3 Stocks to Sell and 3 Stocks to Buy for October

Key Takeaways

• September’s stock market recap: It could’ve been worse.
• What to invest in—and what to avoid—in October.
• Whether Constellation Brands’ STZ stock could pop after earnings this week.
• What drove Morningstar’s big fair value estimate cut on Micron Technology MU.
• Whether McCormick MKC or Carnival CCL look like stocks to buy after reporting.
• An update on former stock pick Clorox CLX.
• Stocks to sell and stocks to buy for the new month.

In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski recap September’s market activity and discuss what types of stocks to invest in—and avoid—heading into October. Tune in to find out which earnings reports to watch for this week and why Morningstar cut its fair value estimate on Micron Technology by $150 after earnings.

They share new Morningstar research about McCormick and Carnival and answer viewer questions about former stock pick Clorox. They close the show with three stocks to sell and three stocks to buy in October.

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, I sit down with Morningstar chief US market strategist, Dave Sekera, to recap what’s been going on in the market, cover what investors should have on their radars for the week, and share some new Morningstar research and a few stock ideas.

Now, a programming note: Dave and I are taping this episode on Friday, Oct. 2, before market open. Our comments don’t reflect any developments in the market after that time. Also, I wanted to let viewers know that you’ll be seeing a fresh face on the podcast starting next week. Our colleague, Sarah Hansen, will be sitting in for me for the next six weeks while I’m out on sabbatical. Sarah has been a senior markets reporter at Morningstar for a few years. She’s also written for Money Magazine and for Forbes. Please welcome her warmly, and then I’ll be back on the podcast in mid-November.

September Recap and Takeaways

All right. Well, good morning, Dave. Now, it’s October, so let’s take a quick look back at September. I remember you saying early in September that September is historically the worst month for stocks. How did that month end?

David Sekera: Honestly, Susan, considering just how negative all the macrodynamics in the market have been, September held up much better than I otherwise would’ve necessarily expected. Now, as you mentioned, September on average is usually the worst month of the year. Just have to note, though, October has a history of some of the worst individual selloffs over time. I would say not necessarily out of the woods just yet. In fact, I kind of went through some of the history here in the market. So, October accounts for eight of 20 largest single-day declines. We’ll see. We have got third-quarter earnings season ramping up, so we’ll see if we get some of that volatility this month or not.

Now, as far as how did September do, so if you look at the broad market—I use the Morningstar US Market Index—it was down only six-tenths of a percent. When I break that down into the

, I would note that the value category was down the worst. It was down 4.9%, core stocks down 3%, and growth almost breakeven, only down one-tenth of a percent. By capitalization, large-cap stocks were up seven-tenths of a percent, mid-caps down 4.7%, and small caps down 1.8%.

And then, looking by sector, only two sectors were in the green this month. That was tech and communications. Those were up a little bit, over 4.1% each. And the worst-performing sectors were basic materials and financials. Those were down over 7% in September. Looking down the rest of the list, consumer cyclicals and real estate, both down over 6%. And utilities, of course, being a proxy for fixed income, was down 5.7%.

Dziubinski: All right. Well, speaking of fixed income, you and I talked quite a bit in September about Treasury bond yields on the podcast. How did the bond market end up looking for the month of September?

Sekera: Well, and I guess the real question here to me, and maybe it’s a little too early for the Halloween reference, but are equity investors whistling past the bond boneyard at this point? And I think that they may be, so we’ll see how October shapes up. If you look at the core bond index, so, that’s our broadest proxy of the fixed-income market, that was down 2.6% in September. And of course, it’s all about how much interest rates rose across the entire curve. Looking at the yield curve here, the two-year Treasury was up 54 basis points. It hit 4.88%. The five-year was up 60 basis points, hitting 5.09%, and the 10-year closed at 5.29%. That was a 54 basis point increase just this past month.

I really think as an investor, you need to keep a close eye on the 10-year. For now, it seems like the equity market kind of just doesn’t care about interest rates. I think you just want to watch and see if the 10-year can hold that five and a quarter percent. If it doesn’t and it continues to keep widening, I think the next stop just is naturally going to be 5.5%. And after 5.5%, then I think the market starts gearing on a six handle. Again, if we can keep here at that 5.25% or maybe even get a bit of a rebound back down to 5%, the market will probably be OK with that. But at some point, I think the market’s going to start caring about interest rates. We just, for whatever reason, don’t happen to be there yet.

Dziubinski: OK. Well, let’s take a step back from the numbers and just pan out. What are some of your key takeaways from last month’s market activity as we’re heading into October?

Sekera: I think we’re in an environment which is really kind of one of the most tricky environments for investors really to determine how they want to position their portfolio. Overall, the US equity market is undervalued, trades at about a 10% discount to a composite of our fair values. But as you and I have talked about before, it’s a really concentrated area that we see that undervaluation. There are seven mega-cap stocks that account for pretty much that entire discount. If you were to pull those out from our calculation, the rest of the market is pretty fairly valued. And of course, those seven mega-caps are in some way each tied to the artificial intelligence theme.

Macrodynamics, I think, continue to keep getting worse. We, of course, have tightening monetary policy that at some point should start slowing economic growth. We have rising interest rates. At some point we will see some investors reallocate into fixed income out of equities. And of course, the higher interest rates go, that decreases the present value of any future free cash flow, whether that’s fixed income or the equity markets. We still have rising inflation, that’s continuing to pressure consumers, and at some point that will compress operating margins more and more as well. And the economy is still, in my mind, very reliant on the continued growth in the AI buildout boom.

In this environment, I think the traditional investing growth versus value: Do I want to be overweight growth? Do I want to weigh value? Or the traditional: How much do I want to have in large, mid, small caps? Maybe trying to trade the market around by sector weightings. I don’t think that’s the way you’re going to really get the outperformance going forward. I don’t think that’s the right way to think about it. I think in this environment, if you want to outperform the market, you really need to have a focus on specific stocks, and specifically those stocks are going to have attributes that will perform in a market where capital becomes more and more expensive and, to some degree, more scarce.

October: Where To Invest

Dziubinski: All right. Well then, Dave, let’s get against that backdrop. Get a little specific. What types of stocks then do you think investors perhaps should be focusing on in October?

Sekera: Well, first I do have to note, as far as the AI buildout boom goes, our tech team has not changed their investment thesis for artificial intelligence and just how much capital spending is going to be behind that over the next couple of years. When you look at where the undervaluation in the market is today, I think you still want to have exposure to AI, but specifically that exposure needs to be focused on those companies that are the leaders in AI, whether that’s leaders in building new technology or the leaders in those who are actually utilizing AI to build more economic value. Again, those at the forefront of building and utilization is where you want to be.

I think you still want to steer clear of any of those companies that are tied toward commodity-oriented technology items, those that are really the followers of the AI buildout boom. I think you want to look for companies that, of course, have an economic moat and, in an inflationary environment, those specifically where the moat provides greater pricing power, whether that’s switching costs, products that can’t be substituted, the network effect where the more and more usage of their product creates more and more economic value. And if you’re looking at the economic moat impact of intangible assets, specifically, I’d be looking for the ones where the intangible assets are going to be based on patents.

I think you want to be in more defensive-oriented sectors. Those are going to be less economically sensitive. And I think you also want to be in shorter-duration stocks. So, those stocks where the valuation is going to be based more on the amount of free cash flow a company generates here in the short term, as opposed to some of those growth stocks where you’re really betting on that company producing a lot of free cash flow far out into the future. I’d look for companies that have very little amounts of floating-rate debt. Oftentimes, small-cap companies have a lot of floating-rate debt. As interest rates are going up, their costs are going up as well. I like companies that not only have good, high, solid dividend yields, but those companies that have the ability to continue increasing those dividends at least at the rate of inflation going forward.

And then lastly, I think you want to look for companies that could actually benefit from inflation. Think about companies that can maybe charge fees to their clients and according to transaction size, so that way their revenue actually increases at least at that rate of inflation.

October: What To Avoid

Dziubinski: All right. So then, let’s look at the flip side, Dave. What do you think investors should maybe be steering clear of in October?

Sekera: And sometimes it’s more important, especially in a market selloff, what you don’t own as opposed to what you do own. I think you want to underweight those economically cyclical sectors that I think would be at a lot of downside risk. You want to be underweight anything that’s a long-duration growth stock that’s not tied to those AI leaders that we’ve talked about. Steer clear of anyone that has very high amounts of floating-rate debt, i.e., the private credit market that we’ve also talked about in the past and why I have a lot of concern there. Also, steer clear of anything that has negative free cash flow, anything that needs to be financed—biotech, startups—because I think the capital is going to become more and more scarce going forward. And of course there are always exceptions to those rules; the technological leaders in the AI, that’s where we see the value.

That’s who’s driving new economic value going forward. Whether it’s in the hardware space in Nvidia or Broadcom, or those that are best utilizing it, Microsoft, Alphabet, Amazon.com, but steer clear of those AI followers, those commodity-oriented tech hardware companies, because I think once you get the market starting to price in supply catching up with demand, I think a lot of those stocks have a long way to fall.

Earnings Watch: STZ

Dziubinski: All right. Well, let’s turn to earnings. We have a couple of companies reporting this week to talk about, and we’ll start with Constellation Brands STZ. That one’s been a pick of yours in the past. The stock’s having another tough year. Dave, do you think anything could come out of earnings that might give a little pop to the stock?

Sekera: Yeah. I mean, anything that could just show the stabilization in beer consumption trends is really going to help this one out. I mean, beer consumption for whatever reason has been on a multiyear downward trend. In fact, all alcohol consumption in general has also been on a downward trend. And unfortunately, we hadn’t anticipated that in our models, which is why these stocks have been falling. To some degree, we’ve also reduced our fair values on a number of them over the past year as well.

As far as Constellation specifically, it is a 4-star-rated stock at a 35% discount; good, healthy dividend yield at 3.7%. I think the real question for investors to us is, “Hey Dave, how do you guys get to your valuation? What’s in your model?” So, just a quick synopsis here. We’re looking for a 1% decline in revenue here in fiscal 2027, and that’s on top of an 11% decline thereafter. We’re only looking for flat revenue in fiscal 2028. And then from there on out, we’re only looking for a 2% average revenue growth thereafter. Essentially, just inflation and, depending on where inflation is, maybe even slightly less than inflation growth.

Now, as far as the operating margins go, we are looking for those to improve and normalize. After you had the big hit in revenue last year, we’d be looking for them to be able to better balance their fixed versus variable costs. We’re looking for $11.76 in earnings for fiscal 2027. That puts the stock at really only a 9.6 times forward PE at this point. Considering we’re only modeling a 3.7% average growth from 2028 to 2031, I think that just shows you how little growth you need at this point for the stock to look attractive.

Obviously, the market is pricing in further deterioration greater than what we’re expecting. Any kind of showing that alcohol consumption in general and beer consumption in particular is bottoming out. And in fact, when it starts coming back, I think there’s a lot of upside here when that happens.

Dziubinski: Now, Morningstar’s current fair value estimate on Constellation Brands is $173 per share. And as you pointed out, the stock’s trading well below that. The question I have to ask Dave is, do you think there’s an opportunity here ahead of earnings or would you suggest that investors hold off because it’s at a deep enough discount?

Sekera: I think you can wait until after earnings and decide what you want to do on this one. I don’t know of any specific catalyst, any hard catalyst that potentially could come up this quarter that’s really going to make that stock pop that much that you could miss the upside here. I think there’s enough of a discount that if we do see those signs that beer consumption is stabilizing and maybe even starting to increase, and yes, the stock probably gets a good run after that. But I think that, with the market sentiment being as negative as it is, that you still will have time to participate in the upside on this one. I think it’s going to probably take several quarters in a row for the market really to give them the full credit for what we see in our model. I think it’s going to be a while before you really get all the way up to our fair value estimate.

DAL: Will Travel Demand Persist?

Dziubinski: All right. Well, Delta’s DAL stock is having a great year, and shares are trading well above our $50 fair value estimate. Delta, of course, will be reporting this week. What are you going to be listening for?

Sekera: First of all, with the airline industry, I think you just have to realize that the past couple of years, everything that can go right for the airline industry has been going right for the airline industry. You had all the pent-up demand from the pandemic, and during that time period, you had a pretty slow return of supply that had been taken off during the pandemic. There was a slow return in the number of routes, slow expansion in the number of planes. I think that was all a huge benefit to the airline industry.

Now, at the same point in time, we also have had this consumer spending shift to experiences away from stuff, like running shoes—we’ll get to that later. And at the other point in time, I think you see consumers are willing to spend a lot more on things like the premium seating—not Morningstar, by the way, as far as our travel budget goes.

Now, the other part too that the industry has been making a lot more money on, that I don’t think people had conceptualized before, is that they are charging for the checked bags, the seat selection, the priority boarding, the online Wi-Fi, food and beverage. They’ve been making a lot more money than what people would’ve estimated beforehand. And then prior to the Iran conflict, we also generally had a long-term decline in energy prices and jet fuel prices. All of this really shaped up well for the airlines to be hitting just phenomenal margins.

Unfortunately, the question is how long can all of that last? As you mentioned, Delta stock has had a great rally. It’s up 20% year to date. It’s up 42% since the end of 2024. But I spoke to Nic Owens about this one in length, and Nic is our equity analyst that covers this sector. He thinks revenue has probably peaked at this point, and he also thinks that margins from here on out probably start to decline toward more normalized levels as we get more supply coming on, and that will be able to meet the demand that’s out there.

I think we also suspect that the additional growth that we’ve seen from all those ancillary things that they’ve been charging for has probably peaked as well. When you look at where the stock is trading, it’s trading at 16 times our 2026 earnings estimate, which on the face of it probably seems pretty reasonable. But in our mind, we think that’s probably too high for an industry and a company that from here on out is probably stagnant at best. If not necessarily, we’re looking for declining earnings over the next five years.

MU: Big Fair Value Cut

Dziubinski: All right. Well, let’s turn to some new research from Morningstar about stocks that have been in the news, and we’ll start with Micron Technology MU. Now, the stock pulled back a bit after the company reported another blowout quarter, but this was really interesting to me. Morningstar reduced its fair value estimate on the stock by quite a bit, down from $850 to $700, which is pretty good hack right there. Talk about that cut in the fair value, Dave. What drove that?

Sekera: Well, I mean, first of all, for a stock that’s risen 555% over the past 52 weeks, I’m honestly shocked at how little the stock moved one direction or the other after the earnings announcement. In my mind, there’s no way that the market has perfectly forecast how much more of this rapid growth we’re going to see for the rest of this year and into next year. There’s no way the market is perfectly forecast when the downturn rolls over and starts to decline, and how fast the pace of decline is going to be thereafter. This is one I think you really need to keep your eyes on and really understand the potential volatility you can see in this one going forward.

As you mentioned, Will Kerwin did cut his fair value pretty substantially in this case. It’s a 2-star-rated stock now trading at over a 50% premium to that lowered fair value. Just kind of walking through what’s going on here. So, the company’s just been experiencing phenomenal growth, of course, and we’ve talked about the huge shortage that there is in memory semiconductors. This company can charge whatever they want to charge. People are going to pay for it. The amount of margin expansion has just been phenomenal here. It’s just an indication of this. I mean, their revenue was up 380% year over year this past quarter, but the thing that Will is really looking into that I think is really driving a lot of his view is that the quarter-over-quarter pricing increasing is now increasing at a decreasing rate.

And I specifically pulled this quote out of his write-up, which I think is really the big indication here. He said, “We’re in the final stretch of this unprecedented cyclical upswing.” Right now, we’re modeling in that we think the peak amount of growth will occur here in 2028. And in fact, we’re projecting earnings of $250 a share in 2028, which means the stock’s actually trading at about four times our 2028 earnings estimate, which would be really low, other than we think that at that point, earnings are going to start to come down and come down pretty quickly.

The reason being that we think memory supply doubles by 2028. We just see the amount that producers are revamping their existing production lines. They’re starting new production lines. They’re building out new manufacturing facilities that are coming online. We’re looking for a pretty steep downturn starting in 2029. We’re looking for earnings in 2029 of $200 per share. Even in the face of that higher ongoing memory demand from AI, you’re just going to have lower pricing and lower margins really start to hit the income statement at that point in time. And, in fact, by 2030 is when he expects memory will actually be oversupplied at that point.

Earnings at that point dropped to $125 per share. And by 2031, earnings drop all the way down to $70 per share. To put that all in context, even in 2031, what are we expecting? We’re looking for a revenue of $180 billion. Back in 2025, which seems like ages ago, I mean, the revenue then was still $37 billion. We were still looking for multiple times higher revenue at that point in time, and earnings at $70 per share in 2031 still—what is that? Nine times greater than what they posted in 2025, when it was under $8 a share. And before 2025, I think they also had negative earnings, maybe in 2023 or 2024. Again, it’s not like we’re modeling in the company to go back toward the type of revenue they had pre the huge AI buildout boom, but I think it’s just a matter of, at some point in a cyclical, highly commoditized industry, you will get that normalization, and that’s what our fair value is pricing in today.

MKC Earnings Recap

Dziubinski: All right. Well, you might have to have Will back on a bonus episode of The Morning Filter to talk about all of that. You talked with him about Broadcom, and that was great. We’ll have to put Will back on the short list. All right. McCormick MKC stock pulled back a bit after the company reported what looked like improving results. Morningstar held its fair value estimate on this one at $65. Our analyst remarked in her stock analyst note that the shares looked like a bargain. All right, Dave, so what are your takeaways on McCormick after earnings?

Sekera: Yeah, to me, it doesn’t seem like the slump in the stock price here is due to the fundamentals. I think it’s much more due to the situation. As we talked about the situation here, being the agreed-to merging with the Unilever food business, which we expect to close in 2027. As far as their own results went, I mean, I think they were just fine. Organic sales up almost 2%. You got some good margin expansion, as cost savings more than offset the amount of inflation that they had. I think it’s just a matter of the market being very unsure of how to model this company going forward. I mean, if you look at the stock price, the chart here shows that they actually held up much better than almost all the other food stocks over time.

It’s just that once you had that announcement with the merger of the Unilever food business is really when the stock started to fall. I mean, historically, the spices business has held up much better than what we’ve seen in the food space in general. I think the market is worried that this combination will end up pulling down the results of the combined company after that occurs. Now, as a reminder of what happens, the combined company will actually be more of a food company than it was just the prior spices business. McCormick shareholders today are going to only own 35% of the combined company. Unilever shareholders will own 55% of the combined company, and the other 10% is going to be kept by Unilever.

Now, when I look at our fair value forecast here, Erin has modeled in the combined company beginning in 2027, and after she incorporates her estimates for the merger, she’s looking for earnings per share in fiscal 2027 of $3.67 per share. It’s only trading at a 12 times forward earnings based on the combination of the companies. She thinks the deal makes strategic sense. She thinks that the mix shift in the synergy will actually allow the company to be able to expand margins.

I think it’s just that the market doesn’t like that it’s harder to assess what that combined company will look like because, of course, now you’ve got to model both individual McCormick by itself and model in the McCormick food business, which is only part of … I’m sorry, the Unilever food business, which you have to break out from the Unilever results overall.

In this case, I think it’s probably pretty good that you’re getting as high a dividend as you are. I think this might be one you’re going to have to sit on the stock for a while before the market really starts to see those synergies come to fruition after the merger occurs, which is probably by mid-2027. And even then, you might need a couple of quarters for the market to get comfortable enough to give the combined company the full credit to get toward that long-term intrinsic valuation.

NKE: More Bad News

Dziubinski: All right. Well, you referred earlier in the podcast to no one buying gym shoes, so let’s talk about Nike NKE. The stock’s falling this morning in premarket trading after reporting earnings, and Morningstar put the stock Under Review, and Morningstar doesn’t put stocks under review very often. Dave, what’s your initial take here on Nike? And then tell us a little bit about what leads Morningstar to do that, to put a stock under review.

Sekera: I mean, as we talked about last week, and I think even over the past few quarters, and where we’ve talked about Nike, we really needed to see indications of the turnaround. As we talked about, until then, I really just didn’t want to get caught in the downdraft of this long-term fall in the stock price. When we take a look at the results here, not only is there no sign of a turnaround, it’s still in the stage where things are actually getting worse. I think revenue was down 4%; the company’s guiding to being down high single-digit percentages for the full year. That means the next three quarters, to average in to get to that high single-digit percentage down, means that things are still getting worse from here.

Taking a look at management’s earnings guidance, their guidance here is for $1.15 to $1.35 per share. That’s well below our analyst pre-earnings forecast of $1.69 per share. As you mentioned, we did put this under review, and I think it’s just a matter of, at this point, we really need to go back to the drawing board. We really need to reevaluate what our long-term investment thesis was on this company, and reevaluate what all of our financial projections were. And in fact, personally, I would start with a blank model on this one and rebuild it back from the bottom up in order to get to what the fair value or what the long-term intrinsic value of this company is based on its new performance levels.

CCL’s Postearnings Rally

Dziubinski: Carnival CCL was up double digits after reporting all-time high revenue numbers for the latest quarter, and Morningstar held its fair value estimate on the stock at $35 per share. What’d the market get so excited about?

Sekera: Well, I mean, they beat earnings guidance, and then they increased guidance even further. They increased their yield growth expectations to up 3.8% from being up 3.2%. They’re looking for cost growth being lower than what they had expected before, so that’s only up 3.5%. It was higher at 3.7%. We’re looking for a slight increase in earnings as well. I think they bumped that up a couple of pennies. And the stock’s only trading at 11 times earnings.

Now, personally, I have to admit, I’ve actually never been on a cruise, but people that cruise really like to cruise, and this is just an indication that demand remains extremely strong even despite the weak consumer sentiment out there. Even though we have all the inflationary pressures, a volatile geopolitical environment, I mean, they’re still seeing great growth in new bookings coming online.

In fact, we noted in our note that they’ve already booked 50% of their 2027 capacity at just record pricing levels. And they even talked about experiencing a very solid start into 2028 already, with higher occupancy and prices than they would’ve been on a kind of equivalent basis for 2027 last year. Everything is still looking really good for the cruising industry overall, and I think we’ve made a couple of recommendations on the cruising stocks in the past. As far as consumer sentiment goes, yeah, consumer sentiment might be really negative, but I think this is a great indication of you have to watch what consumers actually do versus what they say.

Dziubinski: And even after the runup in the stock price, Carnival stock still looks really undervalued. Do you think there’s still an opportunity here?

Sekera: I do. I mean, even after that pop, it’s still at a 30% discount to fair value, puts it in 4-star territory, almost a 2% dividend yield. Now, this isn’t as undervalued as when you and I have recommended Carnival multiple times in the past. To some degree, I think as an investor, it’s also going to depend on your outlook for oil and the economy, and not just the economy, but really employment levels and making sure that people have jobs. Of course, from where we are, if oil prices slide in 2027, I think that’s going to be a good ongoing tailwind. And if the economy holds up and jobs in particular hold up, that’s also a good tailwind. Of course, if either of those are not true, then maybe the stock takes a bit of a dip from here, and you could buy it cheaper in the future.

Overall, looking at our coverage here of the cruise lines I recently recommended, is it Norwegian? That one’s at a 40% discount. What I like about that is their demographics, their client base skew to higher-income households. I think those would hold up better in any kind of downturn. Plus, I think with the stock trading at lower levels compared with our intrinsic valuation, it just naturally has better upside potential.

Stock Pick Update: CLX

Dziubinski: All right. Well, time for our question of the week. Now, as a reminder, if you’d like to ask a question to Dave, you can send it to us via our email, which is themorningfilter@morningstar.com. Now, a couple of questions have come up lately about one of your former stock picks, Dave, and that’s Clorox CLX. There’s not one question in particular here; just in general, people are looking for some insight into some of the stock’s ups and downs this year, probably more downs than ups, and whether you still like it as an investment today.

Sekera: Well, that’s a very polite way, Susan, of telling me just how much people are calling me out on the carpet with this stock pick. So, it is a 5-star-rated stock, trades at almost half of our fair value, so a very large discount. But I think this is one of those situations where it just shows that even though you think something might be cheap, cheap can still always get cheaper. And I think this is also a good example of, personally, why I recommend if you’re investing in individual stocks, starting with that partial position and keeping dry powder so that way, if a stock does sell off, you can then dollar-cost average to the downside, if your long-term investment thesis is still in place.

In this case, the company last quarter provided fiscal 2027 guidance. They’re looking for organic sales growth three and a half to 4.5%, which I think in this environment is pretty good. They’re looking for earnings per share to be in a range of $5.70 to $6 per share, means the stock’s only trading at 14 times that forward earnings guidance. Our expectation, our projection for earnings for 2028 is $6.56. Again, only 12 times fiscal 2028 earnings estimate.

What that tells me is that the market is obviously pricing in further declines as opposed to what we’re expecting here, which is for stabilization and a return to growth. So, really, what’s happened with Clorox, they’ve had a rough number of years. I mean, actually going all the way back to the beginning of the pandemic has really messed up their operating performance. I think a lot of investors have just thrown in the towel and just gotten discouraged with this situation.

When you think about it, over the past six years, you had the huge surge in sales early on during the pandemic, but then, of course, you had the destocking that occurred thereafter. We had the negative impact on their earnings from skyrocketing inflation in 2021 and early 2022. Then, unfortunately, the company got hit by a very costly cyberattack in 2023 that really hampered their operations and took some time to recover from.

And then most recently, they changed to a new ERP system. That led a lot of customers to prebuying inventory prior to them instituting that change. Then, we also had that pull forward in sales and then destocking, which we’re now finally getting past that. But of course now we’ve got higher oil prices leading to higher resin prices, higher transportation costs, which is hitting them right now. What Clorox really needs is just a good, boring, uneventful operating environment for performance to normalize and just get back to what I would consider to be that prepandemic operating conditions.

I spoke to Erin at length on this one. She doesn’t think that the brand or their portfolio brands have been tarnished. Really doesn’t see anything different in the operating environment as far as the normal trade-off between branded items versus private label items. I mean, that has always been occurring, and it doesn’t look any different to her now than it has in the past.

In our model, we are forecasting an operating margin for fiscal 2027 to bounce up to 15.1%, is 14.4% last year, but that’s still well below what I would consider to be that eight-year average, prepandemic, of 18%. We are looking for ongoing gradual operating margin expansion from fiscal 2027 all the way out to 2031. And that would be the point we finally get back to the prepandemic average. By putting that into our model, we’re looking for a five-year compound annual growth rate for earnings of 12.5%. When you look at that growth rate versus the current multiples, we think the market is just discounting that way too heavily today.

Dziubinski: All right. Well, great background, Dave, but at the end of the day, would you say Clorox is still a buy? Would you still call it a pick of yours?

Sekera: It is. And when I look at it—and I look at it from a couple of different perspectives. We talked about the multiples; we talked our intrinsic valuation based on our discounted cash flow, but one of the things I also look at that we don’t talk about very often is I look at an

multiple. Essentially, enterprise value is just the total value of the company. It’s the value of the debt plus equity less cash. And I compare that to EBITDA, which is a proxy for the amount of free cash flow. The reason I look at that multiple is it’s often kind of a quick way to look at how attractive could this company be to private equity or even strategic buyers as a buyout target. If that multiple starts to get too much lower from here, I do think it could be a target. This could be one of those situations where you start off with that partial position, and then you need to set levels where you’re going to buy more stock to the downside.

In this case, the way I’m looking at it is I would set that next buy level being for each multiple of enterprise value/EBITDA being lower. Every multiple lower would be about $11 down in your stock price. In this case, your next purchase price would be about $70 a share, which means that you’d be buying that next round of stock at 9.5 enterprise value/EBITDA, which is also a 12 times forward PE multiple. The thought process here is that as that multiple declines, it becomes more and more attractive for being a buyout target. If someone does end up identifying this company and taking a run at it, you’ve been able to buy more stock to the downside and collect that premium once it occurs.

Now, in the meantime, you’re collecting a 6.1% dividend yield. I spoke to Erin about the dividend yield specifically. She’s confident in their ability to be able to maintain that dividend. In fact, they still have enough free cash flow left over after that dividend payment to be able to do some small share buybacks, which, of course, if you’re buying back stock at a 50% discount to its intrinsic valuation, that’s just very accretive to the economic value of the company overall over time.

Dziubinski: All right. Dave’s referred to Erin a couple of times. Erin Lash is the analyst who covers Clorox, and you can read her full report on it on Morningstar.com.

Stock to Sell: SPCX

All right, time for our stock picks portion of the program. Because it’s a new month, Dave has brought us three stocks to sell and three stocks to buy in October. We’ll start with Dave sells this week, and the first stock to sell is SpaceX SPCX. Morningstar awards SpaceX a narrow

rating and pegs it with a $62 fair value estimate. Dave, is the sell call on this based strictly on valuation, or is there more to it?

Sekera: It is based on valuation, but there is more to it as well. And I’m already prepared for the amount of hate mail I’m going to get for talking about SpaceX being a sell. But when I think about the investing environment today that we talked about at the beginning of the podcast, this one in my mind is kind of emblematic of everything that you really want to be avoiding in today’s environment. Now, I talked about how you want to steer clear of those stocks that are going to be economically sensitive. I will admit this one is not economically sensitive per se, but when you look at the valuation and especially what the market is incorporating and where it’s trading today, the market’s incorporating the value of a lot of businesses that aren’t actually even up and running yet.

Some of those businesses, which we just don’t think, using today’s technology, are anywhere near being economically viable. If any of those don’t end up coming to fruition, that’s a big hit in where that stock is compared with where it’s trading today. Very long duration stock. I mean, the value of the stock is based on free cash flow that’s going to be far, far out into the future, past even our five-year forward forecasts, valuation just based on huge growth expectations for pretty much every part of their business.

As far as free cash flow goes, I mean, according to our estimates, we think they’re going to be free cash flow negative through at least 2029, if maybe not even through 2030. So that tells me they’re going to have to raise a lot of debt in order to be able to build the business the way they want to build the business, may even have to raise new equity at the same point in time. Their cost of capital—it’s just going to be increasingly more and more difficult to be able to raise that capital, and the capital they raise is just going to be increasingly more expensive as well. Plus, you still have that huge technical overhang of equity from the IPO that’s currently locked up. We have different lockup periods that are expiring over the next couple of months. There’s just going to be a lot more equity supply coming on the market.

Then lastly, one thing I don’t think people talk enough about with SpaceX and Tesla TSLA as well: You do still have a huge amount of key-man risk here. So, God forbid anything were to happen to Elon Musk, I think that would be a huge hit to the stock. Or if he just decides there’s something else out there he wants to spend his time on, other businesses he wants to start, other industries he wants to try and disrupt, and he’s not paying as much attention here, I think that key man risk is probably not necessarily correctly valued in this situation as well.

Stock to Sell: HOOD

Dziubinski: All right, Dave, your second stock to sell is Robinhood HOOD. Morningstar assigns it a $57 fair value estimate and a narrow economic moat rating. Why is this one a stock to sell in October?

Sekera: Well, first of all, the valuation. So, it’s a 1-star stock, trades at double our fair value. I mean, you do mention that we assign a narrow economic moat. I think there’s a lot of debate about the economic moat in this one and how strong it is. It’s a mid-cap growth stock. I mean, to some degree, the mid-cap growth category, I think, has probably gotten overextended. And ‚of course, being a growth stock means that it’s naturally also a very long-duration stock, which, if people start pricing in higher interest rates, is subject to a lot of downside risk there, and you’re not even getting paid a dividend on this one.

Now, taking a look at our model, we are looking for pretty strong growth. I mean, we’re looking for a five-year compound annual growth rate for revenue of 18%. Little bit of margin expansion gets you to a 21% compound annual growth rate for earnings, but half of the valuation of this company is in what we consider our stage three part of our discounted cash flow model. That’s the perpetuity value of the company when you get out there. Again, when you think about duration, what is duration? It’s the rate of change in price based on a rate of change in interest rates. In my mind, this one is very subject to downward revisions if interest rates still go up from here.

When I look at the underlying business, well over half of the business, half the revenue is coming from individual investor stock trading. If we saw any kind of selloff in the market, the individual investors, their clients start losing money in the market, then I could see fewer and fewer investors trading. And then lastly, I think the big question with this company is, can they really grow enough, diversify away enough to be able to compete with more established brokerage companies and asset managers? In order to do that, they need to get further and further away from that baseline individual investor trading, which, to some degree, the way they have it on their platform is, in my mind, more gaming than it is necessarily long-term investing.

But I think in order to assume the company’s worth anywhere near what it’s trading in the marketplace, you have to have huge growth estimates in the amount of brokerage assets that they bring on board, bringing on board a lot more retirement deposits, company has to do a lot more securities lending, and you also have to make some very large assumptions in the amount of revenues that they drive from crypto trading as well. I think we actually have some pretty strong revenue and earnings growth estimates in our model, but yet the market is still double what our fair value is.

Stock to Sell: GRMN

Dziubinski: All right. And the last stock on your list of sales is Garmin GRMN. Now, Garmin earns a narrow economic rating, and we think shares are worth $231. So why is this one a stock to sell?

Sekera: Well, I mean, just from a valuation point of view, it trades at about a 24% premium, more than enough to put it in 2-star territory. Now, personally, I remember I had a Garmin GPS for my car, but that was over 15 years ago. To be honest, when I was doing my searches here, I didn’t even know this company was still up and running. Now, it is in the large-growth category, long-duration stock. In my mind, I think that based on their current business lineup, I think they are going to be a very economically sensitive company going forward.

So, what do they still do today? They make GPS-enabled hardware and technology and five different types of product lineups, those lineups being fitness, outdoors, automotive, aviation, and marine. For example, in that fitness division, a lot of their earnings are made from smartwatches and fitness trackers. They make money with their communications equipment, specifically the marine and aviation navigation equipment. But I’ll also note there, even there, that’s really much more for the recreational market than as opposed to the commercial, which makes me think that it’s very sensitive to consumer spending.

Now, I pulled up the model, and I’ll have to admit, I was very surprised at just how strong earnings growth they’ve had over the past three years. I mean, averaged over 21%, which I would not have suspected, but when I look at our model and look at our analyst write-up, we just don’t forecast that to last, whereas I think the market is looking for that type of earnings growth going forward. Our five-year compound annual growth rate for revenue and earnings, just a little bit over 8%. I mean, that is inflation plus some product expansion from here, but yet the stock is trading at 29 times earnings. This would be one I think would be very subject to a significant multiple contraction if that growth doesn’t meet those investor expectations over the next few years.

Stock to Buy: SPGI

Dziubinski: All right. Well, let’s move on to your stocks to buy in October. The first one up is S&P Global SPGI. Give us the highlights.

Sekera: S&P is a 4-star-rated stock, 27% discount, about a 1% dividend yield. We rate the company with a Medium

and a wide economic moat, that wide economic moat being based on the network effect, switching costs, and intangible assets.

Dziubinski: Now, S&P stock is down quite a bit this year, though. It does look like it’s up off its lows. Why do you like the stock given today’s market environment?

Sekera: Well, first of all, when you talk about the stock being down as much as it is this year, I think to some degree it just got pulled into that software category. We’ve talked about why software stocks have sold off as much as they had this year. A lot of concern about AI disrupting or displacing software in some of these types of businesses, which we just really didn’t see in our long-term investment thesis. The market’s starting to come around to that view, so these stocks have to some degree bottomed out and been recovering over the past month or so.

Now, as far as S&P Global specifically, when I look at the rating agencies, I think the rating agencies have some of the widest and deepest moats in the finance business in and of themselves. When I look at this company, they have over 30% net income margins. I mean, that puts it well into the top quartile of the S&P 500. But the thing that that also does is because so much of the value of the company is at such large margins, that also means it’s going to be a very low-duration stock. I think S&P, as a rating agency, is going to be a lot less economically sensitive than you’re going to see for the other average companies out there.

And then I also like the way that the business is structured on the rating agency side. Rating agency fees are charged as a percent of the amount of debt issued. When you think about how much money, how much debt the hyperscalers need to raise, end of this year and even in 2027, I think there’s a lot of upside potential in rating agency fees there. I know there are estimates of up to half a trillion of new debt by the hyperscalers expected to be issued in 2027. I think you could see a pretty good earnings boost from that here in the near term. I mean, the index providers—so, you have the S&P 500 index, but all their other indexes as well. They also charge a percentage fee of assets under management.

And then lastly, S&P has a lot of proprietary data, which, in a world of increasingly more and more general AI, that proprietary data becomes increasingly more valuable. S&P is one of the longest dividend growth track records in the S&P 500. I’d like that you’ll at least be able to keep up with inflation with those dividend increases. And then lastly, when I take a look at the model to get to our discounted cash flow, I think you’ve got pretty reasonable assumptions in the model. We’re only looking for 5% top-line growth over the next five years. A little bit of operating margin expansion only gets us to 10% earnings growth. In our model, you really don’t have to model in really any strong or unreasonable growth assumptions to be able to get to a stock that trades at a pretty deep discount.

Stock to Buy: ICE

Dziubinski: All right. Intercontinental Exchange ICE is your next stock to buy in October. Run through some of the key metrics on this one.

Sekera: It trades at a 17% discount to fair value. It’s enough to put it in 4-star territory, 1.4% dividend yield. We rate the company with a Low Uncertainty rating and a wide economic moat, their wide economic moat being based on cost advantages, network effect, and intangible assets.

Dziubinski: The stock’s down for the year, but it has enjoyed a nice rally during the past couple of months after announcing that it was going to be acquiring market access. Dave, why do you like the stock today?

Sekera: I mean, overall, when you think about their business, they own some of the world’s largest and most profitable futures and derivative trading exchanges. They also have very high net income margins over 30%. Again, that’s going to make this a much more lower duration stock. I like the lineup they have when you look at the network effect, the cost advantages, the intangible assets. All leads me to thinking that this company has very good pricing power.

I also suspect that this company would be a lot less economically sensitive than the average company. Trading activity for institutional investors often increases during periods of higher volatility. I think they’d be a beneficiary from higher inflation. If you have much higher inflation, then you have an increase in the number or an increase in the volume of derivative contracts that trade in order to be a higher dollar volume or a higher dollar value. It’s a good dividend grower. I mean, they have exchange-specific clearing and collateralization requirements, which really creates barriers to entry from AI. And like S&P Global, they also have a lot of proprietary pricing data, which becomes increasingly more valuable in an area where AIs trade on public data. Modest assumptions in our model, but yet still very undervalued.

Stock to Buy: LNT

Dziubinski: All right, Dave, your final stock to buy for October is Alliant Energy LNT. Give us the bird’s-eye view on it.

Sekera: Alliant stock is a 4-star-rated stock at a 17% discount to fair value, 3.4% dividend yield. We rate the company with a Low Uncertainty and a narrow economic moat, and pretty much like every utility, that narrow economic moat is based on efficient scale.

Dziubinski: All right, so that’s a pretty attractive discount. Besides valuation, why is Alliant a stock to buy in today’s market?

Sekera: Really, two aspects to it. The first aspect is that I wanted to have a utility stock as a buy because the utility industry or the utility sector has gotten hit very hard with the increase in interest rates. In fact, if I look at the returns for the Morningstar Utilities Index, it’s actually down a lot more than what the fixed income index is, but yet to me it has a lot of benefits of potentially floating interest rates upward because dividend payments typically will move up at least with the rate of inflation over time. Whereas with fixed income, you get stuck with a set coupon, so you don’t have that inflation protection to the upside. Now, as far as Alliant in particular, it’s the parent of two different regulated utilities, Interstate Power and Light and Wisconsin Power and Light, and to some degree every utility is a play on AI, but we think this one is particularly well positioned.

Our analyst team thinks that the amount of earnings growth here is probably higher than what management is currently guiding to. In fact, we’re looking for accelerating earnings growth after 2027, so I think that’s going to play well here. I think it’s just a matter of they have a lot of good growth dynamics based on the number of data centers in construction in their market area now, a couple more data centers that are already signed for and will be built over the next couple of years, as well as some attractive areas that we see even more data centers being built. Again, a lot of additional growth even beyond 2028. In this case, when I look at the regulatory environments that they’re in, we also think that those regulatory environments are very constructive for the equity perspective.

Dziubinski: All right. Well, thanks for your time this morning, 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. Be sure to tune in next Monday for The Morning Filter Podcast at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.