7 Stocks to Buy That Can Move the Market

Key Takeaways

• What today’s concentrated market undervaluation is telling investors and the risks to monitor
• Expectations for this week’s Fed meeting
• Whether cybersecurity stocks Palo Alto Networks PANW and Zscaler ZS look attractive after earnings
• Unpacking good and bad news from former stock picks Medtronic MDT, Campbell’s CPB, Amphenol APH, and Lululemon LULU
• What ADRs are and how they work
• Mega-cap stocks to buy that look undervalued

In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss whether the market is really undervalued and what risks investors need to keep on radar. They preview this week’s Fed meeting and some key earnings, too. Tune in to find out if cybersecurity’s Palo Alto Networks or Zscaler are buys after earnings, what to make of Ciena’s CIEN stock slump, and whether Medtronic and Amphenol remain stock picks after their recent rallies.

They answer a viewer question about the pros and cons of American Depositary Receipts as a way to invest internationally. The episode wraps up with seven undervalued mega-cap stocks to buy.

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

Transcript

Susan Dziubinski: Hello. 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 markets, what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.

Market Highlights

All right, well, good morning, Dave. You and I haven’t talked in a couple of weeks, so let’s start by talking a little bit about what’s standing out to you when it comes to recent market activity in September. What are some of your key takeaways?

David Sekera: Hey, good morning, Susan. Well, first of all, I just have to point out in our September market outlook, which was published on morningstar.com at the beginning of the month, we warned investors that the macrodynamics out there were starting to turn pretty ugly and, as such, to expect a volatile month this month. And unfortunately, that’s what we’re seeing playing out over the past couple weeks.

If you look at oil prices, unfortunately they’re continue to keep heading higher. Last I checked this morning, there were about 103 per barrel, so fill up your gas tank. Those prices, unfortunately, are going to keep crawling higher over the next couple of weeks. If you look at inflation, unfortunately, I think that’s still getting worse as well. If you look at the CPI and the PPI prints, I think both of those are indicating that inflation certainly isn’t getting any better. When you look at some of the underlying data, I think that’s actually still getting worse.

Taking a look at long-term interest rates, if you look at the 10-year US Treasury, that’s really still trying to hit that 5% handle. The question there will be when it hits that five handle, is there going to be enough buyers coming in in order to push that yield back down? Or once it hits five, is it going to stay above there? And I think that’s going to have a lot of impact on how things trade thereafter. We’ve got tightening monetary policy coming pretty quickly again.

Then looking at the individual stock action with a lot of the different AI sectors, we’re seeing some on-again, off-again action. A number of those like the tech hardware having been selling off really over the past couple of months, and some of the other leaders trying to gain but not necessarily really getting any footing yet.

Market Valuation & Risks

Dziubinski: Now for our audience, Dave mentioned his September stock market outlook, and we do have a link to that research in the show notes. And Dave, in your outlook, you also had some very interesting commentary about market valuations, maybe how they’re a little bit misleading today. So talk about that.

Sekera: I wouldn’t necessarily use the word “misleading,” but I think you need to understand what the market valuations are telling us today. Based on where the market is right now, we’re at about a 9% to 10% discount to fair value. Now, as a reminder, I think we look at fair value for the market differently than what you hear from a lot of other market strategists. Always seems to be most other market strategists start with this top-down approach. They have some way that they calculate what they think S&P 500 earnings are going to be for the year. They apply some sort of forward multiple to it, and it seems like they’re always telling you the market’s 9% to 10% undervalued compared to their target price, but really to me, that’s always been an exercise really more for goal seeking than it was necessarily true valuation.

Of course, here in the US, we cover over 700 stocks that trade on US exchanges. I mean, predominantly all the biggest of the large cap and even a high percentage of the mid-cap stocks out there. So what we do is we put together this bottom-up analysis. We put together a composite of the total market capitalization of all of those companies, and we divide into that the intrinsic valuation as determined by our equity analyst team on those same stocks, and that gets to that

Now at a 10% discount, that’s usually the area that I would start thinking about: This might be a good time to start overweighting US equities, but in this case, I really have to point out how the undervaluation is especially concentrated and why I’m not necessarily willing at this point to go to that overweight recommendation. If we look at all of the big mega-cap stocks, there’s seven of those right now that account for essentially the entire discount for the marketplace today. If you look at where those are trading versus our intrinsic valuation, those seven stocks being Nvidia NVDA, Alphabet GOOGL, Microsoft MSFT, Amazon AMZN, Broadcom AVGO, Meta META, and Tesla TSLA. And of course, each of those, to some way, shape, or form, is going to be a play on artificial intelligence, maybe slightly different ways that they’re play on AI, but still an AI play at the end of the day.

Now, if I take those stocks out of our fair value calculation, the rest of the market—pretty close to being at fair value today. And of course those mega-cap stocks also end up skewing a lot of the different sectors. So there are some sectors that appear more attractive than others, but it’s really because of how those mega-cap stocks skew those individual sectors. So in that case, I’m not even really looking at wanting to be overweight or underweight individual sectors so much because, unfortunately, it’s really a stock-pickers’ market. And so I think it’s one of these ones, where, and again, I always hate the term “stock-pickers’ market” because it’s always a stock-pickers’ market, but it is essentially that much more so today, with the market, once you take those seven stocks out, being much closer to fair value.

Dziubinski: You’re still recommending a market weight in equities. From your perspective then, Dave, what are the risks the stock investor is facing today or needs to have on radar today?

Sekera: The biggest risks to me are the macrodynamics. First of all, the United States 10-year, really trying to hit that 5% level. If it goes above five and stays there, I think that has a lot of implications, negative implications for the market. Specifically, once it gets that high, I think one, that’s just a psychological hurdle. Once it gets that high, I think that’s going to drive some negative market sentiment. But at the same point in time, you’ll get some investors, especially those investors that do asset liability, duration matching that might move out of equities into fixed income, pension funds, insurance companies, and so forth. You might also have some people reevaluate what the risk-free rate is in their discounted cash flow models. They might bump that up, and that, of course, would have a very negative impact on long-duration stocks, which are typically those growth stocks.

We have the Fed hiking. The adage, “Don’t fight the Fed,” so the Fed’s going to be hiking at least one, if not two, possibly even three times. Oil—still going the wrong way. When I look at the international economies, there’s really no one to bail out any potential weakness. Europe, I think, is pretty stagnant at best. From what I can see in China, I think the Chinese economy is probably weaker than what’s being reported. Some of the other risks that we’ve talked about out there, like Japanese government bonds and yen, looks like the interventions from the BOJ and the United States government have kept that under control. But again, I think you need to keep a close eye out on that.

And of course, the elephant in the room is US market is still just highly dependent on the continued spending and increase in spending on artificial intelligence, on the AI buildout boom. Any kind of hint of a slowing rate of spending, I think, is going to send a lot of those stocks down very quickly. And of course I sound like negative Nancy here, and I don’t want to sound like everything is really that negative, because again, if you look at the valuations, especially on a lot of those big stocks, we think they are undervalued. So really when I’m thinking about trading and investing, not really just for the latter part of this year, but going into 2027, I think what the market’s going to need to take that next leg up in order to move toward our intrinsic valuations is to start getting more comfort that spending on AI isn’t necessarily only going to be what the market’s already expecting for 2027, but that that growth continues into 2028. And once we get that comfort, then I think there’s still a lot more upside in those seven stocks that we talked about.

The Fed: Will They, or Won’t They?

Dziubinski: All right. Well, you said don’t fight the Fed, and looking to the week ahead, we do have the Fed meeting. Dave, how likely do you think we are to see a rate hike at this meeting or at meetings later this year? And again, what impact might that have on the market?

Sekera: If you take a look at the market-implied probability of a Fed hike this week, I mean, the market’s effectively pushing the Fed into having to hike this week. Honestly, I can’t see how the Fed doesn’t hike. Right now, the market-implied probability for a hike here at the September meeting is now 87%. I mean, that’s up from 60% just last week. It was only a 35% probability a month ago. That would end up taking the fed-funds rate to 3.75% to 4.00%, which in the grand scheme of things still isn’t really that tight of a monetary policy. If we look at the October probabilities, that’s now a 40% probability of another hike. So that would take the fed-funds rate to 4.00% to 4.25%. And now, taking a look at December, we now have a 27% probability of a third hike before year-end.

That wasn’t even on the radar a couple of weeks ago. So again, the market’s certainly pricing in at least, I think, not only next week’s hike, but I think there’s a pretty good chance we get at least one more. And if we had that third hike, that means that the fed-funds rate going out to the end of the year would be 4.25% to 4.50%.

Earnings on Radar

Dziubinski: All right. So in addition to the Fed meeting, what else do you have on radar this week? Any earnings reports?

Sekera: There’s a couple. It’s a pretty quiet week as far as earnings go. And honestly, with these two, I’m really just listening more for what they’re going to be talking about as far as whether or not there’s anything different from what they’re seeing from consumer behavior than I am necessarily really looking at anything to do in those stocks individually.

First one is going to be Carnival CCL. Of course, that’s the cruise line company. And this was a stock, I mean, it was a pick long, long ago. It was like one of our original pandemic plays coming out of the pandemic. Generally, it’s worked pretty well. I mean, it did go all the way up to 3 stars, but with oil rising, that stock has retreated a bit. It’s now back into 4-star territory, but again, really not interested in it as a stock pick right now, especially with oil prices going the wrong way. But I really want to hear from them whether or not they’re seeing any changes in consumer behavior, consumer spending. Of course, we’ve talked about for a while how consumer spending has changed, getting away from people buying stuff as much as they are spending now on experiences. So again, if there’s any change there, that could have some pretty significant implications.

And then the other one is Lennar LEN homebuilding. So really I’m just listening for an update on the new housing market. New-home sales, of course, have been pretty sluggish for a while. And unfortunately, I think if interest rates continue to keep going up, new-home sales aren’t going to get any better anytime soon. This is, of course, a stock that we talked about not that long ago as being like a stock to rent, not necessarily one that you’d want to own for the long term, but this is one of those ones that, at a low enough valuation, once you start to see a turnaround in the fundamentals, this is one that you could play to the upside. But again, I think you really need to see that performance and the fundamentals shift to the upside before you’d want to get involved in this stock.

PANW & ZS: Earnings Review

Dziubinski: All right. Well, let’s talk about some new research from Morningstar about companies that have been in the news since the last time you and I sat down and talked. And we’ll start with Palo Alto PANW Networks and Zscaler ZS. Both stocks were down after the companies reported earnings. What did Morningstar think of the reports? Were there any fair value changes, and does either stock look attractive today?

Sekera: Sure. And of course, you know me, I’m a big fan of the cybersecurity industry, but like anything else, a lot of these stocks like a Palo Alto have really run well to the upside and, in some cases, certainly deservedly so. So Palo Alto, very strong top-line growth, fourth-quarter revenue, their fiscal fourth quarter was up 34%. Unfortunately, their operating margin was unchanged at 30%. When you see that kind of top-line growth, I usually prefer to see some operating margin expansion, which we didn’t get here. Of course, it’s not necessarily enough for me to change my view on the stock and our valuation overall, but again, I think maybe the market might’ve been a little bit disappointed in that. Thematically, just the things that they were talking about, still seeing increase in demand in cybersecurity solutions from AI. Within the industry itself, still a lot of vendor consolidation going on. So I think that helps bolster the larger cybersecurity companies.

They specifically talked about growth in emerging products like agentic identity and security. Even their firewall business is doing well, that traditional firewall, again, still getting a lot of tailwind behind it because we have so much growth in data centers going on. We bumped up our fair value a little bit, up to 300 a share, but it is a 3-star-rated stock at that level. Sold off a little bit. Still a little bit above our fair value. I don’t necessarily think there’s a fundamental reason why the stock sold off. To some degree, I think it probably just got a bit overextended after an almost 80% rise year to date.

Turning to Zscaler, pretty similar story in that the top line was up 25%, but here, we did get that operating margin expansion by 200 basis points, up to 24%. Again, just talked a lot about the products focused on AI security solutions are what’s growing the fastest. In this case, we maintained our fair value at 250. Stock trades at a 35% discount to that fair value, so it’s well into 4-star territory. So I think what’s going on here, what we need to see is the management guidance here we think was relatively conservative. They’re only looking for ongoing growth of 17%. We think the company should be able to easily beat that number. So if we do get a couple of beats over the next couple of quarters, I think that’s what you would need to see for that stock to move up to our intrinsic valuation.

CIEN’s Selloff

Dziubinski: All right. Well, let’s stay focused on tech for a minute and talk about Ciena CIEN. Company put up strong results, but the stock was then down double digits after earnings. So why the disconnect there, do you think?

Sekera: So again, this is a tale of two cities between fundamentals and valuations. Fundamentally, we saw everything you’d want to see in this quarter to the upside. Revenue up 37%, operating margin expanded by almost 12%, and management still increased guidance from there. However, as you and I have talked about multiple times, I’m very concerned about the valuations of tech hardware stocks. We’ve been warning about these for quite a while. Most of them peaked, I don’t know, maybe in June‚ and they’ve all kind of rolled over. They’ve been falling ever since. I think this one’s down 45% from its peak, and yet it’s still above our fair value of 325 a share. So I just have to kind of walk through, when you think about these type of stocks, and Ciena in particular, what is our fair value based on in our model? And again, I don’t think that we’re being overly negative or overly conservative in our forecasts.

This company did just under $5 billion of revenue in 2025. We’re looking for them to do almost $12 billion of revenue by 2030. Last year, in 2025, operating margin was just over 4%. We’re looking for that to expand at almost 22% by 2030. And in the out years of our model, we have expansion even from thereafter. So again, I don’t think that we’re being very negative on the fundamentals. I think it’s just a matter of the market traded way too far to the upside. I mean, the stock still trades at 58 times 2026 earnings, trades at 32 times 2027 earnings, which—that’s just way too rich for my blood.

MDT’s Healthy Report

Dziubinski: All right. Well, let’s talk about a few of your former stock picks that have reported during the past couple of weeks. We’ll start with Medtronic MDT. Company put up some good results. Morningstar held its fair value estimate at $112, and the stock has really come off nicely off its lows this year. So sort of update us on this one and whether it’s still a pick.

Sekera: Yeah, still a pick, still a 4-star-rated stock, almost a 20% discount to fair value, slightly over 3% dividend yield. So it looks good from all those point of views. And what I like here is that we’re finally starting to see the fundamentals improve like we’ve been expecting for a while. So there’s really a strong start. This is the beginning of their fiscal year for 2027. Our analysts noted that they’ve started commercializing several key technologies that had been under development. We’re starting to see the results flow through their financial statements, things like cardiac products and acute care monitoring categories. Both of those were up double digits, and I think those are what we’re expecting really to propel growth from here.

In our model, we’re forecasting revenue growth in 2027 of 7.5%. Over the next five years, we’re looking for compound annual growth rate and earnings of about 9% overall, yet the stock’s only trading at 15 times our 2027 earnings estimate. I think there’s also several products in testing here that if those end up getting approved and once they roll out, I think we could even see some greater earnings growth than what we’re currently modeling in.

CPB Serves Up Bad News

Dziubinski: Campbell’s CPB was a pick of yours, I think last year. Stock was down 7% after earnings, and it was really just a bowlful of bad news on this earnings call for our investors. Hey, you use Tale of Two Cities and Negative Nancy, so I get to throw a couple in occasionally. Anyway, it was just a lot of bad news, falling sales and margin, weak outlook, and, of course, that dividend cut. Morningstar reduced its fair value estimate on the stock to $41.50. What’s your take on Campbell’s today, Dave?

Sekera: This is just one where, unfortunately, we’ve been long and wrong on this stock pick. Now this is one that from its 2022 pick to the first time that we came out with it as being a new stock pick, it already dropped 33%, which typically for a consumer defensive name is a pretty big fall. And so I thought that was a pretty good entry point. But like you said, results here not only were pretty ugly this quarter, they’ve been pretty ugly for quite a while, and this trend isn’t necessarily what you want to see.

I talked about with Ciena, it’s kind of like everything you want to see in earnings results—this is one I would say it was kind of everything you don’t want to see. Organic sales down 1%, and again, just taking a look at some of their business lines, like the snacks business itself was down 6%. Unfortunately it looks like the GLP-1s are still putting a lot of fundamental pressure in the snacking business and that of course is the higher margin and was the higher growth part of their business and still going the wrong way.

Overall, the margin contracted 250 basis points. Inflation—still outpacing the pricing that they’re able to put through, outpacing the cost savings that they’ve been able to get. So when you look forward on this one, we’re now forecasting a sales decline of 2% to 4% in 2027 and more margin contraction. And in this case, too, the company thought that things were getting tough enough that they had to cut their dividend in order to try and preserve cash and protect their balance sheet at this point in time. For the most part, when the stock had been a pick, the fair value had been holding pretty steady, but in this case, we updated our model, and we just cut our fair value by 25% to 41.50.

So where does that leave us today? The stock’s still trading at a huge discount to our long-term intrinsic valuation, trades at a 50% discount. That’s more than enough to put it in 5-star territory, but what do you want to do with the stock today is a different call based on whether or not I think you’re involved. So if you’re not involved in this stock, it still looks really undervalued. I think it’s just a matter of you need to see those fundamentals really kind of bottom out and start turning upward for the market to get that confidence back that you’ll start getting toward more-normalized long-term historical operating results. Until then, the stock might stagnate for a while. So if this is one that you’ve bought into, I think you need to take a good look at it and think whether or not this might be a good time to take a loss on it in order to offset capital gains you might have elsewhere in your portfolio.

It’s one that if you wanted to, you could take that tax loss now. And again, you have to wait a certain number of days from when you bought it to when you sold it and when you can buy it back again to make sure it’s not considered a wash-sale rule, but you can take the tax loss on it now and either, one, you can repurchase it at some point in time in the future if you want, or take a look at the other food names. Maybe this is one where you sell it, take that tax loss, and reinvest in a different food name like maybe at Kraft Heinz KHC.

APH: Still a Buy Postsplit

Dziubinski: Now another former pick of yours, Amphenol APH, was a pick on the May 11 episode of The Morning Filter. Stock’s up 37% since then, and the stock also underwent a stock split earlier this month. Morningstar’s fair value estimate on the stock after the split is $100. So do you still like the stock after the split and after the runup?

Sekera: Well, I wish I could take credit for this one, but no, this is really a good call by Will Kerwin. He’s the equity analyst that follows this name. And in fact, when I had recommended it on the podcast, he had specifically highlighted this one as really kind of the last of the undervalued tech hardware stocks. And as you noted, it’s done pretty well since then. Overall, like anything else, anytime you have a stock split, it doesn’t change really the long-term intrinsic valuation of the company overall. All it does is just change the share count and the per value per share, but it does look like there is some juice left here. Maybe with the stock split, it gives a little bit of positive market sentiment to the name. But at this point, it’s not nearly as much upside as when we’d first recommended it.

After the rally in the stock last Friday, it’s only at a 16% discount, still well into 4-star territory. We rate the stock with a medium uncertainty, so it has to get all the way up to a 10% discount before it start moving into that 3-star range. But this has been a pretty volatile stock. Generally, it has been up and to the right since we recommended it. And maybe you’d want to let this one run a little bit. Still seems like it has some upward momentum, but once it gets into that 3-star territory, it’s probably a really good time to take at least some of the profit.

More Weakness from LULU

Dziubinski: All right. Now, Lululemon LULU stock fell 17% after the company reported weak results and reduced its guidance. Morningstar also brought down its fair value estimate on the stock to $255 from $280. Now, this one was a pick back in October of last year and then again in March. So what do you think of it today?

Sekera: I don’t know, Susan. I mean, between what’s going on with the food stocks, all of the athletic apparel stocks, looking at the sports equipment stocks, sports retailers, I mean, has everyone just stopped eating and working out at this point? I don’t know, but all of these stocks, I mean, to some degree, have all still been on a very negative trend for quite a while in particular. Yeah. I mean, the trading on this one is just a bloodbath after earnings. I think this is also another one, even though it may look undervalued today, I think within your own portfolio, this might be a good candidate for tax-loss selling and then either reinvest back into a different athletic leisure type of company or one of the other ones that we’ve talked about before. Or of course you have to wait a certain amount of time after the sale so that wash-sale rules expire.

But in this case, the results really just were awful. I mean, second-quarter revenue is down 4%. It was down 8% in Americas, and of course, that’s where their greatest sales occur. Offset by 4% increase internationally, so a little glimmer of hope there, but certainly not enough in order to turn around the fundamentals here. If you exclude the tariff refunds, I think the operating margin here contracted by 750 basis points. I just want to walk through what our analyst forecasts are here so that way our viewers and listeners can understand how we’re getting to our fair value and what you have to believe today if you’re going to invest in the stock.

At this point, we are looking for a 6% contraction in the top line for 2026, looking for a little bit of recovery in 2027 for the top line to increase by 1.2%, and then getting back toward more historical type of growth, 5.5% in 2028 and about 5.0% in 2029 and 2030. We’re looking for operating margin contraction to 14.6% in 2026. To put that in perspective, the company did 19.9% last year, so that’s a pretty strong contraction. We’re looking for it to bounce a little bit in 2027, getting up to 15.1%, and then recovering back toward that 19.8% in 2028. And in fact, our analyst then has that still continuing to expand, getting up to 22% by 2030, which should put it really in line with the long-term historical average that they’ve had.

As far as earnings, we’re looking for them to bottom out this year at 9.66 per share, recovering to 10.56 in 2027. So based on that, we’re looking at a fair value of 255 per share, whereas the market price right now, I think is just under $100, so it’s trading at over a 60% discount to fair value. So again, 5-star rated stock, huge discount, but all based on really the company’s fundamentals bottoming out this year, starting to improve next year, and then by 2028, getting back toward more of those normalized historical operating margins.

If you look at where the stock is right now, it’s trading at 10 times our 2026 earnings estimate. So that tells me the market is actually looking for something quite different than what our analyst is forecasting the market is pricing in, further earnings contraction in 2027, not looking for any real recovery until multiple years out. At that point, I think this is one where you have to really gauge your own view on where you think this company’s going over the next couple years to determine whether or not you think the stock is a buy at today’s price.

A Primer on ADRs

Dziubinski: All right. Well, it’s time for our question of the week. As a reminder, if you have a question for Dave, you can reach us at our email address, which is themorningfilter@morningstar.com. Now, this week’s question is from Duncan. Duncan is a longtime Morningstar subscriber, so Duncan, thank you for that. He’d like some information about ADRs, Dave, how they work, how their fees work, and what are the pros and cons of investing in them.

Sekera: All right, so ADRs stands for American Depository Receipts. So essentially what this is is a certificate that represents the beneficial ownership of stock in a foreign company; in this case, the foreign stock is actually held by a custodian bank, and then you are buying and selling these certificates that represent your proportional amount of that stock. So in this case, a great example would be Taiwan Semiconductor, ticker TSM, which, by the way, is a stock we’ve also recommended a number of times in the past. And again, because the way that these are held, you’re able to get that equity interest in that foreign company without having to try and buy those shares on a foreign-listed exchange. So in this case, allows you investors to be able to buy and sell these foreign stocks on US exchanges and also be able to do it in US dollars.

The only caution I would really have here is you also have to make sure when you look at these ADRs, what they represent, sometimes it’s not necessarily a one/one ratio of one ADR/one underlying foreign stock. So, for example, sometimes one ADR might be 10 shares of the underlying stocks. So just make sure that you understand if there is a conversion there.

I think part of the question they asked about like what the fees were, so I think you have to realize fees for ADRs are different than for mutual funds. In this case, the ADRs are really just to cover servicing costs. They’re very low, typically like one to five cents per share. So it’s different than when you think about the management fee of an ETF or a mutual fund.

Thinking through some of the pros and cons here: The pros side being they’re very easy to trade, they’re exchange-listed, they’re not over-the-counter, you’re not trying to buy these as foreign shares like on pink sheets or anything like that. They trade in US dollars, and then I believe most of them have to follow SEC reporting requirements as well. So you’re going to get much better transparency on the results than for foreign companies that don’t have to report according to SEC guidelines. I think some of the cons here: You are exposed more to foreign-exchange risk because the stock is traded on foreign exchanges, at whatever their local currency are. And honestly, I’m not sure how voting rights are managed. I don’t know if you get those voting rights in ADRs or not. So if that’s something that’s of concern to you, you’d need to do some more due diligence on the specific ADR that you’re looking to invest in.

Stock Pick: NVDA

Dziubinski: It is time for Dave’s stock picks of the week. This week, Dave’s picks are those seven undervalued mega-cap stocks that he referred to at the top of the show. We’ve talked about most of these stocks before, but we’re still going to go through each of them one by one, starting with Nvidia. Give us the highlights.

Sekera: So Nvidia is a 4-star-rated stock, trades at a 30% discount, not much of a dividend, only a half of a percent yield. We rate the company with a Very High Uncertainty, but we do assign a wide economic moat based on switching costs and intangible assets.

Dziubinski: Now, Dave, walk us through Morningstar’s expectations for Nvidia because the market seems to be a little bit more bearish on the stock than we are.

Sekera: I think this is going to be the same story that you’re going to hear on a lot of the AI stocks. I think the market is definitely giving the company for the amount of growth that they’re projecting here in the short term for the rest of the year and even for 2027. But as you noted, I think the market is very leery of giving the company the credit for 2028 and thereafter.

So taking a look at our forecast for fiscal-year 2027, which is what we’re in right now, we’re looking for revenue to be a little bit above 400 billion. That’s a 74% growth rate. We’re looking for earnings of almost $9.50 a share. That would be up almost 100% versus last year. And that puts the stock right now at 23 times, which is not necessarily a very expensive multiple.

In this case, we are looking for that ongoing growth in 2028. We’re looking for revenue of a little bit over 700 billion. That’d be another 70% increase in the top line, little bit of operating margin expansion. We’re looking for earnings to grow 76% to 16.61 per share. And then from there we do dial our expectations back a bit. So in fiscal 2029, we reduce our growth rate to 15%, and we continue to step it down from there. But in this case, I don’t think the market’s giving them really any credit for 2028. If they get anywhere near our earnings projection for 2028, stock’s only trading at 13 times 2028 earnings. And I think that’s just indicative of the market not giving credit for that high growth past 2027, not only for Nvidia, but a lot of these other AI stocks.

Stock Pick: GOOGL

Dziubinski: All right. Well, Alphabet is your next undervalued mega-cap stock pick. So share some of the key metrics on this one.

Sekera: Alphabet is a 4-star-rated stock, trading at a 22% discount from our fair value. Again, like all of these, not much of a dividend yield. If you’re a dividend investor, it might not be for you. It’s only a quarter of a percent dividend. We rate the company with a Medium Uncertainty. We assign it a wide economic moat. And in this case, I just have to point out four of the five moat sources are evident here, that being cost advantage, network effect, switching costs, and intangible assets.

Dziubinski: Walk through Morningstar’s thesis on Alphabet. Specifically, what does Morningstar think investors should really be focused on when it comes to this company?

Sekera: I mean, just big picture, one of the things our equity analyst has really talked about when he talks about Alphabet as being a pick, it’s probably one of the best-positioned companies as far as AI goes. And he’s noted that they really have what he calls the full stack of exposure to AI. When you think about it, you have Google Cloud, that’s their hyperscaler part of their division. They have Gemini, that’s their own AI service. We’ve been seeing that Gemini’s actually been increasing the value of their search. They design a lot of their own AI semiconductors and are now selling these semiconductors to other companies as well.

And of course, you have YouTube, and AI has been helping them improve their ad targeting, which of course, then in turn, increasing the economic value to advertisers of advertising on the YouTube channel. So they really have a lot of ways of being able to benefit from AI, depending on how AI develops anywhere over the next couple of quarters to next couple of years. Short story as far as our model here: We’re forecasting 24% revenue growth in 2027, 18% in 2028. Our five-year compound annual growth rate for earnings is 20%. Only trades at 21 times 2027 earnings, only 18 times 2028 earnings. So maybe not necessarily a screaming pound-the-table buy, but at those type of valuations for that type of long-term growth, very attractive in our mind.

Stock Pick: AVGO

Dziubinski: Your next big stock pick is Broadcom, and I think this is the most undervalued one of the bunch that we’re talking about today. So give us the highlights on it.

Sekera: Yeah. Broadcom, one of the very few 5-star-rated stocks out there, almost a 45% discount to our long-term intrinsic valuation, seven-tenths of a dividend yield. Now, of course, it’s a tech stock. We rate it with a High Uncertainty, but we do have a wide economic moat rating based on switching costs and intangible assets.

Dziubinski: Broadcom recently reported earnings. The stock pulled back a bit afterward. Morningstar held its fair value estimate at $650. So talk a little bit about earnings specifically and then what Morningstar’s expectations are for Broadcom.

Sekera: Well, and I just have to reiterate what you said before: I mean, not only is this really one of the most undervalued stocks here, but when I look across all of our AI plays, this is pretty much the most undervalued one altogether and probably the one that I think we have the most differentiated view from the marketplace. Now, interestingly, the stock did sell off after earnings. We maintained our fair value at 650 per share.

In my mind, it was a strong quarter, strong guidance. We just think the market’s probably overconcerned about Alphabet multisourcing TPUs from other vendors. The market’s really concerned whether or not that’s going to erode Broadcom’s business over time, but that’s not what we see. If you look at the specific TPUs that Broadcom is manufacturing for Alphabet, these are much higher volume than what they’re outsourcing to others. And even more importantly, they’re a higher complexity than what’s being outsourced to others. So again, a lot of other people don’t necessarily have the technology to be able to manufacture those high-complexity chips yet.

So again, we still think that that is really much more about multisourcing than it is about trying to replace. In this case, using management guidance, our forecast is for 67% in revenue growth for 2027 and 2028. Our five-year compound annual growth rate for revenue and earnings are 46% and 53%, respectively. So huge growth rates here, based on our 2027 earnings expectation for 2027 of 18.85 per share trades at 19 times. We’re looking at $30 in earnings in 2028, only trading at 12 times. So if this company performs anywhere near what our forecasts are, trading at some very low market multiples today.

Stock Pick: MSFT

Dziubinski: Your next pick is a name we’ve talked about a lot, and it’s Microsoft. So I would think we all have the key data points memorized by now, Dave, but anyway, give them to us anyway.

Sekera: Well, not memorized because it has moved up into 4-star territory. I’m pretty sure it was a 5-star toward its bottom. At this point, still at a 17% discount even though we’ve gotten a pretty good recovery off the stock. Not much of a dividend yield, less than 1%. I think it’s about seven-tenths of a percent. Medium Uncertainty, wide economic moat, that moat being based on its cost advantage, network effect, and switching costs.

Dziubinski: Now, as you alluded to, Microsoft really got hammered earlier this year with a lot of the other software stocks, but as you also mentioned, it’s really bounced back pretty nicely. It’s up 40% from its lows in June. Talk about what’s been going on with Microsoft and why you still like it after the runup.

Sekera: I think this one gets back to our broader investment thesis on a lot of these software stocks—that the death of software had been greatly exaggerated by AI. And in this case, when you look at Microsoft, our investment thesis here is not only do they have that strong software business, but if you look at their portfolio of businesses overall, that they pretty naturally balance one another out depending on how AI evolves over next couple quarters, next couple of years.

So on the one extreme, if we’re wrong and AI really does hammer the software portion of the business, that probably means that its cloud-hosting business, Azure, their other AI businesses like Copilot, will probably have even stronger than expected revenue and earnings growth. So that would naturally offset what you could see happen on the software side. Conversely, let’s just say AI is kind of a fizzle and it’s not the catalyst everyone expects it to be, and you have growth slowing in Azure, in that case, their traditional business lines will be more than enough to offset the slowing and the growth there. So we like that natural balance between different parts of the portfolio.

As far as our model here, we’re looking for five-year compound annual growth rate of 15%. Trades at 25 times our 2026 earnings estimate, only 20 times our 2027 earnings estimate. And if you look at the long-term averages of the multiple range that it’s traded at, this is kind of bouncing around the bottom of that range. So I think the market—starting to give the company some better credit for their earnings growth over time. We still think the stock has further to run to the upside.

Stock Pick: META

Dziubinski: All right. Your next mega stock pick is a name, I don’t think has been a pick in a while, and it’s Meta Platforms, so run through the numbers on it.

Sekera: Sure. Meta is a 4-star-rated stock at a 24% discount, only three-tenths of a percent dividend yield. We rate the company with a High Uncertainty. We assign it a wide economic moat, that wide moat being based on the network effect and intangible assets.

Dziubinski: Now the stock was up a little bit last week after Meta announced the launch of its personal AI assistant, Muse. What’s Morningstar think of that news and of Meta today?

Sekera: I actually had to look up and find out what Muse actually is. I hadn’t personally heard of this one. According to our equity analyst, Muse is a personal AI agent that can interact with the digital world and help users complete real world tasks such as booking travel, making purchases, and managing communications.

I think, more importantly, when we think about Muse than necessarily what it does in and of itself, but our analyst thinks that this is a good indication of the progress that Meta is making in utilizing AI to create economic value for its customers. And in fact, in this case, our analyst thinks that Muse is an upgrade compared to a lot of the other personal agents out there like Gemini Spark. So looks pretty good as far as that goes. My understanding is that you get a free intro version, introductory version, if you want to try using it. You can pay more for additional tokens. So there are step-ups to a $20 and $100 per month pricing programs.

But I think, again, the real value in this one is showing what it can do and how it can utilize AI, more than necessarily the amount of money that they’re going to make off of it, off just those subscription businesses. And then lastly, our analysts also noted, too, that we’ve got an impending launch of what they call “watermelon,” which will be its frontier AI model. And you think that’s just more proof of the monetization thesis that he has for Meta and its stock.

Stock Pick: AMZN

Dziubinski: Amazon’s your next pick. This one’s been a pick a few times in the past. Tell us about it.

Sekera: Yeah. And it’s also one that doesn’t really trade at a 4-star rating all that often. So when it does dip into that 4-star territory is usually when we try and highlight it. Currently trades at a 14% discount, not appropriate if you’re a dividend investor. They still don’t pay a dividend, but of course, that’s just because they’re spending all their free cash flow and then some in order to build out their business, which really has been the long-term way this company has been run anyway. Medium Uncertainty, wide economic moat. And in fact, in this case, four of five moat sources are evident here: being cost advantage, network effect, switching costs, and intangible assets.

Dziubinski: Dave, walk us through Morningstar’s case for our fair value estimate on Amazon, which is $300.

Sekera: I really think that, in this case, we’re looking at Amazon as being a long-term beneficiary, being able to utilize AI within all other large market segments, and in fact, not only be able to use it themselves, but they’re also having their own cloud-hosting business with AWS. So in this case, when you look at the fundamentals, in our view, the company is still just continuing to hit on all cylinders. AWS is one of the largest hyperscalers. We’re looking for over 30% growth for multiple years in a row, very large total addressable market that they’re capturing there. We’re looking for AI to improve their retail business, whether it’s targeting for advertising, whether it’s targeting individual on sales or just the logistics portion of their business. We’re expecting improved operating margins. And of course, it’s such a low-margin business that any expansion to operating margin there just drops right to the bottom line.

We think their advertising business is especially valuable. We’re still seeing growth in their different subscription businesses. So I think the reason that it’s a 4-star stock today is because of the concern in the marketplace about how much they are spending on capital expenditures in artificial intelligence. We think that they will be able to monetize that capex spending over time. As far as our model goes, on a five-year compound annual growth rate, we’re looking for 13% revenue growth. Little bit of operating margin expansion gets them to 15% earnings growth over the next five years. Stock’s only trading at 20 times our 2026 earnings estimate.

Stock Pick: TSLA

Dziubinski: And then your last mega-cap stock pick this week is Tesla. Tesla was actually one of your very first stock picks from our first episode of The Morning Filter back in January of 2023. So what stands out here?

Sekera: Well, first of all, I have to note this one actually just dropped into, I guess it rose into, 3-star territory from 4-star territory. Currently trades at a 19% discount, no dividend yield. And we, of course, rate this one at a Very High Uncertainty because, a lot of the business lines, while we do have our base-case estimates, are business lines that you have to expect very high growth rates on products that may not necessarily even be, while they’re under development, not necessarily being sold yet. We rate this one with a narrow economic moat based on the cost advantage and intangible assets.

Dziubinski: Now, we’ve talked in the past about stocks—you’ve talked about stocks to rent versus stocks to own. So given that Very High Uncertainty that you mentioned when it comes to Tesla, is Tesla really one of those stocks to rent?

Sekera: I think it can be both, and I think it’s really just going to depend on the individual preference of the investor and whether or not I call them a “true believer” in Elon Musk. So from that point of view of whether or not this is a stock to rent, this is certainly one where it’s traded enough like a pendulum, where it’s shot way too far to the upside when you want to be taking profits, and then sells off too far to the downside, so then you can buy it after the selloff, waiting for that recovery, and then go ahead and sell it. But I also think that this is one, if you want to have that long-term core holding, and as long as you keep some dry powder with that core holding, it’s one where you’ve certainly had multiple opportunities over multiple years to be able to dollar-cost average into the downside when it sells off too far and then be able to take profit to the upside and get back to that market weight after you’ve gone to overweight. I think this one is really going to be much more personal preference and going to be based on maybe your own view as far as what Elon may or may not be able to do in the future.

Dziubinski: All right. Well, thank you for your time this week, Dave. Viewers and listeners who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. We hope you’ll join us next Monday for The Morning Filter Podcast at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this video and subscribe. Have a great week.