4 Stocks to Buy Before They Bounce Back

Key Takeaways

• What mattered in the market last week.
• Earnings to have on radar: Costco COST and Darden Restaurants DRI.
• Which of these stock picks we still like today and which ones may be value traps: Lennar LEN, RH RH, Veeva Systems VEEV, CNH Industrial CNH, Northrop Grumman NOC, Hasbro HAS, Scotts Miracle-Gro SMG.
• How we’re thinking about Tesla TSLA as an investment today.
• High-quality stocks that have pulled back and now look attractive.

In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss last week’s market highlights, including the Federal Reserve’s interest rate hike and the 10-year Treasury yield’s push above 5%, and debate how much longer the current bout of market uncertainty may last. They explain why to keep an eye on Costco and Darden Restaurants this week. And they review several former stock picks after earnings and reveal which remain stocks to buy today.

Tune in for a deeper dive into one of last week’s stock picks, Tesla. The show wraps with a few quality stocks to buy on recent weakness.

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

Transcript

Susan Dziubinski: Hello, and welcome to The Morning Filter podcast. I’m Susan Dziubinski with Morningstar. Every Monday before market open, I sit down with Morningstar Chief US Market Strategist, Dave Sekera, to talk about what’s going on in the markets, the important things that investors need to have on their radars for the week, some new Morningstar research, and a few stock ideas.

Now, before we get started this week, we have a programming note for our audience. We will be dropping a bonus episode of the podcast this Thursday. Dave sat down with Morningstar senior analyst, Will Kerwin, to take a deep dive into one of Dave’s recent stock picks; that’s Broadcom AVGO. Dave and Will discuss Morningstar’s outlook for the company, how Morningstar can assign the company a wide-moat rating given all the uncertainty around AI, and what a possible slowdown in AI spending could mean for Broadcom’s future. Be sure to catch it wherever you get your podcasts.

Last Week’s Market Takeaways

All right, well, good morning, Dave. Let’s kick off today’s podcast with last week’s interest rate hike. Now, going into the meeting, the market seemed fairly confident that the Fed would raise interest rates, yet stocks still sold off after the meeting. What do you make of that?

David Sekera: Well, I think you need to be really careful. Yes, stocks did sell off after the meeting. Then on Thursday, we had what I would just call an everything rally. I mean, everything seemed to do better on Thursday, and it was a very strong day. Market held up pretty well on Friday, and before market opened today, it looks like everything is doing pretty well. In fact, I would say surprisingly strong this morning. In my opinion, I mean, all of the headlines, all of the talk about Chair Warsh’s talk and his tone and everything that he was trying to tell the marketplace, to some degree, you always have to realize a lot of that is just going to be noise here in the short term.

So, yes, the message he was trying to get across to the marketplace was that inflation is still too high; it’s been too high for too long. The Fed is willing to do whatever they need to do in order to restore price stability and so forth. If you look at their economic projections, they showed the upward revision to the expected policy path, but at the end of the day, the Fed’s going to end up always doing what the economy and the market forces them to do. So, as long as they don’t make a policy mistake, they’re really what I would consider to be more a lagging indicator than they are a leading indicator.

Looking forward, the market, still a little unsure exactly what they’re going to be doing here in October, still over 50% probability of them hiking at that point. But I have to point out there’s also a 40% probability of another hike in December. I mean, one month ago that wasn’t even on the radar that they would hike in December. I mean, there’s, in my mind, at least one more hike before the end of the year, if not necessarily even two.

I guess the real question to the marketplace is why is there such a focus on inflation right now? And in fact, if you look at core CPI, that’s actually lower now than when Fed Chair Powell did the opposite, and he had cut the federal-funds rate by 50 basis points in September 2024. Again, take this with, I would say, a boulder of salt. I’m not an economist. This is my purely non-economist opinion, but to me it’s all about the 10-year US Treasury. At this point, we’re still battling 5%. Some days it’s a little bit over, some days it’s a little bit under, but back then, when they had cut, they had a lot more room to make changes to ease monetary policy. Back then, the 10-year was only at 3.7%.

Now, if you look at the 10-year today, the market-derived future inflation expectations are still really in the middle of the range they’ve been since 2021. With the 10-year interest rate being higher, that means that really the market is requiring higher real interest rates after inflation than what we had before. And to some degree, I think it’s just a supply/demand issue because there’s just too much supply of new US Treasuries that’s going to be coming to market. There’s going to be tens, if not hundreds, of billions of dollars of new supply coming in order to be able to fund the AI buildout boom. So, the market’s pricing that future supply into expectations, and people are just saying, “Hey, if we’re going to have all of that still yet to come, you need to pay me a higher yield now in order to be able to compensate for that.”

The thing with inflation is that they have to keep inflation expectations from rising because if inflation expectations start to move up here, that’s going to end up pushing that 10-year yield even higher. Right now, the five-year, five-year forward is at 2.3%; let’s just say that went up to 3%. If people started pricing in a 3% long-term inflation, that’s going to take that 5% yield and take that all the way up to five and three-quarters. And in fact, if that’s going up that high, you’re probably going to get an even higher real yield. At that point, you’re not over 6%. I think it’s really a matter of you got to keep those inflation expectations from rising because any of that that starts to flow through is immediately going to push the 10-year Treasury even higher.

Dziubinski: Dave, I was going to ask you about the 10-year Treasury topping 5% last week. Would that be the other thing that really sort of stood out to you last week, or was there anything else that investors should really be mindful of given last week?

Sekera: No, I think you definitely really need to keep a close eye on the Treasury. I mean, there’s a huge battle that’s going on right at that 5% level. Now, 5% in and of itself is not necessarily that impactful from purely just a fundamental point of view. I think, to some degree, being over 5% in the low-five area, probably the greatest adverse impact is really just the negative sentiment that I think that drives for equity investors. But if yields stay there and they start continuing to creep higher from there, the higher it goes, of course, the more material and negatively material impact it’s going to have.

I think, to some degree, you get fixed-income investors, investors in general, especially those that do asset-liability duration matching, like insurance companies and pension funds; they will continue to start reallocating more of their portfolios into fixed income and away from equity. So, you have the negative technicals from that. And of course, if the equity market starts pricing in a higher rate of return required because you’ve got higher interest rates and you put that into your DCF model, that, in return, lowers present values today. Again, it’s really a matter of if that interest rate stays here and continues to creep higher, then I think those kind of both fundamental as well as technical negatives really start to hit stocks.

Earnings Watch: COST, DRI

Dziubinski: All right, let’s pivot and look ahead to this week. We have a couple of companies reporting earnings that you’re going to be watching, and those are Costco and Darden Restaurants. Let’s start with Costco COST. Morningstar assigns the stock a $740 fair value estimate. The stock is lagging the market quite a bit this year. Why is this one you’re watching?

Sekera: Well, I think when you think of Costco, great company, but expensive stock. From a fundamental point of view, when I think about Costco, you just have to recognize that their customers are going to skew to much higher income demographics, and so they’ve been less affected by higher inflation. I really just kind of want to watch what customers are doing here, because if you start to see customers at Costco really starting to dial back, that to me could be a pretty good indication that the economy might be in real trouble.

Now, thinking about the stock overall, as you’ve noted, the stock has been on a bit of a downward trend, but from a valuation point of view, we still think it’s overvalued. It’s still a 2-star-rated stock and trades over a 20% premium to our fair value.

Just took a quick look at our model here. I mean, we’re forecasting 8% top-line growth. I think that’s a pretty strong top-line growth estimate. We’re looking for some additional margin expansion over the next couple years. In fact, we’re even looking for that margin to get to new highs. Between that, we’re getting the over 10% earnings growth, yet the stock is trading at 43 times our 2026 earnings estimate, trades at 40 times our 2027 earnings estimate. So, I don’t know; with this one, I mean, with that stock already being on this downward trend, any miss here, I would be very concerned about that stock gapping down with those high of a multiple.

Dziubinski: All right. Now, Darden DRI is actually having a pretty good year, the stock. Morningstar assigns it a $156 fair value estimate, but shares are trading well above that. Same question here, Dave. Why is this one you’re watching this week?

Sekera: I really like watching Darden because this is a perfect example of being able to see what consumers are actually doing as opposed to what they’re saying. And the thing with Darden that really gives you this good perspective across, really, the entire consumer base is that they serve a lot of different types of consumers when you look at their demographics.

First of all, you have the Olive Garden; that’s about 43% of their total sales. The demographic there is going to be much more middle-income households, and that part of their business has really been able to benefit over the past year or two just because you have been having a pretty good amount of trade down from dining, and it’s a very good value proposition. Now you move up a little bit in the demographics to the upper-middle-income households, and you have LongHorn Steakhouse; that’s 25% of their revenue. Really, that’s what I would consider the value proposition within the steak category. It’s an area that they’re still really marketing toward being what they consider an affordable indulgence.

And then lastly, those brands they have—The Capital Grille, Ruth’s Chris, Eddie V’s, and so forth—that’s their fine dining business. That’s 21% of their revenue. So again, very much more upper-income households that have been able to really benefit from the asset appreciation we’ve had in the markets over time. So, it’s interesting when you look at and really watch for any changes in behavior among any one of those demographics, and I think that can give you a really good indication of what might be happening in the economy as opposed to listening to what consumers are saying that they’re doing.

Now I also have to mention too, if you look at the restaurant coverage, we’ve expanded our coverage quite a bit over the last couple of months. I’d say take a look on Morningstar.com, whichever Morningstar platform you use. We’ve got new coverage on Cava CAVA, Shake Shack SHAK, Jersey Mike’s JMKE, Dutch Bros BROS, Texas Roadhouse TXRH, and I think a couple of others. I’d say the takeaway here that to me is most interesting is when you look at our valuations, generally, I think a lot of these restaurant stocks are overvalued at this point.

Really, the only exception would be Wingstop WING, and I think Chipotle CMG is the other one, which, of course, have been two stocks over the past, I don’t know, like 12 to 18 months. You and I have been warning investors multiple times just how overvalued those were. They’ve now come down enough that they’re getting into that fair value category, maybe even starting to look a little bit undervalued here. Personally, I wouldn’t want to try and catch a falling knife in those stocks. But again, I think it’s interesting looking at our restaurant coverage across the board and just seeing that I think the market’s getting a little bit too comfortable with what’s going on with those stocks and pricing in too much growth and too much earnings growth for too long.

LEN: A Buy After Earnings?

Dziubinski: All right. Well, let’s pivot over to some new research from Morningstar, and we’re going to review some of the earnings reports from Dave’s former picks list from the past quarter that we just haven’t had time to get to until now. Let’s start with Lennar LEN, Dave. Lennar was a pick of yours on the Aug. 24 episode. It was one of your undervalued stocks to rent. The stock pulled back after earnings. Morningstar held its $120 fair value estimate. What’s your take on Lennar today?

Sekera: Overall, I would say the results were not necessarily surprising. They did miss both on the top and the bottom line, but if you look at the stock performance after the results came out, they actually, I think, traded up slightly on the day, which tells me that the market had already expected these weak results, but then it took a hit on Friday. In fact, all of the homebuilders were down somewhat substantially. And I think that was just in relation to the 10-year US Treasury starting to climb back up to that five handle once again. And of course, mortgage rates are going to still climb. I think the market at that point was really just pricing in much more of a weak housing market more than anything else over the longer term. Now, as far as the stock evaluation, it trades at a 36% discount to fair value, more than enough to put it in that 4-star territory.

Again, talking about stocks to rent as opposed to own, this is one where I think it’s really more of a leverage play on interest rates than anything else. Once interest rates start to come down, that’s when the stock is really going to perform. It’ll perform very quickly until it gets up to fair value. But until then, it’s going to be one of these laggards, especially if interest rates were to stay here or even climb higher.

RH Update

Dziubinski: RH RH was another one of your stocks to rent on that same episode of the podcast. Stocks are down more than 5% since reporting. Morningstar’s fair value estimate on this one is $258. Dave, run through the results for us and tell us if this is still a stock pick, one to rent after earnings.

Sekera: Yeah. And again, with this one, I think it’s just that the negative macro dynamics were that much more important to the marketplace than what we saw as far as the fundamentals in this one. I mean, when I look at what this company reported, I think their earnings were better than expected. They raised guidance. If you look at their 2026 outlook for sales, they increased that to 5.5%-7%. The prior guidance was 4.5%-8%. Their EBITDA margin, we’re now looking at 15%-16.2%. That’s an increase from 14.2%-16%.

Overall, I mean, all of this was in line with our model forecast, but again, the market just didn’t care. I think there’s just too much overhang from the ongoing weakness in the housing market, yet the stock is at a 50% discount, 5-star-rated stock. Again, I think this is one where you really need to see that rebound in the housing market. And once that happens, this will be a quick leveraged play on the housing market recovery, but we do need to see interest rates starting to come down for that to start to work.

VEEV: Postearnings Take

Dziubinski: Now, Veeva Systems VEEV reported in late August, and Morningstar reiterated its $287 fair value estimate on the stock at the time. Now, Veeva was a pick way back in 2024. What do you think of it after earnings?

Sekera: Well, and if you think about how this one has performed, if you remember back in 2024 when this was a pick on the March 11 episode, we went over a whole bunch of small-cap stock picks since then, and they generally did pretty well thereafter as small-cap valuations came up faster than what the market valuations came up. This is one where it rose pretty quickly up to that 3-star territory by mid-2025. And honestly, once it hit that 3-star area, it just fell off my radar until it started dropping, and it dropped pretty significantly this past spring. In fact, if you remember, on the April 13 podcast, that was our question of the week where our viewer was asking whether or not its moat was at risk.

From our point of view, when you look at how much that stock had started selling off, it was really in relation to all of the software stocks. We just had that big bloodbath and all the software stocks—everyone thought that software companies were going to be disrupted or displaced by artificial intelligence. We think the death of software is greatly exaggerated. That stock fell all the way back down to about half of our fair value. But over that same time period that the stock was falling, the quarter results, like a lot of these other software stocks, remained pretty strong this past quarter. Taking a look at our note, the company reported both 18% top-line and 18% earnings growth. They noted they had multiple new customer wins. Again, I think this one is a really good example of the overall software space and how that market sentiment kind of really whipped these stocks around. All of these software stocks have been climbing right back up over the past couple months. This one’s now back to fair value, trades only a couple dollars below. Again, right in that 3-star territory.

CNH’s Runup

Dziubinski: CNH Industrial CNH has also been a pick of yours actually several times on the podcast. Morningstar assigns this one a $21 fair value estimate, and shares are up quite a bit since the company reported in early August. What’s sort of been driving that runup in the stock, and does it still look like a pick from your perspective?

Sekera: Well, I think it’s really a combination of not just only the fundamentals, but the macroeconomics that we see going on in the agricultural markets today. From a fundamental point of view, we like to see that they tightened up their 2026 guidance to the high end of what their prior guidance was. They’re looking for margins between 5%-5.5%. In their construction business, that’s also doing very well. Overall, earnings are now, I think, expected to be between 41 cents and 46 cents for this year. It looks expensive from a valuation point of view. I think that’s about 31 times earnings where the stock is trading today.

But looking forward, management noted that they’re seeing a lot more industry indicators normalizing. Things like new and used inventories are getting back toward more normalized levels. The spread between new and used equipment is also normalizing. And in fact, they also just said that replacement demand alone is normalizing to the point that that’s going to cause the company to increase production. We’re looking for a pretty big rebound in earnings in 2027 for a dollar a share. At this point, the stock’s only trading a little bit above 13 times the 2027 earnings estimate.

The other portion of why I think the stock has run up so much really over the past couple of weeks to a month or so is because it is a leverage play on agricultural prices overall. If you look at corn, wheat, and soybean prices, they’ve all been rising pretty substantially. In fact, if you look at corn, that’s now up to, last I saw, like $5.30 a bushel; that was as low as $4.10 midsummer. I think all of that provides a very good tailwind for demand for agricultural equipment of which this company will benefit to a very large degree.

NOC: Still Undervalued

Dziubinski: All right, let’s talk Northrop Grumman NOC. Now, Morningstar trimmed its fair value estimate by 10 bucks after the company reported in late July. The fair value now is $630 per share. So, the stock’s kind of been up and down since then. What’s been going on with this one, Dave, and would you say it’s still a pick today?

Sekera: First of all, when I think about that fair value cut, yes, you never like to see the fair value cut in a stock that you’re interested in. But to put that in context, I think that’s only a 1.5% decrease in the fair value. Overall, I would say this really is no change to our investment thesis. In fact, I think all this was really just kind of dialing in our earnings expectations for growth beyond 2030. And of course, when you get to be that far out with a stock like this, it’s not going to really change the fair value today all that much. As far as what’s going on here fundamentally in the shorter term, I mean, second-quarter sales were up 5%. The problem is that you did see this dip in the operating margin, but that was really just because the company wrote down some costs that were higher than expected in the missile program, and extended profitability for the period was a little bit lower.

Again, it wasn’t necessarily a change in the investment thesis. It was really just, I think, more like accounting changes than anything else. Now, we are still looking for some of their programs, like the Sentinel and the B-21, to accelerate over the next couple quarters. We think that bodes well for the company’s ability to meet our forecast for the year. We still think the stock looks attractive. It’s still got very good long-term tailwinds behind defense spending, not just in the US, but in Europe and pretty much all of the developed markets. Trades at a 16% discount to fair value, a little bit under a 2% dividend yield per se; I’d like a little bit higher than that. But again, with that discount, it’s enough to put it in that 4-star territory. The stock we rate with a Medium Uncertainty, and we rate the company with a wide economic moat.

Is HAS Running Out of Steam?

Dziubinski: All right. Now, Hasbro HAS was a pick of yours in spring of 2025. Morningstar held its fair value estimate on the stock at $100 after the company reported in July. It’s been a while since we talked about Hasbro. What’s been going on with the name, and would you still consider it a pick today?

Sekera: Yeah, I mean the stock really kind of has acted like a pendulum. Again, it was significantly undervalued. I think it was the April 28 episode in 2025 that this was a pick. The stock rose over 70%. In fact, it hit $106 per share this February, which was above our fair value of $100 a share. That would’ve been a great time to do some profit-taking. Since then, it has retreated. It’s now back into the mid-70s following the US strikes, and now we’ve had another bounceback up to $88. Again, this one has been swinging back and forth. It’s been one where you could actually have some good entry points, some good points to take some fair value, take some profit off the table, and then kind of back into it.

As far as the fundamentals here, looking at earnings, they did beat, they did raise, they increased their 2026 guidance. They’re now looking for sales growth of 5%-7%. Beforehand, it was 3%-5%. Operating margins: They’re now guiding 25%-26%. That’s up 1% from a range of 24%-25%. And we are already really kind of forecasting that same kind of sales growth, but that’s a little bit higher operating margin. While our fair value, I think, was pretty steady here, I think there’s still some upside potential if they’re able to hit those operating margin targets.

SMG: Bargain or Value Trap?

Dziubinski: All right. Scott’s Miracle-Gro SMG was a pick a couple of times in 2025, and then again on the March 23 show this year. Stock is down more than 20% since reporting in July, and at the time the company reduced guidance. At the time, Morningstar reaffirmed its fair value estimate of $80 on the stock. What do you think of it today, Dave?

Sekera: This is an interesting stock in the perspective of looking how it trades in the short term, as well as what I consider over the longer term. In the short term, as you mentioned, it’s been a really volatile stock. I mean, it was a 4-star stock when it was trading in the low $50s. It was, I don’t know, above $70, went to 3 stars, and now it’s back to its lows again. But if I look at how the stock has performed going all the way back to mid-2022, I’d say it’s in that generally $50-$70 range and has been trading back and forth several times.

As you mentioned, I think the real question with this one is: Is this a value trap? And let me just kind of walk through why we don’t think it is, but it looks like one here in the short term. The market hates nothing more than seeing earnings contract. And when earnings are contracting, people just want to get out. Of course, everyone’s looking for growth stories, and we are forecasting the operating margin to contract next year. A lot of that is just due to higher commodity and chemical prices, higher transportation prices, and a lot of that due to the conflict in Iran and really what’s going on in the Middle East. We are looking for earnings to decline in 2027 down to $4.09 per share, down from $4.35 here in 2026. Based on 2027 earnings, the stock’s now trading at under 13 times our 2027 estimate. It really does look cheap as long as you expect earnings to recover. In my mind, and I think about this stock, it is a 2028 story right now.

If you open up our model and take a look, we are looking for two and a half percent revenue growth. We are looking for margins to begin improving once again, and that’s really just going to be based on a combination of prices increasing, catching up with inflation, more normalization in energy and chemical prices, and so forth. And so then, we’re looking for earnings of $4.69 in 2028, and we’re looking for it to then continue to keep growing thereafter. So, if they are able to hit what our expectations are, I do think the stock is very undervalued.

I’d say the good thing about this stock for now is that you are clipping a 5% dividend yield. According to our write-up here, our analysts noted the company does plan to maintain that dividend. And then once their leverage ratio falls below 4 times, they’ll start using free cash flow in order to repurchase shares as opposed to paying down debt. We expect that probably happens sometime in the next couple of quarters. Once you get them repurchasing shares, especially when the shares are at such a large discount that adds economic value, plus from a technical point of view, I think that helps put in a floor on the stock. But again, as an investor, I think you really have to look at this as being much more of a 2028 story than even a 2027 story.

TSLA Follow Up

Dziubinski: All right, so, be patient. It’s time for our question of the week. Now, as a reminder to viewers, if you have a question for Dave, you can send it to us via our inbox, which is themorningfilter@morningstar.com.

But actually, Dave and I took this week’s question from the YouTube comment section on last week’s episode of the podcast, where people were talking about Tesla TSLA as one of Dave’s picks last week. Now, one viewer in particular noted—and I’m paraphrasing this just a little bit, Dave—for Tesla, you didn’t discuss a single point about financials. Why is that? Why is that the one company that no one seems to care about revenue, profit margin forecasts, none of it? I know robots and self-driving cars and Elon, good, but eventually the rubber has to meet the road, and something has to be shipped. No? All right, Dave, what’s your response to that?

Sekera: Well, one thing about this podcast, man, our audience, they really keep me honest with this kind of stuff. I mean, I have to be perfectly honest, at the end of that last podcast, I actually had more notes up here to talk about Tesla, but I’ll be honest, man, I actually was just kind of running out of steam last week.

Dziubinski: Not enough coffee.

Sekera: Yeah. I was just running out of steam. I did pull up my notes from the last podcast, and I did dig a little bit deeper into the model. So, I might bore some people with some of the numbers here, but we’ll get into it a little bit more in-depth. And of course, if you have an interest, you can always go to whatever Morningstar platform you use and really get into more of the fundamentals here.

But I think the first question you really need to answer is why is Tesla stock down 19% year to date? And so our analyst, when I talked to him last, really noted, I think there are really three key aspects that he thinks the market has been disappointed by. First has been the robotaxi rollout; it’s been much slower than what the market was expecting. I think at this point, they’re only in seven of the nine cities that they said they were going to be rolling out in. And even within those seven, I think there are a lot fewer cabs that are actually operating than what the market had been expecting.

Second, if you look at the Optimus robot, that also has been recently delayed once again; that’s for the third generation. And I think one of the problems here with, and again, not to bang on Elon, but really I think to some degree the market always wants to have you underpromise and overdeliver. And I don’t think Tesla or Elon Musk has really learned the art of the underpromise, overdeliver. I think between what’s going on with the robotaxi and Optimus, that’s really been a lot of people maybe taking some profit off the table if they have profit, or maybe just kind of losing faith here.

And then the third aspect that our analyst was talking about is that they do have a pretty significant ramp-up in capex spending. But again, that’s really just to be able to build out new factories to support long-term growth, building more battery capacity, building more AI compute, which we do think will add value to the stock over time. And in fact, we still think Tesla is probably one of the best long-term real-world plays in actually utilizing artificial intelligence to be able to drive economic value over time, specific things like the transition from cars and batteries to autonomous driving, like the full self-driving and the robotaxis, as well as when the humanoid robots really come to fruition in the future.

So, we want to get into numbers. Let’s get into some numbers. From 2027 through 2031, our analyst does break out all the different segments. He models out the individual revenue and the cost of goods sold for each individual segment. As far as the autos go, we are forecasting revenue to increase an average of 17% over that time frame, so, from 2027 through 2031. And that’s really based on looking for an average increase in total deliveries of 14.6% on average. The balance between how much we’re looking for auto deliveries to increase and the total segment revenue, I think, is really much more software sales built in for the full self-driving software.

If we take a look at the energy generation and storage business, over that five-year forecast period, he’s looking for average revenue growth of 30%. And then lastly, for the services and the other segment, he’s forecasting average revenue growth of 30% there as well.

Now, as far as the operating margin, I’m just going to get into the blended margin as opposed to each individual segment, but we are looking for the operating margin to be 8.2% in 2027, but expand all the way up to 24.7% by 2031. And I would say probably the biggest difference there is because you’re going to have a huge amount of mix shift in the much higher-margin businesses than the auto segment. For example, the auto segment, we’re expecting that to be 65% of total sales in 2027. That drops down to 52% in 2031 because those other segments are expected to grow that much faster than autos.

Getting down to the bottom line here for earnings, we are expecting $1.95 here in 2026, which means that the stock is trading at 187 times the 2026 earnings estimate. Even with the amount of growth that we’re looking for in 2027, looking for $3.22 in earnings, that’s still 113 times on a multiple basis. By 2028, we’re looking for $5.90 per share, still 62 times the 2028 earnings estimate. Again, you really got to believe the long-term growth; you’ve really got to buy into some of our projections here. We’re looking for earnings in 2031 to get to $17.78.

Again, now the stock is trading at a much more reasonable multiple of 20 times. Then at that point you have to consider, OK, from 2031 and thereafter, what kind of growth can you expect from there? Does that 20 times look undervalued as a five-year forward multiple? In our model, if I look at our 2031 through 2035 projections, we are still looking for an average of 25% growth thereafter. So, that 20 times multiple on 25% long-term growth does look attractive.

Again, this is a believe-me story when you really have to believe in the long-term potential of how Elon Musk is running this, really believe in the robotaxis and the expectation for the humanoid robots over time to really become a meaningful portion of their business. And if you do, then yes, the stock does look very undervalued today.

Dziubinski: Just to build on that, Morningstar does assign Tesla a Very High Uncertainty Rating. Even though it is trading well below the $450 fair value estimate, it’s 3 stars right now. To Dave’s point, you have to really believe in the story and that it’s going to pan out on the positive end of that high uncertainty, not the negative one, for it to be that opportunity today.

Stock Pick: PG

All right. Well, it’s time for the picks portion of this week’s podcast. Now this week Dave’s brought us four stocks that have recently pulled back that he thinks look attractive. The first one up today is Procter & Gamble PG. Give us the highlights, Dave.

Sekera: Sure. P&G is currently a 4-star-rated stock right at that border between 4 star and 3 star, trades at only a 5% discount, has pretty healthy dividend yield at 3%. It is a company we rate with a Low Uncertainty, I think, as most people would expect, which is why you don’t need that much of a discount from intrinsic valuation to start looking attractive. And of course we also rate it with a wide economic moat, that moat being based on cost advantages and intangible assets.

Dziubinski: Now you pointed out that Procter & Gamble, the stock isn’t terribly undervalued right now. Why is this a pick at this price?

Sekera: Well, if you look at our longer-term price/fair value chart, this one actually had been a 2-star-rated stock for a pretty long time. And at this point, that stock price is close to where it was trading all the way back in mid-2020. In my mind, I think of Procter & Gamble as being a core holding type of stock, but of course you have to buy it at the right price. And this is just one we had not been able to recommend in the past because it had been overvalued, and it’s finally at the point where the price and the valuation make sense. And again, thinking about those kinds of stocks I looked at as being core holdings for most portfolios: wide moat, Low Uncertainty, attractive dividend yield at 3%, and not only attractive at 3%, but if you look at their dividend history, they just have a consistent history of raising it every year. And in fact, I would suspect that they probably continue to raise it at least at the same rate of inflation, if not even slightly higher than inflation over time.

Looking at some of the other aspects here, very strong balance sheet, looks like they’re rated Aa3, AA minus, Exemplary Capital Allocation. So, again, it’s one where it’s finally starting to look attractive here. When I look at our model forecasts, I think they’re probably pretty modest. I mean, for the most part, we’re just looking for inflation and maybe low single-digit volume growth, only looking for modest operating margin expansion. And lastly, a good consumer defensive stock is going to be one of the ones that’s going to be least affected by the macrodynamic headwinds we’ve talked about the past month or so. If we did go into any kind of risk-off environment, I think this one would do well if the rest of the market’s in that risk-off downward trend.

Stock Pick: HSY

Dziubinski: All right. Well, your next pick this week is another consumer name. It’s Hershey HSY. Tell us about it.

Sekera: Hershey’s trading at a 25% discount to fair value. That’s enough to put it in 5-star territory. It is one that we rate with a Low Uncertainty as well. Attractive dividend yield at 3.4%, and we rate it with a wide economic moat also based on cost advantages and intangible assets.

Dziubinski: Now, there are kind of a lot of undervalued stocks in that sort of packaged food snack space because, of course, these companies have been facing headwinds. So then, what do you like about Hershey specifically?

Sekera: Well, this is one we’ve recommended a couple of times, and it’s bounced around enough that this is one where you’ve actually been able to trade this one around quite a bit. If you had that core holding, you were able to dollar-cost average into the downside, and then it moved back up, you’re able to take some profit off the table.

Historically, I mean this is one where, again, I hadn’t been able to recommend it too far in the past because it used to trade at a pretty large premium to our intrinsic valuation. It got hit in the second half of 2024 and into the first half of 2025 because cocoa prices were rising at just astronomical rates because of some issues in the cocoa market. And in fact, this stock was also a 5-star stock as recently as early 2025. Now, it then rallied too far to the upside. In fact, it was a 2-star-rated stock in early 2026. And once again, it’s now fallen enough to the downside that it looks pretty attractive.

Just a quick synopsis of the company itself. One of the things I think is a real positive here for investors is that they have the highest market share in the US. They’ve got 36% market share. The next closest competitor is going to be Mars at only 29%. But once you get away from those two, you have really low market share across the remaining branded and private label competitors. A little bit of a duopoly kind of business. I think between those two, they’re able to do a pretty good job managing pricing in the marketplace because between the two, they have such a large market share.

Now, chocolate in and of itself, as you get to, like you’re talking about how a lot of these other food companies have been negatively impacted by GLP-1s, I don’t think chocolate as a category has been as negatively impacted because, to some degree, purchasing chocolate is much more of an indulgent type of purchase and has a lot of emotional connotations to it. And it’s also much more tied to holidays, gifting, celebrations, small treats for consumption, and things like that. Again, this is one of those categories that hasn’t been hit nearly as much. And then if you look at Hershey, some of their other categories like gum and mints actually tend to do well as more people are on GLP-1s because then they enjoy having that flavor without actually having to consume something.

Just a quick look at our forecast and our model here: We’re looking for a five-year compound annual growth rate for revenue of 3.8%. We’re looking for operating margins to recover back toward historical norms. Even if you look at our 2030 forecast for operating margin, it’s still below what the company actually did in 2024. We’re not even getting back toward peak margins in order to get this company to be looking pretty attractive here. Overall, we’re looking for 12% earnings growth, taking a quick look at where the stock is trading. It is trading at 20 times our 2026 earnings estimate that falls to 17.5 times our 2027 earnings estimate. And with that 3.4% dividend yield, I think it just looks like a pretty solid value play today.

Stock Pick: MRVL

Dziubinski: All right. Now your next couple of picks are from the tech sector. First up is Marvell Technology MRVL. Give us the highlights on this one.

Sekera: Marvell is a 4-star-rated stock, trades at a 19% discount. Of course, it’s a tech stock, so we have it rated as a High Uncertainty, as you would expect. And a narrow economic moat on this one, still not bad. A narrow moat in the tech sector, I think, looks pretty attractive, and that narrow moat is going to be based on switching costs and intangible assets.

Dziubinski: You and I have talked a bit about Marvell several times before on the podcast, and it seems like, I don’t know, in general, Morningstar is often more bullish on the stock than the market seems to be. What sort of underpins that?

Sekera: Well, first of all, I mean, first when I think about Marvell, you’re right. I mean, there were times that the market had been overly bearish on the stock, and of course that was what gave you that buy opportunity. I think we highlighted this one on both the March and the May 2025 episodes of The Morning Filter. And since then, I mean, the stock had just been on a tear. It was up over 300% and got into 2-star territory. And now once again, we think the market is being overly bearish based on a couple of things that are going on that we don’t think are going to play out. We do think it’s now overcorrected once again to the downside.

First of all, for those of you that don’t know Marvell, it’s a networking chip designer. It’s the number two market share for those specific types of semiconductors. And I’d say the short story here for the investment thesis is we think they have a differentiated portfolio of silicon across the entire data center chain for artificial intelligence. We see broad-based demand across their custom chips, the interconnect chips, the switching products, and so forth. And the company recently announced a new agreement with Google that further adds upside to our long-term growth forecasts.

Kind of quickly running through the numbers here, the company reported $8.2 billion in revenue for fiscal 2026, which recently ended as a 42% increase in revenue year over year. We’re looking for a 49% increase in revenue. We’re forecasting $12.2 billion for fiscal year 2027, which is what we’re in now. And then we’re looking for that actually to accelerate. And I think that’s probably one of the most attractive parts of this story is looking for not only that kind of revenue growth, but for that kind of revenue growth to accelerate the next couple years thereafter. For 2028, we’re modeling in $18.5 billion in revenue; that’s a 52% growth rate. And then for fiscal 2029, a 58% growth rate, which gets you to $29 billion in revenue.

Now, as far as earnings, we’re modeling $4.28 for fiscal 2027, puts you at a 50 times multiple, but that drops to below 30 times by fiscal 2028, yet we’re looking for a five-year compound annual growth rate of 54%. This actually puts you in that GARP, that growth-at-a-reasonable-price kind of context. As far as what some of the catalysts might be to really help bolster this stock price in the short term, it appears they have their investor day on Oct. 6. We’re looking for them to maybe give more guidance as far as what their financial targets are through 2030, looking for more details on the ramp-up and their business with Google. And I think if we get those two things, you really could see some strong stock performance thereafter.

Stock Pick: ASML

Dziubinski: All right. And then your final pick this week is ASML Holding ASML. Run through the key metrics on it.

Sekera: So it’s currently a 4-star-rated stock at an 18% discount, another tech stock, of course, rated with a High Uncertainty, but we do rate it with a wide economic moat based on cost advantages, switching costs, and intangible assets.

Dziubinski: Of course, here we have an example of another really volatile stock pick in ASML. So, why do you like it today?

Sekera: Yeah, I mean, it’s been a very volatile stock. I mean, it was a buy a couple of times, I think, in the first half of 2025, yet that stock then rallied over 170% by June of 2026, which was enough to then, at that point, put it into 2-star territory. Like a lot of these other stocks, it has sold off, and now we think it’s overcorrected too much to the downside.

What does the company do? They’re the ones that actually make the equipment, which is then used to make semiconductors. Of course, huge tailwind in this business, specifically for the high-end equipment that they specialize in, which is what is used to make artificial intelligence semiconductors, where we still see the amount of demand for those AI semis well outpacing the amount of supply out there. So, very strong tailwind for their equipment.

Just taking a look at our own forecast here, we’re looking for 34% revenue growth this year, another 28% revenue growth in 2027. Earnings for 2026, we’re looking for that to be $37.12, puts it at a 42 times multiple, yet it goes down to 30 times in 2027 when we’re looking at $51.67 in earnings. Another one for a company where we’re looking for a five-year compound annual growth rate of 27%, that 30 times multiple in 2027 looks pretty reasonable. And again, it’s enough to put you in that growth at a reasonable price area.

Dziubinski: All right. Well, Dave, thanks for your time this morning. Now, viewers and listeners who would like more information about any of the stocks Dave talked about today, you can visit Morningstar.com for more details. We hope you’ll join us next Monday morning for The Morning Filter podcast at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please tune in to the bonus episode that we’re drafting this Thursday about Broadcom, and of course also like this episode and subscribe. Have a great week.