3 Stocks to Buy After Earnings

On this week’s episode of The Morning Filter podcast, Dave Sekera and Susan Dziubinski unpack results from Palantir PLTR, Advanced Micro Devices AMD, and Fortinet FTNT. They also review the reports from several former stock picks, including Huntington Ingalls Industries HII, Zimmer Biomet ZBH, LPL Financial LPLA, and Diageo DEO. And they talk with Morningstar’s equity analyst about what went wrong with FMC FMC and how to think about the stock today.

Is the US stock market overvalued right now, and should investors take some chips off the table? Tune in to find out—and to hear about the sectors that look most undervalued this month. This week’s episode wraps with three stock picks that look attractive after earnings.

Episode Highlights

1. Earnings to Watch This Week
2. New Research on PLTR, AMD & More
3. Is the US Stock Market Overvalued?
4. Stock Picks of the Week

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

Transcript

Susan Dziubinski: Hello and welcome to The Morning Filter podcast. I’m Susan Dziubinski with Morningstar.

Every Monday before market open, Morningstar Chief US Market Strategist Dave Sekera and I sit down to talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.

So we’re going to spend most of this week’s episode catching up on key companies that have reported earnings, including Palantir, AMD, and Fortinet, as well as several of Dave’s former stock picks. And viewers, we’ve heard you. This week, we’re taking a deep dive with Morningstar’s analyst on FMC.

Dave and I will also discuss his new stock market outlook, and we’ll end with a few stocks to buy after earnings. And for those of you out there who are eager to get the picks, here’s a clue about one of Dave’s stocks to buy this week. So there you go.

David Sekera: Very subtle, Susan, very subtle.

Dziubinski: Product placement.

Anyway, well, good morning, Dave. We have some good news this morning, hopefully, if all goes according to plan, we’ll see the end of the government shutdown this week, so what do you think the economic impact has been, and could the shutdown influence the Federal Reserve’s interest rate decision in a few weeks?

Sekera: Good morning, Susan.

Actually this morning when I was grabbing my coffee I grabbed this mug. Says “happy fall.” Well, viewers I think this is going to be the last one you see of this one for the next year. I woke up this morning: I’ve got a full layer of snow on the ground outside. I think it’s 24 degrees right now, so winter came very quickly this year.

All right, so getting into what’s going on this week. I did touch base with Preston Caldwell, who’s Morningstar’s chief US economist last Friday, so from an economic point of view, there’s really no change to his forecast at this point in time. He is still expecting that the rate of economic growth is slowing and that it will slow sequentially until the second quarter of 2026. But his base case is still that we’re not going to slip into any type of recession. And then he’s looking for a slow reacceleration of growth in the second half of next year.

Now, from the point of view of the Federal Reserve, I don’t think that the government shutdown is not—it’s not going to make any difference, I think, in what they’re thinking, I think. All the voting members, if you kind of listen to some of their speeches, I think they’re already kind of dead set in what they’re thinking right now. As far as the economy goes, I mean, there’s a lot of economic metrics that the Fed itself produces, a lot of other alternative metrics out there. So I think it’s enough that they’re going to be able to decide to cut rates.

Took a quick look at the CMA Fed tool. So according to that, there’s a two thirds probability that the Fed will cut at the December meeting. Yes, that is a lower probability than what it was a month ago but that’s still slightly higher than where it was last week, so that’s still our base case for one more rate cut going into the end of the year.

Dziubinski: All right. Let’s talk a little bit about earnings reports or anything you’re watching this week in particular.

Sekera: AMAT Applied Materials AMAT is probably the only one that I’m really going to be watching this week. Now, that company is the largest semiconductor wafer fab equipment manufacturer in the world. Some of its clients include Taiwan Semi TSM, Intel INTC, Samsung. So they have visibility across really just a wide swath of the semiconductor industry.

Now, when I took a look at this one, I’d note that in August, the stock did sell off after earnings. So the company had met management guidance, but they kited down for this current quarter to an 8% sequential decline in revenue. Now, at that point in time, our analyst noted that he thought the selloff was overdone. The stock did drop a bit so it got right to that boundary in between being a 3-star and a 4-star not necessarily sure if it actually went 4 star but kind of right into that area, and then since then, the stock has surged. It’s now up into 2-star territory. Over that same time period, we actually increased our fair value slightly a little while ago, just taking into consideration the investments in AI accelerator chips helping drive more medium-term growth so we increased our projections there.

So with this one, it’s really just going to be very close scrutiny of any guidance, any commentary that the company gives, not only for artificial intelligence products, but just whatever language they have regarding more traditional logic semiconductors. So I think that just will help gauge global and economic growth across the rest of the world.

Dziubinski: All right, well, then let’s pivot over to some new research from Morningstar about some companies that reported earnings during the past few weeks. We’ll start with Palantir, which is ticker PLTR. Now, the stock last I checked was down about 14% since the company reported. But Morningstar actually raised its fair value estimate on Palantir stock by about $20 after earnings.

So two-parter here, Dave, why did the market respond the way it did? And what drove that fair value increase from Morningstar?

Sekera: Well, the fair value increase from our analytical team was really just to incorporate the new guidance that the company had provided. So when I take a quick look at our financial model, the R5 year revenue compound annual growth rate is now 44%. That’s an increase from our prior model of 41%. And just to put that into perspective, what that means, we’re looking for $4.4 billion in top line this year in 2025. We’re projecting that to grow to $17.7 billion by 2029. And over that same time frame for earnings to more than triple, to go from 72 cents a share this year all the way up to $2.43 cents in 2029. So it’s just trading at approximately 250 times 2025 earnings estimates. I mean, even using 2029 earnings, it’s still trading at a 73 times PE multiple.

So I think at this point, it’s just that it’s bumping up against its valuation limits. So I think it really just ended up being. more profit-taking, maybe a bit of a buyer strike more than anything else last week.

Dziubinski: So then even after that pullback in shares and that increase in the fair value estimate, Palantir stock is still way overvalued, right?

Sekera: It is according to our model. It’s a 32% premium over fair value, which puts it pretty well into 2-star territory.

Dziubinski: OK, well, let’s stick with tech stocks.

We had AMD reporting last Tuesday after market close, and the stock finished the week down about 9%. Morningstar held its fair value on AMD stock. So what’s Morningstar’s take after earnings? Is there an opportunity with AMD?

Sekera: I mean, the earnings in and of themselves were pretty good. So third-quarter revenue is up 20% sequentially. That’s 36% on a year-over-year basis. So above the guidance that they have provided. And then when we look at guidance for fourth quarter for revenue of $9.6 billion, that’s a 4% sequential growth. That’s still 25% year over year. So that also was better than consensus expectations.

It’s just that at this point, I think the revenue for the deal with OpenAI is already incorporated into the valuation. And as you and I talked about last week, I think the market really wanted some additional color on the timing for the buildout. They wanted additional detail on how AI players are forecasting growth for future usage. So overall, I think that they were just disappointed that they didn’t really get anything new. Our fair value is unchanged. It’s still $210 a share. Stock closed at $233 last Friday. So trading a little bit over a 10% premium keeps it in 3-star range here.

But what I will note for investors is that the company will host their financial analyst day tomorrow, Tuesday, Nov. 11. So I think the company, of course, will be trying to put its best foot forward to the analytical community. So personally, I really wouldn’t be surprised if they were maybe holding back some good news to announce at the investor day. If so, maybe that’s something that can get our fair value and maybe the valuation of the market to increase. If not, that could actually be more disappointment.

Dziubinski: All right. Well, it sounds like AMD is one to keep an eye on this week then. OK.

Fortinet, ticker FTNT, is down about 5% since reporting earnings last week. Morningstar’s analyst called results solid, and we held our fair value estimate on the stock at $108. So unpack the results for Fortinet, and tell us whether the stock’s valuation is attractive or not after earnings.

Sekera: Yeah, so I’d just point out, if you look at the day-to-day chart on this one, the stock definitely got hit after earnings, but it does look like it started trying to reclaim some of that loss thereafter. Sales were up 14%, adjusted earnings per share up 17%. So I think this is a case where our own analytical team is more focused on a couple of individual parts of their businesses that are growing, even though they’re a relatively small part of the business now, we think those are growing faster than more of the legacy part of the business. And I think we’re more comfortable giving them the valuation in our fair value today than what the market is.

So it’s just a matter of when you look at future growth, it’s coming more from the secure access service edge, more from security operations solutions. Both are gaining traction. They contributed 37% of quarterly billings. So when we model that into our model, we’re coming up with a fair value that is currently putting the stock in 4-star range. Trading at a 24% discount. There is more detail in the Stock Analyst Note, so I would say if you have an interest in cybersecurity and specifically Fortinet to go ahead and read that Stock Analyst Note.

Dziubinski: All right. Well, we talked about Sherwin-Williams SHW, which is ticker SHW, a few weeks ago. This was a company you were watching ahead of earnings because it cut its 401(k) match. So, you know, Dave, how were those results? Company drop any bombs? And how’s the stock look from a valuation perspective?

Sekera: So there’s a lot of things going on in the world, which anecdotally make me really confused as far as like where the economy is going. Some things that I’m looking at, especially anything tied to AI, going great guns, great growth. Anything not tied to AI seems to be stagnant or even struggling. So this is just one of these ones where it just adds to my confusion to be perfectly honest.

In this case, I expected that the underlying business must have been really soft for them to get to the point that they would halt their 401(k) contributions. I did a quick search. It looks like the last time they did that was either during the global financial crisis or during the emergence of the pandemic. But it turns out when you look at the earnings report that was announced, it came out, it was just fine. I mean, there’s nothing to write home about, but it certainly wasn’t the downside that I was guessing at that they probably could have had with that 401(k) cut.

Now, taking a look at the transcript, they did address the 401(k) cut in the prepared remarks, but in my mind, they didn’t really say anything meaningful about it. So again, I’m just confused as far as what’s really going on here, fundamentally. When I take a look at the chart, I mean, the stock popped pretty substantially after the earnings. Maybe it was some short covering. Maybe people were thinking what I was thinking and expected to see some downside here. But since then, it did give up a lot of the gains. It’s actually now trading back to pre-earnings levels. Overall, it’s still at a 30% premium to our long-term intrinsic valuation. So still a 2-star rated stock.

Dziubinski: All right. Well, let’s talk about some of your stock picks that have reported earnings over the past few weeks.

Huntington Ingalls Industries, which is ticker HII, was up after earnings and the stock is up more than 60% this year. Dave, what did Morningstar think of Huntington’s results? Any changes to the fair value?

Sekera: Well, as you mentioned, this was originally a pick of ours, I think on the July 8, 2024, episode of The Morning Filter. And I probably recommended it a little bit too early. It did have several selloffs thereafter. But I have to note: Nic Owens, who’s the analyst that covers this one, really stuck to his guns, even to the downside. We reiterated our call on Huntington several times over the course of the past year. And now it’s just a matter of the story is playing out as Nic expected.

Again, what we saw this past quarter was a solid quarter for revenue and earnings. Management raised their revenue and their free cash flow guidance. So we actually increased our fair value 7%. Our current fair value is $348 per share.

Dziubinski: All right. So then after that runup in the stock price, change in fair value, how does Huntington stock look from a valuation perspective? Is it still attractive?

Sekera: Yeah, I mean, from the perspective of being more of like a hold at this point it’s still at a slight discount to fair value. But following the rally that you talked about, it is now a 3-star-rated stock.

This is just a good example of how to layer into a position. We’ve talked about this in past episodes of The Morning Filter. My own personal investment style is to start with maybe a third to a half-size position in a new name. That way, it does leave some dry powder so that you can buy some more to the downside and then that way when the stock does recover and starts moving back up, you also have the ability to start selling some to lock into some of those gains. So maybe depending on how you’ve played Huntington, maybe now is actually not a bad time to lock in some of those gains today.

Dziubinski: Now, Zimmer Biomet, which is ticker ZBH, is down about 14% since management lowered guidance last week.

Dave, was there anything in the report that led Morningstar to change its fair value estimate on Zimmer’s stock? And then secondly, is the stock still attractive from a valuation perspective?

Sekera: Well, I think from the management—I’m sorry—from the market’s point of view, I think that lowered revenue guidance really disappointed investors here. And I think this is going to be one of these stories where I think management is going to need to really rebuild their credibility over the next couple of quarters, maybe even the next year or so. So management’s stated long-term goal is mid-single-digit top line growth. After this guidance cut, that looks to be more and more of a stretch for the company.

Now, having said that, when I pulled up our model, we only forecast revenue growth to average 3% from 2026 to 2029. I mean, that’s 200 basis points below the company’s long-term goal of 5%. So from our point of view, the company is still on track to meet those longer-term forecasts. We left our fair value unchanged at $130 a share. So it is trading at about a 32% discount to that fair value, puts it in four-star territory.

So I think the upside in this one is that we are looking for the company to increase their margin improvement as new products roll out over the next couple of years, but this might be one where it takes longer than what I originally had thought for this one really to start performing.

Dziubinski: LPL Financial, which is ticker LPLA, is up about 10% since reporting earnings. And Morningstar’s analyst noted in the note that the company’s strategy remains on track, and Morningstar held that fair value at $504. So what do you think of LPL Financial as an investment today?

Sekera: Still looks attractive to us. 4-star-rated stock at a 26% discount. And if you take a look at the results and you exclude the impact from the acquisitions, the underlying results, according to our analytical team, were pretty strong. Company’s doing what we thought it was going to do. We’re seeing a fee-based business benefiting from the tailwinds in the marketplace. We’re seeing income growth from their cash sweep programs. Overall, we’re exhibiting—or looking for the company to continue exhibiting organic growth for assets under management. It’ll just benefit over time from the rising stock market. So they’ll be able to generate a higher fee income from higher assets under management. They’re growing from acquisition.

So this is just one where, yeah, it looks like the story that our analytical team put together, our investment thesis, is playing out as expected.

Dziubinski: Now, Diageo, which is ticker DEO, reported weaker than expected sales, and management reduced guidance. Stock’s down around 3% since reporting. So what did Morningstar think of those results? Any changes to Diageo’s fair value estimate and is the stock attractive?

Sekera: Well, I guess the changes here, Susan, I’m guessing going to have to come up with better holiday-themed cocktail suggestions in order to drive some earnings growth here. My Halloween ones obviously did not resonate here, with the top line being flat at Diageo.

Now, they did have some volume increase, but that was offset by the negative mix shift. As you mentioned, they did lower their fiscal 2026 guidance. So at this point, they’re now expecting a slight decline to flat organic revenue, only looking for low-single-digit to mid-single-digit operating profit growth. So the market is definitely disappointed by that. The stock did drop. But I also think the market does realize that this one does look attractive from a long-term valuation point of view. We did see the stock try to recover some of those losses thereafter. We did take the incorporated updated guidance into consideration.

So we updated our model. That did lower our fair value to $118 per share, but at $118, it is still a 4-star-rated stock at a 23% discount. Nice healthy dividend yield at 4.6%. I would say to our audience, I’ll definitely try and come up with some better ideas for Thanksgiving and the holidays for some new cocktail recipes.

Dziubinski: But in the meantime, Diageo is still attractive.

Sekera: It is, yes.

Dziubinski: All right, so it’s time for our question of the week. Now, several viewers have been asking us about FMC, and for good reason.

FMC cut its dividend and slashed its guidance, and the stock is down more than 50% since then. So for an update on the company’s prospects, Dave sat down this past Friday morning with Morningstar Senior Analyst Seth Goldstein, who follows FMC. And here’s their conversation.

Sekera: Hey, Seth. So first of all, thank you for taking the time to meet with us to talk about FMC this afternoon.

Now I was taking a look at FMC’s stock chart over the past couple years, and it looks like, at the beginning of 2023, the stock was actually pretty close to our fair values at that point in time. Then later in the year it did take a brief selloff for a pretty good chunk of change, stabilized for much of 2024, trading kind of in the trading range, but now it’s sold off once again.

Could you briefly walk us through the story over the past two years? What’s occurred? And really, why has the stock performed the way that it has?

Seth Goldstein: Yeah, thanks for having me, Dave.

So as we look at FMC, if we start when FMC was fairly valued, this was when the company was coming off of a few record years postpandemic, where many of the agriculture retailers and their customers, especially in a market like Brazil, which is FMC’s largest market, were stockpiling inventory due to supply chain fears that they wouldn’t be able to get enough crop chemical products. And for farmers, they need crop chemicals to control weeds, insects, and fungi in order to make the crop yields large enough and more profitable. So these are very important products to farmers, and farmers were stocking up crop chemicals as well on their own farms.

So then once the supply chain fears eased, we saw inventory destocking really hit FMC hard in 2023 and 2024, especially in a market like Brazil, where farmers had built up more inventory during the upcycle for crop chemicals, and so they had more inventory to work off. And so we saw that region get hit even harder during the downturn. And so for FMC, because they have a more geographically balanced portfolio versus a company like Corteva, who’s half of their revenues in North America, FMC did better on the upside but also way worse on the downside. And so that really led to the selloff in 2024.

And now in 2025, we have an issue where FMC’s largest product category, called the diamides—it’s a really effective insecticide. they started to come off manufacturing patent. So the patent for their largest product, Ranaxapyr, came off patent in 2022, but it’s manufactured in a very specialized process and that patent didn’t expire till this year. So now we’re seeing generic pressures for Ranaxapyr. That’s really hurt profits this year, and FMC’s tried to reduce their manufacturing costs to be able to match the cost structure of generics and sell it out at a lower price. But so far, that’s been a transition, and it’s been weighing on profits this year.

And then for next year, the other big diamide product called Cyazypyr starts to go off the manufacturing patent as well. And so we expect generic pressures will be able to once again hurt FMC as they enter the key markets like Brazil. So really we have inventory destocking started the big downturn for FMC, and now that’s pretty much over, but we do have generic pressures for their largest product categories. And for reference, the diamides made about 35% of revenue last year. So you can see, from that number, it’s a very important product to FMC.

Sekera: Now, following this recent earnings release, the stock did take a bit of a dive. So I’m just curious, what more specifically changed this past quarter than what we’ve really seen over the past couple quarters before that. And how did you then incorporate that into your projections within our financial model?

Goldstein: Well, there were really two key things that caused the stock tank.

First was the dividend cut. FMC had been guiding for free cash flow to exceed dividends at the midpoint. And so they didn’t cut the dividend at the start of this year. But it looked like they had some working capital buildup issues that progressed throughout the year. And that led to now free cash flow is going to be negative. And they decided to cut the dividend because their debt is getting a little too high. I think they have to go to the banks and look to renegotiate some covenants, and as a part of that, they had to cut the dividend in exchange for some covenant relief. And so that’s really the big driver that tanked the stock.

But FMC also cut guidance on a much weaker outlook due to their inability to get their manufacturing costs for diamides down quick enough. Management said the first half of this year, they were going to finish up their inventory destocking, all the while, they were going to reduce their unit costs for diamide production to be able to match their generic competitors, and they could keep profit margins more stable by doing that. But it looks like that has not come to fruition. And now we think that diamides have gone from one of FMC’s most profitable products to a pretty—one of their least profitable products within the past year or so. And so we think that’s really weighing on the near-term forecast. And we think as Cyazapyr goes off manufacturing patent next year, that’s going to lead to the second step down.

And so coming into the earnings, we were forecasting somewhat of a turnaround for FMC. We were forecasting profit growth in 2026. Now we’re forecasting profits to fall nearly 20% next year as we see this sort of second diamide step down. And that’s what really led to our fair value cut from 95 to 60, just due to a much weaker 2025, 2026, and 2027 forecast

Sekera: Then thinking about what investors should be looking for going forward, first of all, what is Morningstar’s valuation on the stock and stock rating, and really what do you think investors should be listening for in these futures earning releases to really decide whether or not this is bottoming out and turning the corner and could be going back up again or to the downside, what they should be listening for if things aren’t going according to the company’s plans?

Goldstein: Yeah. So our new fair value is $60. The stock is trading in the mid-teens, so about 75% below our fair value estimate. So 5-star territory, we see a lot of upside here.

I’ll note that we did recently raise our Uncertainty Rating from High to Very High because we think, with FMC’s patent issues that they’re trying to overcome, to get the portfolio back to growth and with their high debt levels, we see a wider range of outcomes now.

So if we’re looking to the upside, what we’re looking for is how quickly can FMC deploy and grow their new products? We still think ultimately FMC has a very strong new product portfolio that if we look five or 10 years down the road, we think will more than replace the diamides and become more important to their portfolio. But it’s going to take time to do that. And getting new products first registered in each different geography and then sold to farmers and ramped up does take some time. And so, you know, I think some of the new products have been delayed. I think that’s what’s going to weigh on revenue growth in the next year or two as well as the diamide patent expiration issues.

To the upside, we do think if the new products are ultimately successful over the next several years, we think FMC could get back to the mid-20% EBITDA margins that they historically generated when the diamides were still on patent and selling very well. We expect EBITDA margins in the near term will fall to the low 20% and then even step down to the high teens next year. And so we do see some margin compression, but ultimately longer term. We look for FMC’s new products to drive them back to a mid-single-digit revenue and mid-20% EBITDA levels.

Now, if we look to the downside, the really big concern is FMC still has elevated debt levels. And so if we see delays in new products, if we see Diamide generics enter the market quicker and really erode FMC’s market share, not just their profitability in these products, then we could see revenue fall faster. We can see profits fall faster than our current forecast and FMC may need to raise equity. And if they were to have to raise equity to pay down debt, that’s going to be highly dilutive to shareholders at the current stock price. And so I think a lot of the big reaction to the latest earnings was concerns of not only a dividend cut, but the need for a potential equity raise if FMC can’t fix this.

So the downside, we would be looking at a highly dilutive equity raise, likely cutting our fair value if FMC has to go that route to raise capital.

Sekera: Got it. All right. Well, thank you very much, Seth. I really do appreciate your time and appreciate the insights that you brought for us today regarding FMC and its outlook.

Goldstein: Thanks for having me.

Dziubinski: So Dave, after your talk with Seth, what are your thoughts today about FMC?

Sekera: I think this stock and this company and this management team, it’s going to have to be a “show me” story. And it’s probably a “show me” story for quite a while. At this point, in my mind, I think they’ve probably lost a lot of investor confidence. And once confidence is lost, it’s going to take a long time for them to be able to rebuild that back in the marketplace.

I think we’re going to need to see at least several quarters, maybe even longer than that for the company just to be able to perform in line with their guidance. I suspect the stock probably is going to be pretty lackluster until then, but I would say that once the company does show that the worst is behind it, I think that with where that stock is and the valuation is, you could have a pretty quick rally thereafter. It’s just really going to be hard to try and figure out exactly what the timing is going to be that the market really starts getting that confidence back once again.

Dziubinski: Well, a reminder to our viewers to keep sending us your questions.

In fact, Dave and I are putting together a viewer mailbag episode soon where we’re going to tackle as many of them as we can. So send your questions our way through our inbox at themorningfilter@morningstar.com. Now, Dave published his November monthly outlook last week, and viewers and listeners can access Dave’s outlook via the link in the show notes.

So Dave, let’s talk a little bit about it, starting with the market’s valuation in November. How does the market look from a price perspective?

Sekera: So when I look at our price/fair value metric, it did drop to a slight discount as of Oct. 31, but that’s still within the range that we consider to be fair value.

Now, when I looked at this price/fair value chart over time, I would suggest from an investing point of view, you need to be cognizant that while this tool does have a pretty good long-term track record as far as valuation goes, it is by itself not necessarily a great timing tool. So, for example, coming into this year, stocks were at the high end of the range that we consider to be fairly valued. I’d kept my market weight recommendation at that point in time, partially because I just didn’t see any other macro dynamic fundamental catalysts out there that I would think that was going to cause the market to sell off.

Whereas if you remember back in our 2022 outlook, we’d recommended to underweight stocks. At that point in time, stocks were slightly more overvalued than they were at the beginning of this year. But you did have those macro dynamic factors that were of concern, which caused us to go to that underweight recommendation. Back then, we were looking for inflation to increase, for the Fed to tighten, interest rates to rise, the economy would slow. All of those came to fruition over the course of 2022. Then stocks sold off.

Then once that selloff got us back to that fair value range, we would have moved to a market-weight recommendation. Stocks did what they often do. They overcorrected to the downside, which is then when we went to an overweight. The market then bottomed out in October of 2022 and started a recovery thereafter.

This year has been quite different. The selloffs that we had at the beginning of the year really came much more from idiosyncratic issues as opposed to macrodynamic issues. So that first selloff, if you remember, was after DeepSeek was released in late January. That caused a lot of the overvalued AI stocks to sell off. The selloff was further exacerbated by the “Liberation Day” tariffs. But we sold off too much to the downside. And in fact, if you remember, you and I went to an overweight recommendation on the April 7 episode of The Morning Filter. And then once the market moved back up toward—moved back to a market weight once again.

So a long-winded way of me saying: At this point, when I’m looking at the markets, trading at a very slight discount to fair value, I’d still say I think the macro dynamics look relatively balanced. The economy is slowing, yet we have the Fed easing. Inflation is running a little bit higher than target, but it doesn’t look like it’s going to be running where we are right now. And we still expect long-term interest rates to be on a longer-term declining path.

AI stocks generally at fair value, some of them getting to be back into overvalued territory. Yet there’s still others like Alphabet and Microsoft that we’ve talked about that still are undervalued that we think provide that value in the AI sector for investors today. There’s still value in other parts of the market. So all of this altogether does still keep me at that market-weight recommendation for now.

Dziubinski: Now, Dave, the market was trading, if I remember correctly, just slightly above Morningstar’s fair value estimate at the start of October, then stocks were up about 2% during the month of October. And then in early November, you’re saying that the stock market looks slightly undervalued relative to Morningstar’s fair value.

Now, I know I was an English major, but the math is not adding up for me, Dave. So walk us through that math a little bit.

Sekera: Yeah, I mean, there are just a lot of moving parts. over the course of October. And of course, we had some very large fair value increases in some of the largest of the mega-cap stocks, which of course, valuation changes, market changes in the prices of those stocks really can skew that price/fair value factor pretty significantly.

So over the course of October, we updated a lot of our valuations as new information came to light. If you remember, it seemed like almost every other day we were getting some new AI partnership, some new AI deal being announced. I think we talked about how that deal between Alphabet GOOGL and Anthropic really increased our fair value for Google over time. We’ve had new revenue projections. So for example, with Nvidia, when that company was talking about their value—I’m sorry—their forecast for, I think, over half a billion over the calendar year, this year, and next year, and updated our valuation when we increased our sales numbers and projections there.

So again, a lot of these moving parts changed such that the amount that our valuations ended up really going up more over the course of October than the broad market went up. So overall, the result is that the fair value is now actually at a 2% discount. So it’s really those two moving parts between, not only how much was the market in and of itself moving, but when you look at some of those really big mega-cap stocks and how much we increased our fair values over the course of October. Really, it’s just the math between how those two moved.

Dziubinski: Got it. So then just to clarify, I think you said in your prior answer that you think investors should maintain their target or their market allocation to U.S. stocks since the market is still in that sort of fairly valued range, right?

Sekera: Exactly. And I kind of think about it, plus or minus 5% from fair value is that fair value range. In fact, when the market is falling, I usually like to see it maybe get more toward that 10% down before I really start thinking about moving to more of an overweight. But again, I think this is just a good example of when we’re looking at fair values, whether it’s for the overall market, category, style, or even individual stocks, why we use those ranges of fair value.

So in this case, I think a lot of times it’s a good idea just to let the market run up above fair value until you get to an underweight. And in those cases, I’m usually looking for some other macro dynamic factors to get me to the point where I’m really willing to go to that underweight recommendation. So this is just one of those examples where you see our fair values rising faster than the market, which is what kept us in that fair value range. And then conversely, to the downside, I want to see the market sell off enough to go to an overweight like we did in April of this year.

Dziubinski: Now let’s talk about sub-allocations then. Let’s start maybe broken down by investment style and market capitalization. So how should investors be thinking about these allocations based on Morningstar’s valuations?

Sekera: So according to our valuations, by style, nothing has really changed. We’d still look to overweight value. That’s the area that we see the best valuation for investors today. Would look to market-weight core and then underweight growth.

Now, the thing I would note with growth is that with as much as our fair values increased on a lot of those growth stocks in October, it’s probably less of an underweight following those valuation increases, especially in those mega-cap stocks than what we had even just two months ago.

Taking a quick look by capitalization, similar overweight small caps based on valuation. Now to be overweight small caps, you need to be underweight something. So in this case, I think probably a slight underweight in both the large- and the mid-cap stocks.

Dziubinski: So tell us a little bit about sectors, Dave, which sectors might investors tilt toward or away from based on valuation today?

Sekera: Based on valuation, the communications sector is the most undervalued sector, trading at about a 15% discount. Of course, a huge reason for that discount is Alphabet. That is a 4-star-rated stock at a 16% discount. And Alphabet does make such a large proportion of the market cap of that sector overall. Any changes we make in that stock is going to skew overall the price/fair value for communications.

Real estate still looks very undervalued to us at an 11% discount. Personally, I’m still recommending the steer clear of urban office space. I just don’t like the risk/reward there. But I do see a lot of value in real estate with defensive-oriented characteristics.

Energy also still attractive, 10% discount. As we’ve talked about before, we do incorporate our long-term view for oil prices. Our oil price forecast is $60 a barrel for West Texas Intermediate crude. Even using that in our model, the overall sector, a lot of the oil producers look undervalued. We’ve talked about Exxon being our pick in the past. I believe Exxon is now a 3-star- rated stock, so in this case I would highlight Conoco Phillips. Now that’s a 4-star stock at a 20% discount, 3.6 dividend yield. So that’s the one that kind of looks the most attractive to me.

Now, from the perspective of overvalued sectors, utilities—trading at 11% premium, I would say the sector is broadly overvalued. Very hard to find any undervalued opportunities here. Where there are undervalued opportunities are usually very much storied stocks that do have some idiosyncratic risks. But we just think the market is generally overestimating the long-term earnings growth from AI. Yes, we do expect that AI will increase demand very substantially. Our team’s already incorporated that into their models. We think that it’s just the sectors run up too far here in the short term.

Consumer defensive, also still a 7% premium. We’ve talked about this one in the past. Bit of a barbell sector. You have Walmart and Costco, both rated one stars, trading at 70% and 45% premiums to our fair value. I mean, I think those two stocks are trading at 40 times and 50 times earnings, respectively. Once you exclude those two, the rest of the sector looks pretty undervalued at 11% discount. A lot of the food names we still think are very undervalued.

Financials broadly overvalued, trading at a 6% premium. I think the market’s just overestimating that interest income growth, underestimating loan losses among the banks. We still think a lot of the insurance companies are valued too high. Market is still overestimating how much that high premium growth over the past couple of years will last. We think it’s going to slow. We’re seeing some indications that it’s slowing here in the short term.

And then lastly, industrials at a 6% premium. This is a sector—those companies tied to AI are doing very well. The companies that are not tied to AI, I’m very cautious about those. We are looking for the rate of economic growth here to decelerate sequentially through the end of this year and for the first half of next year. Be very cautious about investing in any of the industrials if they’re not tied to artificial intelligence buildout.

Dziubinski: We’ve arrived at the stock picks portion of The Morning Filter.

This week, Dave is sharing three stocks to buy after earnings. And your first stock pick this week is Coca-Cola KO, which is ticker KO. Give us your elevator pitch for the stock.

Sekera: We rate Coke with both a wide economic moat and a low uncertainty. It is a name that’s going to have very defensive characteristics. I think that would then hold up very well if we do get any kind of correction here in the marketplace, as a lot of people are very concerned about just where the valuations are for artificial intelligence stocks.

I’d say historically, when I look at the long term chart here, rarely does Coke trade at much of a discount to our fair value. Now, unfortunately, the stock did run up 3% last Thursday and Friday since we identified this one for this week’s Morning Filter. It’s still at a 5% discount, but that 5%, it puts it right at that border between 4 star and 3 star. It is a 2.9% dividend yield. So overall, I still think it looks attractive here, especially for investors that might be looking to maybe swap out of some of the gains they’ve made in artificial intelligence and look for more defensive picks.

Dziubinski: Now, the stock’s been kind of flat since Coke reported earnings in October. So what’s Morningstar’s thesis on it?

Sekera: Granted, it is just not an exciting story. We’re just looking for kind of that slow and steady, you know, long-term growth. We’re looking for five-year compound annual growth rate of 5% on the top line. It’s just a combination of about 2% to 3% annual volume growth, regular price increases.

We do think that over time, the emerging markets will bolster volume growth here. And although we model flat to kind of medium macroeconomic growth here. It’s still just a good defensive play over the longer term. I think the company’s focus on better for you offerings will pay dividends for them over time. They’re doing things like coming up with new types of beverages that include protein and fiber. So I think the better for you offerings will resonate over the longer term. And over time, we expect the operating margin to expand. That’s just really a combination of better operating leverage. And your higher margin products that get sold gets us to a 9% earnings growth rate over the next five years.

And lastly, I just have to note, Warren Buffett’s Berkshire Hathaway owns 9.3% of this stock. To me, I don’t know. It always feels good anytime I can find opportunities to co-invest with Warren Buffett. So

Dziubinski: Your second pick this week, Dave, is Halliburton HAL, which is ticker HAL. Run through the highlights on it.

Sekera: Well, unfortunately, this one just moved back into 3-star range. It is kind of close to that 3- and 4-star range, but still 11% discount, 2.5% dividend yield. It is a stock that we rate with a high uncertainty because it is in the energy sector, but we do rate it with a narrow economic moat.

Dziubinski: Now, Halliburton stock isn’t having the best year, but it is up more than 30% during the past three months. So why is this one a pick, Dave?

Sekera: The reason this one was a pick is that sometimes I just like to find examples of going with what’s working now.

So when I look at Halliburton, the company is North America’s largest oilfield services company as measured by market share. It’s got very good momentum in the charts. The stock’s up 22% since their earnings release. We raised our fair value a little bit. So good momentum, at least as far as that goes. Good combination from the company as far as paying a dividend and share buybacks. I think we estimate the combination of that is about 8% return to shareholders between the two over the quarter. It is a value stock. That’s where we see the best value in the marketplace today. It’s in the energy sector, one of the few undervalued sectors. And I also like the fact that I think that there’s pretty low expectations already baked into the valuation by both us and the marketplace. So I think that provides some opportunity if oil prices were to start moving up.

In our model. we’re just flat top line growth over the next five years. We’re looking for operating margins to normalize over the next five years. So they came in at 10.2% or we’re forecasting them at 10.2%, expanding to 14.6% by 2029. Yet, even that 14.6% in 2029 is still below the company’s three-year trailing average of 15.9%. So maybe some potential more upside from operating margin expansion as well. And yet the stock’s still only trading at 12 times earnings.

Dziubinski: And then your last pick this week is a sweet one from the past. It’s Hershey HSY, which is ticker HSY. Give us the headlines on this one.

Sekera: It’s a 4-star-rated stock, trades at a 19% discount to fair value, nice healthy dividend yield at 3.2%, wide economic moat, and a low uncertainty rating.

Dziubinski: So then what did Morningstar think of Hershey’s recent results? And why is the stock a pick after earnings?

Sekera: Well, we’ve talked about Hershey a number of times, you know, over the course of this year, and I still think that this is an interesting story.

Now, if you take a look at the stock, it looks like it had bottomed out in January. It’s kind of been up and to the right throughout most of the year. But then that stock peaked in early October as cocoa prices were falling. Now, cocoa prices began to bounce. And so we saw that stock I think it’s now giving us another opportunity to be able to buy some more here at what we think is a pretty attractive price.

Now cocoa of course is a very high percent of their cost of goods sold, but we think the market is just too focused on cocoa prices here in the short term. The company’s doing a lot of different things. They’re working to diversify their supply chain. But overall when I look at the company and look at really how we break up revenue growth and where that revenue growth is coming from, I think over time cocoa prices do become less and less important to this story.

So what we really find most attractive here are the aspects of its nonchocolate business. So that’s only about 10% of revenue now, but we expect that to increase as a percentage of revenue over time. We’re looking at some of the other candy that they offer, like the sugar confectionaries growing, such as their gummies. That’s got some very good growth prospects here in the short term. But I think the most interesting area of focus will be the focus from the new CEO. So he came from Wendy’s. But his real experience came from Pepsi, where he spent a lot of time in their Frito-Lay division, which is, of course, Pepsi’s salty snack business. So we expect a lot of his focus will be a positive catalyst for Hershey’s salty snacks as well. They have brands like Skinny Pop, Pirate Booty, one of my kids’ prior favorites, and Dots Pretzels, one of my favorites. And in fact, our analyst just noted that I think Dots is overtaking Snyder as the number-one brand share for the pretzel category. Overall, we think that the salty snacks end up being a very good complement to their chocolate business.

And specifically, we note that the company is very focused in those salty snacks categories that aren’t already saturated. So they have no plans getting into the chips business, which already has a bazillion different brands of potato chips out there. I think they’re going to focus a lot more in the better-for-you types of snacks. It’s a category that we think is going to grow faster than candy. We’re looking at 4% to 5% revenue as opposed to 3% revenue growth in the chocolate area.

And then lastly, just looking at the fundamentals here, Hersey also recently completed bringing their brands under the same ERP program. We expect that that’s going to help them be able to bolster efficiency and margins over time. So in my opinion, a lot of good aspects to like for the underlying fundamentals and the long-term outlook for this company.

Dziubinski: Well, I know I learned something new this episode. Dave’s a pretzel guy. There we go. All right.

Well, thanks for your time, Dave. Viewers and listeners who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. We hope you’ll join us next Monday morning for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe and have a great week.