5 Stocks to Buy That Defy Value vs. Growth

Key Takeaways

• Will cooling inflation affect the June Federal Reserve decision?
• Market heavyweights Alphabet GOOGL, Tesla TSLA and Intel INTC report this week; here’s what to watch for.
• Highlights from big bank earnings.
• Whether Taiwan Semiconductor Manufacturing TSM and ASML ASML are attractive investments after earnings.
• What to make of SpaceX SPCX after its fall.
• Undervalued stocks to buy that are a little bit growth and a little bit value, too.

In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss what last week’s better-than-expected inflation readings may mean for Fed policy this year. They preview earnings for Alphabet, Tesla, and Intel, and explain why to keep an eye out for results from Charles Schwab SCHW and Blackstone BX, too. They unpack results from Taiwan Semiconductor and AMSL, discuss the huge selloffs in IBM IBM and SpaceX, and cover PayPal’s PYPL potential buyout.

Tune in to find out if a growth-and-value barbell is still the best way to structure a portfolio of stocks today. They close with undervalued stock picks that are neither value nor growth but a blend of the two.

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 talk about what’s been going on in the market, what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. Now, we have two programming notes to share.

First, we dropped a bonus episode of The Morning Filter last week focused on dividend stocks. If you haven’t done so already, be sure to check out that episode wherever you get your podcasts, and then keep an eye out this week on Thursday, because we’ll be dropping another bonus episode of The Morning Filter. We’re trying to keep Dave really busy. The upcoming bonus episode is actually a replay of Dave’s third-quarter stock market outlook webinar, where he was joined by Morningstar economist Preston Caldwell. Dave and Preston shared their outlooks for stocks, bonds, inflation, interest rates, and the economy for the rest of the year. Be sure to tune in.

All right, Dave, good to see you. Let’s start by talking about last week’s market activity. Stocks finished the week down about 1.5%, but tech stocks were down more than 3.5%. Walk us through kind of what happened and why you think it happened.

David Sekera: Good morning, Susan. When you look at the broad market movement, and you look at those individual stocks that move the most, both those that moved to the downside as well as some of the ones that moved to the upside, it’s still all about the longer-term outlook for artificial intelligence.

I’d say last week, in addition to those of us that had to deal with all the smoke coming down from the Canadian wildfires, I think the medium-term and the longer-term outlook for artificial intelligence also was becoming increasingly hazy. A lot of the things I’m hearing about is that there’s just a lot more focus on just how expensive artificial intelligence is. A lot of users are talking about that it’s not necessarily producing the results that they’re looking for and that they have to use increasingly larger numbers of tokens in order to be able to generate what they’re looking for from artificial intelligence.

I’m also hearing increasing concerns about Chinese competition out there. A lot of that seems to be getting better, but at the same point in time, it’s also becoming cheaper. I think that’s a big concern from the market. Lastly, there’s also discussion that there might already be enough compute capacity out there for what’s currently needed. I think when you look at things like Meta META talking about selling AI capacity and cutting their token prices, it’s really causing a lot of concern in the marketplace about whether or not that capital-expenditure spending that people expect for ’28 and ’29 really is going to hold up or not.

Now, of course, offsetting that, we had a lot of companies talk about AI on their earnings call. We had a couple of early indicators out there still showing that capex spending plans, at least for 2027, are still rising. The infrastructure for the buildout boom, still full speed ahead. Adoption rates generally still growing for artificial intelligence. There’s still definitely a long runway ahead. It’s a matter of looking at that price volatility, really just indicating that back-and-forth risk-on, risk-off sentiment for these artificial intelligence stocks.

Inflation and The Fed

Dziubinski: All right. Well, let’s talk inflation for a minute. We had CPI and PPI numbers come out better than expected last week. What did the market make of it, and what could these numbers mean for the Fed this year?

Sekera: When you take a look at the numbers and break it down between both the headline and the core, it shows that inflation was slowing pretty rapidly last month. As far as what the market took out of it, essentially what they said is we still think there are going to be Fed future rate hikes in the future, but at this point, not necessarily here in the short term. Before the release, it was about a 50% probability that the Fed was going to hike as soon as this meeting here in July. That’s fallen all the way down to now being below 15%. For the September meeting, there’s still a fifty-fifty probability that they may hike at that point in time, and the market’s still pricing in one, if not necessarily two hikes before the end of the year. We saw a big pop; well, not big, but we saw a pop in stocks when those numbers first came out, but they quickly faded.

I think there are really two main reasons. One, of course, one month is not necessarily indicative of a trend. In fact, oil prices have started to move back up again. The lower inflation this past month doesn’t eliminate the need for rate hikes. It just pushes them back until maybe later this year. Second, I’d say inflation, I think, is just low on the list of market concerns right now. We’re going into earnings season. We’ve got to figure out all the implications for the earnings reports both on the individual companies as well as with the market. Really, it’s just grappling with what those implications are for artificial intelligence. Just trying to understand, of all the AI growth that people are expecting, how much is already priced in and whether or not there’s still further room to run.

On Radar: GOOGL Earnings

Dziubinski: You mentioned earnings season, so that’s a good segue because we do have that heating up this week. Let’s talk about some companies you’re keeping on radar, starting with Alphabet GOOGL. Now, Alphabet’s been a pick of yours, and the stock is trading at a discount to Morningstar’s $433 fair value as we head into earnings. What are you going to want to hear about?

Sekera: I think it’s too early for the company really to be talking about any 2027 guidance or color at this point. I think the market’s really just going to be focused on the status of their AI models, trying to find out what the rollout schedule is or their timing on new models that might be coming to the market, and then get a better understanding of the accuracy, the efficiency and the performance metrics of what those new models are going to be just so they can compare them against some of the other models that are out there. Other than that, just kind of like the regular update on the impact of AI on search and monetization. Still trying to understand that revenue path and the guidance for Google Cloud. That’s where they host artificial intelligence for their clients.

Then lastly, I think more details on external sales for TPUs. I think that’s going to be a big one for the semiconductor sector just to see how much more of that they’re now selling into third parties and clients as opposed to just using it for their own needs.

TSLA Results on Deck

Dziubinski: Tesla TSLA reports this week, too; Morningstar thinks Tesla is worth $450 per share. What should investors be looking for here?

Sekera: When it comes to Tesla, I think there are always two trains of thought that you need to take as far as how that stock is going to perform and any potential changes to the fair value. Of course, there’s exactly what’s going on with the numbers. You have to look at it from that financial perspective. We already know that second-quarter auto deliveries were pretty strong. I know our analyst team wants to figure out what exactly the financial impact of the strong deliveries is. We should see pretty good fixed-cost leverage, which should improve some of the margins. We’ll see if that pans out or not. We want to get a better understanding on the free cash flow metrics. The company has a big capex cycle that, they’re really ongoing, but even more that’s probably going to be spent coming up, specifically on Full Self-Driving and the Optimus robots. It’s not just all about the numbers.

Of course, we’ve talked about Tesla. It’s really a story stock at the end of the day. That short-term trading is really about the story. In this case, we want to get an update on Tesla’s robotaxi rollout plans, what’s going on with the geographic expansion, the cybercab, and then also get some updates on when Full Self-Driving version 15 is going to be released and then any other updates they might have on the Optimus humanoid robots.

INTC Earnings Preview

Dziubinski: Intel INTC also reports this week; now, the stock pulled back a little bit during the past month, but it’s nevertheless one of those triple-digit returners this year. What are you going to be watching for with this one?

Sekera: Yeah. I mean, first of all, you have to kind of put what’s going on with this company over the past couple of years into context to understand what people are really going to be concerned about for the quarterly earnings. The company really has missed out on the artificial intelligence semiconductor race. This stock had been in a pretty long-term downward trend. It peaked in 2021 and just kept moving down until it bottomed out in July 2025. And then this year the stock started to recover. In fact, it doubled. It was around $50 in April. It peaked at $100. Now, it’s just below $100. The reason for that is really because of what’s going on with the AI buildout boom. It’s led to a shortage in the CPUs. Those CPUs, of course, are needed to efficiently manage AI workloads.

Coming into this quarter, I think the big question is going to be what’s going on with their gross margins and any gross margin guidance that they can provide. What I want to understand with this company: Is this similar to a lot of these other commodity-oriented hardware tech companies, where the shortage is allowing them to charge any price that they want? Or, in this case with the CPUs, is there more limited pricing power? We also want to get an update on the outlook for that CPU demand, just trying to understand how much longer that shortage is going to last before we can see supply catch up. When I look at our current forecast here, we’re currently projecting CPUs essentially to double for the next couple of years.

Dziubinski: Dave, based on the runup in the stock and the answers to those questions you just posed, how could Intel trade after reporting?

Sekera: This is one where you have to remember, we do assign the company with a high uncertainty. Sorry, it’s actually a very high uncertainty rating. Our fair value right now is $90 a share, trades around $95, so a little bit above what we think the stock is worth, but still close enough that it’s a 3-star-rated stock. I would say because of that very high uncertainty, I really wouldn’t be surprised to see any large fair value changes here, both to the upside as well as potentially to the downside. That’s what the market’s looking for too. I took a quick look at the options market last Friday. The implied volatility on the couple-week options right now is 120, so very elevated. If you run the math behind that, that tells me that the market is pricing in either an up or down move of up to 17% over the course of this week.

SCHW: What to Expect

Dziubinski: Charles Schwab SCHW is a recent pick of yours. The company will hold its quarterly investor day this week. The stock looks slightly undervalued heading into earnings. It’s trading below Morningstar’s $117 fair value estimate. Could there be any surprises here, or probably not?

Sekera: I mean, there always can be, but in this case, I’d say probably not. For them, their earnings reports tend to be pretty low-volatility events. In this case, we’d be looking for things like net new asset growth, client cash balances, and trading activity. Now, in this case, trading activity should be pretty strong. A lot of retail trading going on in the marketplace over the past quarter. Lastly, net interest margins—any kind of guidance there with what we’ve seen going on with the yield curve and what the Fed may or may not do over the second half of the year. When you think about the stock, and really how it’s been trading over the past year, to some degree, it got caught up with these other stocks where people are concerned about how AI may disrupt or displace their business over time.

In this case, if management can give any kind of clarity on how they think things like financial advice might change over time if artificial intelligence is used in order to give financial advice to clients, or some of the changes in the back end of using AI to sweep cash into higher-yielding alternatives away from bank accounts, how that might impact their net interest margins. But yeah, other than them talking about artificial intelligence and how that may impact their business, I think it probably should be a pretty low-volatility event.

Why Watch BX Earnings?

Dziubinski: OK. Now, we have alternative asset manager Blackstone BX reporting this week. Why is this one on your radar, Dave?

Sekera: Well, a couple of different reasons. This is a stock that we recommended back, I think it was on the March 9 Morning Filter. I’ll admit, this is one where I think I got more lucky than I was smart on this one. Part of the investment thesis then is we just thought there was just too much negative sentiment in the private credit markets. Even with this negative, I am on what still needs to go on there. The stock just went down too far too fast at that point in time. Then, earnings came out. The stock had a nice pop afterward. It moved from 4 stars into 3 stars. We quickly recommended in April to take the money and run on that one.

In this case, I’d say it’s not that I’m interested in Blackstone in and of itself all that much. It’s really just trying to understand and listen for what’s going on with private credit in those parts of their portfolios. The questions here are: How’s the fundamental performance of those issuers in private credit doing? I also want to understand what’s going on with the pricing of those assets in those portfolios. Of course, being private credit, there’s no public market. I suspect that we could see a lot of write-downs in a number of those positions, or at least we should be seeing some write-downs in a number of those positions, especially because I’m hearing that the Securities and Exchange Commission is taking a much closer look at the pricing of those portfolios as well. I mean, net-net, in my opinion, I do think that private markets could be a systemic risk if we see them sell off too far too fast.

In this case, if you think about what’s gone on over the past 10 or 15 years, private credit has just become an increasingly larger portion of how a lot of highly leveraged companies fund themselves. If that funding were to dry up, it would be bad for those individual companies. I think it’d be bad for the economy overall, and I do think it would end up being a big headwind to further growth in the stock market. It’s just one of these cases where I think there are a lot of losses there. Those losses will need to get recognized over time. It just becomes: How quickly do they need to take those losses here in the short term, or can they end up really taking these losses and pushing them out over the next couple of quarters and try and do it so they don’t have to take too much all at once?

Defense Names Reporting

Dziubinski: All right. Well, we have a trio of defense names reporting this week in Northrop Grumman NOC, Lockheed Martin LMT, and RTX RTX. Northrop and Lockheed look undervalued as we head into earnings, while RTX is about fairly valued; all three stocks did well in the first quarter but have since pulled back. Dave, tell us what’s been going on with defense and why you’re watching these names this week.

Sekera: Well, we’re watching all three names because at some point in time, all three of these stocks have been recommendations on The Morning Filter. I think the very first one a couple of years ago was RTX, but then that ended up going up into 3 stars. At that point, we then swapped out for I think Northrop or Lockheed. All of them, as you noted, had done pretty well for probably the past year or so. In fact, they did very well coming into this year, but then they ended up selling off in March. Honestly, I don’t know what it was that triggered these stocks to sell off over the past couple of months.

Overall, there’s still just a good long-term tailwind here. I mean, defense spending is doing nothing but heading up in the US, Europe, the Middle East, and the rest of the world. With that tailwind behind us, I think all of these still look attractive in our mind. I’ll just be listening for if there is anything different on the conference call than what’s currently in our investment thesis. If not, then I still think that Lockheed and Northrop look like pretty attractive picks here.

Bank Earnings Takeaways

Dziubinski: All right. Well, let’s move on to some new research from Morningstar. Start with your key takeaways from big bank earnings last week. So what’d you think?

Sekera: I mean, as we talked about last week, our team was looking for pretty solid to even strong earnings reports. I would say the earnings reports that came out were actually exceedingly strong. In this case, the strength really came from two different divisions. It came from the investment banking and the equity capital markets groups. Now, I also think that those should have pretty good results for the second half of the year, as we expect a couple of other AI companies and a couple of other companies to go public as well. However, when you think about the value of the big banks, the short-term excess returns that you get in those groups really aren’t something that’s going to change the long-term valuation of the bank all that much. When you think about banks and where they make their money and where the long-term value is coming from, it’s still all about net interest income.

This past quarter, net interest income was relatively weak, maybe even kind of flat. Considering the Fed is now going to hold off on raising rates, that should bolster net interest income for a couple of more months, but it really doesn’t change how we think about the long-term value of these companies. We did make a couple of small fair value increases: JPMorgan Chase JPM, Bank of America BAC, Wells Fargo WFC. When I look at those small fair value increases, they’re really just in line with what you would expect those to go up over the longer term, in line with that annualized cost of equity type of analysis. We did lower the fair value on Citigroup C by a couple of dollars just to increase our forecast for some higher expenses, but it wasn’t anything that really is indicative of a change in the story overall.

ASML and TSM Results Review

Dziubinski: All right. Viewers can visit Morningstar.com to see the details of those fair value changes. We also had a couple of tech names reporting last week. Morningstar raised its fair value estimate on ASML ASML by quite a bit after earnings. Walk us through the results in that fair value hike.

Sekera: I mean, the results in and of themselves were very strong, but when I think about the fair value and why we hiked it as much as we did, it wasn’t about the quarterly earnings. The company is talking about increasing the capacity that they have for the amount of throughput. When our analyst incorporated that higher capacity into the model, that’s really what drove that fair value increase. In this case, they’re increasing capacity by 30% in 2027, and I think they’re potentially increasing capacity by another 30% in 2028 as well. We think that 2027 capacity is essentially already booked, and we estimate that about 30% of that 2028 capacity increase is probably already booked as well. When we made those increases in our model, taking it out the next couple of years, we increased it to our revenue forecast all the way out to 2030. For example, our 2030 revenue forecast was $60 billion, which was the high end of their longer-term guidance. We’re now expecting that to be $70 billion. It’s really that capacity increases incorporated into our model that drove that fair value change.

Dziubinski: All right. Morningstar also raised its fair value on Taiwan Semiconductor TSM after earnings by 27%. Now, we peg that at $534 per ADR. How did the results look for Taiwan Semi, and why the fair value boost?

Sekera: Again, results were very strong, but the story here isn’t about the historical results. It’s all about even-greater-than-expected future growth. Again, we updated our model, and we took into account an increase in the company’s revenue guidance. I think they increased the revenue guidance for this year to over 40%. Even a bigger impact than that was that the company increased its 2026 capex budget by $8 billion, up to $62 billion, essentially a 15% increase. In this company’s case, management is known to be pretty conservative, so I think there’s probably even more capex and more capacity increases yet to come in the second half of the year. Our assumption is that the capex increase this year is because they’re already talking to their clients, already talking to the hyperscalers. I’m assuming that those hyperscalers are also increasing their 2027 budgets, which is what the company is planning for right now.

Dziubinski: All right. And viewers and listeners, I didn’t have this information in my question, and I should have; we did increase that ASML ADR fair value to $2,050 per share, so that’s our fair value. Dave, now we raised these fair value estimates on both of these stocks, yet I think they both pulled back after earnings. Why do you think there was that disconnect?

Sekera: I think there’s a couple of things going on here. From that fundamental point of view, I mean the market’s already priced in just the exceptionally strong growth that we’re looking for here in the second half of this year. To some degree, I mean these companies have already scheduled their production runs for 2027 for their clients. I think the market’s probably already priced in that as well. At this point, I think it’s now starting to become about trying to forecast 2028 revenue and earnings. I think the market volatility and prices indicate that there’s a pretty wide range of assumptions right now for 2028.

Now, from a technical point of view, I think there’s a lot of overhang in our market because of what’s going on in the Korean stock market. The Korean stock market has just been on a tear for really the past year and a half to two years, and it’s led to a lot of speculative activity. If you look at the Korean market, over 50% of the market cap is just two stocks. If you think the US market’s concentrated, that can’t even hold a candle to what’s going on in the Korean stock market. Those two companies, of course, are Samsung 005930 and SK Hynix SKHY, which are both memory semiconductor companies. We all know that those stocks are up what, a couple hundred percent each year to date and even more than that over the past 52 weeks. The Korean stock market peaked a couple of weeks ago. It’s down enough that it’s now technically in a bear market. I think it’s down about 25% off its high. We’re hearing a lot of reports out there that a lot of margin accounts ended up getting called in. Essentially, that’s probably led to a lot of forced selling over the past couple of weeks. At the same point in time, even with that market being down 25% year to date and having forced sellers, it’s still up 50% year to date, and it’s doubled over the past 52 weeks.

IBM’s Selloff

Dziubinski: All right, let’s talk about IBM IBM. Now, IBM released some preliminary second quarter results, and they were not good. The stock fell 25%. Dave, what happened and what did Morningstar think?

Sekera: IBM, I mean, they missed expectations both on the top line and the bottom line. If you go to the transcript of the call and after talking to our analyst, it sounds like management was really blaming this shift on a change in the timing of their client’s capex spending on mainframes away to other areas like servers, storage, memory, and so forth. Is that shift in timing, as well as a shift in spending toward cybersecurity, what hit the results this quarter? The big question will be: Is this just a timing differential? Are these sales still going to occur over the next couple of quarters? Or, for some reason, are these sales actually just lost for good with how things are changing with artificial intelligence versus mainframes? Now, our analyst thinks this is just a delay in sales, not a cancellation. As such, he left our fair value unchanged at this point in time. The big risk is if these sales are actually canceled and not coming back, then I do think there is a pretty good downside risk to our valuation from here.

PGR: Tailwinds Ebbing

Dziubinski: All right. We don’t often talk about insurance stocks because they’re very often overvalued, but let’s talk about Progressive PGR. The stock was down 9% after earnings, but Morningstar held its fair value estimate at $191 per share. What happened here?

Sekera: Well, I mean, as you mentioned, the insurance sector is overvalued. It’s been overvalued for quite a while at this point in time. So names like Progressive, MetLife MET, Allstate ALL, Chubb CB, all 2-star-rated stocks for the most part. I think some of them may even have moved up into 1-star territory. Essentially, it’s just as simple a story as a lot of these companies were pushing through very high premiums and increasing their revenue by a lot over the past couple of years. We think that, again, it’s a very competitive industry, and while you can get those short-term increases in premiums over time, that’s just going to have to slow. In this case, I think it’s just as simple as seeing more normalization in the amount of premium growth. The market right now just has to readjust lower to be able to take those lower growth estimates into consideration.

PYPL’s Buyout Bid

Dziubinski: Now, PayPal PYPL finished the week up 22% last week after it received a buyout offer from Stripe and a private equity firm. Morningstar’s fair value estimate on PayPal is $80. Dave, what are the details of the deal and what does Morningstar think of the offer?

Sekera: The buyout bid is at $60.50 per share. It looks like it’s a pretty solid bid in that they already have committed financing from the banks to be able to close this if the company were to agree to being bought out. In our view, I mean, we think this does make strategic sense. If you add PayPal’s volume to their volume, they would get pretty good fixed-cost leverage, which could lead to scale-based cost advantages, which maybe could end up helping drive an economic or a long-term durable competitive advantage here. I would say the buyout offer is attractive when you compare it to where the stock has been trading, but it dropped quite a bit in February. In fact, it dropped down into the low $40s, but the stock was actually around $60 at the beginning of the year, and that buyout bid is well below our $80 fair value.

In this case, if it turns out that the board is open to selling the company, I think there’s a pretty good chance there might be a lot more upside here because we think, one, the company is undervalued compared with our long-term intrinsic valuation. But also at the same point in time, if they put the company up for auction, I think you could see other potential bidders get involved here. In this case, I think they would just have to negotiate a higher price in order to sell the company.

SPCX’s Fall from Grace

Dziubinski: Now, SpaceX SPCX fell below its IPO price last week. The stock, of course, still looks overvalued according to Morningstar because we assign it a $62 fair value estimate. Dave, are you surprised by this fall?

Sekera: I mean, that’s kind of a yes and no type of answer. From a fundamental point of view, I would say no, we’re not surprised. At the same point in time, there are so many vested interests out there that want to keep that stock price high above the IPO price that I am surprised that the stock fell as much as it has as quickly as it has. I think the problem here is that this could cast a negative sentiment over the IPO space for the rest of the year. A lot of those AI companies that are looking at coming public in the next couple of months might not necessarily be able to do so. If they try coming to market, they’re not going to get anywhere near the valuation that they thought that they were going to get. Now, as you noted, our fair value is $62 a share.

I just want to caution people that when you think about our fair value, it’s not like we’re not pricing in a lot of growth here. We’re just not pricing in anywhere near the amount of growth that the market is currently pricing in. Again, just to run through some of the numbers here, the revenue for the company last year was $18.7 billion. We’re modeling $37 billion this year. We’re expecting it to grow all the way to $73 billion by 2030. I mean, that’s almost four times the growth from 2025 to 2030.

As far as earnings, it was negative last year. We’re looking for breakeven this year. We’re only looking for 90 cents per share, though, in 2030, which of course means that they’d be paying a huge P/E multiple on that stock today based on that earnings estimate. I just say with this one, if you do have an interest in the stock, we did a short interview with Nic Owens; he’s the equity analyst that covers the company, on the June 8 episode of The Morning Filter. Might be worth going to that section and watching that interview with him.

Selling When You Have No Losers

Dziubinski: All right. Well, it is time for our question of the week. If you have a question for Dave, you can reach us at our email address, which is themorningfilter@morningstar.com.

Now, this week’s question comes from someone I’d consider to be a longtime friend of Morningstar, BK. BK has reached out to many columnists and analysts at Morningstar over time, so it’s really nice to be able to answer one of BK’s questions on The Morning Filter. The question is, what to do if all of your holdings are gains and you have no losers to sell?

Sekera: Well, that is a really high-quality problem to have.

Dziubinski: That’s what you get when you use Morningstar for as long as BK has, right?

Sekera: Well, unfortunately, I don’t have a specific, detailed answer for BK. It’s just one of these things where I can really give some ideas of how to think through it. Of course, we can’t give financial advice to any individuals here. We can only give general recommendations. Like anything else, it’s going to depend on a lot of different factors. In this case, I would say first of all, talk to your tax advisor. There might be different things that they can look at in your portfolio and figure out what they could do to move things around or at least figure out where to take gains in order to minimize the tax costs here in the short term. From my point of view, from a fundamental point of view, the first thing you need to do is look and see which stocks are the most overvalued and maybe, from a technical perspective, which ones are the most overextended at this point in time.

From there, look at which accounts you own those overvalued and overextended stocks in. Are they in retirement accounts or are they in taxable accounts? Overall, how do those stocks fit in with that general portfolio? What was the part that they played within your portfolio? Was there a specific diversification that we were getting from owning those stocks? Also, depends if they’re short-term gains or long-term gains; that makes an impact as far as the amount of taxes that you’re going to be paying on it. You also have to think about whether there are going to be any changes in your own personal tax situation or tax rate going forward. Are you maybe getting closer to retirement, where you’re going to have lower taxes than maybe while you’re working? Do you have any intention of moving to lower tax states, or whether or not you donate to charities?

In this case, maybe you could donate some of that appreciated stock and get the charitable write-off. And then, if there are any estate tax planning implications here as well. Once you have that better holistic view, understand the tax and the investment implications, then I think you can decide what to sell, how much to sell, and out of what accounts you can sell from. Of course you don’t always really need to sell an entire position. You can always trim. I think of it really in three different buckets. There’s going to be the sell now bucket. These are the stocks that are clearly the most overvalued, especially if any of them have deteriorating fundamentals. Your first sell is going to be your best sell here. And then also just trying to understand from a portfolio position, are there other better opportunities where you can put that money to work today?

Second bucket is going to be those where you want to trim the position, you don’t necessarily want to sell out. Maybe this is an example where the position has just become too large a percentage of your portfolio overall. These are the ones that I consider to be maybe good company, but expensive stock. Then there might be those that you just want to hold despite gains anyway. These are those long-term high-conviction compounder-type stocks. Maybe they’re modestly overvalued but still have a long reinvestment runway. Once you put in those three buckets, then I think it makes it pretty clear which ones you want to take some profits on. To some degree, I think one of the bigger mistakes investors can make is holding onto an overvalued stock solely to avoid paying taxes. Sometimes you just got to bite the bullet and pay that capital gains tax and move into maybe some more undervalued opportunities.

Barbell No More?

Dziubinski: All right. Well, before we get to your picks this week, Dave, let’s talk a little bit about how, based on valuations, you think investors should be thinking about that barbell structure for their stock portfolio that you’ve been talking about this year. We’re going to cover that more in the bonus episode that people can watch this week, but let’s touch on it briefly before we get to the picks.

Sekera: Yeah. Just to put it in context too, I mean, there’s been a very quick pace in how our recommendations have changed really since the beginning of the year. As you mentioned, at the beginning of the year, we recommended that barbell-shaped portfolio: being overweight value, overweight growth, underweight core. The reason being, and we had outlined a whole bunch of reasons why we were expecting a lot of volatility over the course of this year, that you could use that barbell and readjust that barbell as volatility occurred to be able to take advantage of dislocations in the market. Of course, in February and March, we had a big selloff in the market. Now, the value part of that barbell actually not only held up, but it was up a couple of percent. Whereas, of course, those growth stocks, tech stocks, AI stocks got hit pretty hard to the downside.

End of March, coming into the second quarter, we recommended to take profit in the value category and put those proceeds back to work in the growth category, overweight growth, especially those tech stocks and AI stocks that got beat up the most. After that, the market rallied very quickly, and by the end of May, at that point in time, we recommended to then take profit in that overweight in the growth category, specifically those AI and tech stocks that got beaten up too much and now probably rose to the point that they were back to fair value. And then, it was time to go back to that barbell once again.

Looking at how valuations have changed over the course of June and the beginning of July, it looks like now is actually a good time to be an equal weight across value core and growth. When I look at the price to fair values and the discounts, they’re all similar enough that there’s really no reason to overweight or underweight any one of those categories. Overall, the risks in the second half of the year at this point feel a little bit more balanced than they did at the beginning of the year. Of course, then by having that equal weight, you are then positioned to be able to reallocate to any one of those categories if we have any other further dislocations in the second half of the year.

Stock Pick: ICE

Dziubinski: All right. Given that, your picks this week are undervalued stocks that have a combination of growth and value characteristics. They’re sort of a blend. Now, your first pick this week is Intercontinental Exchange ICE. Tell us about it.

Sekera: It’s a 5-star-rated stock, trades at a 22% discount to fair value, has a 1.5% dividend yield. It’s a company we rate with a low

and a wide , that wide economic moat being based on cost advantages, network effect, and intangible assets. I’d note too that if you look in the , this stock falls in that mid-cap core category.

Dziubinski: Now, the stock’s down more than 10% this year. What’s been going on with it and why do you like it?

Sekera: I’d say a big portion of the reason for the selloff in this company is that it’s just been lumped in with all of these other companies where people are concerned that artificial intelligence may disrupt their business in some way, shape, or form going forward. In our view, our investment thesis here really is unchanged even when we can conceptualize how AI may or may not impact trading going forward. Overall, the company is the dominant futures exchange globally, especially in energy contracts. When we think about the economic moat here, we think that their liquidity-based network effects are nearly impossible for AI to try and replicate or disrupt. Again, for trading, you really need to have the clearing and the collateralization requirements. We think that creates a barrier to entry from artificial intelligence. Lastly, the company has a huge amount of proprietary pricing and market data, and a world of artificial intelligence when everybody is going to be basing all of their AI searches on public data.

We think that proprietary data is actually even worth increasingly more over time. Lastly, it’s just the New York Stock Exchange. When you think about the New York Stock Exchange and the specific proprietary data that it has, we still think that this company has those long-term durable competitive advantages that you’re able to buy at a pretty attractive discount in today’s market.

Stock Pick: AMT

Dziubinski: Now, your second pick this week is a REIT, American Tower AMT. Give us the highlights.

Sekera: 4-star-rated stock, 24% discount, attractive dividend yield at 4.1%. We rate the company with a medium uncertainty and a narrow economic moat, that narrow moat being based on efficient scale and switching costs. Similar story, if you look at the Morningstar Style Box, this one falls into that mid-cap core category.

Dziubinski: REITs have done reasonably well this year, but American Tower has been kind of flat. Why is this one attractive?

Sekera: When I take a look at the entire category of real estate investment trusts, I mean all the cellphone towers have been selling off. To some degree, I think a large portion of that is just because people are concerned about how SpaceX may disrupt or displace that traditional wireless business over time. I’ve talked to Mike Hodel about that, and he just doesn’t foresee that anytime soon. When he thinks about the cell coverage that SpaceX can provide today and where it’s going, he thinks it’s more of an overlay than it is necessarily a replacement for traditional wireless. In this case, they can use it in those rural areas where you don’t have cellphone towers, but in urban or suburban areas, you’re still much better off. The economic value still really provides a big advantage for those cellphone towers where there’s enough density that you can really get a lot of fixed-cost leverage off those towers that you don’t get from satellite coverage.

Stock Pick: NOC

Dziubinski: Mike Hodel is Morningstar’s communications sector director. All right, your third pick this week is a name we’ve touched on earlier in the program. It’s Northrop Grumman NOC. Run through the key metrics on this one.

Sekera: Stock’s trading at almost a 20% discount to fair value. It’s enough to put it in 4-star territory. Somewhat attractive dividend yield at 1.8%. We rate the company with a medium uncertainty and a wide economic moat, the wide moat being based on switching costs and intangible assets. Once again, if you look at where it’s placed in that Morningstar Style Box, it falls once again into that mid-cap core category.

Dziubinski: Why do you like the stock now?

Sekera: When I think about the trading pattern for this stock, this was a prior pick in 2025. It traded up pretty substantially since then. In fact, it went into 2-star territory in March, which, of course, anytime something hits 2 stars is usually a pretty good indicator to take at least some of the profit off the table, but the stock sold off too much to the downside. I think this is giving you that ability to, if you sold some of that stock or just hadn’t gotten involved in it, a good ability to be able to pick some up at a pretty good margin of safety from its fair value. When I look at the earnings report from Q1, results were just fine.

In fact, our analyst noted that the company had reached agreements to accelerate production of the Sentinel ballistic missiles and accelerate the production of B-1 bombers, so fundamentally, I think everything is still going well here for the defense companies and for Northrop overall. We think that it bodes well for the company’s ability to meet our forecast. I still think that there’s further upside in this stock.

Stock Pick: HSY

Dziubinski: All right. Your next pick this week is Hershey HSY. Give us the bird’s-eye view on this one.

Sekera: Hershey’s currently trading at a 25% discount, with that being a low-uncertainty stock. That’s more than enough to put it in 5-star territory. Attractive dividend yield at 3.4%. We rate the company with a wide economic moat based on cost advantages and intangible assets. And if you look at the Morningstar Style Box, once again, this one falls into that mid-cap core category.

Dziubinski: Of course, rising cocoa prices and consumer belt-tightening have hurt Hershey’s. Why do you like the stock?

Sekera: I think this is another instance where you can kind of double dip on a stock that we’ve recommended in the past. It was a pick multiple times in 2025. Generally, the stock had moved up into the right since we were making those recommendations. But then the stock peaked this year; I think it was maybe in February or March, running well into that 2-star territory. In this case, it sold off, and it’s overcorrected to the downside. I think you’re getting that opportunity that if you took some profit, you can move back into that equal weight or maybe even overweight position. As you mentioned, the stock is very correlated to cocoa prices. Cocoa prices had skyrocketed in 2023 and 2024, but then they declined throughout the year in 2025 and bottomed out. And now, they’re starting to creep back up again. I’d say at this point they’re still pretty far below where they peaked out in 2024.

We don’t necessarily see this as something that’s going to disrupt their gross margins all that much here in the short term. Depending on the type of chocolate and the amount of cocoa that you use, it’s typically only like 20% to 50% of cost of goods sold. Yeah, a little bit of margin pressure, but not enough really to change that longer-term investment thesis. I just note Hershey has dealt with high prices in cocoa before. They’re going to have to deal with high prices in cocoa at points in time in the future, but it’s one of those things that really impacts every chocolate manufacturer out there; it’s not endemic just to Hershey. When you think about the company overall, 36% market share in the US chocolate market. I mean, that compares with 29% at its closest competitor, which is Mars. But really, I mean the rest of the market, the remaining branded and private label competitors all have very low market shares out there. That’s part of the reason that we look at this company as having long-term durable competitive advantages, and it’s not necessarily expensive. Trades at 20 times our 2026 earnings estimate, drops down to 18 times our 2027 earnings estimate.

Stock Pick: AMZN

Dziubinski: All right. Your last pick this week is Amazon.com AMZN. Give us the key points on this one.

Sekera: It’s trading at a 12% discount. It’s enough to put it in 4-star territory. Not a dividend stock, so if you’re a dividend investor, it may not necessarily be right for you. We rate the company with a medium uncertainty and a wide economic moat. In this case, I would note that it’s only one of two companies out there that have four of the five moat sources: cost advantage, switching costs, network effects, and intangible assets. If you look at the Morningstar Style Box, this one falls into that large-cap core category.

Dziubinski: Dave, a double-digit discount’s pretty good. I’m not going to say it’s not a bargain, but talk a little bit about why specifically it’s your final pick this week.

Sekera: It kind of also goes back to when you and I talk about core stocks. In this case, I differentiate between a core stock for your portfolio versus how a company may fall into that core category in the Morningstar Style Box. The style box is broken out between value, core, and growth. A core stock in the style box is one that has some attributes of growth stocks, some attributes of value stocks, but not necessarily enough that it falls into one of those two categories. It kind of ends up in that core category. Now, when you and I have talked about core stocks and think about your portfolio, those core stocks are the ones that have attributes of a long-term hold position. I mean, the kind of stock that you want to own through economic cycles, the kind of stock you want to own through different market cycles.

It’s the stock that really forms the basis of your portfolio that you can then build other positions around. There are companies that have a very long runway for growth, companies that have long-term durable competitive advantages, companies with strong balance sheets. In this case with Amazon, I mean the company’s still continuing to hit on all cylinders. I think there’s still a long runway, still very much upside from AWS. That’s its AI platform. Margins here can continue to keep improving in the retail business. We think the advertising business is very valuable. Overall, we’re still looking for just very stable growth, both on the top line, looking for that continued margin expansion over time. I still think Amazon is one of those core stocks for your portfolio, as well as it’s a core stock in the style box.

Taking a look at our model here, I mean the company, we’re averaging 15% earnings growth over the next five years, and you’re getting it at a bit of a discount to its historical multiples where it’s trading today. It’s trading at 30 times our 2026 earnings estimate. If you look at the historical average of where it’s traded over the past five years, it used to trade much closer to 40 times. Over the past 10 years, it was trading at 57 times. That 30 times multiple may look expensive, but when you start thinking about the type of average earnings growth that we’re looking for and how it’s traded in the past, it looks attractive to us here today.

Dziubinski: All right. Well, thanks for your time this morning, Dave. Viewers and listeners who’d like more information about any of the stocks they talked about today can visit Morningstar.com for more details. We hope you’ll join us again 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.