5 Stocks to Buy During Q1 2025

Susan Dziubinski: Hello and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning I talk with Morningstar Research Services' chief US market strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or pans for the week ahead. Now, a programming note before we begin: We will not be streaming a new episode of The Morning Filter next Monday, Jan. 20, due to the Martin Luther King Jr. holiday.

But Dave and I will be back on Monday, Jan. 27, same place, same time. All right, good morning, Dave. There are a couple of economic reports you’re watching this week, including the CPI [Consumer Price Index] report and retail sales numbers. But before we get to those, we need to talk about last week’s hotter-than-expected jobs report. Nonfarm payrolls came in well above forecast, stocks fell, and Treasury yields spiked on the news. So why the market response?

David Sekera: Hey, good morning, Susan. This is just one of those instances now where good news is actually bad news for the marketplace. Now, the markets already assume that the Fed wouldn’t cut at its January meeting. But with the better-than-expected jobs number, that also drastically reduced the probability of a fed-funds rate cut here at the March meeting.

That was as high as a 50/50 probability at the beginning of the year, but right now it looks like the market’s only pricing in about a 24% probability. But I think what really hit the market the hardest is that it also reduced the market-implied probability of the total number of cuts throughout all of 2025. So right now the market is pricing in a much lower degree of monetary easing.

Dziubinski: So, what did Morningstar think of those jobs numbers?

Sekera: Like anything else, the Morningstar’s economics team is just trying to make sure that they can separate signal from noise. And at this point, my reading is I don’t think that they’re reading that much into this single report just as of yet. So I was reading through Preston’s notes. And as far as payrolls go, he’s looking at the three-month annualized rates more closely than anything else.

And I think that’s how the Fed is also looking at it. So currently, nonfarm payroll employment is standing at 1.3% annualized. I think there’s some benchmark revisions coming in. So I think once you incorporate that, he’s estimating that an adjusted three-month growth rate is only 1%. And that’s in line really with the 1.1% average that we’ve seen since the second half of 2023.

And then just lastly, I know he noted, too, on a year-over-year basis, those adjusted nonfarm payroll growth has really held steady at 1.1% for the past six months. So I think we’re waiting really to see what the next report or two comes in at before we’re really changing any of our longer-term assumptions.

Dziubinski: Got it. So now given the market’s response—kind of dramatic—to those jobs numbers, how on edge do you expect the market to be this week with CPI and PPI [Producer Price Index] numbers coming out?

Sekera: Yeah, I think the market’s going to be on edge, but not necessarily just because of the inflation metrics. We really have two competing factors going on this week. So as you mentioned, we have PPI coming out on Tuesday, CPI on Wednesday. And yes, the market will certainly be focused on both of those, but we’ve also got earnings season now really starting to kick off. On Wednesday, we’ve got the mega banks, who are all starting to report.

So we’ll see where the inflation numbers come out versus consensus, but also we have to start watching where earnings and, more importantly, where guidance come out versus expectations. So depending on each set of results, it might be pretty hard to really dissect exactly what the market is focused on depending on the intraday volatility that we see. Now, if inflation reports are much different than consensus, I think that would increase some short-term volatility in the market, but it’s going to depend on whether those numbers are better than expected or worse than expected.

So if they’re better than expected, we could see the market trade up that could give the Fed the green light to resume cutting in March. Whereas if they’re worse than expected, that could indicate that the Fed will need to be on hold for a while longer before we could see any additional rate cuts. So as far as those two numbers coming out, PPI on a month-over-month basis is projected to be about a tick better.

Looks like consensus is at three tenths of a percent versus four tenths of a percent last month. And then core PPI on a month-over-month basis projected to be stable at two tenths of a percent and on a year-over-year rate at 3.3%, which would be flat from the last report. Taking a look at CPI here, the headline CPI in a month over month expected to be flat at three tenths of a percent.

On a year-over-year basis, coming in at 2.8% versus 2.7% last month. But really focused on core CPI, that’s projected to be a tick better at two tenths of a percent versus three tenths of a percent last month, but that would still only be flat on a 3.3% rate on a year-over-year basis.

Dziubinski: Now, you mentioned earnings, and we’ll get to that in a minute, but we also have fourth-quarter retail sales numbers this week, which will, of course, include sales from the critical holiday season. So do you think there could be any market-moving surprises in those numbers?

Sekera: We shall see. I doubt it. We had talked about our forecast a couple of weeks ago, I think, for holiday sales being a little bit on the stagnant side this year, certainly compared with what we’ve seen over the last couple of years. But when I take a look at the consensus numbers here, it looks like headline retail sales is for six tenths of a percent. That’s a slight downturn from last month at seven tenths of a percent.

But when we look at the consensus core retail sales number, they’re looking for an improvement of five tenths of a percent up from two tenths of a percent. So if it does come in better expected, that could cement the market’s mind that the economy is holding up better than expected as well in the face of the current interest-rate regime. So if that were to come out, that could signal that the rate-cutting cycle could be over for now.

Dziubinski: All right. Well, as you mentioned, earnings season kicks off this week with pretty much all of the major US banks reporting. So Dave, take a minute to get us up to speed on the performance of bank stocks during the past year or so. It’s been pretty strong, right?

Sekera: Oh, it’s been exceptionally strong, especially among the mega banks. So just taking a look at the results here, since the end of 2023, Bank of America looks like that’s up over 30%. Citibank, that’s up 30%. If you remember, that had been one of our favorite value plays back in 2023. JPMorgan, Wells Fargo, both up over 40%. Wells also was one of our longtime picks in the banking sector. I looked that one up last night. We actually last recommended that one March 18, 2024.

But the regional banks have all been relatively strong, but generally they’ve lagged all the mega banks. So some of the banks that we’re looking at here, Truist, that’s only up 16%. Would be good in any other year, but certainly lagging the mega banks. Fifth Third up 19%. Huntington up 26%. So I think what’s going on right now is it looks to me like the market’s pricing in more earnings growth at the mega banks, and there’s really two reasons for that.

One, all the mega banks do have their own investment banking divisions and their trading groups. We expect to see a rebound in mergers and acquisitions this year. So that should bolster earnings here in the short term. But also I think a lot of people are expecting that the mega banks will benefit more from the higher net interest margins more than the regionals as the yield term has been normalizing.

Dziubinski: All right, so given that performance of bank stocks, how does the US industry look from a valuation standpoint heading into earnings?

Sekera: Getting pretty pricey here as far as we’re concerned. The sector right now is trading at about a 10% premium overall as compared with a composite of our fair values. But really the mega banks with as much as they traded up last year are getting into overvalued territory. So Bank of America is now rated 2 stars that trades at a 14% premium. Wells Fargo also 2 stars at a 17% premium. And JPMorgan trading at the greatest premium, 35%. That puts it well into 2-star range.

And Citi is really the only one of the mega banks that really still looks halfway interesting here. It’s a 3-star-rated stock right at fair value, only trades at about a 2% premium, so pretty close to our target price. Really the only interesting opportunities here are going to be among the regionals and even those are, pretty much for the most part, all 3-star-rated. I don’t even think any of the regionals at this point are even 4 stars anymore.

Dziubinski: Wow. OK, so let’s talk about the world’s largest chipmaker, Taiwan Semiconductor. That company’s going to issue its full earnings report and forecast this week. Though the company did report last week, that quarterly revenue beat forecast. So given that, what are you going to be listening for in this week’s full report?

Sekera: And of course, Taiwan Semi is a foundry that makes semiconductors for a lot of different clients, but of course, everyone’s going to be focused on its highest-profile client, which is Nvidia. So specifically we’d be listening for any commentary regarding the GPUs for AI, the Nvidia designs, any kind of guidance, really just trying to listen for what the growth rate is at there. And of course, depending on what they say, that could lead to some pretty dramatic swings, not only in Nvidia, but really all of the AI stocks.

Dziubinski: Now, Taiwan Semi’s stock was up more than 90% last year. So how does the stock look from a valuation perspective as it heads into earnings?

Sekera: Yeah, I looked this one up too. Originally, this was one of our picks on our July 31, 2023 show. It’s also several picks back in I think the first half of 2024. But at this point, it’s a 3-star-rated stock, only trades a few dollars below our fair value. And in fact, the stock’s only up a few dollars since that last earnings report last October. Now, those third-quarter results in October were better than expected. Revenue, for example, rose 13% sequentially.

Both gross margin and operating margins improved from the prior quarter. As far as guidance go, they guided toward better fourth-quarter revenue and margins as well. But in my opinion, it looks like momentum might’ve run out after that last quarter’s earnings report. So I think we might need to see even a greater beat from an earnings perspective, even greater guidance in order to get the stock to start breaking back to the upside again.

Dziubinski: All right. Well, moving on to some new research, one of your recent picks, Constellation Brands, reported earnings last week and the stock was just pummeled after the company reported disappointing results and cut its 2025 guidance. So what’d Morningstar think of the report?

Sekera: In fact, our analysts just published an updated note this morning, so that will be, of course, available on Morningstar.com. Unfortunately, I haven’t had a chance to review an updated financial model at this point, but taking a quick read through the note, overall revenue is flat. So we saw a 3% increase in beer sales. That’s about 82% of the total revenue of the company.

But the wine and spirits division, which has been under a lot of pressure, it fell 14% last quarter. Overall adjusted earnings were flat and management did come out and lower their full-year outlook for net sales growth to 2% to 5%. It was a 4% to 6% range beforehand. And then they also cut their adjusted earnings to $13.40 to $13.80 per share. That had been $13.60 to $13.80.

So after that big selloff last Friday, it now looks like the stock is trading at about 13 times a midpoint of that new adjusted earnings range. I’d say the net impact from our point of view at this point anyways will be to lower our fair value estimate. Our analyst, she’s expecting that she’ll lower that fair value somewhere in that midsingle-digit percentage range.

So from our perspective, it does look like the selloff on Friday, just the amount that it sold off, is probably an overreaction here in the short term. But again, let me spend a little bit more time going through the numbers on this one once I have some time to go through that model, and hopefully on our next show we could maybe do a deeper dive on it.

Dziubinski: Well, I will make a note of that. We will. Let’s talk about Edison International. Now, that stock fell last week by nearly 19% as the California wildfires burned in its service area. So what impact could the fires have on Edison International?

Sekera: From a trading perspective, this is just a good example of the market selling first and asking questions later. But having said that, in my experience for situations like this, as long as those fires are burning, I think that stock is going to be under pressure here in the short term. It won’t bottom until we get a better idea of exactly how much damage there has been and really any kind of investigation that goes on as far as what started those fires.

And I just don’t think we’re going to see that stock recover until investors are comfortable that Edison was not the cause of those fires. So Travis Miller, who covers the stock, did put out a note. So I think that’s going to be important for everyone to take a quick read. According to Travis, at this point, there are no reports that Edison’s equipment is responsible for starting the fires, but acknowledge the widespread outages and system damage could narrow or impact 2025 earnings.

But we reaffirmed our $80 fair value at this point and our narrow moat rating. So as long as those forthcoming investigations find the Edison did follow safety protocols, we expect that over the long term Edison will be able to recover substantially all of those fire-related costs and liabilities. Now, just really try and give an idea of what the potential valuation impact could be here, Travis noted a couple of different things, but specifically he wrote that for every $1 billion of direct costs or liabilities, that would reduce the fair value of about $2 per share.

So just to give investors a little bit of maybe a back-of-the-envelope math here of what the potential impact could be to the downside. But when we look at what’s happened here in the past, we did reduce our fair value estimate by $12 per share, and that was to account by the wildfires in 2017 and 2018. So again, not that this is going to be similar to that same situation, but just to give investors a little bit of an idea of the upside/downside dynamics here.

Dziubinski: Now, still on the topic of the wildfires, how big of an impact does Morningstar think they’re going to have on property and casualty insurers?

Sekera: Well, first of all, I have to note that we rated pretty much all the P&C insurance stocks as overvalued to significantly overvalued even before the fires began. For example, I think it was on our Nov. 4 show, we had highlighted Met as being one of our sells for a number of different reasons back then. Generally, I’d say our investment thesis on most insurance companies in the P&C group has that been for a while.

They’ve been able to benefit from tailwinds on both sides of the business. They had very favorable underwriting conditions, higher interest rates were buoying profitability across the space. But over the longer term, we expected that both those factors would begin to normalize over time. We noted even back then we started to see some of that normalization starting to play out.

For example, underwriting premiums in that space were starting to contract. Just taking a look at some of these stocks, even after a little bit of selloff, Allstate still a 2-star rated stock trading at a 31% premium. It was actually a 1-star-rated stock just a couple days before that. Progressive, very expensive, 1-star-rated stock at a 56% premium to our fair value.

Met still at an 18% premium, puts that in 2-star category. So irrespective of the ultimate impact the fires may have directly, we still think these stocks are overvalued according to our estimates. So in my mind, why wouldn’t you sell now? I’d also note that Brett, who covers these stocks, noted in a recent note, too—overall he thinks the losses will be manageable.

They’ll probably fall short of the losses the industry will see under large hurricane scenarios. But in my mind, I think these stocks are going to be under pressure until investors get clarity as to who has direct exposure or reinsurance exposure to the homes in California that have been destroyed and how much on the hook those companies are going to be.

Dziubinski: All right, well, on last week’s episode of The Morning Filter, we began to scratch the surface on your 2025 stock market outlook, and we’ve provided a link to that outlook beneath this video. So this week we’re going to delve a little bit more into it, and we’ll talk specifically about your sector commentary from the report. So we’re going to start out by talking about the most overvalued sector at the start of 2025, and I think it might surprise viewers. Tell us what it is.

Sekera: It’s the consumer cyclical sector. Right now it’s at a 19% premium. Although I’ve got to note, really that’s mainly because of Tesla. Tesla is the number-two largest holding in the Morningstar US Consumer Cyclical Index. Number two right after Amazon. Now, Amazon itself is up 10% just since the presidential election, but Tesla is up 57% since the election. Puts that as a 1-star-rated stock. Trades at a 88% premium to our fair value. In fact, I looked through some of the charts.

This is one of the more overvalued levels that Tesla has traded as compared with our fair value over time. But it’s also not just Tesla, not just Amazon. Most of those large-cap names in the index are overvalued to some degree. Only a couple that we still see as being undervalued today. So really if you’re looking for investment opportunities in the consumer cyclical index, really you’re going to need to drill down well into that mid-cap and even to the small-cap area in order to find undervalued stocks.

Dziubinski: All right. Now, let’s talk a little bit about top-performing sectors of 2024. And those were technology and communication services. So let’s look at them one at a time. First, let’s look at communication services stocks. So after a really good 2024, is this sector attractive in 2025?

Sekera: Yeah, communications still attractive, but of course, much less so after the huge runup that we saw last year. At this point, it’s only at a 5% discount to a composite of our fair values. It was 15% undervalued at the beginning of the quarter, and it was actually the most undervalued sector coming into 2024. Now, of course, when you’re talking about communications, you got to talk Alphabet GOOGL. Alphabet, of course, is 42% of the market cap of the index.

It’s up 37% since the end of 2023, yet still 4-star-rated stock at a 13% discount. But that stock just because of the large capitalization it has, it’s always going to skew the price/fair value of the overall index. But generally, I’d say we still see a lot of other undervalued opportunities within the communication sector, specifically in the traditional communications areas such as Verizon and a lot of the other media companies like the cable companies.

Dziubinski: Now what about tech stocks, Dave? And again, they had a great 2024 as well. Are they overvalued?

Sekera: Yeah, I think tech was up. The Morningstar Technology Index was up about 36% in 2024. But sector is not as overvalued as you might think after that big of a run. Currently trades at about a 7% premium to a composite of our fair values. Now, I’ll have to say, I think we were ahead of the curve with tech coming into 2023 a couple of years ago, but that’s when it was trading at a 20% discount to fair value.

But the explosive growth that we’ve seen in AI surprised everyone to the upside in 2024. Generally, I would say our fair value increases in 2024 in the technology sector were pretty similar to the market returns. And I think that there’s a really good quote here that I got from Brian Colello. He’s the equity strategist for the technology sector.

And specifically when he’s thinking about 2025, and I kind of incorporate this into my thoughts for 2025 as well for the overall market, specifically, he said, “Spending on AI graphic processor units and the hardware is less likely to provide anywhere near the massive positive surprises we saw in 2024 as this fast-moving mega trend is better understood.” So as concentrated as a lot of the returns were last year, and even in 2023 in those big AI stocks, I don’t think we’re going to see really the same kind of upside surprises in the results that we saw like we did last year.

Dziubinski: Well, I’d like to toss in here a sector-related question from a viewer. Now, Steve asked for Morningstar’s outlook on REITs. So Dave, tell Steve and the rest of us how do REITs look in the new year.

Sekera: They look pretty good. So REITs are the most undervalued sector. Traded at a 11% discount to a composite of our fair values there. Now, of course, real estate has long been the most hated asset class on Wall Street. We just started to see some upward momentum in that sector in the third quarter, but we gave back a lot of those gains in the fourth quarter specifically because we saw a big increase in the yield on the 10-year Treasury.

In fact, I think it went from like 3.8% at the beginning of the quarter to now 4.78% as of last Friday. Now, the Morningstar US economics team is still projecting that the 10-year Treasury, that the yield will decline in 2025. If so, that should provide a pretty good tailwind for real estate. But here in the shorter term, so long as momentum is pushing long-term interest rates higher, I think REITs will probably be under pressure.

Personally, if you’re looking to invest in this space, I still like the REITs that have more defensive characteristics—those with healthcare, medical office buildings, R&D, and so forth—and I’d probably still steer clear of the urban office space.

Dziubinski: Now, Dave, what REITs to our analysts like most this quarter?

Sekera: The first one that’s on our top picks list is going to be Healthpeak. It’s a stock you and I have talked about many times, currently rated 5 stars, trades at a 36% discount, healthy dividend yield at 6.1%. And of course, the company has a pretty diversified portfolio of healthcare, medical offices, life sciences, some senior housing, and some hospitals as well. The next one I think we’ve talked about once or twice as well, that’s Sun Communities, 4-star-rated stock, 30% discount, 3.1% dividend yield.

They own manufactured housing, RV communities, and housing near marinas. Then last one, I just have to say, I’m going to exercise a little caution on this one here in the short term. That’s Kilroy. I think we made this recommendation before the fires in California began, but it is a 4-star-rated stock, very large margin of safety at 40%, 6.1% dividend yield. It is down, I think, about 10% over the last couple of days, or at least toward the end of last week.

They do have a number of properties in the Los Angeles area. So right now the market is trying to determine if the California wildfires will have either a direct impact or damage to their individual properties. I’m also concerned about maybe any indirect impact there might be specifically if the tenant’s employees have been left without housing.

If their houses have been damaged or destroyed, certainly would impact a lot of the amount of people that would be coming into those buildings for quite a while. I did reach out to our analysts over the weekend. At this point, we are not seeing any direct impact to their properties. But with the fires ongoing, this is still one that I think you need to watch very closely here in the short term.

Dziubinski: Let’s talk about some other undervalued sectors at the start of the new year. Energy is pretty undervalued. Just how undervalued is it, Dave, and what are the factors behind that?

Sekera: The energy sector is trading at a 10% discount to fair value. It still puts that near some of the most undervalued levels that we’re seeing by sector today. To some degree, I think it’s just because oil prices over the course of the year, we had some ups, we had some downs, but I think largely it ended up the year pretty close to where they began at the beginning of the year. So to some degree, I think it must just be that the market has much more of a dour outlook than we have on oil prices over the longer term. But again, from my perspective, a lot of interesting opportunities in energy today.

Dziubinski: And then Dave, lastly, any other sectors look undervalued today?

Sekera: Let me talk about two of them. So first of them is going to be healthcare. Now, generally, healthcare had been on a downward trend since August. That was exacerbated following the election. A lot of concerns about what changes a Trump administration may have on the industry. Overall, healthcare did pull back 10% during the fourth quarter. It’s now trading at an 8% discount to fair value.

But I’d also note here too, it’s actually trading at 12% discount to fair value if you exclude Eli Lilly. Again, we’ve talked about Eli Lilly multiple times in the past. We think that stock is overvalued at this point, 2-star-rated stock at a 38% premium. So once you get away from Lilly, you see a lot of interesting and more attractive opportunities in healthcare. And then lastly is going to be the basic material sector.

Overall it’s trading now at a 7% discount to fair value. It was trading at a premium coming into the quarter, but the sector is down 12% during the fourth quarter, mostly slid since mid-November. So it’s sold off pretty quickly here. And I’m really watching this one as a red flag. I’m concerned whether or not this might be an early indicator of just how much the global economy may be slowing at the end of last year.

Dziubinski: All right. Well, a note here for viewers, Dave’s going to be sharing his full 2025 outlook and a webcast that will be airing this Wednesday. And you can register for that webcast via a link beneath this video. All right, so time to move on to the picks portion of our program, and this week Dave’s brought us five stocks to buy from Morningstar analysts' first-quarter list of undervalued stocks that they like. So your first pick is a name that I don’t think we’ve talked about before on the show, or if we have, it’s probably been a while, and that’s Corteva CTVA. So run through the key stats on it.

Sekera: Well, Corteva, you have to remember too, it may just be a stock that a lot of people don’t know the company. It was formed in 2019 when it was spun out from DowDuPont. So maybe not necessarily a very widely known company across the street as well. We like it. We think it’s a 4-star-rated stock, trades at an 18% discount to our fair value. May not necessarily be one for dividend investors, only has a 1.2% dividend yield, but we do rate the company with a wide economic moat.

The moat sources here being based on intangible assets. Company has a portfolio of patented biotech seeds and crop chemicals. And those patented products have pricing power as they’re able to help protect farmer yields and reduce other expenses such as insecticides. And we rate the stock with a Medium Uncertainty.

Dziubinski: Now, Corteva’s stock, you had a pretty good 2024. It was up about 20%, yet the stock is still trading well below Morningstar’s fair value estimate. So what’s the story on this one?

Sekera: I took a quick look at the model overnight and it looks pretty interesting to me in that we’re only really looking for top-line growth of about 2% on the compound annual growth rate over our five-year forecast period. So in our view, this one’s really much more of a margin growth story.

Over time we expect that a greater percentage of revenue will come from their patented crop-protection products and the seeds, both of which have much higher margins. So we’re forecasting that margins for EBITDA, for example, will expand from just under 20% in 2023 to nearly 24% by 2028. And that is what’s going to give us some good earnings growth over the next couple of years.

Dziubinski: Now, your second pick this week is Polaris PII. So give us the bird’s-eye view on this one.

Sekera: Yeah, and this one I think is going to be for investors that might be more willing to take a little bit more speculative investments in their portfolio in the short term, but it’s a 5-star-rated stock, trades at a 50% discount to fair value, has a 4.9% dividend yield. Now, we do rate the company with a wide economic moat, the moat source here being the intangible assets based on their brands.

When we look at Polaris, they do have leading market share positions in all of the categories in which it operates. So for example, ATVs, side-by-sides, and they’re also the number-two player in snowmobiles. And it’s a stock we rate with a Medium Uncertainty. Although I got to say, the stock’s been acting with a little bit more uncertainty than that medium rating may necessarily imply.

Dziubinski: Yeah. Well, Polaris stock had a horrible 2024. It was down 36%. And demand for power sports has been just way, way down. So are you suggesting that there’s light at the end of the tunnel on this one, Dave?

Sekera: We do. It may just take a while for this one necessarily to play out. And I think this is a good example of how the pandemic really played havoc with a lot of companies' sales and margins over the past couple years. And in fact, with some of these companies, it’s still really playing out even today. So of course, sales surged as consumers look to buy outdoor sporting equipment. When lockdowns were in place, people had a lot of extra money in their pockets since they weren’t going out.

They weren’t going on vacations. They weren’t spending on other services. So the company did see a 17% increase in sales in 2021 in order to restock dealerships and meet demand. And sales actually did pretty well for two years after that, increasing 4% on average per year. But we’re really starting to see the payback and a decline in sales now. So in 2024, we are expecting the top line to be down 21%.

And of course, just the negative impact of fixed cost leverage when the top line is coming down like that has really just been crushing margins. I think our operating margin forecast for 2024 is down to 4%. It’s down from 7.4% last year. Now, looking going forward, we’re only looking for a flat top line this year. We’re looking for 0% growth, and then we’re modeling in 3.7% average top-line growth thereafter.

But realistically, we’re looking for operating margins to get back toward prepandemic levels by 2027, looking for those margins to normalize once everything gets restocked and all that demand that got pulled forward during early in the pandemic starts to play its way out, and we get back to more of a normalized demand environment going forward. But taking a look at the stock from evaluation basis, I think it trades at just under 11 times our 2025’s earnings estimate.

Dziubinski: All right, now both Corteva and Polaris are midsize picks, so let’s get onto a couple of larger companies our analysts and you like. The first is Alphabet. So run us through the numbers, Dave.

Sekera: Still a 4-star-rated stock, trading at a 13% discount. Again, this is one not necessarily for dividend investors, pays less than a half of a percent dividend yield, but a company with a very wide economic moat. In fact, in our view it has four out of the five moat sources, including intangible assets, network effect, cost advantage, and customer switching costs. A stock we rate with a Medium Uncertainty. And this is one stock that we still think has some upward momentum as a long-term beneficiary of artificial intelligence.

Dziubinski: Now, Alphabet’s been a stock pick on the show a few times during the past six months or so. So remind viewers why you like it and why Morningstar’s not overly concerned at this point about the antitrust cases against the company.

Sekera: Well, from more of a portfolio standpoint, I just note that while we do recommend an underweight in large-cap stocks overall, you still need to have some exposure there even if you are underweight. So this would be a large-cap stock that we still think is attractive even in an overvalued space today. And similarly, while we may recommend a slight underweight in technology stocks, you still need to have some tech exposure there.

Yes, technically, I know it’s in the communications sector, but I still think of Alphabet as a tech company as opposed to a communications company. And while a lot of tech, especially those AI plays, are overvalued, I still think this is leveraged to AI and one of the few AI plays that we see trading at a discount to fair value today. As far as the antitrust cases go, I know our analyst team has noted that of the three big antitrust cases out there, Google Search was the most material.

Now, the DOJ has recommended that the company should divest Chrome, reduce self-preferencing, remove search agreements, and start lightening up some of the data sharing or increasing the data sharing with its rivals. But I still think you have to think about the timing of how this runs out. The ruling on the antitrust case probably comes middle of this year and, of course, it’ll get appealed thereafter.

That’s at least another year before that appeal works its way through the system. So we don’t think that anything is going to happen anytime soon anyway. And then I know lastly, our analytical team does think that these proposals are unlikely to be held up in an appeals court. And even then, to impose a breakup, the DOJ does have to prove that other remedies don’t work.

So we think they would need to implement and measure those other remedies before we get to some of these really drastic changes that the company might have to make. And then lastly, and this is just my own speculation, there may be some winds of change in antitrust under the Trump administration as well. So we’ll see if any changes in the administration does have an impact on the DOJ cases here.

Dziubinski: Now, your next pick this week is ExxonMobil XOM. Review the stats on this one.

Sekera: Four-star-rated stock, 21% discount, 3.7% dividend yield. A company we rate with a narrow economic moat, the moat source here really based on their integrated business model as a source of their cost advantage. But a stock we do rate with a High Uncertainty.

Dziubinski: Now, given Exxon’s position in the oil and gas industry, why is the stock so undervalued today?

Sekera: Yeah, I think the market just must have a much more dour outlook on the long-term price and demand for oil than what we have. So the way our model works is we use the market two-year forward strips, so what the market is actually pricing in today for the futures for oil for the next two years. And then we’ll depreciate that price at the end of year two toward our midcycle forecast. Our midcycle forecast for West Texas Intermediate right now is $55 a barrel.

So in our model, we bring our oil price down to $55 by the end of the fifth year of our forecast period. And then when we think about oil demand, we do expect the oil demand will slowly begin to decrease later this decade. So it’s not like we have a rosy view of oil in and of itself, but we think that the market is probably pricing in a much more negative outlook than what we currently have.

Now, as far as taking a look at this company, it looks to me like you’re buying it at a pretty good margin of safety, a relatively high dividend yield. But most of all, I really like having energy stocks, and Exxon specifically, in your portfolio. I think it provides a good natural head for inflation if that were to come back. Of course, if we were to get any more or an expansion in geopolitical conflict, that could bump up oil prices in the short term as well.

And of course, there’s a lot of leverage here if oil prices stay high or move up higher over the medium term, as compared with our forecast, or if demand were to stay higher than expected over the longer term.

Dziubinski: All right, well, then your last pick this week is US Bank, which has been Morningstar’s favorite bank stock pick for a while. Walk us through the numbers.

Sekera: Yeah, so it is a 3-star-rated stock. Although when I take a look at it, it’s right at the edge of that 4-star category. So yes, 3 star, but it is trading at 11% discount. Pretty good healthy dividend yield at 4.2%. It’s a company we rate with a wide economic moat. In fact, it’s the only US regional bank we rate with a wide moat, moat sources being cost advantages and switching costs. And a stock we rate with a Medium Uncertainty.

Dziubinski: Now, as you pointed out, this is a 3-star-rated stock, not a screaming bargain. So why is this one a pick this week for you, Dave?

Sekera: Well, to some degree, it’s also really just a swap idea for a lot of those other mega banks, which have just run up too far, too fast in our view. And really when I look at the trading here, for whatever reason, the stock here has failed to keep up with the rally across the rest of the financial sector. I reread through our research, took another look through our model last night.

And in my opinion, it just doesn’t look like it’s a matter of poor fundamentals. Again, wide moat. We note the company has a strong deposit base, good fee income, very high efficiency ratio. In fact, the company has top-four market share in almost every market that it operates. So I’m wondering if right now this might be a little bit of an orphan stock play where it’s too big to be considered a regional bank play.

So the regional bank players aren’t necessarily looking at it and buying it. But at the same point in time, it’s too small to be considered a US mega bank. So I think maybe that’s why we’re seeing the value in that one today just because it’s not getting the attention that I think it deserves.

Dziubinski: 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 on Monday, Jan. 27 at 9:00 a.m Eastern, 8:00 a.m. Central. In the meantime, please like this video and subscribe to Morningstar channel. Have a super week.

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