On this week’s episode of The Morning Filter podcast, Dave Sekera and Susan Dziubinski discuss the likelihood of a Federal Reserve interest rate cut and why to watch the earnings reports from Costo COST, Cambell’s CPB and Adobe ADBE this week. Tune in to find out which cybersecurity stocks are buys after earnings and whether Marvell Technology MRVL or Salesforce CRM remain top picks.
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They unpack the market’s current valuation: Are stocks overpriced, underpriced, or fairly valued today? This week’s stock picks are high-quality wide-moat stocks to buy that can upgrade an investment portfolio in 2026.
Episode Highlights
- On Radar: Fed Meeting, Earnings
- New Research: Cybersecurity Firms, MRVL, More
- Updated Stock Market Outlook
- Wide Moat Stocks to Buy
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Transcript
Susan Dziubinski: Hello, and welcome to The Morning Filter podcast. I’m Susan Dziubinski with Morningstar. Every Monday before market open, Morningstar Chief US Market Strategist Dave Sekera and I sit down to talk about what investors should have on their radars for the week, some of the Morningstar research, and a few stock ideas. Well, it’s been a couple of weeks since Dave and I have talked, and we have a lot of catching up to do today. We’ll cover the latest odds on whether the Federal Reserve will cut interest rates. And what to watch for in Costco’s and Adobe’s earnings reports this week. We’ll also unpack Dave’s updated stock market outlook and his stock picks based on current market conditions. All right, well, good morning, Dave. Let’s start with this week’s Fed meeting. Is the market expecting a rate cut or not, and why?
Dave Sekera: Hey, good morning, Susan. It’s really been a bit of a roller-coaster ride over the past month or so. I mean, really, since the last Fed’s meeting. But yes, at this point, the market is pricing in a cut here at the meeting this week. And in fact, it’s not my own language, but someone else called it “the cut that saved Christmas this year.” So, taking a quick look at the CME FedWatch tool. That’s showing the market implied probability of a cut to 3.5% to 3.75%. Right now is 88%. And that’s after being a much lower probability just one month ago. But I think the real question right now is, what are they going to do in January—is it one and done, or are there more yet to come? Taking a look, the January probability for a cut is only 25%, and in fact, if we look at the March probabilities for a cut to the Federal Reserve rate to 3.25% and 3.50%, that’s only 45%, so it’s not until the April meeting that we’re now getting above 50% again. So I think the market right now pretty doubtful that we’re going to see another cut here in the short term. But I’d note that if you look at Morningstar’s US Economist, he’s still looking for several rate cuts next year, which he thinks still will probably come more in the earlier part of the year than the latter part of the year.
Dziubinski: All right. Well, let’s talk a little bit about earnings. We have a couple of companies reporting that you’re watching. Start with Costco, which is ticker COST, one of the biggest retailers in the S&P 500. Now, the stock continues to trade well above Morningstar’s fair value estimate, which is $640. So, Dave, why is this one you’re watching this week?
Sekera: Well, for a couple of different reasons. So, first of all, while it’s one of the largest retailers, it’s also one of the ones I think we have the most differentiated opinion on out there. It’s currently a one-star rated stock, trades at a 40% premium to our fair value. Now, full disclosure, high-quality company, wide economic moat, medium uncertainty. Sekera household is a very happy consumer of Costco—and members. But when I just look at our fair value here, and I look at the market performance over the past two years, our fair value has ticked up pretty steadily over those two years, but the stock price has well outpaced our fair value increases.
I took a quick look at our model just to see what the assumptions are in our forecasts. We’re looking for 7.6% five-year compound annual growth rate on the top line for revenue. It’s really just based on a combination of increasing same-store sales and new store openings. We’re looking for operating margins to expand to 4.2%. That’d be up from 3.8% currently. And that 4.2% would put it at a new historical high. In fact, if you look over the past five years, it’s only averaged 3.5%. So very strong expectations there. We’re looking for 10% average earnings growth over the next five years, yet the stock trades at 45 times our fiscal 2026 estimate. So I think every quarter in order to maintain the story here and maintain that type of valuation, they just have to continually posting increased membership growth, increased foot traffic, higher same store sales. You’ll see that operating margin continue to keep expanding every quarter to keep this story alive. Any miss in any one of those, I think, could result in a pretty swift selloff in the stock.
Dziubinski: Well, a couple of your former picks are reporting this week as well. And that includes Campbell’s, which is ticker CPB. Stock’s having a tough year and looks really undervalued today. So what are you going to want to hear about here, Dave?
Sekera: Yeah, I think this is actually almost the exact opposite of Costco. While Costco we have a very differentiated opinion there, saying that it’s overvalued, we have a pretty differentiated opinion with Campbell’s, thinking it’s significantly undervalued. In fact, it trades at a 50% discount to our fair value, puts it deep into 5-star territory, and the stock has a pretty attractive yield at 5.3%. It’s a company we rate with a wide moat and a medium uncertainty. Again, I pulled up the model over the weekend, took a quick look through here. I think our assumptions are probably on the conservative side. We’re forecasting only 1.2% average top line growth over the next five years. We’re looking for operating margins to normalize. We’re looking for it to rise up to 16.8% by 2030. Comparatively, it’s only 13% expectation this year. So overall, between the operating margin expansion and only a little bit of top line growth, we’re looking for earnings growth of 7.6%.
I think a lot of people also just kind of need to realize, too, and just remember, Campbell’s isn’t just a soup company anymore. Yeah, the majority of their sales, 60%, still comes from the meals and beverage divisions, which is where soup is. But they also have a lot of different sauces and juices in that group as well. And then the other 40% of the business comes from the snacks business, brands like Pepperidge Farm, Goldfish, Snyder’s, among others. Overall, when we look at where the stock is trading compared to our earnings, again, we’re not a PE shop. We do the full discounted cash flow. But again, just to put in perspective, it only trades at 12 times our 2026 earnings forecast.
Dziubinski: So then, Dave, given that differentiated view and the valuation, would you say that Campbell stock is a buy ahead of earnings?
Sekera: So I think this is probably one where I don’t think you need to try and get ahead of the earnings. I don’t know of any specific catalyst that would cause earnings to spike in order to get that stock really to rage higher after earnings. But it’s just at such a large discount that even if it does post a good earnings results and you do see a good rally in the stock, I still think it has a lot of room to run, even if we were to get a pop after the earnings.
Dziubinski: All right. Well, Adobe, which is ticker ADBE, is another former pick that reports this week. Now, here’s another case where Morningstar has kind of a differentiated opinion on this one from the market. So walk us through that take, and tell us what you’re going to want to hear about from management in the call this week.
Sekera: I think the biggest differentiation here is that it appears to us the market is pricing in the assumption that artificial intelligence over time will end up eroding the value of their products, whereas our analyst team thinks otherwise. In fact, we see Adobe incorporating AI into its products and services to be able to make them more economically value-added to their customers. So I’d like to really just hear anything that management could do to try and help sway the market opinion that their business will not be overcome by AI. I think that would help the stock a lot here. This is one where the stock’s currently trading about 17 times, actually a little bit below 17 times, our earnings estimate. Our analyst is forecasting a 13.6% income growth on a compound annual growth rate basis over the next five years. So overall, this is one where we have a very differentiated view from the marketplace. I’d say this is a good one. Go to Morningstar.com or whichever Morningstar platform you use, and read through not just the most recent stock analyst note, but a couple of the stock analyst notes. I think Dan does a pretty good job here covering not only what’s happened with the earnings reports but he also highlights in a couple of different notes what Adobe has been doing, what they’ve displayed at their conferences, what different AI innovations they’ve had. So I’d say, read through the full write-up on this one, but this is one where we have a pretty differentiated view from the marketplace.
Dziubinski: And again, here, the Adobe stock is still pretty compelling from a valuation perspective, right?
Sekera: Exactly. Our analyst team certainly thinks so. It’s a 5-star rated stock at a 40% discount and a company we rate with a wide economic moat.
Dziubinski: All right, well, let’s shift over to some new research from Morningstar about companies that have been in the news. And we’ll start with a few cybersecurity companies that have reported earnings. Now, Zscaler, which is ticker ZS, reported before Thanksgiving, but Dave and I haven’t talked since then, so we’re going to get his take on that. And then we had CrowdStrike, which is ticker CRWD, and Okta, ticker OKTA, report last week. So, Dave, what are your takeaways from all three of these reports? And were there any notable fair value changes after earnings?
Sekera: Generally, I’d say it’s pretty strong results across the board. And in fact each of these companies, I believe, also increased their guidance as well. So I’d say, overall, really no change to our investment thesis in the space overall. Really, the biggest themes, I think, are just the ongoing vendor consolidation that we expect to continue to keep going. And then we also expect that the cybersecurity industry I still think has some of the most attractive dynamics out there. I think you’ll continue to see each of them talking about how they utilize artificial intelligence to be able to automate their security services more and more. So we did have a couple of fair value changes here. So for CrowdStrike, we boosted our fair value there to 410. Essentially, that was just as we recalibrated our medium-term and our long-term growth estimates. For Okta, we maintained our $100 fair value estimate. And then, lastly, on Zscaler, we raised that one by 14% to $300 a share from 264. And that was really just a matter of just increasing the duration of the top line growth and some increased profitability.
Dziubinski: All right. So of the three—CrowdStrike, Okta, and Zscaler—any of the three look attractive from a valuation perspective?
Sekera: So, from a valuation perspective, Zscaler, the most attractive right now, a 4-star-rated stock at an 18% discount. Okta is a 3-star stock, trading within the range we consider to be fairly valued. And then CrowdStrike is a 2-star-rated stock, even after our fair value increase, still trading at a 25% premium to our long-term intrinsic valuation.
Dziubinski: Now, Marvell Technology, which is ticker MRVL, it’s a former pick of yours, and the stock rallied after earnings, and Morningstar raised its fair value estimate on the stock by quite a bit. So, Dave, unpack the results and that fair value increase.
Sekera: I think the biggest thing that our analyst noted here is that he thought that the results continue to erode. The bear case in the marketplace, or the bear-case narrative, that Marvell has been losing out in their AI accelerators to competitors. We’re still seeing very good takeup. In fact, our analyst is confident in their business with Amazon AMZN. And then he also expects pickup in their business by fiscal 2028, with Microsoft MSFT and bolstering their AI chips there. He noted the guidance for the next two years was pretty bullish. In fact, it met our above-consensus forecast for next year but came in above our expectations for year two. So once we modeled in that stronger organic growth, we did increase our fair value here by 33% to 120 dollars per share.
Dziubinski: Does Marvell still look like a buy?
Sekera: It does. It’s a 4-star-rated stock, trading at 18% discount to our fair value.
Dziubinski: All right, well. Staying in the tech sector, we had Salesforce, which is ticker CRM, up after earnings, and Morningstar maintained its $325 fair value estimate on the stock. So what do you make of the results? And is Salesforce stock attractive today?
Sekera: This is one of these ones with as many quarters in a row now that the company has put up pretty good numbers for each of their earnings, I’m starting to wonder, is the market finally starting to understand, finally starting to believe the story here? And I think so. I think this is another one where the market had been very concerned that artificial intelligence would erode the value of their business over time, whereas we think that they will incorporate AI more and more, that will increase the economic value of their service. In fact, our analyst has noted, specifically, he thinks AI is a tool, not necessarily a threat. And in fact, if you look at their AI-enhanced businesses, whether that’s Agentforce or Delta 360, the other annual recurring revenue increased 114% year over year. So I think this is one where maybe this stock is finally starting to gain some traction here. In fact, even after leaving our fair value unchanged this past quarter, it’s still a 4-star-rated stock at a 20% discount to fair value.
Dziubinski: Now, both Dollar Tree, which is ticker DLTR, and Dollar General, which is ticker DG, were up after reporting earnings. So what did Morningstar think of the results, and is either stock attractive today?
Sekera: I’d say both of them posted pretty solid top-line growth, both of them had good increases in foot traffic, and they also noted comp store sales up across all categories, and I think that’s probably what really helped the profitability this past quarter. So in the past, when we’ve talked about these stocks, I think it was about a year ago, the issue had been that they were seeing lower spending in the discretionary items. Those items, of course, are a higher margin than nondiscretionary items, and so that had hurt their operating margins about a year ago. Now, both companies did raise their guidance. And if you take a look at the midpoint of their guidance, Dollar General’s trading at 21 times earnings, Dollar Tree at 22 times earnings. Of the two, Dollar General had been our pick. On the Oct. 24, 2024, episode of The Morning Filter. That stock is now up over 60% since then. So at this point, I think it’s just a matter of the investment thesis that we had highlighted back then has been playing out. I think the market has recognized that. And at this point, both of these stocks are rated 3 stars.
Dziubinski: Dave, let’s take a little time to talk about Bath & Body Works. This is ticker BBWI. Now, the stock slid after earnings. Morningstar cut its fair value estimate by $6. And then, since then, the stock has regained some of its losses. So sort of recap what happened here and what you think of the stock today.
Sekera: Yeah, and being a smaller, discretionary retailer, I mean, this has been one where it’s just been a very volatile stock. And I think this is one where it’s really best suited for those investors that can take, some higher risk in their portfolios. As you noted, the stock did get hit pretty hard after earnings. It’s recovered some of that but still trading lower than where it had been before those earnings were released. The results, you can’t really say anything other than they were just very disappointing. Lowered sales and earnings guidance. And in fact, if you look at guidance, that indicates a high-single-digit sales decline and earnings to be down 18% in the fourth quarter. They noted, or at least our analyst thinks that they’re signaling accelerating demand weakness during this holiday season. And, of course, holiday sales represents about 40% of their annual sales overall. So the market is definitely still pricing in ongoing deterioration. And you see that in its valuation, currently trades under 7 times management’s EPS guidance of 283 a share.
Now, the company did start talking about a turnaround plan. If you take a look at our model right now, we’re looking at top-line compound annual growth rate for the next five years of only 1.2%. And we’re looking for the operating margin to expand to 17.4% by 2029 from 15% this year. Just to put that in perspective, they posted 18.4% over the past five years. So even when we’re modeling in the operating margin expansion, it still doesn’t get back to where they had been over the past five years. As you noted, the analyst team did cut our fair value by 10% to $56 a share. It’s currently a 5-star-rated stock at a 66% discount. So I think the hope here right now with the stock is that the guidance cut here is what you’d call a kitchen sink approach, that they’ve just lowered their earnings guidance to such a low level that they expect to be able to easily beat it so that they can outperform what that guidance is. I think at this point, this is going to be a story stock for a while. I think they’re going to need to show the proof of that top-line stabilization in growth. They’re going to have to show that operating margin starting to expand to be able to regain the market’s trust once again.
Dziubinski: All right. Well, it’s time to turn to our viewer question of the week. The question is from Chris, and Chris asks, if an undervalued stock’s price moves up quickly into 1- or 2-star range in less than 12 months, should he sell the stock and deal with those tax consequences that come with realizing a short-term gain? Or should he maintain the position through that 12-month holding period to get that more favorable tax treatment but risk a stock pullback?
Sekera: Again, this is one of these ones—it’s a great question, but I’m not going to have any kind of definitive answer. It’s just another one of these situations where it’s really just going to depend. So, first of all, I have to give kind of the standard disclaimer, always check with your tax advisor first, as far as the potential implications of any one individual trade here. But, I’d say, if you already have short-term losses to offset those short-term gains, then, yeah, I don’t see any reason why you wouldn’t go ahead and sell and lock in some of those gains, maybe not necessarily the entire position, but the old adage—you never went broke taking a profit. Otherwise, I’d say it really is just going to depend on how long it probably would take to get to that 12-month holding period, the type of investor you are, and what your risk tolerance is, whether or not you’re willing to take that risk that the stock stays up there and doesn’t go through any kind of selloff before you hit your 12-month holding period. So, I mean, if you’ve only owned it a few months and then it’s rallied, you probably shouldn’t wait to lock in at least some of those gains if you have still a long time period to get to that 12 months. But if you’re getting pretty close, and I certainly understand the desire to maybe wait it out a little bit, and in that case, I think really the thing to do is just keep a close eye on it. Maybe watch some of the stock trading patterns. Certainly, keep an eye out for any new news that might impact where the stock is trading. And at that point, you just got to keep a pretty quick trigger finger on it. And if it does start looking like it’s selling off, go ahead, lock in some of those gains before they erode away.
Dziubinski: All right. Well, a reminder to viewers to continue to send us your questions. You can reach us at our email address, which is [email protected]. Dave has published a new stock market outlook. You can find the link to it in the show notes or on Morningstar.com. Now, November was a volatile month for stocks, and the broad market finished November about where it started the month. So then, given that, Dave, how’s the market look from a valuation perspective?
Sekera: So, as compared to composite of our fair values at the end of November, overall, the market was trading at a 3% discount to that composite. For those of you that might be new to our podcast, just to describe how we look at the market overall, we take a differentiated view than what you’re going to hear from a lot of other strategists. A lot of other strategists start off with a top-down approach. They come up with some way of modeling out what they think S&P 500 earnings are going to be. They then slap some sort of multiple on there. For the most part, it always seems like they’re telling you the market’s 8% to 10% undervalued. We actually do pretty much the opposite. We have a bottom-up focus. We cover over 700 stocks that trade on US exchanges. So what we’ll do is we’ll take a composite of the market capitalization of all of those stocks and divide that by the intrinsic valuation as determined by our equity analyst team on those same group of stocks. And that’s how we get to that 3% discount overall. I’d note, the Morningstar US Market Index was only up a quarter percent in November, but I’d say generally, our valuations increased much faster than the market over the course of the month. In fact, we increased our fair value on about 15% of the total companies under our coverage. The increases outpaced the decreases by a 2-to-1 ratio. And if you look at the composite of our valuation increases, like, the total valuation of those increases was $1.15 trillion. So that’s about 1.4% of the total market cap of the stocks we cover. And so that’s why our fair value discount went to 3% at the end of November, as compared to only being a 2% discount at the end of October.
Dziubinski: Now, those large-growth stocks that had been driving so much of the market’s performance had a kind of tough go of it in November. And then we saw value stocks were up quite a bit that month, and as were small-cap stocks. So, given that shift in leadership in November, walk us through market valuations through the lens of style and market cap.
Sekera: Yeah, so by style, I would note that if you look at value stocks and growth stocks, those are both trading at discounts to that composite of fair value for each of those categories. I believe value stocks are at a 6% discount and growth stocks at a 7% discount. Now, I would note that the discount for value category has been relatively stable. Whereas the discount in growth actually increased since the prior month, and that was based on a combination of 2.4% decline in the Morningstar US Growth Index. So the stocks came down. Yet our analyst team made several different fair value increases upwards in the growth category as well, so that’s really what led to the change in the fair value for that individual category. Now, by capitalization, small-cap stocks—still the most undervalued at a 15% discount, whereas large-cap and mid-cap are only at very slight discounts.
Now, whenever we’ve talked about small-cap stocks, in fact, I think we even noted at the beginning of this year that they were the most undervalued, but that they probably wouldn’t necessarily outperform until later this year, which is, to some degree, what we’ve seen happening. And the reason for that is typically small-cap stocks do best when the Fed is easing monetary policy, when long-term interest rates are coming down, and when the economy has been slowing, or even in a recession and bottomed out, and it looks like it’s starting to reaccelerate to the upside. So looking forward, two of those three conditions have been met. We expect the Fed to cut several more times, including here at December. When we look at long-term interest rates, our US Economics Team is still looking for the 10 year to break through 4%, get into that mid-3% range by the end of next year. However, our US Economics Team still doesn’t expect the US economy to start to reaccelerate until mid-2026. We are looking for the rate of economic growth to slow sequentially, not only here in the fourth quarter, but in the first quarter and second quarter, and then slowly reaccelerate thereafter. So I think it’s a matter of needing the market to start pricing in the economic reacceleration in the second half of the year as the easing monetary policy starts to help kick in gear for the broad market economy.
Dziubinski: So then, given where valuations are today, Dave, how should investors be thinking about their allocations as we head into the final stretch here in 2025?
Sekera: Now, as far as the broad market goes, no change to our opinion there. It’s still really a market weight equity at the targeted allocation within your overall portfolio. By category, value and growth stocks, both trading at discounts. So in that case, I think you could have small overweights in both of those categories. In order to pay for that, you could be underweight the core category. Yeah, I think you want to be overweight, small caps, to some degree. In order to pay for that, you need to underweight the large- and the mid-cap area. And then by sector, just running through some of the valuations here, real estate being the most undervalued, undervalued by 10%. Personally, I’d still steer clear of urban office space, but we see a lot of attractive opportunities in individual stocks there. Energy and tech, both trading at 9% discounts, and communications trading at an 8% discount. Of those sectors, we think are overvalued, consumer defensive, the most overvalued, at an 11% premium to our fair value. As we’ve talked about in the past, that’s really a barbell-shaped portfolio. Walmart WMT, Costco skewing that valuation up, whereas a lot of the food stocks in that sector look very undervalued. Utilities broadly overvalued, that being kind of that second derivative play in artificial intelligence. That’s run up too high. That’s overvalued by about 10%. And then, lastly, financials overvalued by about 5%, most of that being in either the large banks or a number of the insurance companies. We still think are overvalued, even though insurance has started to sell off.
Dziubinski: Also in your new outlook, you say investors should think about “trading up” to high-quality wide-moat stocks. So why are you suggesting that at this time?
Sekera: Like anything else, it always comes down to the combination of what valuations are telling me and what the macro dynamics look like. Now, in this case, when I look at valuation. The wide-moat category is trading at a 5% discount to fair value, whereas narrow-moat stocks are trading at a 1% premium and no-moat stocks are actually at a 6% premium. So a differentiated view, certainly in that no moat category. Now, we’ve talked about a number of times how hard it has been this year to really tell what’s going on with the broader economy. I mean, so much of the economic growth this year has been all supported by the artificial buildout boom and the capex spending required there. So when I’m thinking about 2026 and our base case is that the rate of economic growth should slow here in the fourth quarter, as well as in the first and second quarter of next year, Before beginning to reaccelerate. Yeah, I think the biggest risk next year is if the rate of increase in the AI buildout boom slows even just a small amount. That could lead to even slower economic growth or potentially even a recession. So in my mind, if I can buy higher-quality companies at undervalued levels, seems like a pretty good opportunity to me.
Dziubinski: Given that perspective, it’s probably going to be no surprise to viewers that Dave’s picks this week are high-quality, wide-moat stocks that look attractive today. So, Dave, your first pick this week is Amazon AMZN. Run through the key metrics on it.
Sekera: Going to be a lot of Amazon boxes on people’s porches going into the holiday season here this year. I mean, as far as like high-quality stocks, from that perspective, it is a wide economic moat and very high quality in the fact that that wide economic moat is based on four of our five moat sources—being cost advantage, intangibles, network effect, and switching costs. We rate the company with a medium uncertainty, not necessarily a huge discount to fair value. It’s trading at a 12% discount right now, but that is enough to put it in 4-star territory.
Dziubinski: Amazon stock price is up a bit this year, but it’s really nothing to write home about. So why do you like it?
Sekera: When I look at Amazon compared to our fair values, I’d say, other than kind of during the big, broad market pullbacks, it’s not very often that you’ve had the opportunity to be able to buy this stock at that much of a discount or more. Overall, looking at the company performance, they’re still hitting on all cylinders. The Amazon Web Services, that’s their AI hosting division, still a huge amount of total addressable market yet to go, growing very well. Retail business doing pretty well overall. Advertising business, I think it’s probably more valuable than I think the market is giving it credit for. Taking a look at our model, we’re modeling out top line growth of 10.5% over the next five years, looking for earnings growth of 13.2%. As you’ve noted, the stock isn’t necessarily really cheap per se, but it is a better valuation than I see in a lot of other stocks out there today.
Dziubinski: Your second high-quality stock pick this week is Palo Alto Networks PANW. So give us the elevator pitch on this one.
Sekera: As far as I know, this one, I believe, is the one that we think is the highest quality of all the cybersecurity vendors. And as we’ve talked about many times in the past, I just like the dynamics of the cybersecurity industry overall. I think it’s some of the most attractive out there. This is another one of those stocks where it doesn’t trade in 4-star territory very often. In fact, with as much as that stock now has bounced really over the past two weeks or so, it just moved back into three-star territory at a 12%. discount. It is a stock we rate with a high uncertainty, but it is a wide economic moat based on switching costs and network effect.
Dziubinski: Palo Alto has been making some acquisitions, so talk a little bit about those and how they might strengthen the company’s already wide moat.
Sekera: One of the biggest parts of the investment thesis here with the cybersecurity industry is just that it’s a very fragmented industry. A lot of different players providing a different parts or different aspects of cybersecurity for their clients. And we’ve opined for just quite a while now that we expect the industry to undergo consolidation, which is what we’ve seen. I think a lot of the company’s clients will prefer having only one vendor to deal with. And I think that with that consolidation, you’ll see better integration of different aspects of cybersecurity into one cybersecurity platform. Now, of course, as with any acquisition, there’s always execution risk as far as being able to merge those operations together. But this company has a pretty solid track record of being able to do that pretty seamlessly. So, I would say, from our point of view, the acquisitions that they’ve made and we expect for them to continue to make, will probably still help to widen their economic moat over time.
Dziubinski: Now, Brown-Forman BF.B is your third high-quality pick this week. Tell us about it.
Sekera: So it is a company we rate with a wide economic moat, based on intangibles and cost advantage. Trades at a 24% discount, so it’s a 4-star-rated stock and with a 3% dividend yield, this is at least one where you’re getting paid to wait until the market comes around to our point of view and trades out.
Dziubinski: Brown-Forman stock’s having a pretty ugly year, so how’s Morningstar’s view on the company today differ from that of the markets?
Sekera: This is one where they’ve actually had a pretty ugly view for Probably five years in a row now. But, I mean, all kidding aside, the stock peaked in November 2020. And of course, if you remember, early during the pandemic, we saw big shifts in alcoholic consumption, specifically in alcoholic spirits. But the stock’s really been on a downward trend ever since. In fact, it fell into 5-star territory earlier this year. And I think the stock right now is as low as it’s been since late 2013 at this point. Now, all the alcoholic manufacturers have been under pressure. We’ve seen alcohol consumption declining in the US and in Europe. And while they do have growth in the emerging markets, it hasn’t been enough to be able to offset the losses that they’ve had in the developed markets. Taking a quick look through our financial model here, we are looking for a revenue decline for the past three years between fiscal 2024 and fiscal-year 2026. We’re looking for stabilization in fiscal 2027 and slow growth thereafter. We’re forecasting that earnings should bottom out here in fiscal 2026. So overall, we’re just looking for a 2% five-year compound annual growth rate on the top line, enough to be able to get to 4% earnings growth. And if you look at the stock chart, appears that maybe it’s kind of in the bottoming process. Between September and November, it’s interesting to look and see the stock popped at the open. after earnings. but then it quickly dropped. It looked like someone used that opportunity to be able to sell into. I’m hoping that whoever that seller was maybe is done selling at this point. So that stock is now back to pretty close to where it was pre-earnings report. So I’m kind of hoping that all the sells here have maybe kind of washed through the system.
Dziubinski: Your next high-quality stock pick this week is actually a repick that we’ve gotten a few questions about, and that’s LPL Financial LPLA. Give us the highlights.
Sekera: Yeah, I mean, even after the run that they’ve had, it’s still at a 26% discount, enough to put it in 4-star territory. Pretty small dividend yield here, only three tenths of a percent, so if you’re looking for the dividends, This may not necessarily be the one that’s for you. But it is a stock that we rate with a wide moat, based on its switching costs and cost advantages.
Dziubinski: Now I think you first recommended this one in October, and last time I checked, it was up about 17% since then. So why do you still like LPL Financial after that runup?
Sekera: Yeah. And for those of you that didn’t catch the show when we recommended this one, just, for background, the company is, I think, the largest independent broker/dealer out there. They have over 29,000 advisors on their platform, with over 10 million accounts. So really, the investment thesis here is that we think that, in the short run, they benefit from the amount of existing assets under management. Of course, as the market goes up, their assets under management increase, which then leads to a higher fee income. But then over the longer term, we would note that the percent of advised assets continue to keep growing. We think that that will then bring in new assets under management, so they’ll grow on an organic growth basis there as well. And overall, our analyst noted that he thinks the recent earnings report really just confirmed this investment thesis. Underlying results were strong, fee-based business benefiting from the market tailwinds. The rates, interest rates, that we’ve had has been helping to prop up income from the cash sweep program. So overall, everything is just kind of doing is what we’ve expected here. Good organic growth in assets under management, benefiting from that rising stock market, and then also growing from making small tuck-in acquisitions here and there as well.
Dziubinski: Well, your final wide-moat stock pick to buy this week is Clorox CLX. Fill us in.
Sekera: So 5-star-rated stock at a 36% discount, 4.7% dividend yield. We rate the company with a medium uncertainty and a wide economic moat, with that wide economic moat being based on cost advantages and its intangible assets.
Dziubinski: Now, Clorox has been a pick of yours in the past, and the stock is continuing to struggle this year. We’ve gotten a few questions about it from viewers. In fact, I saw one sneak in over the weekend in our inbox. So, Dave, why do you still like Clorox?
Sekera: Yeah, I have to admit, unfortunately, I think I just started recommending this one too early in this year. Stock’s really just been trading down in my face all year. But for the most part, our analyst really has stuck to her valuation here. She’s only made, I think, one or two small reductions in the fair value. So again, this is one where I think you need to look at the longer-term story here. This stock just skyrocketed higher in 2020 at the beginning of the pandemic. In fact, it was well into 1-star territory. The stock then sold off in 2021 and 2022, as a result, just couldn’t justify the type of valuations. So I think you have some group of investors that I think to some degree still feel burned here. I think they’ve got a negative sentiment after that stock essentially was cut in half from its peak. So I think a lot of people, a lot of investors in the institutional side, are probably taking a wait-and-see attitude here in the short term.
The last earnings report did look pretty bad, but our analyst noted it’s not as bad as I think it looks when you kind of really dig into the numbers. We did see a shift in some of their client consumption. Retailers built inventory ahead of Clorox, moving on to an enterprise resource planning system. So we had a drop in sales, but that was really from retailers using up some of that excess inventory that they had bought earlier. Of course, that did lead to negative fixed cost leverage as well. Generally, our analyst thinks that this upgrade to a new ERP system will help bolster their operating margins in the years ahead. So when you look at our financial model here, the stock model’s out in very undervalued territory, even with what I consider to be pretty modest forecast assumptions. If you look at our top line growth forecast, we’re only looking for 1.3% five-year compound annual growth rate. I mean, that’s essentially less than what we’re forecasting for inflation over that time period. And then looking for operating margin to improve back up towards historical averages. So that would then help lead to a little over 7% average earnings growth. Yet the stocks only trading at maybe 16 and a half times our fiscal 2026 earnings estimate.
Dziubinski: Well, thanks for your time this week, Dave. Viewers and listeners who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. We hope you’ll join us next Monday morning for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.
