 16% last year. And the demographics of an aging population, the premiumization of consumer healthcare products, the growing emerging markets should all provide very good tailwinds for this company over the long term.

Dziubinski: Now, we had activist investor Starboard Value take a significant position in Kenvue. So do you think we’re going to hear more about that this week, too?

Sekera: We’ll see exactly what they say. Now, I’m assuming that they will end up addressing it, but it’s only been two weeks since the news hit the headlines. So we’ll see if they have much commentary yet. And again, this is just my own assumption that they will probably meet with Starboard. Really they’re going to want to understand what exactly Starboard thinks Kenvue should be doing to help unlock shareholder value.

And then once they’ve had a time to analyze those ideas, then I think they’ll make a much larger and a full presentation to investors at a later date, as far as what changes they may implement and which ones they may not.

Dziubinski: All right. Well, it’s time to move on to some new research from Morningstar, focusing on some of the market-moving companies that reported earnings last week. And let’s start with Apple. Morningstar raised its fair value estimate by 8% to $200 app after Apple reported earnings. Walk us through the key takeaways here.

Sekera: Yeah. So I mean the key takeaway here is that in the short term, we actually did lower our forecast for iPhone revenue really to reflect less of an impact from AI on unit sales over the next two years. And we originally forecasted, however, our analyst team really took a new look at our long-term assumptions on Apple Services segment. And of course, that’s a very high margin segment. So we’re forecasting even greater growth now than we had in the past. And of course that will lead to greater margin expansion for the overall company as that becomes a larger and larger position of their business. So really that combination we expect to lead the double-digit earnings growth over the next five years.

So when you put all of that into our model, the net effect was that increase in the long-term forecasts outweighing the short-term decrease, leading to that small increase in our fair value to $200 per share.

Dziubinski: Now, even after that fair value increase, Apple stock still looks overvalued, right?

Sekera: Yeah, we think so. It trades at a 11% premium to fair value at this point. That’s just enough to put it into 2-star territory in our rating scale.

Dziubinski: All right. Let’s move on to talk about Microsoft, which reported good results for the quarter. But the stock fell about 6% on disappointing guidance. Morningstar maintained its fair value estimate on the stock. So what in Microsoft’s guidance rattled investors?

Sekera: Yeah. And generally, even before I get into that, I would just note I think Microsoft is really a similar story as far as like what we expected to play out across earnings season here. So the economy in the third quarter certainly came up much better than expected, than I think most management teams expected at the beginning of the quarter when they were giving guidance.

So generally from most companies, it’s been pretty easily meet or beat guidance. But really the guidance for the fourth quarter has been pretty mixed. And, most people still expect the rate of economic growth to begin slowing here. And so I think many management teams are looking to lower the bar from maybe what the consensus is expecting on top line revenue growth for the fourth quarter.

But having said that, a lot of management teams did put through some cost-cutting programs earlier this year when everyone expected the economy to be running really at a much slower rate than we are right now. And so in this case, when I look at Microsoft revenue guidance, it was a little light as compared to expectations on the top line. But they are reporting better than expected margins for the remainder of this year going into next year.

Dziubinski: Now, you know, investors are always interested when it comes to Microsoft in AI opportunity. And it seems like it’s enjoying some solid demand there. Right?

Sekera: It is. Microsoft has been able to capitalize really on just the rapid increase in demand for AI computing power. They’re seeing demand increases just in general for more hybrid cloud environments. That’s really been playing out as our investment analyst thought on this one. And specifically on its cloud platform, as you’re seeing a rapid increase in growth there.

However, I would note the following earnings. There was no change in our longer-term assumptions. As that growth is kind of playing out as we’ve already modeled into our financial model.

Dziubinski: And you mentioned Azure. And that’s really the star of the Microsoft story, right?

Sekera: Exactly. And actually I think what’s really interesting in the story here, talking to our analyst Dan Romanoff, he noted that he thought that growth at Azure was actually been capacity constrained over the past couple of quarters. And we’re expecting that as they’re spending more money on capex, building out capacity, in that business line that we expect accelerating growth over the next two quarters, as that capacity expands. And that’s really a large reason of why we forecast compound annual growth for earnings of over 15% for the next five years.

Dziubinski: So then how is Microsoft stock look, Dave, is it attractive?

Sekera: We think so. It’s a 4-star-rated stock. Again there was no change to our fair value at $490 a share. But you know following the selloff we saw after earnings just became even more attractive. Currently trades at about a 17% discount to that fair value.

Dziubinski: Now, Amazon issued a pretty sunny report, and the stock rallied. So what do Morningstar make of the results? And were there any changes to the fair value estimate on Amazon stock as a result?

Sekera: Generally it looks like it came in pretty much in line with our expectations. There’s really kind of two key segments for long-term growth that we’re really focused on for thinking about kind of the valuation of the business today. And of course, that’s AWS, which is its cloud business and as well as its advertising business.

And it looks like both of those businesses increase year 19% year over year. Taking a look at AWS, the growth there accelerated for now the fifth straight quarter. And the advertising growth, when you look at the growth there, and we compare it to a lot of its internet peers, it’s still outpacing the rest of the market.

Fourth-quarter outlook provided by management is in line with our model. We made a few small updates here and there. Not a big change to fair value. Essentially it just bumped it up to $200 a share from 195.

Dziubinski: So then how does Amazon stock look after the rally, Dave? Opportunity here?

Sekera: Yeah, it depends on what you’re really looking for an investment like this. So I’d say from the perspective of being undervalued trading at a large margin of safety from its fair value. Probably not. I mean our fair value is $200 a share. It’s a 3-star-rated stock. The stock closed at 198 last Friday.

But overall in the rest of the market, generally with the market that’s getting to be a bit overvalued, with large-cap growth stocks in particular being very overvalued. At 3 stars, trading right by our fair value, actually looks like a pretty reasonable investment to me.

Dziubinski: Now, Meta Platforms had a pretty strong quarter, but the stock was down a bit after earnings. Morningstar didn’t make any changes to its fair value estimate. So unpack the results here and the guidance.

Sekera: Just a quick takeaway. It’s a 3-star-rated stock. No change to our fair value. Earnings were good. Guidance was mixed. Still very elevated capex spending that’s keeping margins low here in the short term. But they did note that they are starting to see some benefit from AI generating more engagement in their different business lines.

Dziubinski: Now, the market’s been pretty sensitive about Meta’s capex spending. So what’s the update from the company on that topic specifically?

Sekera: So they expect the 20% increase in their capex spending for the next year. And for the most part, it looks like it’s really all going toward expanding those AI capabilities for their different product lines. Now, in our model, we do expect that these investments will end up driving future growth, really adding economic value to their advertisement campaigns for their clients.

But, I just note really with this one, I think the market is just very leery of their capex spending. You have to remember, Meta spent tens of billions of dollars of capex on the Metaverse, of course, which never really panned out, never really provided much economic value for shareholders.

Dziubinski: All right. Time to move on to the picks portion of our program. This week, you’ve brought viewers three stocks to sell and three stocks to buy in November. All of these companies have reported earnings for the quarter and have either updated or reiterated their forecasts. So let’s start with those sells. Your first sell is Chipotle. First, run us through the numbers on this one.

Sekera: Looking at earnings here, I would say the earnings were good enough. I mean there wasn’t anything in the earnings that necessarily changed our overall long-term view on the company. In fact, when I looked at some of their numbers, they reported same store sales growth of 6%. Half of that came from pricing increases. The other half came from greater traffic coming through their stores, which, in my view, is actually pretty good for the consumer environment that we’re in right now.

But those results were well overshadowed by the weaker than expected guidance, specifically, management guided toward 330 new store openings in 2025. In our model, we had forecasts of 364 store openings. And I think the market is probably expecting even more.

We did get a pretty large drop in the stock price, which really isn’t necessarily surprising. It’s a stock that’s trading at over 40 times our 2025 earnings. In fact, you know when you have that kind of valuation multiple on a company and you have a company providing kind of lower than expected guidance, I’m actually kind of surprised the stock didn’t even drop more than that.

Now looking at the company overall again, it’s another one of these ones where from a story perspective, we’re modeling in pretty strong long-term growth prospects for the company. Our analyst here noted that he’s assuming Chipotle grows to 8,000 stores over the course of the next decade. That’s, in fact, ahead of this firm’s guidance or their target of 7,000 stores.

And our forecasts are calling for your 10-year compound annual growth rates by sales, operating profit, and earnings to grow 13%, 17%, and 19%, respectively. Yet even with all of that in our discounted cash flow model, it’s still a 1-star-rated stock, trading at a 30% premium.

Dziubinski: Well, then your second stock—that’s a sell—your second stock to sell this week is Eli Lilly. So go into some of the key metrics on this one.

Sekera: Yeah, another high-quality company in our view. Wide economic moat, although it does have a high uncertainty rating. But it trades at a 41% premium to our current fair value. So puts it well into the 2-star category.

Dziubinski: So, let’s talk a little bit about earnings with Lilly because they did report last week, and the stock fell by double digits. The company disappointed on both revenue and profits. And it also cut its profit guidance because it needs to invest more in manufacturing to meet the demand for its diabetes and weight loss drugs.

So what did Morningstar think of the results and forecast, and were there any fair value changes here?

Sekera: No, we didn’t change our fair value. We maintained our fair value at $580 a share. As you mentioned, maybe there were some disappointed investors by third-quarter results, but our analyst team really thought that that was more a matter of pressure on GLP-1 sales as a result of inventory fluctuate and not necessarily indicative of slowing demand growth.

In fact, if you read our note here, we’re still looking for a significant improvement in fourth-quarter sales. But it’s really just one of these stories where we think that the market is just overextrapolating kind of the short-term growth that we’re expecting here too far into the long-term.

Now long-term, again, we think Lilly is going to be one of the largest players in the weight loss drug market. We’re looking at a total addressable market of over $200 billion in sales globally by 2031. However, you also have to note, two, there’s a lot of competitors out there trying to get into this business. We think it’s possible that there could be 16 new obesity drugs that could launch by 2029, and some of those are some next-generation obesity drugs coming out from players like Roche, Amgen, Pfizer, and AstraZeneca.

And some of those could be out even as soon as the next three to four years So, of course, if there is more competition out there in that weight loss category, that would of course put pressure both on volume as well as pricing.

Dziubinski: So even after the pullback in price last week, Eli Lilly is still way overvalued, right?

Sekera: Yeah. And I mean it was a 1-star-rated stock. But even after that 10% pullback, still trades at about a 40% premium. So puts it in that 2-star category. And I’d say the investment thesis here, kind of the takeaway, is the company’s right now moving from a situation where it was supply constrained and they were able to charge very high prices on those drugs. The current situation is one now where we’re starting to see sufficient supply with very high but not necessarily unlimited demand. And ultimately, I think it’s going to move to a situation where there will be additional new competition coming on. Then, prices are going to have to be able to come down a bit in order to maintain volume.

And just as a complete aside, I think that’s also going to at some point be the same situation we see with Nvidia, although we’re probably still not there, three four, five quarters or more out before we see that start to happen in those AI chips.

Dziubinski: Well, that’s a that’s a topic for another show day. Your third stock to sell this week is MetLife. So walk us through some of the key metrics on it.

Sekera: Yeah. After having fallen 5% following its earnings release, it still trades at a 15% premium to fair value. So it puts it in 2-star territory for us.

Dziubinski: It looks like MetLife missed expectations on both earnings and revenue, and just didn’t seem like there was really any good news out of the report. So, what’s Morningstar think of what it heard? And were there any changes to the fair value estimate on the stock as a result?

Sekera: There was no change to our fair value. I think to some degree the story is kind of playing out as we expected in our investment thesis. So this past quarter we saw softer underwriting margins, specifically in the group benefits business, lower variable investment income, a lower rate outlook. So again, it all seems to be pretty much playing out, in general, for the investment thesis we’ve had on all the insurance companies, which of which most of them are actually overvalued today.

Dziubinski: And here again we have another example of a stock that’s overpriced even after it pulled back after earnings. So what’s the market overestimating here, Dave? Why is MetLife a sell from our perspective?

Sekera: The investment thesis on the insurance companies overall has been that, for a number of quarters now and maybe even longer than that, they’ve been able to benefit from tailwinds on both sides of their businesses. So they’ve seen a pretty favorable underwriting conditions. The higher interest rates were blowing their profitability across the insurance space.

But we expect that these factors will begin to normalize, go back to more like historical averages. And as that starts to play out, we would look for underwriting premiums to start contracting. And the Morningstar US economics team is still looking for interest rates to decline across the entire yield curve. So both of those will start putting your additional pressure on all of the insurance stocks.

Dziubinski: All right. So let’s move on to the positive: your stocks to buy. The first is Alpabet, which was a pick just a few weeks ago on the show. So it looks like you’re doubling down on this one, Dave. Share the key stats on alphabet.

Sekera: Four-star-rated stock, trades at a 22% discount, company we rate with a wide economic moat. And in fact, I kind of was reviewing our economic moat right up here, and, it’s probably one of the widest moats across our coverage today. When I look at, again, we have five different sources that we consider that companies can use to build that moat. We highlight four of them here. For Alphabet, those being intangible assets, the network effect, cost advantage, and customer switching cost. So between all of that, a very high-quality, very strong business. So at 4 stars and a 22% discount, looks still quite attractive to us.

Dziubinski: Now the stock shot up a bit after earnings and then pulled back a bit. So lots of good news in that report. What did Morningstar think of the results?

Sekera: We increased our fair value to $220 a share from 209. Not a huge increase, but a pretty good bump up here. And again, just the company’s just still hitting on all cylinders. It’s a company that is able to benefit from artificial intelligence. Specifically, they noted that they were getting a boost from AI overviews that’s leading to more user engagement, more ad clicks. Taking a look at their cloud business, Google Cloud, that was up 35% year over year. And the stock is still at what I would consider to be pretty reasonable multiples at this point. Your trades at just under 21 times this year’s earnings. 19 times our 2025 forecasted earnings. And for a company that we have a five-year compound annual growth rate of over 17%, looks pretty reasonable to me compared to what we see elsewhere out in the marketplace.

Dziubinski: Now, Morningstar thinks Alphabet’s stock is really undervalued. So you know why? Why is the market’s so undervaluing this name? Are the antitrust issues really dogging the stock?

Sekera: Exactly. And that’s a big portion of why we think the stock is probably trading where it is today, is that the market is, in our view, overpenalizing Alphabet for those antitrust concerns.

So there’s really three main antitrust cases out there. We think the antitrust case against Google search is probably the most material. Now the DOJ recommendation to the courts is likely to come out, we think, by the end of this year, that may include calling for the divestiture of both Android and Chrome. Now, of course, once that recommendation comes out, they’re going to appeal that. That could be a multiyear process just in and of itself for those appeals to make its way through the courts. And then even once those appeals are used up, the DOJ has to prove that other remedies other than a break up wouldn’t work.

So we think that even before you got to the point that they could try and require the company to break up by making those divestitures, they’re going to have to go through other different types of remedy periods first to see if those work. And if they don’t, then you could get to the point where maybe you could see the company getting broken up.

Dziubinski: All right. So your second stock to buy this week is FMC. Run down the list of key metrics on this one.

Sekera: I’d also note, too, FMC was a top pick by our analyst team in our fourth-quarter 2024 outlook. Now the stock did spike 10% after earnings. It gave back a little bit of that gain. But we still think this stock has further to room to run. It’s a 5-star-rated stock, trades at a 43% discount to fair value. It’s a company we rate with a narrow economic moat, with the source of the economic moat being its intangible assets and its patented crop protection products, which again then gives the company pricing power.

Dziubinski: And as you mentioned, FMC stock did rally after reporting.

So give us some of the key takeaways from the report and whether there were any changes to Morningstar’s fair value estimate on the stock.

Sekera: When I take a look at what Street estimates are on both the top line and the bottom line, the company easily beat both of those. But we actually didn’t change our fair value. We left it unchanged at $110 a share just because things did come in line with our model and our outlook.

I’d note here things like adjusted EBITDA were up 15% year over year. Looking forward, I know management guided to a 19% increase in revenue for the fourth quarter, half of that growth coming from new products. So again, that just tells us that their new products are not just necessarily just cannibalizing their existing products, but also driving incremental growth, which is exactly what we’ve been looking to see.

Dziubinski: So then what’s the long-term story on FMC? Dave, what is Morningstar think the market’s missing with this one?

Sekera: Well, our investment thesis here does appear to be playing out. So the near-term thesis on FMC was that the inventory destocking we’ve seen over the past year to year and a half would prove temporary. And that once that ended the company’s sales and profits would bounce back in the second half of the year with larger growth in 2025. And that is kind of how we’re seeing the story play out right now.

Dziubinski: And then your final stock to buy this week is Zimmer Biomet. Run through the metrics on this one.

Sekera: Sure. It’s a 4-star-rated stock, trades at a 28% discount. Not necessarily a good stock for dividend investors, has a less than a 1% dividend yield. But a relatively high-quality company. It’s a wide moat with the medium uncertainty. And really that moat is really going to be built around that there’s a very steep learning curve in order for orthopedic surgeons to learn different types of instrumentation systems. So again, there’s a very substantial switching cost for those surgeons if they’re going to try and move from one company’s products to a different company’s products. And then we also do believe that the patents on their intellectual property protects their product portfolio from some competition as well. So again, we think it’s a very high-quality company.

Dziubinski: Now, Zimmer stock rallied after earnings. Seems like the results came out pretty solid. But no changes to Morningstar’s fair value estimate on the stock, right?

Sekera: Correct. So the fair value is still $150 a share, unchanged. And the thought here is that, generally, it’s still on track in order to meet our expectations for this year.

Dziubinski: So then talk a little bit about Morningstar’s thesis on Zimmer, longer term, Dave, and why it might be so undervalued today.

Sekera: The company is one of the leaders in providing devices for joint reconstruction, and longer term, we expect that favorable demographics, including the aging of the baby boomers, will just fuel solid demand for joint replacements for the next decade or longer.

Now, what’s been happening, I think, with this stock is that a lot of the headlines about the GLP weight loss drugs have raised a lot of concerns that that may reduce the need for large joint replacements over time. But our analysts just noted that osteoarthritis is a progressive disease, results from a combination of a couple of different things, whether that’s a genetic predisposition, trauma to the joints, aging, and lifestyle. And weight is really only just one of the causative factors there.

So we’re not necessarily changing our long-term view on this company because of the weight loss drugs resulting in people losing weight. They’re still going to need joint replacements based on those other kinds of factors.

Stock only trades at less than 14 times this year’s earnings forecast. And we’re forecasting a compound annual growth rate for earnings of over 10% for the next five years. So looks pretty attractively priced to us.

Dziubinski: Yeah, that sounds like a bargain. All right.

Well, thanks for your time this morning, Dave. Viewers 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 for the Morning Filter next Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this video and subscribe to Morningstar’s channel. Have a great week!

Got a question for Dave? Send it to themorningfilter@morningstar.com.