Key Takeaways
- What the Supreme Court’s ruling against some of President Donald Trump’s tariffs may mean for investors.
- Where the stock market’s artificial intelligence fears are justified—and where they’re overblown.
- Whether Nvidia’s NVDA earnings release could revive the AI trade.
- The hardware stocks to avoid.
- Stock Picks of the Week: stocks that sold off too much and now look like bargains.
In this episode of The Morning Filter, co-hosts Dave Sekera and Susan Dziubinski unpack what the Supreme Court’s ruling on the Trump administration’s emergency tariffs may mean for markets. They also discuss whether the AI-fueled stock market selloff has gone too far and where the opportunities may lie for investors today. They discuss whether Nvidia’s earnings report this week can lead to a recovery in AI-related stocks and if earnings releases from Salesforce CRM or Workday WDAY could lift their struggling stocks. Tune in to find out what to make of Walmart’s WMT results, plus what Kraft Heinz’s KHC breakup flip-flop and Elliott’s investment in Norwegian Cruise Lines NCLH may mean for their stocks.
Sekera and Dziubinski reveal which rallying hardware stocks look at risk. And this week’s stock picks are five companies whose stocks have suffered exaggerated pullbacks and look like attractive stocks to buy before they recover.
Got a question for Dave? Send it to [email protected].
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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, I sit down with Morningstar Chief US Market Strategist Dave Sekera to talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. Grab your coffee, because Dave and I have a lot of ground to cover this morning.
Tariffs and the Market
Last Friday, the Supreme Court ruling struck down some of the Trump administration’s tariffs. Dave, what could this mean for the markets going forward?
David Sekera: Hey, good morning, Susan. I think it was Yogi Berra who once said, “It ain’t over until it’s over.” And at this point, it ain’t over yet. In fact, President Trump already announced some new tariffs under Section 122 of the Trade Act. And these can be in place for the next 150 days without any other kind of legal authorization. My assumption, he’s gonna look to other alternative legal formats or frameworks to be able to put new tariffs out there. And, of course, when those come about, they will impact trade negotiations going forward. But for now, from a broad perspective, I think investors just need to ask themselves, you know, how meaningful is this to future earnings growth for those companies that they’re invested in? Over the past year, I think we need to look at what’s happened while the existing tariffs, or the prior tariffs were in place. And of course, during the negotiations, some of them were suspended, put back in place, and back and forth.
But either way, from an economic point of view, real GDP in the US in 2025 was much stronger than economists had originally anticipated when those Liberation Day tariffs were first announced. Just running through the numbers here, in Q2, we had 3% GDP growth. In Q3, we had 4.4% GDP growth. And then, in the fourth quarter, that was just announced at 1.4% growth. However, if you didn’t have the government shutdown, GDP in the fourth quarter would have been over 2.4%. Here in the first quarter right now, the Atlanta Fed GDP is running at 3.1%. So, again, much higher than any of the economists had expected early last year. Taking a quick look at inflation, that never soared like the economists originally had feared. In fact, if I look at the numbers, I think they were relatively range-bound. CPI was 2.4% last March on a year-over-year basis, crept as high as 3.0% by last September, and most recently came in at 2.4% in January.
So, in my opinion, I think this indicates there are a lot of other factors that are much more important and have a lot more significance to the economy than what the tariffs have been. Just things like the AI buildout boom and the related multiplier effect on the economy that we’ve seen, the boost that we’ve had in net exports, consumer spending being much higher than expected. And all of those right now, for the near-term horizon, are all still impacting the economy as well. So, net-net, we made very few changes to our fair values after the Liberation Day tariffs were first announced. I still suspect that we’ll make very few changes to fair values based on tariffs going forward.
Dziubinski: Dave, given what has transpired in the market and with GDP and with inflation while these tariffs were in place during the past year or so, how should investors really be thinking about that impact today?
Sekera: I just put out a note last Friday that’s on Morningstar.com. And really, I think the biggest takeaway here, from an investor point of view, is don’t overreact. At the end of the day, it still comes down to fundamentals and valuations. And I’ve got a number of different examples here, which really are kind of going against the grain of what you would expect from what’s going on with all the news. So, if you take a look at Nike NKE stock, originally that popped after the Supreme Court ruling came out, but then it quickly gave up those gains. I think it might have even been down on the day. From an investor point of view, I still think it’s much more about the company’s ability to ward off competitive threats from other brands than it is from what tariffs are doing to their margins here in the short term.
Another example is going to be Walmart WMT. That was actually down 1.5% after the announcement. As a huge importer, and might even actually be the largest importer in the United States, it should have been very positive for Walmart. But Walmart trades at 45 times earnings. So, I think people are much more concerned about whether or not 45 times earnings–which, by the way, we don’t think is the right multiple for a company like that–is too high and whether or not they can live up to that type of valuation. Apple AAPL was a stock that was hit really hard after the Liberation Day tariffs were first announced. I think it was down like 9% pretty quickly over the next couple of days when they were first announced last year. Yet, that stock was only up 1.5% last Friday. I still think from an investing point of view, trying to figure out the long-term intrinsic value of that company is really more about artificial intelligence, how Apple may or may not be successful in incorporating that into their products and services going forward, than about how tariffs might impact their margins over the next couple of quarters or next year.
Dziubinski: The Trump administration has indicated that it may take action in Iran. What could that mean for markets, Dave?
Sekera: First of all, I’ll just recommend viewers go to Morningstar.com. Josh Aguilar, he’s the sector director for the energy sector, put out a note outlining his view, and that’s what I’ll just give a synopsis of here. In order to find that, just look up a ticker like Devon, ticker DVN, and the note should be the first one there. And I would just note that, according to his analysis, it seems like the market is pricing in a relatively high probability of some sort of military action here in the near term. Specifically, if you look at Brent futures, they’re over $71 dollars this morning. That’s up 20% since early January. Net-net, thinking about oil prices, over the longer term, we’ve still maintained our midcycle estimates of $65 a barrel for Brent. That’s why we think that right now there’s at least a $4, maybe up to a $10 premium due to the heightened geopolitical risk in oil prices. And I think that’s how Josh is looking at his probabilities.
Now, of course, the impact here on oil prices will vary, and probably vary quite significantly based on how the situation evolves. Now, we think that Iran’s ability to close the Strait of Hormuz is probably pretty low. So, we would think that if there’s a limited strike on military or nuclear targets, that’s not going to then impact the global physical flows of oil. So you’d see a minimal impact on oil prices, similar to what we saw last time. And of course, just depending on the severity and the duration of any kind of potential military action, that’s going to end up impacting spot oil prices for as long as that military action takes place. Overall, our top picks for the US energy sector are still for US domestic-focused oil production would be Devon Energy. And if you’re looking more for a natural gas play, we’d still point to no-moat Energy Transfer ET.
Is AI Fear Overdone?
Dziubinski: We’ve experienced a lot of market volatility during the past couple weeks tied to AI fears. And when you and I last talked, software stocks were getting hammered, then those AI fears sort of cascaded over to financial-services stocks. We even saw some trucking and logistics companies get hit. So, are all of these AI fears overblown?
Sekera: According to our existing base case by our technology team, and really even coming from a lot of our other sector directors, I would say, yes, our base case is that a lot of these AI fears are overblown here in the short term. Although I still think you have to acknowledge Dan Romanoff, the director who covers Microsoft MSFT and a lot of those software stocks, still would admit the ultimate impact on a lot of these companies and a lot of these stocks is to some degree unknowable. And I think that’s why we’ve seen the prolonged selloff in the software stocks. Those started selling off at least a year ago, if not even a little bit longer. And why we’ve seen these sharp selloffs more recently in some of the other sectors. At the end of the day, the market is just trying to answer the question, what services and products will be able to be replaced by artificial intelligence? And so that’s why we’ve had this rotating target of industries getting hit with these sharp selloffs, just as people are trying to figure out who could be at risk. At this point, though, taking a look at a lot of these selloffs, I think it’s just much more about fear and uncertainty than it is really based on a rigorous analysis of who actually really is subject to that kind of risk.
Dziubinski: Dave, are there any industries that have gotten sold off that, in your mind, deserved to be sold off? Or, put another way, is that AI threat real for some industries more than others at this point? Or are we just seeing sort of indiscriminate selling?
Sekera: It’s not indiscriminate. It’s definitely going to be a real threat to some industries and sectors. But I’d say to some degree, we don’t really know exactly what the end cases of AI are going to be, and we don’t know exactly how and when it’s going to be implemented. So I think from your own point of view, you just kind of really need to sit and think about who is most at risk here. And I’d look for those that have characteristics where I’d say it’s probably easier to replace services that don’t require interpersonal dynamics, those that you don’t want to have that human interaction. Anything where you have high volumes of repetitive, data-driven, or rules-based tasks. Things like data entry, clerking, processing, accounting roles, things like that. And then we’re also seeing a big focus on content creation.
In our view, we think that low-end production can certainly be moved to artificial intelligence. But where you want to have originality, you want to have a lot of context, that isn’t something that is going to be able to get moved to AI anytime soon. You mentioned a couple of different examples, like trucking and logistics. This is one where we think, at the end of the day, you still need transportation companies. You still have to have trucking in order to move goods from here to there. Over time, that probably gets augmented with self-driving trucks in order to make it more efficient. Whereas something like the logistics part, I think really, that could be replaced by artificial intelligence and used within those trucking companies as they move things around.
The wealth management stocks, they all sold off pretty hard. I think that’s actually a good opportunity for investors right now. I mean, if you think about it, we’ve already had robo-advisors out there for at least the past decade. But at the end of the day, I think people want that human relationship with their investment manager when it comes to money. Another one you mentioned was the insurance brokers, that those all got hit. This is a sector where I think the analysis part of that business would be augmented by AI, as opposed to being, you know, completely replaced by it. But again, it’s another area, you probably need fewer people to do that analysis, because they’ll be more productive using artificial intelligence. But it’s still a relationship business, you still need human consulting with clients, you still need the ability to work out different types of issues on a human-to-human basis. So, that’s another one where I think it gets more efficient over time but not necessarily replaced.
Dziubinski: Dave, let’s say I’m an investor who wants to sort of suss out the compelling investment opportunities in this AI selloff. What should I be looking for if I’m trying to figure out whether a company will be disrupted by AI in a positive or in a negative way?
Sekera: The way that we’re thinking about it here in the equity research group is overall, from that thematic point of view, we’re looking for where AI augments businesses as opposed to replacing businesses. And so, if you think about our investment thesis for the software sector, we think that those companies will end up incorporating artificial intelligence into their products and services. That then adds more economic value to their individual clients, as opposed to clients trying to be able to recreate those entire software platforms on their own.
For something like software, I think there’s still economies of scale, specific specialization that adds a lot more value in those products than just the underlying raw coding those platforms. So I’d say, if you’re looking at the software sector, with as much as a lot of those stocks have sold off, Dan Romanoff, who covers these names for us, specifically said to look for those that have the most complex and complicated software and platform. Software that has the most touch points across the individual clients’ businesses. Those are their most embedded into their day-to-day operations. And then those software companies that have a wide or a narrow economic moat, specifically those that we think have a network effect across clients. And lastly, those that we think are just most risky to businesses to try and replace and put in their own. So, really, I don’t know. I mean, businesses that require human relationships, require judgment, require negotiation. Businesses that are more unpredictable are going to be the ones that would be hardest at the end of the day to replace with AI.
All Eyes on Nvidia This Week
Dziubinski: Speaking of AI, Nvidia reports earnings this week. Now. Nvidia, of course, has that history of blowing past its estimates and then raising its forecast. Do you expect more of the same? And what do you think Nvidia’s management would have to say to really sort of perk up or help this AI trade?
Sekera: As far as I know, there’s no reason why they won’t beat on the top line, in the bottom line once again. I mean, I would just say if they don’t look out below. But at the end of the day, as always, especially with Nvidia and especially with AI, it’s all going to be about the guidance. Now, we’ve had all the hyperscalers report their capex spending plans for the year. Those capex spending plans were generally much higher than the market had expected, and the market was already looking for higher capex spending plans. The question for Nvidia is, how much of that spending is going specifically to Nvidia? We’ll want to listen to see if there’s any kind of detail as far as that goes. But I think for me, I’d really like to hear from Nvidia how long can this really heightened capex spending last? How should we be thinking about 2027? How should we be thinking about 2028? Like anything else, when we’re getting to these kind of law of large numbers, it can’t keep increasing at the same rate that it’s been increasing. So, when should we look for that deceleration in the rate of increase?
Some of the other things that I think Brian specifically is listening for is be like an update on the relationship between Nvidia and OpenAI. Would like to hear some details on the terms of that partnership. The bottleneck that we’ve had in the data center buildout right now has been in memory and hard disk drives. That’s really kind of the current bottleneck as far as like continuing to keep building these things out as fast of a rate as they are. Whether or not there’s any potential impact to the timing of Nvidia shipments and or just kind of those data center construction schedules, I think would be important to hear about as well. And then, lastly, any updates on status of sales of specific products that are allowed into China.
Salesforce, Workday Report
Dziubinski: All right, well, a couple of your picks and software are reporting this week, and that’s Salesforce CRM and Workday WDAY. Both stocks are down about 30% already this year, so what’s the market gonna want to hear here, Dave? Can management really say anything that might improve investor sentiment around these stocks?
Sekera: I’ll be honest, I don’t know. Looking at what’s going on here, really over the past, call it 16 months, since the beginning of last year and even since last fall, the market just hasn’t cared about what the earnings and what the guidance have been for these software companies. The stocks just continue to keep falling. Even though they’ve beaten earnings, they’ve been raising guidance. The stocks just continue to have gone down and down and down. So, I don’t know what management can actually say at this point. To some degree, they need to provide the market with the reasoning as to why their business is not going to get replaced or substantially displaced by artificial intelligence. So. It just may be a matter of time and just seeing how artificial intelligence is incorporated into their business, how clients are utilizing it going forward, in order to get people to get that kind of comfort level to see these stocks start going back anywhere up near, kind of, any other historical type of valuations.
Walmart Earnings: Takeaways
Dziubinski: All right, well, let’s move on to some new research for Morningstar. And we’ll start with Walmart, which you mentioned earlier in the show. Now, the stock is kind of flat, after the company reported. Dave, what stood out to you in the report, and how does the stock look from a valuation perspective?
Sekera: I mean, as far as earnings go, they beat both on the top line and our earnings per share. The market was maybe a little disappointed. Guidance was below consensus. But when you look at the stock price, the market really didn’t care all that much. To some degree, I think one of the things going on with Walmart stock is a lot of investors are kind of looking at it as having a safe-haven status, that it’s not going to be substantially disrupted from artificial intelligence. I think people are looking at it as a way to put some of the money that they’re taking out of those stocks and putting it to work elsewhere. I’d say, and if I’m looking at our fair value change, reading through our note, I think the most significant change in our model here is putting in some faster growth in the advertising business. Of course, advertising is a very high-margin business. I mean, almost all that money will drop directly to the bottom line. So, I think that’s going to end up increasing our fair value here in the short term. But even after this fair value increase, it’s still well into 1-star territory. Stock trades at 45 times earnings. I just can’t understand what the company’s growth would have to look like in order to be able to justify that type of multiple.
No Breakup for Kraft Heinz
Dziubinski: Kraft Heinz KHC, which is a former pick of yours, announced that it was scrapping its breakup plan. And this reversal came a couple of weeks after Berkshire Hathaway BRK.B registered with the SEC to possibly sell some or all of its stake in the company. And for viewers who are unaware, Berkshire is Kraft Heinz’s largest shareholder. Dave, what did Morningstar think of Kraft Heinz’s about-face? And do you still like the stock today?
Sekera: Well, from a technical perspective, hopefully Berkshire is no longer going to be a seller of the stock. Hopefully, that kind of assuaged some of their fears that they had as far as what might happen if they broke those parts of the business up. And if they’re no longer a seller, that should be actually very good from the stock, at least kind of from that technical point of view, because we had that big overhang of Berkshire being a seller. As you noted, they’re a very large holder of the stock, I think they own over like a quarter percent of the company at this point. As far as our own fair valuation, our analyst did cut her fair value down to $42 a share from $51. I’d say, generally, I think fundamentals were worse than what our analyst was expecting. If you look at the top line, fourth-quarter organic sales were down 4.2%. I think that’s a little worse than what I’ve seen from other food manufacturers. And the gross margin also contracted another 130 basis points.
But if I’m looking at our model, I think probably one of the bigger differences going forward is that we’re modeling in much higher brand spending. And I think it’s going to take a longer time for the company to get back toward kind of that low-single-digit sales growth that we’ve been looking for the company to get back to. Taking a look at the model, we’re now looking for a 3% decline in sales in 2026, sales to be flat in 2027, and not getting to that low-single-digit growth thereafter. But even after the fair value cut, still trades at about over a 40% discount to fair value. It’s enough to put it in 5-star territory. From a market valuation point of view, it trades only 12 times our 2026 earnings forecast of $2.04 a share, which should be the low, according to our model. So, we’re looking for it to move back up in 2027 and thereafter. And while you’re waiting for this one to start working, you’re still collecting over 6.5% dividend yield.
Elliott Targets Norwegian
Dziubinski: All right. Elliott Investment Management announced last week that it had taken a 10% or so stake in Norwegian Cruise Line NCLH and was pushing for change. What’s Morningstar’s take on how things might unfold here? And is Norwegian stock attractive on the news?
Sekera: So the stock actually performed very well after Elliott made that announcement. I think it was up about 13%. But even after that run, it’s still trading at a 23% discount, which still puts it into 4-star territory. I think this will just be a good tailwind for that stock moving forward. Generally, I’d say Elliott has a pretty good track record as an activist investor, especially in these deep-value type of situations. Overall, our fair value is still unchanged at $31.50 per share. I’d say, as an investor, the things I would look for, maybe here in the short term, you’ll look for some board changes coming about from Elliott. I think I think the company will be much more focused on cost management. If you look at costs, they had grown much faster at Norwegian than what we had seen at some of the peers over the past couple of years. So, as they focus on costs, that should improve their margin performance in the next year or two. Then, from a medium-term point of view, it sounds like they’re going to really refocus their business to start redriving revenue growth, doing things like maybe moving toward larger ships, focus on the development and the Great Stirrup Cay area, that’s the private island that they own. And I think also bringing assets back into the Caribbean, as opposed to some of the other areas that they’ve moved them to in the world, where they probably haven’t performed as expected.
The Hardware Companies to Avoid
Dziubinski: Our question of the week comes from Bill. Now, Bill is asking a follow-up question to our Feb. 9 episode, where Dave said that he was concerned about commodity hardware companies. Bill wants to know which companies in particular you’re concerned about, Dave, and if Emerson Electric EMR is one of them.
Sekera: Specifically, it’s those commodity-oriented technology hardware companies. And even within kind of that theme, I’d say the ones that I’m going to be most concerned about are going to be the memory semiconductors. As all of these companies for artificial intelligence have been building out their data centers, what’s happened in the past couple of months is there’s been a huge shortage of memory, specifically the high bandwidth memory, in order to support this buildout boom. So if you think about it, if you’re the construction manager and you’re building out a multibillion dollar data center, you’re not going to not let it open up on time because you didn’t have enough memory chips. You’re going to end up paying whatever you have to pay in order to be able to get to them. And so we’ve just seen prices skyrocket higher. Margins are just exploding on these. And the stock prices for those companies have just exploded higher in the past five months.
And I’ll admit, this might be a situation where we might be wrong for a while before we’re right. And we may still see further upside in some of these memory chip stocks over the short term. But again, I’m just concerned that they are really a commodity-oriented type of product. I would expect that over time, you’re going to see some behavior change. We’re already starting to see some behavior change among the players there. They’re going to be looking to convert some of their DRAM facilities to high-bandwidth memory facilities with whatever type of equipment that they have and that they can bring online very quickly. I mean, all of these companies already announced that they’re building new capacity out, and that production there should be available by mid-2027. I just note that at any point in time when there’s a hint that prices for the high bandwidth memory and for memory overall starts to come down as supply catches up, or if demand growth starts slowing, these stocks, I think, are just gonna fall faster than what they even rose.
Taking a look at some of the big players here, Micron MU, 1-star-rated stock, well into 1-star territory. Now, SanDisk SNDK, I would note, is a 3-star-rated stock after we’ve increased our fair value as much as we have. But again, I just want people to kind of realize what you have to assume going on in the industry to be able to come up with evaluations with what we have. So for SanDisk, for the past three years, revenue was kind of in a $6 billion to $7 billion range. I think it was $7 billion and change in 2025. We’re now estimating revenue to be $17 billion in 2026, coming up from $7 billion, and then to increase to $36 billion in 2027. Now we’re looking for sales then to start to slow after that, but even after they come back down a bit, we’re still modeling in an ongoing step change in revenue being permanently higher thereafter. So, we’re still looking for like $22 billion of revenue in 2030, whereas kind of before the shortage it was at that $6 billion to $7 billion run rate.
So, a couple of companies I would just highlight here would be Micron at that 1-star level being very concerning to me. Other areas that I consider would be the low-end networking equipment or optical equipment. Ciena CIEN is a 1-star-rated stock, Cisco CSCO is a 3-star-rated stock, but again, very concerned with the volatility we could see there. Things like optical cables, fiber power supplies, connectors, those kinds of commodities, also be at risk. Corning, ticker GLW, that’s a 2–star-rated stock. Non-AI servers, Hewlett Packard Enterprise HPE is a 3-star-rated stock, so it’s fairly valued based on our base case. But again, if we were to see a big sell-off in the commodity-oriented sector, I think that would get pulled down with it. I would not be invested in any of the stocks that are directly related to PCs and laptops. I think they’re at risk because memory prices have moved up so much. I think that’s going to push the prices of those products back. And from there, you’d see a big pushback from enterprises in their upgrade cycle.
Getting back here to the original question, with Emerson, I would say that’s probably not in my mind a concern as far as being a commodity-oriented tech hardware. They do make products for data centers, but I think this is one where it is considered more a beneficiary of utilizing AI in their products and services. But taking a look at the stock and how much it’s run up over our fair value, I think it has been caught up in the momentum from the AI buildout boom. That stock currently trades at a 45% premium to our fair value.
Dziubinski: All right, that’s pricey. All right, Bill, thank you for your question. And if the rest of our audience has questions for Dave, send them to us via our email address, which is [email protected].
Stock Pick: Microsoft
It is time for Dave’s stock picks of the week. Now, this week, Dave’s brought us some stocks that have sold off this year more than they should have from his perspective. And these stocks, of course, all look undervalued, according to Morningstar. Dave’s first pick this week is a stock that some in our audience were asking about after our last episode. And the pick is Microsoft. Give us the highlights.
Sekera: I didn’t mention Microsoft just because I think people are kind of bored hearing me talk about Microsoft as much as I have. And why we think it’s a core holding. But it’s trading now at a 34% discount to our fair value. It’s a 5-star-rated stock. We rate the company with a Medium Uncertainty. We rate the company with a wide economic moat, that moat being based on its cost advantages, its network effect and switching costs. No change to our valuation, no change to our long-term investment thesis on Microsoft, even with everything that’s been going on.
Dziubinski: Microsoft stock has, of course, gotten caught up in that software selloff, and it’s down about 17% this year as of the end of last week. Why are you more upbeat on the stock than the market seems to be?
Sekera: This is another one where it’s been sliding fora while. It’s actually down 28% from its 52-week high. As you mentioned, I think most of the selloff is really just based on that assumption that AI is going to reduce the need for Microsoft software over time. We generally think that that fear is overdone in the marketplace. From our point of view, we still think Microsoft probably provides the best combination out there of stability from kind of that long-term subscription-based business, but also still has a lot of potential upside linked to artificial intelligence with Azure and everything else that has going on in AI.
I mean, I’ve talked a lot about Microsoft in the past. People who have viewed our podcast for a while now, really probably already kind of understand the story here. I still think it’s a core holding for most portfolios. I think this is just that opportunity that you need to be able to have that intestinal fortitude to be able to dollar-cost an average, you know, to the downside. At this point, the stock’s only trading at 23 times our 2026 earnings estimate. That’s $17.24 per share. Over the past five years, the company’s traded at 30 times on average, it’s forward estimate. If you look at the past 10 years, it’s been 27 times. So definitely a discount to where it’s traded over the past. Still, a company that we’re looking for very strong earnings growth. I pulled up our model over the weekend. I mean, our five-year compound annual growth rate for earnings here is 16%. So still a very strong grower over time.
Stock Pick: Palo Alto Networks
Dziubinski: All right. Your second stock pick this week is also software related. It’s Palo Alto Networks PANW, so share some of the key metrics on this one.
Sekera: It’s a 4-star-rated stock trades at a 34% discount. Maybe it’s not appropriate for dividend investors, does not have a dividend. But in this case, I’m actually comfortable that they don’t because they’re reinvesting their free cash flow back into organic growth and into acquisitions within the sector that we think is a consolidating sector. Having said that, we do rate it with a High Uncertainty. So again, you want that in the part of the portfolio that can handle a little bit more volatility. But it is a company we rate with a wide economic moat, based on its network effect and switching costs.
Dziubinski: Now, you and I had a great conversation at my desk the other day, actually, about why you think cybersecurity stocks will benefit from AI, not be threatened by it. Tell our audience a little bit about what we talked about and why, specifically Palo Alto is your pick.
Sekera: I’d also note to our equity analyst, just put out a note, I think last Friday, specifically on cybersecurity and AI. So, you know, go to whichever Morningstar platform you use and take a read of that note. But I would say, you know, overall, I think it’s actually the use case of AI by hackers, which makes cybersecurity even more important going forward. I think that results in a lot of new cybersecurity needs in the future because of AI. And if you think about AI, I mean, it’s trained to learn from historical threats, But it’s not something that they can necessarily use to be able to identify potential new threats like humans can.
Overall, thinking about cybersecurity, we think that there’s huge switching costs here. We don’t think that people are going to try and replace cybersecurity in-house. If you think about cybersecurity overall, it is a multilayered approach across different types of technology platforms and communication. So it requires a lot of internal networking in order to make it work. It’s not like it’s you can just take out one part of cybersecurity and replace it in-house.
Overall, from a company’s point of view, I think it’s just too important to protect against hackers. Of course, getting hacked has huge reputational costs, huge costs in order to be able to mitigate it. I think if I’m management, I’m not going to try and just piecemeal together my own. And then you also have the network effect here, and I think we got into this in that note, and that you can use what you learn by providing cybersecurity to other firms to make your cybersecurity better for all of your clients. Now, I would note this is a stock that on a multiple basis, trades at a very high multiple. Trades at 40 times our 2026 earnings estimate. But if you pull up the past five years, or the past 10 years averages have been closer to 50 times. We’re still looking for really strong earnings growth here, compound annual growth rate and earnings of over 30% over the next five years. And thinking about the cybersecurity industry overall, we do think it is a consolidating industry. But at the end of the day, we think Palo Alto will be one of those consolidators, not a consolidatee.
Stock Pick: Amazon.com
Dziubinski: Now, your next oversold stock pick this week is Amazon AMZN. Run through the numbers on it.
Sekera: Amazon’s trading in the 19% discount. It’s a 4-star-rated stock. We rate the company with a Medium Uncertainty, wide economic moat based on four of our five moat factors, that being cost advantage, intangible assets, network effect, and switching costs.
Dziubinski: Amazon stocks down about 9% this year. And just a few weeks ago, you and I were talking about that company’s massive $200 billion capex forecast for 2026. Why is this one a pick, Dave?
Sekera: The company’s definitely sold off on worries that that capex spending is going to be way too much. And to some degree, it’s kind of hard to disagree with that concern here in the short term. It’s just that when you think about Amazon, it has such a long history of being successful, with big bets on new technologies and business lines. It’s kind of hard to bet against them as far as kind of their historical performance as far as that goes.
Overall, just thinking about the company in and of itself, you have relatively stable growth, operating margin expansion from its retail business, that subscription business with Prime and some of the other things that they sell subscriptions on. I think you have that good, stable business, but you also have a long runway of growth in artificial intelligence, specifically AWS, Amazon Web Services. They’re getting still ongoing very strong growth in advertising revenue. Advertising revenue, huge operating margins. So, of course, that drops right to the bottom line. Companies trading it just under 30 times, or 2026 earnings estimate. Over the past five years, that’s averaged 40 times. Over the past 10 years, that’s 57 times. So, again, even from a multiple basis, while it may look high on a historical basis, it looks pretty undervalued here.
Stock Pick: LPL Financial
Dziubinski: Your next oversold stock pick is down more than 10% this year, it’s LPL Financial LPLA. Give us the bird’s-eye view on this one.
Sekera: The stock’s currently 4 stars, although it’s at a41% discount, so I wouldn’t be surprised to see this one slip into 5-star territory. Not much of a dividend yield, only four-tenths of a percent. Personally, I’d like to see that higher. But if they’re buying back stock at this much of a discount, that will accrete economic value over time to shareholders. We rate the company with a High uncertainty, but we do rate it with a wide economic moat based on its switching costs and cost advantages.
Dziubinski: Explain why this one sold off, Dave, and why you think the selloff presents a buying opportunity.
Sekera: It’s down 11% year-to-date, but it’s down 21% from its 52-week high. And it really just got caught up with all the wealth management stocks having sold off. The concern here is that artificial intelligence will replace financial advisors. Our investment thesis is we just don’t think that’s going to end up being true. Overall, people want to interact with humans when it comes to their money. They want to have that interpersonal relationship. I mean, if you think about it, robo advising, that’s already been around for well over a decade at this point, but it still has never taken really meaningful share away from financial advisors. In fact, financial advisors as a group are still gaining market share today, and that’s what we expect going forward. Taking a look at the valuation here, it only trades at 12 times our 2026 earnings estimate. Yet, if I pull up our financial model here, we’re looking for a five-year compound annual growth rate and net income of over 26%. So looks very undervalued to us here.
Stock Pick: Thermo Fisher
Dziubinski: Your final oversold stock to buy is Thermo Fisher Scientific TMO. Give us the highlights.
Sekera: Four-star-rated stock, 19% discount. Again, not much of a dividend yield, only three-tenths of a percent. We rate the company with a Medium Uncertainty and a wide economic moat, that wide economic moat being based on switching costs and intangible assets.
Dziubinski: Thermo Fisher’s stock is down about 12% this year. So, what’s been going on, and why do you think there’s an investment opportunity here today?
Sekera: This one is also down 21% from its 52-week high. I think this is a good place to be able to dollar-cost average in. Now, if you think about the company overall and what they do, they sell scientific instruments, laboratory equipment, diagnostic consumables, life science reagents. I think that over time, and in fact, maybe even this year, I am still seeing kind of this ongoing rotation into value stocks. I think the stock can benefit from that rotation. We’re also seeing a demand for the healthcare sector. So people are rotating into that sector, away from those sectors that are at risk of being displaced by AI. So, I see some good technicals with this stock as well.
As far as the stock price, generally, our analyst thinks the market is probably overreacting. We did have a slight decrease in the operating margin. He noted that that’s probably due to the inability to pass on some of the higher costs from tariffs in the short term. But he doesn’t think that that’s going to be a constraining factor for the operating margin over the long term. We maintained our fair value at $630 a share even after the earnings announcement. I don’t think we’re really looking for all that much, taking a look at our projections. I think the company’s guidance was for like, three to four percent organic growth rate, you know, 6% to 8% growth and adjusted earnings per share. So again, relatively stable performance and what we consider to be a subdued environment for those type of products. If I’m looking at our model, and we’re looking for a little bit better growth over the longer term. We’re looking for kind of a 10% five-year compound annual growth rate. Still not anything heroic. Stock’s trading at just under 20 times our 2026 earnings estimate. Historically, that’s traded over 25 times over the past five years. It looks like a pretty decent discount to fair value based on those numbers. All
Dziubinski: right. Well, thank you 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 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.
