5 Stocks to Buy When the Market Falls

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar and welcome to the Morning Filter. Every Monday morning, I sit down with Morningstar Research Services chief US 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. On your radar and on everyone else’s radar this week is the Fed meeting.

What’s the market expecting the Fed to do?

David Sekera: Hey, good morning, Susan. The Fed’s going to stay on hold. I don’t expect to see any change out of the Fed, whether it’s the federal-funds rate or the rate at which they sell bonds off of their own balance sheet.

Dziubinski: So what are going to be listening for in Fed Chair Powell’s comments?

Sekera: Well, everyone’s really going to be hyperfocused on how Powell talks about and characterizes inflation. Personally, I’m curious to see whether or not he talks about if the Fed is looking at any other metrics and how they measure and think about inflation as well as how they typically look at personal consumption expenditures. But I think investors also need to listen to how he characterizes the Fed’s outlook for the economy.

So with the economy holding up better than I think most people have expected, that may make the Fed to start thinking whether or not monetary policy is really as restrictive as they thought. I’m also curious to see if he makes any commentary regarding inflation expectations or yields in the bond market. So when I look at short-term inflation, measured by the five year breakeven rate, that’s been really on an upward trend all year.

And when I look at longer-term inflation expectations, there I use the five-year or five-year forward inflation breakeven rate, that’s actually still been within a range that it’s been in for quite a while. But with short-term inflation expectations, moving up, the concern I have there is whether or not it starts pushing into that five-year, five-year forward.

And if we start seeing those longer-term inflation expectations start going up, that will become a problem. And then lastly, in the bond market, the 10-year Treasury, the yield there has been trending up, year to date. It’s still below where it peaked last October when it got to about 5%.

But it is back up to 4.3% right now. So if that yield continues to keep climbing, especially if it starts getting close to that higher 5% rate that it was last October, I do think that would start to negatively impact the stock market.

Dziubinski: Let’s talk a little bit about those CPI and PPI numbers that came out last week. They both came in a bit higher than anticipated. Unpack that for us.

Sekera: Sure. So, Preston Caldwell, who’s Morningstar’s chief US economist, did recently increase his inflation forecast for this year. We’re now looking for average inflation over the course of 2024 to be 2.0%. That’s an increase from his prior projection of 1.9%. Now, he does still expect that inflation will continue to keep moderating over the course of the year.

So when he breaks inflation down into a lot of its component parts, he notes really that it’s been shelter that’s been keeping CPI higher than expected. And then he also has further noted that the way shelter is calculated, there’s actually a pretty long lag between when cost for underlying rents actually go up versus when they actually get captured.

In that CPI report. So according to more real time data that he watches, he does forecast that those rent costs should start falling and fall on a more of a sustained basis in the second half of the year. Net net, though, when he does take that PCE report and puts the CPI and the more recent PPI numbers into it, he still does think that there could be a core PCE inflation reading for February of about 3.7% on an annualized basis.

So still a bit higher than I think what we are necessarily looking for at the beginning of this year.

Dziubinski: So then given these higher than expected numbers, is Morningstar still expecting the Fed to begin cutting interest rates in June?

Sekera: So the short answer is yes. Our economics team does still forecast that we will start seeing rate cuts here at the June meeting. And I would just note, too, there’s a lot of data between now and then, and we do, I think, have about three different reports coming out for both PCE and CPI before that monetary decision is released.

And when I look at the market implied probability for a cut at that meeting, it’s 60% right now. So a little bit better than a coin flip, but actually not all that much better.

Dziubinski: So also on your radar this week are a couple of well-known brands that will be reporting earnings. The first is Nike ticker, NKE. Nike stock has had a tough couple of years, and it looks pretty undervalued today. What’s the story going on here?

Sekera: I think Nike’s actually just a good example of how sometimes the market can overextrapolate short-term trends too far into the future. So over the past couple of years, when you look at Nike and you think about like in 2020, yeah, we had the pandemic, we had all the stimulus checks, we saw a big shift in consumer spending into goods and away from services.

So that stock surged much higher in 2021 and 2022. But then as good spending started to normalize, people started shifting that spending back into services, away from goods. We started to see no longer having the impact of those stimulus checks. The stock has sold off pretty dramatically. So at this point, the stock has actually round-tripped.

It’s all the way back toward prepandemic levels, which we think is probably too low based on our longer-term fundamentals here. So we do rate the stock with 4 stars, trades at about a 27% discount to our fair value. It is a company that we rate with a wide economic moat and a medium uncertainty.

Dziubinski: Now, another company known for its brands is also reporting this week: General Mills, which is ticker GIS. And I’m going to dig into a bowl of Cheerios after we wrap this morning. What does Morningstar think of the stock heading into earnings?

Sekera: Well, I might join you on some of those Cheerios, but it’s a similar story as Nike. So, again, the stock did pretty well in 2021 and 2022, but then it did fall in 2023. And I just note in the food category, a lot of these food companies have had a pretty difficult time over the past year passing through all of their own inflationary cost increases through to the consumer.

And a lot of these companies, General Mills included, are still working to pass through those costs in their pricing in order to try and get back to more normalized historical operating margins. So it is a 4-star-rated stock, trades at a 13% discount to our fair value company. We rate with a narrow economic moat and low uncertainty. Nice healthy dividend yield at 3.5%.

But I would note here, though, if you are interested in a similar business, even more undervalued than General Mills is WK Kellogg. And that’s actually a stock that I would point investors toward.

Dziubinski: So let’s move on to some new company-specific research for Morningstar. Starting with Oracle, which is ticker ORCL. Oracle reported earnings last week, and the stock soared afterwards. Morningstar didn’t make any adjustments to its fair value estimate. So what did we think of Oracle’s results and outlook, and how does the stock look today?

Sekera: Yes, I mean, first I have to note it is a 1-star-rated stock. Trades at a 50% premium. That’s five-zero over our fair value estimate, and in fact that puts it near the top of some of the most overvalued stocks under our coverage today. So end of the day, there was nothing in this report that had our equity analyst team yet change their longer-term assumptions.

So right now, the market we think is overestimating the amount of long-term growth that they’re going to have in their cloud business. Our analyst is just concerned that over time, Oracle may end up losing market share to new and different types of databases that might be better suited toward artificial intelligence.

Dziubinski: Now, Adobe ticker ADBE also reported last week. It looks like first-quarter results were good. Morningstar maintained its $610 fair value estimate, but the stock plummeted. So what happened here, and what is Morningstar think of the stock after earnings?

Sekera: Our analytical team agrees. They thought the Q1 results were good, but they think the market is probably overreacting to the guidance. So in this case, Dan Romanoff, who is the equity analyst that covers the company, described the guidance as quote unquote, perplexing. And that’s just never a word that should be attributed to guidance. I mean, a management company management team really should be able to clearly extend to the market what they think their guidance is going to be. And he gave a couple of examples here. So, first of all, he noted management refused to reiterate their full-year outlook for net new annual recurring revenue. And yet he said that repeatedly throughout the call, the company said that they felt really good about it.

He also noted a number of different moving parts to that guidance, which he thinks just made it overly confusing to the market. Now, having said all that, there was nothing definitive that caused Dan to change or update his longer-term assumptions. So our fair value was unchanged. Now, that stock did fall enough. It just started trading into that 4-star territory down from being 3 stars.

But personally, I’d be cautious here. Maybe look for a greater margin of safety before you think about investing in this one. Yeah, this is just my own personal opinion. But to me, if a company is unable to clearly convey their outlook to the market, makes me wonder if maybe there’s something going on underneath the surface here.

Dziubinski: Now, we also had two discount retailers report last week. Let’s talk first about Dollar Tree. That’s ticker DLTR. Dollar Tree announced plans to close nearly a thousand stores, and the stock sold off. So what did Morningstar think of that news and the company’s results? And what do we think of the stock?

Sekera: As we talked about on last week’s show, from a top line perspective, these companies are going to be pretty pressured on the revenue growth. I think they’re going to be constrained from a top line perspective. They do serve lower-income customers for the most part. And of course, the lower-income customers being under the most pressure from inflation.

And then from a margin perspective, they’ve just had a difficult time putting their own price increases through. So that’s pressured their operating margins. As you mentioned, the stock did crater after earnings. It fell about 14%. So it does put that stock into the 3-star territory, down from being overvalued in the 2-star territory.

But it’s still in that really top or upper end of that 3-star area. So, again, another stock I would probably still steer clear of for the meantime.

Dziubinski: And then Dollar General, which is ticker DG, also reported earnings last week. The stock pulled back a bit after the release, but Morningstar stood by its fair value estimate. So what’s the story with this company, and how does the stock look today?

Sekera: Yeah, so the stock did fall 5% after earnings, but I would note it actually fell 2% the day before that. So it fell in sympathy once Dollar Tree’s results came out. And the decline here, we think, was really just due to management’s commentary that they do expect margins will remain under pressure. So similar to Dollar Tree, it is a 3-star-rated stock, but it’s still in the top of that range.

Yeah, I’d really like to see some evidence and a rebound in margins before I were to get involved in the stock or Dollar Tree for that matter.

Dziubinski: So let’s talk a little bit about some company news that isn’t earnings-related. We had Lithium Americas announcing last week that it had secured a $2.6 billion loan from the US Department of Energy to fund its Thacker Pass lithium project. And the stock really rallied on the news. But Morningstar trimmed its fair value estimate on the stock by a hair.

So two questions here, Dave. One, why the haircut on the fair value? And two, is the stock still attractive?

Sekera: Yeah. So the reduction in the fair value takes into account some updated numbers and guidance that the company provided at that same point in time. So they did increase their estimate to be able to develop that project up to 2.9 billion from their prior projection of 2.3 billion. And then they also pushed back the timeline that they think that they’ll be able to start producing out of that project into 2027.

It was expected to start producing in 2026, but it’s still a 5-star-rated stock. Trades at a 67% discount to fair value. So in our view, puts it deep, deep into that undervalued territory. And in fact, it’s probably one, if not one of the more undervalued plays in lithium. But I would caution it is a stock we do rate with the very high uncertainty.

So for investors looking for maybe higher-quality exposure to the lithium mining industry, I’d point out Albemarle. That is a 5-star-rated stock. Also trades just under half of our fair value estimate.

Dziubinski: All right. Well, let’s move on to the stock picks portion of our program. Now, this week, you’ve brought viewers a handful of stocks to buy when the market falls. Now, you mentioned in your March Stock Market Outlook, and viewers can access that via a link beneath this video, that you thought market valuations were starting to look stretched.

So while, of course, you can’t predict when the market will fall in any meaningful way and I’m not asking you to, how does the market look from a valuation perspective today?

Sekera: Yeah. So the broad market is trading a couple of percent above our fair value estimate. That does still put it in fair value territory. And as you mentioned, no one can really accurately predict when the market is going to take some sort of correction. I would just note looking at the charts and some of the technical indicators here, the market does look a little bit stretched.

So I wouldn’t be surprised to see either a pullback or maybe the market just takes a breather, the spring going into the summer, especially if interest rates were to still continue moving upward. That’s probably one of my biggest short-term concerns for the market right now.

Dziubinski: So then given that, Dave, what types of companies would you be putting on a watchlist to buy on some market weakness?

Sekera: And of course, that’s just going to depend on what you already have in your portfolio, your risk tolerance. But in a general market correction, I’d first look toward those stocks that are considered core holdings for a well-diversified portfolio. In this case, those high-quality companies that are evidenced by having a wide economic moat. Those that we rate with either a low or medium uncertainty rating.

But then I’d also look for companies that have at least a market average or even better dividend. So good dividend yield, which if we do go into a holding pattern in the market, at least you get paid to wait until the market starts moving back up again.

Dziubinski: All right. Well, let’s get to your picks, Dave. The first is a consumer defensive name, Constellation Brands, known for Mexican beer brands Modelo and Corona here in the US. The stock has performed well relative to the rest of its industry during the past year. Why do you like the stock as one to buy on weakness? And do you prefer Modelo or Corona?

Sekera: Well, it’s a little early in the morning on a Monday, but I actually do like the Modelo brand. But then again, on a hot summer day, there’s nothing like a good Corona. Having said all of that, it is a company we rate with a wide economic moat and a medium uncertainty. Does trade at a slight discount to fair value.

Right now, the dividend’s a little bit thinner than I would like at 1.3%, but again, still, you’re getting paid something here. Now, I’ve actually followed this company for, I think, over 25 years now. And I’ve watched the Constellation Brands really transform itself over that time period from being a relatively small wine distributor to being one of the largest alcoholic beverage companies in the US. As you mention, it does have the rights to distribute both the Corona and the Modelo brands here in the US. And those are two of the faster-growing brands. And the other thing I really like here is Constellation Brands has used those brands now to extend into the alcoholic seltzer category, which again, has been one of the faster-growing areas that we’ve seen in the alcoholic beverage space.

So overall, beer volume has been stagnant in the US for several years. But when you look at Constellation Brands, using Corona and Modelo, they’ve actually been able to drive a high-single-digit volume growth.

Dziubinski: So your second pick this week is from the healthcare sector. It’s Johnson & Johnson. The stock hasn’t really done much over the past year. So why do you like JNJ stock on a pullback?

Sekera: Again, another company we rate with a wide economic moat. In this case, it has a low uncertainty. Trades only a couple percent below our fair value. But it does have a nice 3% dividend yield. So when you think about Johnnie John, it is the world’s largest and most diverse healthcare company. They have three different divisions that make up the firm.

So they have the pharmaceuticals, the medical devices, and the consumer division. So I like this just from a good broad diversification standpoint.

Dziubinski: Now, your next pick operates in a variety of industries. So talking about diversification, it’s Honeywell. The company reported mixed earnings and a forecast that was shy of what the market was expecting. So the stock’s having kind of a tough year. Why is this a stock that you have on a watchlist?

Sekera: Well, the thing that really caught my eye is, according to our analyst team, they think Honeywell is probably one of the strongest multiindustry firms in operation today. So we do rate the company with a wide economic moat and a medium uncertainty. Trades at a 10% discount from fair value. So still in 3-star territory, but at least a decent margin of safety today.

And then also yields 2.2% on its dividend.

Dziubinski: Now next up is Wells Fargo. And it was just about a year ago that the regional banking crisis unfolded and dragged down all bank stocks, including Wells. But bank stocks have since recovered. So why is Wells the bank stock that’s on your list of names here to buy when the market falls?

Sekera: Yeah, a couple of different reasons. First, I know it does have a wide economic moat and a medium uncertainty. Wells Fargo does definitely have some issues in its relatively recent history. But I’d note here one of the things that sticks out in my mind is that Charlie Scharf, who’s now the CEO, he’s a Jamie Dimon protege.

Of course, Jamie Dimon being the CEO of JPMorgan. And Charlie took over in October of 2019. A little bit of unfortunate timing for him. First he had to deal with the impact of the pandemic. But I think at this point, he’s had now enough time to really resolve a lot of the issues that caused that fraudulent activity that occurred at Wells Fargo.

So, again, a 3-star-rated stock a little bit above fair value, 2.4% dividend yield. So I do think that hopefully going forward, we should start to see some of the improvement in operations, coming from the changes that he’s made since he’s been there.

Dziubinski: And then your last pick this week is the stock we’ve talked about before on the show several times, Microsoft. In the case of the stock, it seems like the question really is what’s not to like?

Sekera: Well, again, it’s a 3-star-rated stock. And I guess, just as a reminder to what a 3-star rating means: It doesn’t mean sell; it doesn’t mean that we think a stock is unattractive. What it means is that we think that the stock is trading close to its fair value and that for long-term investors, over time, you’ll still end up earning the company’s cost of equity.

So again, as a core holding, that’s probably still a pretty good position to have today. Now, I would say with Microsoft, it does have a little bit lower of a dividend yield that I would prefer. It’s under 1%. But again, that’s a company with a wide economic moat, medium uncertainty. And as you note, this company has still really been hitting on all cylinders.

It’s dominant in personal computing space, but also we think it has a long runway of growth in its Azure business. That’s the business and the cloud space. And we also think that Microsoft will be a leader in artificial intelligence.

Dziubinski: Well, thanks for your time this morning, Dave. Viewers interested in researching any of the stocks that Dave talked about today can visit morningstar.com for more analysis. We hope you’ll join us for the Morning Filter again 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.