4 Growth Stocks to Buy While They’re Still Undervalued

Key Takeaways

• What the midterm election results could mean for markets.
• What to know ahead of earnings reports from neocloud firms CoreWeave CRWV and Nebius Group NBIS.
• Is Apple AAPL a buy after earnings?
• Why we cut our fair value estimate for Sandisk SNDK.
• Under the hood of the artificial intelligence selloff and the ongoing rotation from growth stocks into value.
• Growth stocks to buy while they’re still undervalued.

In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Sarah Hansen discuss what last week’s midterm election results could mean for markets. They unpack the brutal selloff in technology stocks and Morningstar’s outlook for the artificial intelligence trade in the short and long term. They also preview upcoming earnings results from three technology stocks linked to the AI trade: semiconductor equipment firm Applied Materials AMAT along with neoclouds CoreWeave and Nebius Group.

Sekera and Hansen talk about new Morningstar research after another busy week of earnings, including from Apple, Clorox CLX and Palantir PLTR. Tune in to find out why we raised our fair value estimate for Arista Networks ANET, and why we cut our estimate for Sandisk.

They wrap the show with four undervalued growth stocks to buy while they’re still trading at a discount.

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

Transcript

Sarah Hansen: Hello and welcome to The Morning Filter podcast. I’m Sarah Hansen with Morningstar, sitting in for Susan Dziubinski, who’s on leave for a few more weeks. I’m here now on Monday mornings to talk with Morningstar chief US market strategist, Dave Sekera, about key takeaways for investors in today’s market, what to keep on your radar this week, some new Morningstar research, and of course, a few stock ideas. Good morning, Dave. It is great to see you.

David Sekera: Good morning, Sarah. How are you doing?

Midterm Election Takeaways

Hansen: I’m doing really well. I’m kind of processing after an extremely eventful week last week. We started with the midterm elections. We had Democrats take control of both chambers of Congress, and stocks reacted really strongly to those results, maybe an understatement. Maybe walk us through what happened over the last few trading days and what investors were responding to that prompted those giant moves.

Sekera: Sure. Today actually could just be as interesting, both to the upside and the downside, as what we saw last week. We’ll see what happens. I mean, before the market opened, I checked all the indexes; the futures are in the green this morning, but Nvidia NVDA itself is down over 5%, last I checked. And that’s really just because of the reports that surfaced at the end of last week and over the course of the weekend that the CEO had an affair with an alleged Chinese spy. What does all that mean? I don’t know, but it will be interesting to see how that plays out for the AI space and Nvidia over the course of today. But getting back to last week, I think that’s a great example of why you can’t trust short-term moves in the marketplace. As you mentioned, immediately we saw stocks and indexes start to sell off once the results were coming in, and we saw just how much of a blue wave we were going to experience during the midterms.

But then by the morning, that selloff from overnight ended up being positive. We ended up having a pretty strong open that morning. In fact, over the course of Wednesday, stocks stayed up; the indexes all closed in the green. But I think that covered up what was actually the beginning of the selloff in the growth stocks and the AI stocks specifically. We started that rotation out of growth, out of AI, and we had a lot of the portfolio managers then using those proceeds to buy value stocks and core stocks. So then we get into Thursday, and what happened was that selloff in the morning then started turning into liquidations by mid-morning and by lunchtime. A lot of margin accounts got upside down and started getting liquidated. That liquidation then turned into panic, which just turned into this “sell first, ask questions later” type of atmosphere, which is what really drove the markets down.

Of course, all of this really just predicated on the market now having fears that the newly elected democratic governors in those states that have the most amount of data center growth may end up putting some sort of new restrictions or maybe new regulations in place that could then impede future data center growth. I think there’s also concern too that with both the House and the Senate under democratic control, that may also lead to new legislation that could temper the AI-fueled buildout boom. Looking forward, my own personal advice here is I think this is just another case of you’re going to need to watch what they actually do as opposed to what they say. And having talked to a couple of members on our tech team, I mean, as far as our long-term investment thesis for artificial intelligence and for the AI buildout boom and those stocks, we still think the stocks of those companies that are at the forefront of AI technology, really the leaders of new technology and building it out, will still end up reaping the long-term benefits of AI.

However, those stocks in the commodity-oriented tech hardware space, those that have had really big benefits this year because of all the shortages with just how fast the data center buildout has occurred, are still overvalued and still have further to fall. Really no change as far as the investment thesis in the stocks generally.

On Radar: Inflation

Hansen: OK. Thanks, Dave. We will have some more to come on last week’s market action and on our outlook later on in the show. There’s just a ton to unpack there, but first, let’s look ahead to this week. Let’s look ahead to the economy. We’ll get some inflation data on Tuesday and Friday: CPI and PPI. Tell us what you’re expecting to see there.

Sekera: For consensus CPI, it looks like the market is expecting that to come in a little bit on the hotter side and it probably is going to come in on the hotter side for some several months to come when you take a look at how high PPI had come in last month. Just running through the numbers here. For CPI, the headline figure consensus right now is looking for a 3.9% increase on a year-over-year basis. So, a slight acceleration from 3.7% last month. As far as core goes, that’s flat at 2.8% year over year versus 2.8% last month as well. If I were a betting man, I’m betting that’s probably coming out on the higher side as well. As far as consensus PPI, the economists out there are looking for it to normalize after it came in as hot as it did last month.

For the headline, they’re looking for a 0.4% increase on a month-over-month basis. That was 1.3% last month. And for the core, they’re only looking for that to be 0.3% on a year-over-year basis. That compares with 0.7% year over year last month.

Hansen: OK.

Sekera: Now the—wait, I’m sorry. Actually, those are month-over-month numbers, not year over year. The core would be 0.3% month over month versus 0.7% last month on a month-over-month basis.

Hansen: Gotcha. Thank you. It is early on Monday.

Sekera: That it is. Need some more coffee.

Hansen: Yes. OK. While that inflation data is top of mind, we can talk about the Federal Reserve for a moment. They’ve been pretty squarely focused on this inflation side of their mandate, especially since Chair Kevin Warsh took over the job earlier this summer, but we did see on Friday some pretty hot jobs data, which was swirling around as the market was moving. Do you think that changes anything for the central bank at all, or will they still be kind of inflation all the way for a while?

Sekera: In my personal opinion, I still think it’s going to be much more about inflation. I think that is still the much bigger factor that the Fed has to focus on. So yes, we did get the higher jobs number. It was much higher than expected. That certainly then gives them the room to be able to hike rates if they want to. And that’s certainly what the market is pricing in today. I just checked a little while ago. Right now there’s an 80% probability, based on the futures market, of a hike in December that would take us up to 4.00%-4.25% for the fed-funds rate. Of course, I always have to put my caution in here. I think you have to be very careful trying to read too much into payroll numbers in an individual month. You have to remember those payroll numbers are kind of the government’s best guesstimate at any one point in time.

What I’ve often found is that they’re restated, and not only are they restated, they’re restated multiple times over the course of a year, and they’re often restated by very significant amounts. Again, I don’t read too much into those payroll numbers in any one individual month.

Earnings Watch: AMAT

Hansen: OK. Thanks, Dave. We’ll have one more Fed meeting for the year in December, so something to watch how they watch then. Let’s change gears now to earnings. We still have some reports trickling in from the third-quarter earnings season. I want to talk about just a few companies you have on your radar, starting with Applied Materials AMAT. Now, this was on your buy list just last week, and they are trading at a pretty significant discount to our fair value estimate. What will you want to hear about when they report?

Sekera: Yeah, and there’s certainly a high potential. We could see a lot of volatility in the stock. You mentioned it was a recent buy recommendation, but it was also a sell recommendation as recently as June 2026. We thought that stock had just run too far to the upside over the course of the first half of the year, and then it ended up falling over the past couple of months too far to the downside, which is why it looks attractive now. Now thinking about this company’s business, I’m assuming at this point that 2027, they’re probably pretty fully booked at this point. I think it’s really just the market trying to understand how much is that backlog that they already have for 2027 and really just trying to understand just do they have the capacity to be able to handle as much of a backlog as we think that they have?

But more importantly for this stock and really for all of the AI stocks is trying to gain even more visibility beyond what we’re starting to expect for 2027. I think when you look at the AI stocks, and we’ve talked about this before, a lot of these stocks are already pricing in that huge amount of growth that’s kind of already baked in for 2027. Where we see overvaluation, or where we see undervaluation, is oftentimes because the market doesn’t have that visibility in 2028 and 2029 yet. I think there’s going to be, even over the course of the next few months, a lot more trying to determine exactly where are we going after next year. And then probably the last thing is just what’s going on with more in the traditional semiconductor manufacturing space. Are we still seeing a weakness there because of how high memory prices are right now?

Personally, I also want to hear specifically any commentary they may have about what’s going on with their Chinese customers.

Earnings Watch: Neoclouds

Hansen: OK. One to watch. Moving on to two neocloud companies. This is a new term that seems to have popped up overnight on Wall Street. We will have CoreWeave CRWV and Nebius Group NBIS reporting this week. These are both AI infrastructure companies. They both had a very bumpy ride, speaking of volatility last week. They were down both around 30% at one point, and then they bounced back a little on Friday. It seems like kind of an understatement to say that the market will be paying really close attention this week. What are you going to be looking for?

Sekera: Yeah, so both of these companies essentially are both AI data center buildup stocks, and I think that’s why you see that amount of volatility. Now they have slightly different business models, but in my own mind I kind of group both of these companies together. Nebius was a sell recommendation as recently as the Aug. 10 show. And with CoreWeave, that’s one where we’ve talked about the bonds for that company have just really fallen off a cliff. It was, what, two weeks ago that we were talking about how they were trading at prices that would result in yield to maturity of over 15%. I think the question is whether AI demand is still growing fast enough to absorb all the GPUs, all the data center capacity that’s being built? That’s really the first question that these companies really need to address. Our guess is that yes, that there’s still much more demand than there is supply.

We think for the foreseeable future, whatever these companies can build out will be very quickly put to work. Now, as far as the next line of questions after that, I think it’s going to be much more about the wherewithal for these companies to continue to build data centers over and above what they currently have in the process right now. I think there can be a lot of questions about just how much capital these companies are going to require to fund these data center buildouts until they get to the point that they would be free cash flow positive. And then, OK, well, how are you going to plan to raise that capital? For example, with CoreWeave, where their bonds are trading, they’re telling me that the credit markets are tapped out for these guys. How are they going to raise that capital—some other form of debt, whether that’s going to be maybe convertible bonds, something in the private placement market, some sort of SPVs or asset-backed vehicles, I don’t know, maybe vendor financing.

And then, of course, the last thing you want to do is have to raise equity, but maybe that’s where these companies are that you would end up having to do some dilutive equity financing in order to be able to continue to build out what’s on the books.

Hansen: Yeah. Now I want to ask you about data center and neocloud stocks more broadly while we’re here. You mentioned some trouble in the credit markets for CoreWeave. Is what’s happening there kind of representative of a larger trend? What more can we say about this?

Sekera: Yeah. I mean, those CoreWeave bonds had actually, by, I think, Thursday fallen even further. They’re trading into the upper $0.70s, so $0.78, $0.77. What that tells me is when the credit markets start trading bonds really on a dollar basis like that, you’re now trading it based on probability of default and what you think those bonds would be worth in the default, how much that loss given default is, what your recovery rates are. In this case, you’re not really buying it, expecting it to get a 16% or 17% yield. You’re buying it because either the company will have the wherewithal to be able to continue to fund itself, in which case those bonds are going to trade up pretty quickly, well back into the 80s, if not maybe the low 90s. And so you’re trading the dollars, trying to make that principal gain.

Conversely, you’re then trying to gauge, OK, if this company does go into default, what’s my recovery value on these bonds in the bankruptcy process? How long is that process going to take? You’re just trying to cuff your downside and then do really a probability-weighted measure to determine what you think those bonds are worth today. Again, it’s a much different thought process than when you’re buying bonds as a specific credit spread over Treasuries. But what that tells me is that I think the credit markets either already have or are probably getting pretty close to running out of the bandwidth to really continually finance these buildout projects because you have to remember that from the time they really start the project to when they switch on the lights and start generating free cash flow, I mean, many times that can be 18 to 24 months.

Of course, if they can’t raise more debt, they need to go back then to the equity markets for capital. That’s going to be very expensive, very dilutive to existing shareholders. And if they’re not able to do that, well then the only other thing they could do would be then to halt the new buildouts in order to be able to preserve cash. Depending on what their cash burn rate is, they could even potentially be bankruptcy candidates.

Hansen: Interesting. Yeah. It’s been interesting to watch the themes playing out in the equity market kind of echoed in credit markets. It’s kind of rhyming, is how I see it.

Sekera: Yeah, this is when you really see the interplay in equity and credit. When you get into the high investment-grade space and things are trading at really tight credit spreads, you don’t necessarily have that same kind of interplay as you do when things get down to these very stressed and, in this case, pretty distressed type levels.

AAPL: Anti-AI Play?

Hansen: Interesting. OK. Let’s move on to some new research for Morningstar. We have a report from Apple AAPL last week. That stock is trading in 2-star territory now, and it was one of the better-performing kind of Big Tech stocks coming out of the selloff. After earnings, what is our view?

Sekera: As far as earnings go, I mean they beat their guidance. Revenue came out up 12% and surprised me; their iPhone business did much better than I personally would’ve expected. That was up 18%. Now, having said that, reading through our analyst note, looking forward, we’re not expecting that much out of iPhone performance going forward. In fact, he’s looking for pretty flat iPhone unit sales in 2027. I mean, they’ll be able to get some pricing as they put through the higher costs for the memory there, but we’re really not looking for much as far as any additional volumes for the new iPhones. In fact, what’s probably going to happen there is we’re looking for margin pressure because the cost of the memory in those iPhones keeps going higher and higher, but they’re not able to push all of that through to their end customers. Overall, we did maintain our fair value of $290 a share.

Overall, we think that this stock really over the past couple months probably has risen too far. It’s become a place that a lot of investors want to be in growth stocks, but they’re also trying to hide from that AI downside risk. I think the big thing here is that Apple really hasn’t spent the kind of capital expenditures that we’ve seen a lot of other companies spend on AI. This is one where they don’t have that same kind of downside risk from that point of view, other than, based on our forecast, we think that the stock is overvalued. In fact, just taking a quick look through our model, we’re looking at less than 9% revenue growth in 2027, and our five-year compound annual growth rate for revenue is less than 8%. We’re looking for slowing from 2027 there on out. As far as earnings growth, we’re only looking for a 4% earnings increase in 2027.

Our five-year compound annual growth rate there is 12.5%, yet that stock is trading at 36 times our 2027 earnings estimate. In this case, I would say somebody’s wrong. Either we’re way underestimating that long-term growth rate for the company or the market just has way too high a valuation on that stock today.

CLX Earnings Recap

Hansen: I was going to say that sounds expensive. All right. Next up, Clorox CLX. Last week you said you’d be watching this one for signs that their sales trends are normalizing. Did you see the results that you wanted there, and what does Morningstar think of the stock now?

Sekera: We did. The results were pretty good. I mean, they beat on both the top line and the bottom line. The stock had a nice pop afterward. I think it’s up over 10% since they reported earnings. And yes, we are starting to finally see the signs of stabilization after the impact of the ERP implementation last year. Their fiscal 2027 guidance was in line with what we already had projected in our model, looking for 3.5%-4.0% organic sales growth for earnings. I think they’re guiding to $5.70 to $6.00 per share. That would put the stock at about a 15-times multiple at the midpoint. We’re looking at our own model as a five-year compound annual growth rate for net income of 12.5%. It still looks pretty attractive in our mind. And then, last thing, we do have a new CEO taking over in January. He comes from Unilever, so we’re expecting to see good ability for him to come in and really help that company really take a lot of costs out of their own supply chain, take costs out of their own operating, and be able to boost their margins going forward.

PLTR: Time to Take Profits?

Hansen: Great. Let’s talk quickly about Palantir PLTR, which is another stock that we covered last week. You said then that it might be a good time to take some profits off the table pending their results. What was the update after earnings?

Sekera: Yeah, so it was a buy recommendation on the June 29 episode of The Morning Filter. The stock really rallied thereafter, and in fact, it rallied enough. It moved from being a 4-star-rated stock into 2-star territory. I think it hit a 37% premium to fair value. And of course, from our point of view, when a stock gets into that 2-star territory, it’s usually a pretty good indication that you should at least start taking some profits off the table. Last week, we did walk through all of our forecasts before the earnings were coming out and noted that, from our point of view, we’d need to see something new, some sort of new catalyst or some sort of adjustment in order to move up our forecast even further than what they already were. The quarter was very strong, but overall there was nothing that caused us to change those long-term projections.

In this case, we didn’t make any real change to the stock price. Now that stock has retreated from its early October highs, so at this point it’s a 3-star-rated stock, and in fact, it’s trading almost right on top of our fair value estimate.

DOC Results Review

Hansen: OK, great. Moving on to Healthpeak Properties DOC, and this is a REIT that you’ve recommended a few times before. Why is it on your radar again now, and did you see anything that you liked in those results?

Sekera: I guess it’s never really fallen off of my radar. I mean, this is just a stock that … Yeah, I mean, it’s been a pick multiple times over the years. It always looks more on the undervalued side from our perspective. For whatever reason, it just seems like this company just doesn’t get any respect from the marketplace as compared with what we think the long-term intrinsic valuation of the company is. Now, earnings came out. They were better than expected, both as far as looking at net operating income growth as well as adjusted funds from operations. Our analysts noted specifically that the senior housing portion of their business was much better than expected. Taking a look at the life sciences facilities, that’s the part of the business I think is actually the most attractive. We had our third sequential quarterly increase in occupancy there. Again, that’s rebounding nicely off the lows that we saw over the past couple of years.

Then lastly, their medical office part of their business came in line with expectations. Overall, management did raise the midpoint of their 2026 AFFO guidance by two cents. It’s now in a range of $1.76 to $1.78. We are already at $1.77, so that puts us right at the midpoint of that increased guidance. It’s a 4-star-rated stock at a 26% discount to fair value, with a very nice, healthy dividend yield at 6%.

Is ANET a Buy After Earnings?

Hansen: OK, great. Maybe one to keep on the radar as the way it has been. All right. Arista Networks ANET is up next. You recommended this one over the summer, and we raised our fair value estimate after earnings last week from $230 to $270. That stock also got caught up in the selloff, and then it popped again. So, what do we think? How does our view differ from the market?

Sekera: Like a lot of these, it’s a very volatile stock. As you noted, it was a pick on the June 22, 2026, episode of The Morning Filter. After that, it had risen as much as 24%. And then, as you noted, it gave up a lot of the gains, and essentially that stock is now unchanged compared with where it was when we made that recommendation. As far as the earnings, I mean, they’re coming out extremely strong. Revenue was up 58%. Guidance is calling for that same kind of growth rate here in the fourth quarter. Taking a look at their 2027 guidance, that’s looking for a 40% growth rate in 2027 over 2026. That tells us AI spending is still accelerating into 2027, and we’re not really overextrapolating the 2027 growth that much further out. We’re looking for that 40% growth in 2027.

We’re dialing that back to 20% growth in 2028, and then bringing that further down to the mid-teens by 2030. I think we’re making that kind of right adjustment that, yes, while they’re getting really that extreme growth here in the short term, it will, of course, naturally start slowing over the next couple of years. Now, the stock looks expensive. It trades at 38 times our 2027 earnings projection of $4.45 a share. But as we’ve talked about with AI stocks, they’re already incorporating the very strong 2027 growth. With these stocks, we’re going to need much better visibility into 2028 performance for these stocks to really work next year. In this case, we’re modeling $6.43 in 2028 for earnings; that would take that multiple down to 26 times. And then in 2029, we’re looking for $7.96 per share in earnings; that would bring that multiple down to 21 times.

This is another one where we are expecting a lot of growth over the next couple of years, and if we get that growth, the stock is very undervalued.

SNDK: Fair Value Cut

Hansen: Right. Great. Thank you, Dave. Now, I want to catch up on two names that reported late last month, and we have just been so swamped with earnings, but it’s important that we talk about them. First off is Sandisk SNDK. They beat their guidance on third-quarter earnings, but the market really was not all that happy with the results, and we cut our fair value estimate, too, pretty significantly from $1,000 to $870. What’s the reasoning there? What’s going on with Sandisk?

Sekera: Yeah, so Sandisk is currently a 2-star-rated stock, and it’s still trading at a 25% premium to that updated fair value. This is just a case where the company is growing at just … I don’t even know how to describe revenue up 378% year over year. And with that kind of revenue growth, their gross margins just exploded. They increased by 55 points, not like 55 tenths of a percent or anything like that—55 points to 85%. Their revenue guidance for this quarter is still looking for 300% growth year over year. So, of course, the question is: Why did the stock fall? When you dig into the numbers, what our analysts really noted here is that it appears that pricing is starting to decelerate sequentially. In his view, he thinks that indicates that we’re already at peak pricing, or at least peak pricing is very close on the horizon, and we still expect that once we start to sell off in pricing, that will go into probably a pretty severe downcycle in pricing once it starts to crack.

Now at this point, the investment thesis in this stock and some of these commodity hardware stocks is that we’ve been expecting capacity to increase in 2027, 2028, 2029. We still think that that’s going to happen, so that will bring prices down. So, 2028 will probably be the peak revenue on a combination of both increased prices as well as volume, but then we expect revenue to start coming down thereafter. As you noted, we cut our fair value to $870 from $1,000, and the biggest reason for that is because we’re now pricing in that deceleration and their ability to increase prices coming even faster than what our prior forecast was after we saw this quarter’s earnings.

MDLZ Earnings Takeaways

Hansen: OK. Another one to watch. Last up on earnings is Mondelez MDLZ. This one did pop after its report, and it’s trading at a discount. What were your takeaways from the results?

Sekera: Yeah, and I think Mondelez has actually been what I consider our go-to pick for the consumer defensive sector for about over a year now. I think the first time we recommended Mondelez was in October of 2025, and I would say it’s been a pretty solid performer as far as the amount of price appreciation as well as the dividend yield that you’ve earned over the past year. And their business still looks solid, especially compared with a lot of the other food manufacturers. Organic sales growth was up 2.1%. The best part of that is it almost all came from volume. Volume drove most of that growth. Volume was up 1.8%, whereas what I’m seeing with a lot of the other food companies is that they’re still struggling a lot with volume and having to rely on price. Personally, from a business fundamentals point of view, that volume also really gives me a lot of comfort in this company.

They also noted that 70% of their portfolio either held or gained market share year to date. That’s an improvement from the end of 2025 when only 40% of the portfolio held or gained share. I think their brands are still resonating very well with consumers, and maybe that also indicates that they’re taking market share from other companies as well. We saw a 380 basis point increase in their gross margin, getting that up to over 34%. Net-net, I mean, it’s still trading at a 14% discount to fair value. That’s enough to put it in 4-star territory, and you’re still clipping a good 3.2% dividend yield.

AI Trade Unwinding?

Hansen: Great. Thank you, Dave. It’s time for our question of the week. As a reminder, if you have a question for us, you can reach us via email at themorningfilter@morningstar.com. OK, Dave, so there was pretty much just one thing on everybody’s mind last week. We got a bunch of emails we heard from viewers who want to know what the results of those midterm elections mean for the AI and data center companies and AI “picks-and-shovels” plays that we’ve been talking about on the show. The selloff on Thursday was a pretty clear indicator of just how nervous the market was, how jumpy. Let’s kind of do a postmortem. I know we talked about it a little at the start, but walk us through what the heck just happened. What conditions were there that you saw in the market ahead of the selloff? Obviously, we didn’t know what the catalyst would be, but did we have any signs that this was coming down the pike?

Sekera: Yeah, and I think as you mentioned, there’s just been a lot of things that have been building over the course of the year, and we’ve talked about it a number of times as far as setting those conditions to see the type of thing that ended up happening last week. In our fourth-quarter US market outlook, when we published that, we noted that we thought the US equity market was undervalued overall, but yet it was very vulnerable to these types of downside catalysts. In fact, when I think about over the course of my career, I still think this is probably one of the most tricky environments for investors to invest in today. Some of the reasons behind that is because of just how highly concentrated the marketplace is and how that concentration is all really focused in AI stocks, and of course all the AI stocks really being reliant on continued high growth in order to support those valuations.

The US economy, just overall in and of itself, is also very highly reliant on AI spending. We’ve noted, really since the beginning of the year when we talked about some of the big risks that we saw coming into the year, how a lot of what I call the microdynamics were probably going to get worse over the course of this year. We’ve had rising long-term interest rates; we’ve had tightening monetary policy; we’ve had increases in inflation. The US economy is heavily reliant on the AI buildout boom. If that were to slow, I think that would weigh extremely heavily on the US economy and probably lead to a short-term recession. At the beginning of the year, I just noted corporate credit spreads were way too tight. We’ve seen those weakening really over the past couple of months because of the amount of new debt that these hyperscalers and these neoclouds have been issuing and the market running out of capacity to be able to keep absorbing all that new capacity.

Again, all of that had already led to the conditions that we had going into last week. We had already had a little bit of the “anything-but-AI” trade mentality, but again, that really came to fruition after the midterms. Of course, after the midterms, we now have the concerns in the marketplace that the newly elected Democratic governors in those states where we see the greatest amount of new data center growth might do something to implement restrictions, maybe new regulations, something that could then impede the future growth of additional data center buildouts. I think it was interesting too that all of that built up going into the midterms. And then on Wednesday, even though the indexes were up, that really was the catalyst that started the selling across the AI space. We talked about it a little bit earlier, but it started this rotation.

A lot of portfolio managers were selling out of their growth stocks, moving into value stocks and core stocks. You have to remember, I think 40% of the marketplace today by market capitalization is just the tech sector in and of itself. And then if you add in Meta Platforms META and add in Alphabet GOOGL/GOOG, which are in the communication sector, I mean, you’re getting pretty close to half of the marketplace is really all going to be based on the AI buildout boom and just how much further it has yet to go and then be able to start monetizing a lot of that. What happened is even if you’re selling what you think is a relatively small percentage of the tech space or maybe the communication space, that small percentage on a market cap basis is a much larger percentage of the market cap of the value in the core space.

Even a relatively small movement out of the tech and the AI stocks into those value stocks is what caused those value stocks to bump up originally, until you got to the point where correlation always goes to one to the downside when you have a market that’s just panicking, and people are selling things just to be able to raise capital. I think a lot of margin accounts had to sell enough to be able to have enough margin at the end of the day to keep their prime brokers from closing them out of positions and really just taking them out of the business overall.

Hansen: That’s wild. It was really interesting to watch. I know we were talking during the day on Thursday, and watching it happen in real time was fascinating.

Sekera: It was almost a little reminiscent of some of the days I remember during the global financial crisis. And if you’re looking at the intraday bar charts, you could see when that liquidation was occurring, and there were specific positions that were definitely just getting dumped. You could see the bids just kept getting hit lower and lower and lower, and those bids kept getting thinner and thinner and thinner until we finally got to the point at the end of the day that the market closed and people were able to, at that point, take a breath and reevaluate where they were.

Hansen: Yeah, absolutely. On Friday, they did a little bit. We went the other way. Importantly for investors, Thursday and Friday and Wednesday were big newsy days, but short-term days. But in the long term, let’s talk about Morningstar’s view. Does anything that’s happened change our outlook for the AI buildout at all for these chip stocks, either for the next year or for the next decade? What do we think here?

Sekera: Overall, I would say after talking to our technology team, there’s really no change in our view for now. As I mentioned earlier in the podcast, I think this is one of those environments where you really need to watch what people are going to end up doing as opposed to what they’re saying. For now, we still expect the data center buildout to continue. Even if the Democratic Party starts creating more regulatory speed bumps in order to try slowing down the data center buildout, we still think that the demand for the data centers and the extra compute for running AI is still going to end up being there over the long term. I think what ends up happening is that, here, you might have more negotiations that occur. Maybe they have to do things like, for new data centers, they have to be located further away from populated areas.

I think there’ll be more negotiation regarding things like water rights, maybe more negotiation about bringing your own power, that they’re going to have to have electric generation requirements before the data centers start construction. But it doesn’t change our view as far as the demand for compute capacity that’s going to be needed over the next couple of years.

Stock Pick: MRVL

Hansen: OK, great. Thank you, Dave. Of course, we’ll be continuing to watch this story as it unfolds. I have no doubt we will have more volatile days in the market ahead. But let’s move on to your picks. This week you’ve brought us growth stocks that still look undervalued, kind of a tough brief, but first up is Marvell. We talked about it before. This one appears pretty frequently on our show, and it was in the news again last week after a big acquisition. What’s the story with Marvell Technology MRVL?

Sekera: Yeah, and we certainly had a lot of viewers, a lot of listeners questioning us on this one as well. I got a lot of emails asking, really, what’s going on. As you mentioned, we have now this merger announcement between Marvell and Lumentum. From a strategic point of view, we think the deal ends up making space, or it makes a lot of sense. If you take a look at the space that the two companies are in, our analyst foresees good horizontal integration of the optical chips and the lasers. From our point of view, the deal from a fundamental point of view makes sense. It’s just that we just think that the company that Marvell is probably way overpaying for Lumentum based on what our fair valuation of Lumentum was prior to the deal. So, net-net, how are we taking this into consideration in our fair value?

Because we think Marvell will be significantly overpaying, we did cut our fair value to $326 a share on Marvell from $360. I’ll note there that fair value is actually probability-weighted. We think that there’s a 75% probability that the deal goes through. If the deal goes through, our fair value actually falls even further to $315 per share. But we also think there’s a 25% probability that the deal doesn’t get done. If the deal doesn’t get done, then we go back to our original fair value of $360 a share. It’s when you put those two probability weights together that you get to the new fair value today. I think not only do you have to think about where we are on a fair value basis, but whether or not you think the deal does go through or doesn’t go through at the end of the day. But either way, stock is at a 57% discount to fair value after it fell as much as it fell, puts it well into 5-star territory. It’s a stock we rate with a High Uncertainty and assign a narrow economic moat.

Hansen: Now, even if Marvell is overpaying there, it sounds like you still like the stock. What’s the investment case aside from the deal?

Sekera: The investment case is also the same today as it was when you talked about this one in the past. I mean, the company’s a fabulous chip designer focused on wired networking. They have the second-highest market share out there. We think they have a pretty differentiated portfolio of silicon across the entire data center area for artificial intelligence. We’re seeing very broad-based demand across custom chips, interconnect chips, and switching products. They’ve had very good recent announcements, like, for example, one with Google. We think that there’s a lot further upside to the long-term growth forecast that we already have. Even without the acquisition, I mean, just taking a look at their base business, the five-year compound annual growth rate for revenue is 54%. Our five-year compound annual growth rate for earnings is 65%. It’s just one of these cases that, at this point, we think, based on the market price of where it is and looking at that probability-weighted fair value, we think the market is already more than accounting for the amount of dilution that we would expect because of Marvell overpaying for that company.

Stock Pick: MPWR

Hansen: OK. Next up we have Monolithic Power Systems MPWR. This is a semiconductor stock. It is also a new pick. Tell us about it.

Sekera: Monolithic is a 4-star-rated stock, currently trading at a 32% discount to fair value, with only a 0.7% dividend yield. We rate the company as High Uncertainty. We assign a wide economic moat, with that wide moat being based on switching costs and intangible assets.

Hansen: Semiconductors are pretty volatile these days. What’s the investment case for Monolithic Power?

Sekera: Yeah. The company is a power chipmaker that specializes in voltage regulators in order to reduce total energy consumption and end systems to improve performance. In today’s day and age, with the amount of electricity that artificial intelligence requires in order to run those GPUs, their business is becoming increasingly more important in data centers as data centers become more and more power-hungry. Just quickly looking at our model here, our five-year revenue compound annual growth rate is 33%. Our five-year compound annual growth rate for earnings, 37%, trades at only 25 times our 2027 earnings forecast of $46.90 per share. In fact, when I look at that kind of compound growth rate of 37% for earnings, only trading at 25 times, in my mind, this is a good GARP stock, so growth at a reasonable price.

Stock Pick: HXL

Hansen: Great. And number three, Hexcel HXL. Switching gears, this is an aerospace stock and another new pick. Run us through the key stats.

Sekera: Hexcel is currently trading at a 12% discount. That’s just enough to put it in 4-star territory because we rate it with a Medium Uncertainty. Of course, at a Medium Uncertainty, you have kind of those narrower bands for something to trade at to look at more attractive. We assign the company a narrow economic moat based on switching costs and intangible assets.

Hansen: And why do you like this one?

Sekera: So this is one I hadn’t really paid too much attention to in the past, so it’s kind of more of a newer one for me. But what the company does is design and manufacture highly engineered composite fibers, fabrics, and resins used for both the commercial and defense markets for aerospace. And these products, in and of themselves, are lighter than metal and perform under very rigorous conditions that you require for aircraft frames, wings, jet engine enclosures, really other substructures and subassemblies. This is a stock that rose too far in the first half of 2026. It was a 2-star-rated stock, which is probably one of the reasons that it wasn’t on my radar earlier, but now it’s overcorrected too much to the downside. In fact, it’s down about 30% from its July highs. Taking a quick run through our model, top line, our five-year compound annual growth rate for revenue is 9%.

We’re looking for operating margin expansion, going from 13.4% in 2026 to 20% by 2030. I’d note that is a little bit above their prepandemic average. We are forecasting things to be better than what the company’s done in the past, but I think the thought process there is that the company should get pretty good fixed-cost leverage as they’re expanding their production and as you’re getting that good top-line growth. As far as earnings, between the top line and that margin expansion, our five-year earnings compound annual growth rate is 27%, yet the stock is trading just under 18 times our 2027 earnings forecast, which is $4.54 per share. This one, in my mind, taking a look at a 27% long-term growth rate, but only 18 times, puts it also into that GARP, or growth at a reasonable price, category.

Stock Pick: Q

Hansen: Great. And last, Qnity Electronics Q, more semiconductors. This one sells chemicals. What are the key stats there?

Sekera: It’s a 4-star-rated stock trading at a 22% discount, with only a quarter-percent dividend yield. We rate the company with a High Uncertainty, as you would expect, but we also assign a narrow economic moat, that narrow economic moat being based specifically on intangible assets from the company’s proprietary formulations that are specifically tailored to its individual customers.

Hansen: OK. This one did get caught up in the selloff last week. Why do you like it? What’s the investment case?

Sekera: Yeah. What the company does at the end of the day is sell chemicals and materials to the semiconductor industry. We expect that the company will probably see pretty good revenue growth. In fact, if you look at the way that we model top-line growth here, we think that the volumes that they sell for their premium products will become an increasingly larger percentage of their mix over time, as that specific type of product is used for the higher-end chips, the AI chips, and a lot of the more interconnected devices that are used in data centers. As far as top-line growth, we’re looking at 11.5% for our five-year compound annual growth rate for revenue. With that mix shift to premium products, we’re looking for some operating margin expansion to go from 25.2% in 2026 up to 28.9% in 2030.

You combine those together, you’re now looking at a five-year compound annual growth rate of 20%, yet the stock is only trading at 21 times our 2027 earnings forecast.

Hansen: Fantastic. Well, Dave, thank you so much as always for your time. That is our full list, four picks. Viewers and listeners who’d like more information about any of the stocks that Dave talked about today can visit morningstar.com for details. We hope you’ll join us next Monday for The Morning Filter podcast. That’s at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe, and have a great week.