4 Stocks to Buy Before They Rise Further

Key Takeaways

• Is it time to worry about Treasury bond yields?
• Which economic reports to watch this week.
• Can Micron Technology’s MU momentum continue?
• Nike NKE and McCormick MKC: Is either beleaguered stock worth buying before earnings?
• Berkshire Hathaway’s BRK.A BRK.B big investment in Lennar LEN and which stock is the better buy today.
• Our take on the entertainment industry.
• Four stocks that are up a ton that have more room to run.

In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski weigh the impact that rising yields and lower oil prices had on the stock market last week. They look ahead to this week’s inflation and jobs reports, and cover what to watch for in the earnings reports from triple-digit-club member Micron Technology as well as Nike and McCormick. They share key takeaways from Costco’s COST and Darden Restaurants’ DRI results. And they provide updates on former stock picks Lennar and Berkshire Hathaway; tune in to find out which of the two is the better stock to buy today.

Hear what they think about the entertainment industry as an investment idea. They close the show with several stocks to buy that still look undervalued even after their recent rallies.

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

Transcript

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

Now, before we get started, we have a programming note for our audience. In case you missed it, we dropped a bonus episode of the podcast last Thursday. Dave took a deep dive into one of his recent stock picks, Broadcom AVGO, with Morningstar’s senior analyst, Will Kerwin. So, if you missed it, you can find the bonus episode wherever you get your podcasts. Dave, let me tell you, you and Will are turning into stars on YouTube. The feedback is tremendous on the episode, so congratulations.

David Sekera: Well, that’s not going to be me. I’m not that great of an interviewer, but yeah, no, Will had a lot of great commentary, a lot of good information in there. And I think that’s an interesting one to do that deep dive because it is such a differentiated view from what the market’s currently pricing in.

Treasury Yields: Time to Worry?

Dziubinski: Yeah. Anyway, check it out, audience, if you haven’t. All right, so let’s kick things off this week talking a little bit about last week’s market activity, starting with that spike that we’re seeing in the 10-year Treasury bond yield. Now, Dave, you’ve talked about that a lot on the podcast this year, just about that risk of rising interest rates. Do you think we’re getting a little too close for comfort here as far as this having a sizable impact on stock investors?

Sekera: I think so. And in fact, the bond market last week reminded me of one of the books I used to read, one of the favorite books I had for my kids when they were young, that book being Alexander and the Terrible, Horrible, No Good, Very Bad Day. And that’s really how you described the bond market last week, and unfortunately it looks like the bond market’s getting hit again this morning before market open. If you look at the curve, like the five-year, that increased by 15 basis points; that’s now trading at 5%. And the 10-year increased by 18 basis points up to 5.18% by the end of last week.

In fact, there was one individual day last week that the 10-year gapped out by as much as 18 basis points in just one day. Having traded the Treasury market for a lot of years in my prior history, I just note that’s a very rare move. Rarely do you see the 10-year move that much in one individual day. As I said, this morning they’re getting hit even harder again. The 10-year is now five basis points higher; it’s trading at 5.24%. Month to date, I think the 10-year is about 50 basis points wider than where it started the month. And in fact, year to date, it’s now well over 100 basis points higher than where we were.

Just to put that in a little bit of context, the 10-year is now at the highest yield since it peaked in June 2007. In fact, really, the last time it traded above 5% for any meaningful period of time was pre-2000. Now, to show my age here, I started in finance coming out of undergrad in 1991, and even I barely remember rates being as high as what we’re seeing right now. In fact, I pulled the data down and the average yield since 1990 is four and a quarter percent. My first mortgage back in the early 1980s was eight and an eighth percent, which I think a lot of people would really have a hard time trying to swallow a mortgage at that kind of rate.

Getting back to your original question, is it time to worry? What I would say here is when I look at the market and look at our valuations, the market is undervalued overall, but I do think it is especially vulnerable today because typically you would expect stocks to struggle as interest rates are rising, especially those long-duration growth stocks that are going to be much more sensitive to changes in interest rates. But yet if you look at the market performance month to date, even year to date, it’s held up much better than I would’ve thought. And in fact, last Friday, we had a pretty good rally going into the market close, which I really wouldn’t have expected.

Dziubinski: So then, Dave, let’s talk a little bit about that stock market rally. As you said, things really haven’t been too bad for stock investors. Why do you think stocks are holding up as well as they are?

Sekera: It’s always really hard to know what the market is pricing in and thinking in the short term. I mean, the media is always saying, oh, the market did this because of that, but sometimes it’s really hard to exactly know. Again, just my own personal opinion is I think that the expectation is that rising interest rates really aren’t going to change the pace of the AI buildout boom. And if you think about the AI buildout boom and the impetus behind it, first of all, you have these forecast projections; the AI is just going to drive a spectacular increase in demand. It’s going to generate huge amounts of revenue, and the amount of compute and the amount of capacity that’s going to be needed in the next couple of years is still kind of on that hockey stick curve upward. And when you think about how people are deciding how much money to spend, and they think about what the return on invested capital is going to be, I think that those margins are so large right now based on those forecasts that a 1% increase in debt funding really isn’t going to meaningfully change what the return on invested capital is today based on those types of forecasts.

Lastly, to some degree, I also don’t even think it’s really about what those specific return on invested capital forecasts even are. I think a lot of the AI buildout boom, especially by the mega caps on the AI hyperscalers, is that they just don’t want to take the risk of getting left behind in what should be the greatest technological advancement maybe even ever, certainly since the internet. I think the big fear for a lot of these companies is if they get left behind, they’re never going to be able to catch back up. To some degree, that’s what’s being priced into the market today.

Dziubinski: All right. So then, Dave, look into that crystal ball of yours that you must have. Given what we have seen with stocks in this environment, what would you expect from the market in the near term?

Sekera: And of course, trying to guesstimate what the market is going to do in the short term is always, to some degree, a bit of a fool’s game, and let’s play that game.

Dziubinski: Be a fool, Dave, be a fool.

Sekera: Yeah. I mean, looking forward, overall, I actually wouldn’t be surprised to see the market at an index level hold up relatively well. And of course you have to remember the top 10 largest mega-cap stocks represent over 35% of the market capitalization of the index. I suspect a lot of the stocks of what I would call real economy, non-AI stocks are probably at a very real risk of a selloff, especially if the economy were to take a downward turn. But if those undervalued mega-cap AI stocks hold up, you’re not necessarily going to see that when you calculate it at that index level. Of course, the question today, I think, really is how much longer can the rest of the economy hold up, whether that’s in the face of the higher interest rates, higher inflation, the elevated gasoline prices, and so forth.

And if the economy were to start to soften too much, is there a point that the hyperscalers and all these other companies building out the data centers start to pull back on the growth of the AI buildout boom? Of course, if that starts to happen, then I would say put on your hard hat and look out below.

Key Market Takeaways

Dziubinski: All right. So what else stood out to you in last week’s market activity?

Sekera: Yeah, we had the big meetings in Washington between China and the US. As far as I know—and correct me if I’m wrong—I didn’t see anything of any real interest, no new news coming out of the meetings with Xi from China. There are a lot of conflicting headlines surrounding what we may or may not be negotiating with Iran. So, you saw oil prices whipping around a bit. I think they’re anywhere from like $88 to maybe $96 a barrel.

But really, I think the most interesting news out there, which might’ve been below the headlines that most people would notice, was that Oracle ORCL issued a force majeure notice for construction of its largest data center, which is currently in construction, I believe, in New Mexico. So, what does that mean? A force majeure is a clause in a contract that allows one party to essentially state that forces beyond their control may be causing delays in the buildout of a data center. And this is really going to be used to try and protect themselves against maybe any contractual penalties that they would have to pay if they are late in being able to deliver the data center that they’re currently building.

Now, typically a force majeure is an event where it’s going to be like war, terrorism, natural disasters, public health emergencies, things like that, not necessarily just permitting delays, which is what Oracle noted in their force majeure at this point: that they’re not able to get some of the permits that they need in as timely of a manner as they thought they were going to get. Now, they still also announced, even with that force majeure notice, that they still expect to be able to finish that data center on time. So that tells me there must be enough slippage going on that the lawyers are kind of twisting their arms to tell them to make this declaration, but there’s also still enough time, enough buffer room that was built in the contract, that if all the stars line up, they should still be able to get it done on time.

Why is this of interest? I mean, for now it does appear to be only an issue with Oracle, but of course, is this a red flag? Is this just a canary in the coal mine? Is this going to be emblematic of a lot of other data centers maybe having similar permitting issues as well? And of course, if that’s true and too many data centers are delayed, then that of course would then lead to a big slowdown in the amount of tech hardware and everything else needed for the data centers, which could reverberate throughout the entire economic value chain for the AI buildout boom.

On Radar: Economy

Dziubinski: All right, so that’s something to be keeping an eye on then. All right, let’s look to the week ahead. This week we have inflation and jobs numbers coming out. First, let’s talk about the PCE. What are the expectations for it, Dave? And do you think the number could actually have a big impact on the markets this week?

Sekera: It could have probably a bigger impact than it might necessarily have if the numbers were to come out close to consensus. I think right now, looking at some of the numbers I watch, the headline PCE forecast is looking at 0.3% on a month-over-month basis, so slightly faster than the 0.2% last month. On a year-over-year basis, a slight increase coming in at 3.8% versus 3.7% last month, and then even core PCE being slightly faster at 0.3% versus 0.2% last month.

So, if it comes in slower than expectations, that just means that the Federal Reserve, of course, could then pause additional rate hikes here in the short term. I think that would give a pretty good boost to the stock market. Unfortunately, if it comes in faster, that would, of course, then be more of a reason for the Fed to tighten more and faster. The real concern is if it comes in a lot higher than what the expectations are; if long-term inflation expectations were to start to go up, then I think that the bond market could really get whacked pretty hard once again.

Dziubinski: All right. On the jobs front, we have nonfarm payrolls numbers coming out. Now, the market seems to care more about these numbers, at least in the short term, than you typically do, but why do you think that is, and do you think that number could actually impact the market this week?

Sekera: Yeah, as we’ve talked about in the past, I mean, with the payroll numbers, I don’t think the numbers in and of themselves are usually very reliable just based on the amount that they get restated the month afterward, months afterward, year afterward, and those restatements can, in a lot of times, be very large compared with what the number was that first came out. In this case, it looks like consensus is looking for 90,000 jobs growth. That’s a lot less than the 162,000 last month.

But the reason I think that it could be market-moving this time around is if you look at the market, I mean, we’re over 13% higher year to date. We’re really close to our all-time highs. In fact, the market is 22% higher than where we were when it bottomed out last March. When I think about what happened earlier this year, why did the market crater in March and what’s different now—just kind of running through: Back then, the market was really selling off because oil prices, of course, were rising very quickly due to the conflict with Iran, fears that inflation were kicking back up, were rising, interest rates were rising, and then the market was also changing its view on the Fed that it was going to change to a tightening basis instead of an easing basis. And then there’s a lot of concern about what all of that would do to the economy and how much the economy would weaken.

So, what’s happened since then? Well, oil prices still a lot higher. Last I checked, they’re at $96 a barrel this morning, less than where they peaked at well over $100 a barrel not that long ago, but still a lot higher than where they were preconflict. Depending on how you want to measure inflation—whether it’s headline versus core, whether it’s CPI versus PCE—inflation is faster now and on that rising trend, interest rates, as we talked about, are certainly a lot higher. And the Fed, of course, has started to tighten monetary policy once again.

The question is, why have stocks rallied so much off of that March bottom? To some degree, I think it’s just because the AI buildout boom is still just full steam ahead, still increasing at a very rapid rate. Because of that, the economy has held up very well in light of all of these other negative macro dynamics, which in turn has also supported the labor market. If payrolls come in too low, I think that the economy then is going to be showing that it’s weakening, that could then lead to a selloff on a lot of those non-AI stocks. And of course, from there, if the economy is slowing too much, could that then put a damper on the AI spending? And if it does, then I think that would be very negative for the stock market.

Earnings Preview: MU

Dziubinski: All right. Well, turning to earnings, we have a few companies coming up of interest, including Micron Technology MU. Now, Morningstar assigns Micron an $850 fair value estimate. Micron has, of course, been a member of that triple-digit club; the stock’s up nearly 600% during the past 12 months. Dave, what are you going to be listening for with Micron?

Sekera: Yeah, and all of those stocks in that triple-digit kind of return area are, to some degree, all the same story. Most of them are pretty much these commodity-oriented tech hardware stocks where, because of the AI buildout boom, we’ve had huge shortages in a lot of these commodity-oriented items. In this case, this company makes memory semiconductors, and all of these companies have just been able to jack up all of their prices. When you think about it, if you’re a project manager building out a data center, you’re going to pay whatever you have to pay to get those memory semiconductors to open on time. You’re not going to go to your boss and say, “Hey, we’re going to be a couple months delayed because memory costs me a couple million dollars more.” You’re just going to go, you’re just going to buy it.

These companies not only have seen their revenue just skyrocket, but of course their margins have just skyrocketed to new all-time highs as well. The question is, and it’s not just for Micron, but it’s really all of these same kind of companies, just how much longer are we going to have this type of supply/demand imbalance? So, of course, all of these companies have been revamping their production lines, they’re starting new production lines, they’re even building out new manufacturing facilities, which will be coming online over the next 12 to 24 months.

As far as our forecasts go, we think that in 2028, that amount of new production should be enough to satisfy the heightened demand. And that even includes the AI buildout boom continuing into 2028 and all of these companies still requiring even more and more volume. It’s just that when you get to the point when that supply/demand comes into balance, prices are naturally going to start coming down. And at that same point in time, you’re going to see the margins start to compress. When I look at what the valuations for all of these stocks are, it just looks like the market is pricing in that shortage to last longer than from 2028.

Now, if you look at these stocks, and Micron is emblematic of this, a lot of these were 1-star stocks earlier this year. For the most part, they all peaked at some point in time in June. They rolled over pretty high. In this case, that stock fell to about $750. That was enough to put it back into 3-star territory. But again, now they’re all staging a recovery. It’s back to a 27% premium at a 2-star rating. I think the key for this stock and how it trades in the short term will be what kind of guidance does management give, and can they give the market comfort that that supply imbalance is going to last longer than through 2028? If so, then there’s probably further upside yet to come on the stock. If they can’t, I wouldn’t be surprised to see this one roll over and gap to the downside.

NKE Needs Good News

Dziubinski: All right. Well, Nike NKE also reports this week, and the stock is down something like 80% from its 2021 high, just a disaster. And if you look at—well, of course you do, Dave. I looked at the stock price chart because I was curious. There just doesn’t seem to be any momentum for the name.

Sekera: Oh, there’s momentum, Susan. There’s momentum.

Dziubinski: Is there anything that Nike can say that might lead to a bounce after earnings?

Sekera: I mean, fundamentally, when you look at that stock chart, I mean, there’s really nothing any different right now going on than what we’ve talked about with Nike in the past. I mean, in the short term, the company, we still think, has pretty lackluster product development. The company’s been struggling for quite a while, and China has not gotten any of the returns that they thought they were going to get there. And unfortunately, I think Nike is still probably losing market share to a lot of these other running brands, On Running, Hoka, Brooks, and so forth. The market really needs some good evidence of a turnaround, and that turnaround is going to lead to more long-term normalization.

Now, when I think about Nike, I still think a better opportunity for investors is going to be On Holdings. They just held their investor day, I think, last week. The stock had a pretty good pop afterward, so the market liked what it heard. The company gave a road map for the next three years in which they’re going to be expanding into new adjacent categories. I think that can help drive long-term growth for that company. Trades at a pretty reasonable 18 times 2027 earnings estimates. And what I also like about this one versus Nike, it’s not reliant on a turnaround taking effect to get back toward normalization. All this company really needs to do is kind of continue that established growth trend that it has and continue to keep taking market share gains like it has been.

Dziubinski: All right. Now Morningstar assigns Nike a $94 fair value estimate and continues to rate it with a wide economic moat. Based on valuation, Dave, still not a big fan of Nike ahead of earnings? Should investors hold off?

Sekera: Yeah. When you think about the valuation and think about Nike, this really is a 2028 turnaround story, not even a 2027 turnaround story. If you look at our earnings estimates, the company’s trading at 21 times our fiscal 2027 EPS. Again, the stock is not cheap based on that, especially for a company whose top line and earnings have been contracting since 2023. Now, if you look at what this company has put up in the past, for example, in 2023 and 2024, their earnings per share were essentially $3.25 and $3.75 each. If they can get back toward those types of earnings levels, the stock really does look undervalued here at 11.5 times the average earnings from those years. But yeah, hey, I may not be from Missouri, which is known as the Show-Me State, but I do think that’s kind of the right attitude here. And this is a stock that we just haven’t wanted to get caught in this downdraft that we’ve talked about for quite a while whenever you and I have talked about Nike.

Saying all of that, if Nike can give any good indication that they’re righting the ship, I think the stock has a lot of room to run to the upside based on those 2028 type of earnings estimates. In this case, I think you can probably wait until you actually start to see that. And even if the stock does start running up, I think that would be the point that you’re going to want to jump on this one.

MKC Earnings: What to Watch

Dziubinski: All right. Well, let’s talk a little bit about McCormick MKC. Now, McCormick also reports this week. The company announced plans to merge with Unilever’s food business. Morningstar gives the stock a $65 fair value estimate, and heading into earnings, the shares look very undervalued. The stock’s down 28% this year, so that’s a lot. Dave, given all of that, what are you going to want to hear about, and is there an opportunity for investors ahead of earnings considering where McCormick’s trading?

Sekera: Yeah, I don’t think you necessarily need to get ahead of earnings, and there is a lot that’s going on with this story today. As you mentioned, they are merging with Unilever’s foods business, so not Unilever UL in and of itself, but Unilever’s hiving off that portion of their business. Once that merger occurs, which I think is supposed to be mid-2027, this is going to end up doubling the size of McCormick, and it’s really going to transform them into a much larger global flavor and condiment business than what they are today.

Now, having said all that, I do think this is a little bit confusing. You do need to do a little bit of due diligence and read about what’s going on with this. It’s almost kind of like a reverse merger because at the end of the day, Unilever’s shareholders will end up owning about 55% of the combined company. McCormick’s going to own 35% of the combined company, and Unilever’s going to actually keep that remaining 10% for themselves, which I think is a pretty good indication that Unilever still has a lot of confidence in the new McCormick after this merger occurs. I believe McCormick management will be in place to run the business after the merger.

Now, as far as the performance, McCormick actually had been outperforming all of the other food stocks for quite a while until this merger announcement hit. To some degree, I think a lot of shareholders probably that have been invested in McCormick for a long period of time that were very comfortable with the company really just being the spices business might not necessarily like the shift in this product portfolio and what it’s going to look like after the merger. We might have seen some of those long-term shareholders exit. And to some degree too, I think now because they’re going to be this much larger food company with other businesses other than just spices, now it’s being pulled down just like all the other food stocks are continuing to get pulled down as well. As far as our fair value, it does incorporate our forecasts of the combined company.

Our analyst, Erin, thinks that the deal makes good strategic sense, and she also thinks that the mix shift and the synergies here are going to allow that combined company to be able to expand margins over the longer term. Unfortunately, I think that until that merger closes, it’s just harder for individual investors and advisors really to assess their performance because now the valuation isn’t dependent solely on the numbers coming out of McCormick, but you also have to have some assessment of the performance of Unilever’s food business as well.

There is one bit of good news, though. McCormick did state that after the combination of the companies, they still expect to maintain that commitment to the dividend payments that they’ve been making, that consistent history over time of increasing those dividends. Now, in the short term, it may not increase as fast as they’ve increased them in the past. They are going to use some of the free cash flow in the short term to pay off some of the debt they’re going to take on in order to make the acquisition. But I still like this one from that long-term consistent dividend payment point of view for people looking for that for their portfolio.

Earnings Recaps: COST, DRI

Dziubinski: All right. Well, let’s pivot over to some new research from companies we talked about last week. We’re going to start with where I spent my Saturday, and that’s Costco. Costco COST released earnings last week. Results looked good. Walk us through them.

Sekera: I’m sure, just like the Sekera household, anytime you go to Costco, you always spend a lot more money than you think you’re going to spend before you go in there.

Dziubinski: Hence, those good earnings.

Sekera: Exactly. I mean, the takeaway here is strong fundamentals. Again, we think of the company very highly, but we do think the stock is overvalued. Now, when you think about Costco, I mean, most of the clients for Costco do skew toward higher-income types of households. As they noted in the conference call, they’re still exhibiting very strong buying behavior from the households that are their clients. They also noted a lot of discretionary areas like electronics, health and beauty; a lot of those more, not only discretionary, but also higher-margin items are doing very well. And they also specifically said that they’re not seeing any what they call value-seeking behavior out of desperation. The other part that’s really a good tailwind for this company is that they noted that younger consumers are becoming a bigger portion of their business overall. Of course, the earlier you capture those consumers, the longer tailwind you have of those consumers shopping at Costco.

Numbers, very strong numbers. Revenue up over 11%, same-store sales growth, almost 7%, foot traffic up over 3%, got a little bit of margin expansion, so that was able to bring earnings up 15%. I think our analyst noted that we’ll probably end up bumping up our value by a couple of percent, but even after that, it’s still a 2-star-rated stock, trades over 20% premium. When I go through our investment thesis here and compare that to what the market is pricing in, I think the biggest difference between our fair value and the market is going to be what we forecast for operating margins.

Over the next decade, I think we have an average of 4.4%, and we have that increasing—I think it was like 3.9% is our forecast for 2026—going up all the way to 4.9% in 2035. But to get to what the market is implying today, where it’s trading at, I think you’d have to have an operating margin of 5.5%, which we think is probably just overly optimistic. As a point of reference, over the past decade, the operating margin was 3.4%. So, you really have to believe in, not only to get to our valuation, strong margin growth, getting the new highs, but the market’s looking for it to get even much higher than it’s ever been in the past.

Dziubinski: All right. Well, Darden Restaurants DRI, we also talked about last week. The stock pulled back a bit after the company reported earnings and some slower growth at Olive Garden, yet Morningstar raised its fair value estimate by a few dollars to $163 per share. What were your takeaways from the report for the company specifically, and then was there anything about the consumer more broadly that you took away from it?

Sekera: One of the big reasons I really like reading through the transcript from Darden is because I think it really does give you a really good broad stroke into what’s going on with a lot of different income levels for consumers, whether it’s middle-income households all the way up to high-income households. In this case, consumer spending still remains especially resilient, but the company’s management did note that value does matter even more and more. Every operating segment did very well. I mean, they were all up if you look at same-store sales. So, yes, Olive Garden may have been a little disappointing. It was up 1%, but even then management noted that after the September quarter ended, it was actually even doing better than that. If you think about the upper-middle households looking for kind of value steakhouses, Longhorn, same-store sales up almost 7% and fine dining still holding in there up 1%.

In this case, even after our fair value bump, looking at the valuation as a long-term investor, we still think it’s too high. Trades at a 23% premium. It’s a 2-star-rated stock. When you look through our forecast, they seem pretty reasonable to me. As far as our five-year revenue compound annual growth rate, it’s a combination of 2.4% for comp store sales growth, essentially inflation going forward, and then looking for another 3% unit growth on top of that. Our compound annual growth rate for the next five years is 7.4%, yet the stock trades at an 18 times PE multiple. That’s not necessarily way out there, but for what I would call probably an established restaurant chain, one that’s not necessarily in that real high growth ramp-up stage, that’s a pretty full multiple. think the market really has to be looking for much stronger long-term earnings growth than what we’re currently forecasting.

Stock Pick Updates: LEN & BKR.B

Dziubinski: All right. My son was at Olive Garden on Friday night, and he was enjoying the bottomless pasta. So, there’s something to the value story there.

Anyway, let’s move on. Let’s talk a little bit about Lennar, which was one of your recent stock picks. Stock was up 7% last week after regulatory filings revealed that Berkshire Hathaway BRK.B had increased its stake in the company to close to 10%. Remind us, Dave, why you like Lennar LEN and whether it’s still attractive after that good news and runup last week.

Sekera: Of course, anytime the Berkshire is taking a larger position in a stocky loan, I mean, that’s always really a good positive indication. And of course, when you think about Berkshire, they have a lot of dry powder that they can put to work. In this case, I’m hoping that maybe this is trying to put in kind of a floor in the stock price. And of course, also when you think about Berkshire, they’re not afraid of buying out an entire company if they think it’s cheap enough.

Now in this case, I think they got up to, was it 9.9%? So, you do have Securities and Exchange Commission reporting differentials. From this point, they might’ve bought as much as they can from maybe a public shareholder point of view. They don’t want to be considered probably insiders. But then again, if that stock were to trade down that much more from here and they already own 9.9%, who knows? Maybe they take a run at the overall company and merge that in with some of their other housing investments.

But having said all that, from a fundamental point of view, it doesn’t change anything, but it still looks attractive. It’s a 4-star-rated stock, 32% discount. But I still think, from an investor point of view, this isn’t a stock you really own as a long-term investor, which I know that’s against what Warren Buffett says he likes to have a forever time period. I think this is more of one of those stocks that you rent versus own, especially for a company that we don’t rate with an economic moat.

And when I think about Lennar and I think about the housing market, I really think this is a leveraged play on interest rates. I think really for the stock to perform to the upside, you would need long-term interest rates to come down or at least stabilize and stop going up for the stock to work to the upside. I think once that happens, this is a stock you can rent and get that good leveraged movement on rates stabilizing or even better coming down and having mortgages come down.

Dziubinski: All right, let’s take a minute to talk about Berkshire because Berkshire’s actually been one of your picks in the past as well. The stock’s had its ups and downs this year and is essentially kind of flat from where it started the year. Do you think Berkshire is still an attractive stock to buy today?

Sekera: Well, I still think of Berkshire as probably being one of the ultimate value stocks out there. And as much as you and I, and pretty much the market likes to talk about the public stock portion of their portfolio overall, the greatest value of this company still lies in its portfolio of privately held businesses. As you mentioned, it’s pretty close to fair value, 3-star-rated stock. From our point of view, not necessarily enough margin of safety on a risk-adjusted basis to start a new position. But then again, if someone wants to start a position here, have a little bit of dry powder to dollar-cost average to the downside here, I also wouldn’t argue against it.

Our Take on Entertainment

Dziubinski: Got it. All right. Well, it is time for our question of the week. Now, as a reminder, if you have a question for us, you can send it to our inbox, which is themorningfilter@morningstar.com. All right, this week’s question comes from Carl. And Carl asks, “Dave, I’m hard-pressed to think of a time I’ve heard you talk about the entertainment industry. What do you think of the sector? Are there any stocks you’d recommend or recommend folks steer clear of?”

Sekera: All right. From an investing point of view, you should never let your own personal biases influence your investing. Having said all that, I’m a bit of a hypocrite here, and I have let my own personal bias in this case probably steer me away from recommending some of the stocks in this industry. The reason being I’m just not a big fan of the dynamics from an investing point of view of the entertainment industry. When you think about the entertainment industry, really over the past five to 10 years, there’s been a lot of changes in how entertainment is created, distributed, consumed, and monetized. Let’s just run through each of those real quickly.

From the creation point of view in this sector, you’ve always had very high costs and also the risk of having to generate enough new hits every year to be able to offset some of the things that are slowly tailing down and really offset a lot of the misses that you’re going to have every year as well. But now you also have to think about how artificial intelligence is going to impact content creation going forward. To some degree, I think it’s going to make it a lot easier for people to be able to create content at lower costs going forward. If anything else, I think there’s going to be much more competition for maybe smaller upstarts than what we’ve had in the past. And of course, lots of different platforms to put that content out on. And of course, with AI too, then you have the ability to make deepfakes, be able to create a lot of artificial intelligence content that we haven’t had in the past as well. Not necessarily sure how that’s going to impact the industry going forward.

How this content is distributed, I think to some degree the industry is still trying to figure out the right balance between having their own individual streaming platforms that they charge for, but still be able to have it on a lot of the bundling platforms like cable. What we’ve seen is the shift to streaming puts them in charge of their own content more and more, but it also has a lot higher cost to be able to distribute it, and it’s led to much thinner margins here in the short term.

As far as how content is consumed, if you have younger kids in your household, you’ll see there is a huge generational shift in how younger generations consume entertainment differently than what we’ve had in the past. I mean, a lot of my kids, they just don’t watch TV. And in fact, they spend their time on different platforms, whether it’s social media, watching TikTok, YouTube Shorts, Meta Reels, but a lot of things other than that traditional channel that you and I probably have spent more of our time on over the past couple of decades.

And then lastly, thinking about monetization and just thinking about how all this content is paid for is just under huge amounts of pressure as well. I mean, if you think about traditional TV ads, I don’t think they can really be worth all that much anymore. I mean, personally, the little bit of TV I watch, I’ll never watch them because we always record everything, and you’re able to skip through those traditional TV ads. And thinking about both traditional bundling and then now also the streaming platforms, each are getting squeezed because consumers are getting tapped out from either paying too much for cable because those rates keep going up and up. Or if you get rid of your cable and you’re trying to buy those individual platforms, it gets confusing because now you’ve got four or five different platforms that you’ve got to be able to scroll between to go and find something to watch. And you’re also kind of getting tired of having to pay all of those individual bills as well.

It all gets down to: I just don’t like those kind of macro dynamics from a long-term investing point of view until we see some substantial differences in how this entertainment industry really looks going forward from here.

Stock Pick: ALB

Dziubinski: All right. Well, Carl, thank you for your question. And it is now time for this week’s stock picks. Dave has brought us four stocks that are up a ton, but have more room to run. Your first pick this week, Dave, is Albemarle ALB. Tell us about it.

Sekera: Yeah, so Albemarle is a 4-star-rated stock, trades at a very healthy discount of 45%. It is a Very High Uncertainty stock, but it is one that we rate with a narrow moat based on its cost advantages.

Dziubinski: Now, stocks out more than 30% during the past 12 months. Why do you think this one has more room to run?

Sekera: Overall, I mean, this stock has always been kind of our go-to pick to play that long-term increase in demand in lithium. And in fact, this company owns two of the lowest-cost and highest-quality lithium production sites out there. Now overall, our investment thesis for lithium is we are looking for still kind of that long-term upward trend in demand.

For example, by 2030, we expect that about two-thirds of new global auto production is going to be electrified, whether it’s a hybrid or a battery electric vehicle. And when we look at the amount of lithium that’s currently being produced, and we model out the amount of lithium that we expect to come online based on new production sites that are under development, we still think the amount of lithium overall is going to be undersupplied. Of course, that will keep prices much higher than the cost of production. We also see some other new demand coming from the AI buildout boom, higher demand from utility-scale storage. I think that’s a good long-term tailwind here as well.

And then just running through some of the numbers for revenue, our five-year compound annual growth rate is 11%. We’re looking for good operating margin expansion over time. We’re looking for the company to do a little bit over 23% operating margin in 2026, expanding up to 31% in 2027. The stock, on a multiple basis, looks very attractive, looking for $13 per share in 2026. So it’s trading at, call it, 9 times 2026 earnings estimates, looking for $14.50 in earnings next year. It’s trading under 8 times next year’s earnings estimate. I think this one still has a lot of room, whether that’s from a multiple expansion point of view, maybe in the shorter term or over the longer term, looking for pretty strong earnings growth over the next five years.

Stock Pick: CNH

Dziubinski: All right. Well, CNH Industrial CNH is your next pick this week. Give us the highlights.

Sekera: CNH is a five-star rated stock at a 38% discount to fair value. Not much of a dividend yield. I think it’s a little bit under 1%. We rate the company with a Medium Uncertainty and a narrow economic moat, that narrow economic moat being based on switching costs and intangible assets.

Dziubinski: Now CNH’s stock is up quite a bit this year, I think about 43%. Why do you think this one has more upside ahead?

Sekera: Yeah, it’s been a pick a couple of times over the past two years. I think the most recent pick was on the July 27 episode of The Morning Filter. It’s up 30% since then. And when you think about what this company does, I mean, they’re very leveraged to the agricultural cycle. In this case, 80% of the revenue comes from agricultural equipment, the other 20% from construction. And of course, the construction equipment has a huge tailwind behind it from the AI buildout boom. But on the agriculture side, we’ve seen some big increases in corn prices, wheat, and soybean. These are up very significantly this year. I think we’re expecting more of that yet to come.

Now, this is a stock where it has slid over the past three years, but we think that we’re at pretty depressed earnings right now. We are looking for some normalization. We’re only looking for, call it, 50 cents a share here in 2026, but based on our forecast for top-line growth as well as some operating margin expansion, that gets to a dollar next year. On a forward PE basis, it’s trading at 22 times, yet we’re looking for a five-year compound annual growth rate of earnings to get all the way up to 32%. If you look at a PEG ratio, that price/earnings growth, it’s trading well under one. In this case, it’s only 0.7. Again, I think this one still has a lot of upside potential.

Stock Pick: APH

Dziubinski: All right. Amphenol APH is your next pick this week. Give us the key metrics on this one.

Sekera: Sure. Amphenol stock trades at a 16% discount from our long-term intrinsic valuation. Again, not much of a dividend yield, only six-tenths of a percent. We rate the company with a Medium Uncertainty, so with that Medium Uncertainty band, it is a 4-star-rated stock. We rate the company with a wide economic moat being based on its switching costs and intangible assets.

Dziubinski: Now, Amphenol’s stock is up about 41% since its lows in May. Why do you still like it?

Sekera: And I think it was a pick most recently on the May 11 episode of The Morning Filter. When I look at our valuations across a lot of the tech hardware space, Amphenol was really the last undervalued play on that commodity-oriented tech hardware. A lot of those other stocks, as we’ve talked about, had all skyrocketed way too high up. In this case, the company’s a global supplier of connectors, sensors, interconnect systems, and so forth. A lot of demand. It’s, in fact, the second-largest global market share for connectors, which, of course, you’re going to need a lot of connectors for all those data centers.

Taking a look at our top-line growth expectations, looking at our five-year compound annual growth rate, we’re modeling in 18.5%. For our five-year compound annual growth rate for earnings, we’re looking at over 23%, yet the stock’s trading at just under 25 times our 2026 earnings estimate. And based on our 2027 earnings estimate, it’s only trading at 20 times, yet we’re looking for some really strong growth over the next couple of years.

Stock Pick: BDX

Dziubinski: All right. And then your final stock pick is a name that we used to talk about a lot, it seems, and we haven’t actually talked about in a while, and that’s Becton Dickinson BDX. Give us the bird’s-eye view on it.

Sekera: So, the stock’s currently at an 18% discount, 2.3% dividend yield. We rate it with a Medium Uncertainty, so that’s enough to get it into 4-star territory. And we rate the company with a narrow economic moat based on its cost advantages and switching costs.

Dziubinski: Now, Becton’s stock is up about 30% from its lows in June. Why do you think this one has more room to run?

Sekera: And this is one, as you mentioned before, we have talked about it a number of times. I think it was a pick on the Sept. 22, 2025 episode of The Morning Filter. To some degree, the investment thesis now is still the same investment thesis that we had back then. And really, just that over time we’re looking for more normalized growth and margins. This, of course, was a company that had a lot of disruptions in its business from how the pandemic played out at the beginning of the pandemic, and then everyone bought too much forward, and then you kind of had to give back the next couple of years thereafter. We’re really just looking for the business here, which is life sciences and diagnostic equipment, to really stabilize and looking for the longer-term growth to come back. And in this case, I think that’s what we’re starting to see.

I think we’re going to start getting more investor confidence coming back in this name after the amount of volatility that it had the past couple of years. Running through the numbers here, third-quarter revenue is up a good, healthy 5.4%. In fact, management guided toward sales growth being at the higher end of its prior range, and they also raised the midpoint of their earnings guidance by 10 cents. The earnings guidance right now is $12.62 to $12.72 per share. If you use the midpoint of that, the stock’s only trading at 14.5 times. If you look at our guidance or our forecast here, we’re looking for a five-year compound annual growth rate for revenue of 3.9%. We’re looking for the operating margin to expand as it normalizes over time, and we get to a compound annual growth rate over the next five years of 22%. Based on that 14.5 times midpoint of the current guidance after it was just increased, I think it looks like a good value-oriented stock.

Dziubinski: All right. Well, Dave, that’s great. Thank you for your time this week. Viewers and listeners who’d 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 for The Morning Filter Podcast at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.