5 Stocks to Buy After Earnings

Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services Chief US Market Strategist Dave Sekera about what investors should have on their radars this week, some new Morningstar research, and a few stock picks or pans for the week ahead. So, Dave, welcome back after your long break.

We saw a lot of action in the market in August while you were away, with the markets pulling back quite a bit earlier in the month and then staging a comeback since. So let’s do a quick review of the recent market activity and your take on it.

David Sekera: Hey, good morning, Susan. It’s good to be back. So actually, if you remember back in mid-July, we had noted that the market was starting to become overvalued and overextended. The market began to retreat slightly in the second half of July, but we had that really sharp decline in early August. In our view, it looks like that was prompted by worse than expected jobs data that then heightened fears of a potential recession coming up.

And that was also in conjunction with some weaker than expected data that we saw out of Europe and China. So people thought that things were starting to slow there as well. So on Aug. 5, I did publish an article and it’s titled “Don’t Panic, It’s Not 2022 All Over Again.” And in that article, I walk through what’s different now versus 2022 when we actually recommended to underweight equities going into that year.

So really the gist of this article is really doing a comparison of now versus then. So back then, the market was overvalued at the beginning of 2022. And at that point in time we noted there were four headwinds that the market was going to have to contend with back then. We were projecting inflation to start increasing.

We’re looking at our forecasts for long-term interest rates to start going up. We expected the Fed to start tightening monetary policy. And we were projecting the economy to soften. Now today, when I look at those same four headwinds, three of them are actually now tailwinds. We expect inflation to continue to keep moderating. We expect interest rates, specifically long-term interest rates, to fall over the course of this year and actually the next couple of years.

And we’re looking for the Fed to start loosening monetary policy. So really at this point, only the softening economy is really a headwind for the markets at this point. And I think that’s probably pretty well priced in already.

Dziubinski: So Dave, what does this mean for investors? Since that article, the market has sort of come back quite a bit. Are stocks back to being overvalued? And what are you thinking in terms of what market performance could look like ahead?

Sekera: Well since that article was published the market has rebounded about 9%. So right now that puts us about 3% to 4% over a composite of our fair values. So not necessarily what we consider to be overvalued at this point in time, but it’s really getting to be close to the top of the range that we consider to be fair value as compared to that composite.

So for most investors, I would still stay at your targeted allocation to stocks. In the short term, I don’t necessarily see any specific catalyst over probably the next month and a half or so that could cause any real selloff. In fact, we do have the Fed meeting coming up on the 17th and 18th.

That’s when we do expect the Fed to start loosening monetary policy. They’re beginning to cut the fed-funds rate. So really I think the next potential for downward volatility probably isn’t until mid-October. That’s when companies will start to begin to report earnings, provide guidance for the fourth quarter. Now there could be some disappointments there as the economy slows.

If the economy is slowing further and faster than we expect, we could see people bring their guidance down. Plus, at that same point in time, we might have some traders looking to take some risk off the table as we head into the elections.

Dziubinski: All right. So now let’s get to what’s on your radar this week ahead of the long Labor Day weekend. The first is the PCE figure. Now, given the mild CPI number we saw earlier this month, the market’s expecting an equally pleasing PCE, right?

Sekera: Yeah that’s correct. And in fact we also to continue to expect that inflation will moderate over the rest of this year and going into next year. So looking at the consensus numbers, for this week, the headline PCE number, that consensus is 2/10 of a percent increase on a month-over-month basis. On a year-over-year basis, that would put us at 2.5%. And for the core, slightly hotter on a year-over-year basis at 2.7%. But on that month-over-month basis, still at only 2/10 of a percent. So in our view, that shows inflation, while still slightly higher than the Fed’s target, it’s still under control. And those numbers we think does give the Fed the room that it would need to start easing monetary policy after having been as restrictive as long as they have.

Dziubinski: What’s the market’s expectation now in terms of the Fed meeting next month? What’s that probability of an interest-rate cut?

Sekera: Well the probability is actually 100%. I mean the market is definitely pricing in a cut. So at this point the only question that the market has is if it’s a 25-basis-point cut or a 50-basis-point cut. So looking at the futures market right now, it’s probably about a two thirds probability of a 25-basis-point cut and a one third probability of a 50-basis-point cut.

Dziubinski: And then what’s Morningstar’s expectation there? 25 basis points or more?

Sekera: Our expectation from our US economics team is a forecast of a 25-basis-point cut. And then we expect ongoing cuts of 25 basis points thereafter. In my view, I just don’t see a reason for a 50-basis-point cut. In fact, I actually think that would be a negative. I think if they cut by 50, the market might interpret that, that the Fed is more worried about the slowing economy than what we necessarily foresee.

And I think that could heighten concerns about a potential recession in the near term. All of that actually could prompt the market to decline if there was a 50-basis-point cut. Now, looking forward over the remainder of this year, in the next year, we do see further ongoing cuts. Our forecast for the federal-funds rate is actually did decline all the way to 3% to 3.25% by the end of 2025.

Dziubinski: So while we’re sort of on that topic, Dave, give viewers a rundown of Morningstar’s expectations for the economy. Now, given the economic news we’ve seen in the past few weeks, is Morningstar still looking for a soft landing?

Sekera: Yeah, our US economics team is still in the soft-landing camp. Now, we do expect the rate of economic growth to slow here in the third quarter, slow again sequentially in the fourth quarter, bottoming out in the first quarter of 2025 and then start to reaccelerate over the remainder of 2025. As the impact from the fed-funds rate cuts start to flow through the real economy.

Dziubinski: All right. So on the earnings front, we have a few tech names reporting this week that are on your radar. Of course, Nvidia reports earnings on Wednesday. Now the stock did pull back quite a bit in July but has trended back up in August. So is the stock attractive heading into earnings?

Sekera: It’s not necessarily attractive. It’s trading within the range that we consider to be fair value. It’s currently rated 3 stars, but I would note it’s at that top of that 3-star range at this point. So getting to be a little overextended at this point. Now Nvidia of course is the bellwether stock for artificial intelligence.

And I would just note this has the potential to lead the market both upward and downward depending on where the results and where their guidance comes out. Of course, if they were to miss either revenue or earnings, which we don’t think is going to happen, or if guidance for next quarter isn’t strong enough, you could see it and all of the AI stocks sell off. But again that’s not our expectation this quarter.

Dziubinski: So what’s Morningstar really want to hear about from Nvidia during this call?

Sekera: We expect that they should easily be able to beat their guidance numbers that they gave for this quarter. They then will most likely offer up higher revenue and growth guidance for the current quarter that we’re in. At this point, I mean, there’s still so much more demand for their AI GPUs than the amount of supply that they can produce.

They can just charge whatever they want. And people are just paying whatever they’re asking. And in fact, I think it’s interesting, the prevailing sentiment for AI buildout: It’s really best exemplified by Google on their earnings call. They mentioned in their view the greater risk right now isn’t spending too much on AI but not spending enough.

And if you look at the earnings and some of the commentary by companies like Microsoft, Meta, Amazon, each of them are all pointing to higher capex spending over the course of the next 12 months as well. The other thing that we’re really starting to hear more is a lot of investors are really starting to focus more on the potential for how much revenue is going to come from artificial intelligence.

Investors are starting to question whether that future revenue stream will be enough to generate what you need to get in order to justify the current AI spending. And that is certainly a legitimate question. But I think investors also need to realize, too, that that kind of misses the point to some of that capex spending, as a lot of that capex spending on AI is needed really just to protect your existing business from a lot of AI upstarts that we see out there as well, and if firms fail to invest enough in their AI and especially in the technology sector, you can become real quickly antiquated.

Dziubinski: Now, a couple other tech names reporting this week. We have Salesforce also on Wednesday. How does that stock look heading into earnings, and what will Morningstar be listening for on this one?

Sekera: Salesforce stock is rated 3 stars, trades at a 7% discount to fair value. So it puts it in that range that we consider to be pretty close to fair value at this point. Now having said that, I know our analyst still thinks that the company represents probably one of the best long-term investment opportunities in the software space.

He thinks that the company really has a very good balance between the amount of revenue growth that he forecasts, as well as the ability to still improve profitability over time. Now, I would note on this one, revenue growth has decelerated recently, but we think that with their focus on margin expansion, the amount of share buybacks, and their dividends, we think that’s going to still continue to compound the strong growth for earnings for years to come for this company.

Dziubinski: And then we also have CrowdStrike reporting this week. Now here is a stock that was having a good year until mid-July when that failed update led to a massive technology outage that affected millions of users. What will you want to hear about from CrowdStrike during this week’s earnings call? And what do you think of the stock today?

Sekera: Well, first, I do have to note that stock had risen not too far coming into the summer, in our view. It was 2 stars prior to the announcement. And I think there’s really two things that really led to the decline here. So first according to our valuations, the stock was already overvalued, and secondly, that was just very negative fundamental news to come out.

Now that stock briefly fell into 4-star territory. It’s bottomed out and started to rebound. And at this point it’s now rated 3 stars. But I think that this news is going to be an overhang on their ability to generate new revenue for a while. Realistically, when I think about it, I mean what IT manager is going to recommend switching to a cybersecurity vendor that led to massive worldwide outages.

So I think it’s going to take some time for the company and for the stock to get past this negative connotation. I kind of look at this as similar to their competitor Okta, after they were hacked a while ago.

Dziubinski: All right. Let’s pivot over to some new research from Morningstar about some companies in the news. Let’s start with Starbucks. Starbucks stock soared 25% on news that former Chipotle CEO Brian Niccol was coming in as new CEO. And, you and Brian, Dave, have something in common: You’re both Miami (Ohio) University alums. What’s Morningstar think of the move?

Did we make any changes to the fair value on the stock after the news? And how’s the stock look after the rally?

Sekera: That news quickly took that stock up. It was an undervalued 4-star-rated stock. Now puts it in 3-star range. And in fact it’s trading really almost right on top of our fair value estimate of $95 a share. So at this point there’s no change to our fair value estimate. I think our analyst is going to want to evaluate whatever specific changes he makes to the business.

Now, having said that, based on the success that he had both at Chipotle and Taco Bell, I think that does provide a very positive sentiment to this stock, though.

Dziubinski: Now, not surprisingly, Chipotle stock fell on the news and the company is now in the market for a new CEO. Any changes to our fair value estimate on that stock given the departure?

Sekera: Not yet. I mean, there’s no change to our fair value. Again, I think what we’re going to do is wait to see who the successor is and then reevaluate whatever changes they may or may not put through with the underlying business. Now, with Chipotle, we thought that stock was already overvalued even before the news hit.

It is a 2-star-rated stock, trades at a 25% premium that are fair value. Generally I would say when I look at where the market is versus our forecasts, I think the market’s just pricing in too much new unit growth and too high profitability for too long.

Dziubinski: Now we also saw a lot of retail earnings come out the past couple of weeks. So let’s walk through some of the more notable ones. First, let’s talk about Walmart and Target. Walmart’s earnings looked good on the surface. What did Morningstar think, and how does the stock look today?

Sekera: I think we’ve talked about Walmart a couple of times. As a retailer focused on an everyday low price strategy, the company continues to benefit from consumers trading down from traditional supermarkets. Their comp store sales increased 4.2% this past quarter. And that’s actually pretty impressive considering that’s on top of a 6% increase last year.

Now a big portion of that increase is coming from an increase in transaction volume. Transaction volumes were up 3.6%. So we’re seeing more and more shoppers turning to Walmart in order to save money. They also have showed an increase in their operating margin by 20 basis points. That takes them up to 5.7%. But it’s not only in-person sales that are doing well.

Their online sales continue to do very well as well. I think that increased by 20% this past quarter. So the thing is, I would just have to caution here, that while the fundamentals are definitely improving, we think the stock has gotten a little bit too far ahead of itself at this point, probably pricing in too much of this kind of growth for too long.

Plus it appears I think the market’s expecting margins here to expand further than what we think an everyday low price retailer will likely achieve over the long term. So just as an indication of how highly valued the stock is, I think that stock is currently trading at 31 times our forward earnings estimate.

Dziubinski: We saw Target stocks soar after earnings, but Morningstar held firm to its fair value on the stock. So what got the markets so excited, and why wasn’t Morningstar as enthusiastic about what it heard?

Sekera: First, you have to remember, Target’s had a rough year over the past year. In fact, they reported negative comp store sales over the past four quarters prior to this quarter. So to some degree, I think the market was just relieved that sales were this past quarter. We might have also had some short covering going on.

However, in our view, the results just weren’t as good as I think that they looked according to the market. So yes, comp store sales were up 2%, but that’s actually after they had fallen 5.4% in the prior quarter last year. Plus, that 2% increase: That’s less than half of the comp store sales increase that we saw at Walmart.

Now their operating margin also did improve but generally we just don’t see much more improvement from here on out. When we think about Target, in our view, it’s a company that does not have an economic moat, really an undifferentiated product assortment, lack of a of a clear cost advantage relative to other discount retailers.

So net net, it’s a 2-star-rated stock, trades a 17% premium to our fair value. And based on our current earnings estimates for this year, trades at a pretty rich 17 times as compared to what we think this company will generate over the long term.

Dziubinski: Now we had Home Depot and Lowe’s both also reported earnings recently. Now both companies as expected experienced sales declines. What’s Morningstar expecting for both for the rest of the year in terms of sales? Are we going to see sales perk up a bit? And how do the stocks look from a valuation perspective today?

Sekera: I think both reports from these companies just confirm what we’ve been talking about for the past couple quarters. And that’s that ongoing weakening of consumer spending generally, and specifically in the case of these two companies, how relatively high interest rates have been keeping home renovation projects down as compared to a couple of years ago when you had lower rates and people were financing those home projects.

So taking a look at Home Depot, specifically, their same store sales were down 3.3%. There’s a combination of transactions being down at 2.2%, and the average ticket was down 1.3%. And one thing that our analysts highlight is that spending on big ticket purchases—those where it’s over $1,000—those were down 5.8%. Now considering we do expect the economy to continue to keep softening in the next couple of quarters, we expect same-store sales to continue to decrease here in the third quarter and the fourth quarter until interest-rate cuts by the Fed start to flow through, but that’s probably not until well into 2025. Home Depot, in our view, is a very richly priced stock. It’s rated 1 star, trades at a 33% premium to our fair value.

And when we look at our earnings estimate for this year, it’s trading at 25 times PE, which is really pretty high for a company that we expect to only earn 7% earnings growth over the next couple of years. Taking a quick look at Lowe’s: Their same store sales was actually worse than Home Depot. They were down 5.1%.

They also reported pretty weak performance in their big ticket items. That stock not as richly valued. It’s 21 times our earnings estimates for this year. But 2-star-rated stock at a 14% premium to fair value.

Dziubinski: Now let’s pivot a little bit and talk about a couple of stocks that Morningstar brought down its fair value estimates on. And these are stocks we’ve talked about on the show before. Morningstar cut its fair value estimate on Illumina by 30% and reduced the fair value on Estée Lauder by about 16%. So, Dave, what drove these cuts?

And is either stock attractive today?

Sekera: First, with Illumina: Unfortunately that’s been a very disappointing story for a couple of years now. It goes back to a couple of years ago. We had some managerial mistakes. They closed their acquisition of Grail before they got regulatory approval. They were then forced to have to divest that, which we saw earlier.

And then they’ve just had a lot weaker than expected performance in their underlying fundamentals, specifically in their sequencing business, than I think what they were projecting to the marketplace. And they then gave new guidance on their investor day. That new guidance was much lower than what we had been projecting. So as such we significantly lowered our long-term revenue and our margin assumptions.

In fact, we took our long-term top line growth forecast down by an average of 200 basis points per year over our forecast period. And then we also lowered our operating margin assumptions. Now maybe this is the new management team’s way of resetting the bar so it’s low enough to be able to easily beat guidance going forward, but at this point, following that fair value cut, the stock is rated 3 stars, and it puts it in the range that we consider to be fairly valued. Turning to Estee Lauder, that’s another stock that’s struggled over the past two and a half years now. However in this case, we do think that stock is still significantly undervalued.

It’s rated 5 stars and trades at about half of our fair value estimate. Now generally I think what happened here is we were overly optimistic with our assumptions as to when we thought sales were going to rebound in China. And to some degree, this is still just a play on when the Chinese economy and consumers really begin to rebound.

So the thing that our fair value takes into account now is that we did cut our revenue assumption for 2025 by pretty significant numbers. We took our sales forecast down to 2% from 7%. And we also decreased our operating margin, so net net, that took our adjusted earnings per share down to 287 a share, down from 395 prior.

But even more importantly, we did cut our average annual sales growth and our operating margin in our forecast from 2026 to 2029. And that’s really what drove the big reduction in the fair value there. But like I said, to some degree, if you’re looking for a play on a potential rebound in China and even just Asia more generally, this is one of those stocks to take a look at in that case.

Dziubinski: All right. Well, it’s time for the picks portion of our program today. This week, you’ve brought us five stocks to buy after earnings. First stock on your list is Alphabet. Now, Dave, given the regulatory questions surrounding Google today. Why is Alphabet a pick?

Sekera: First of all, I’d just note, the stock is down 9% since the end of June, whereas we actually bumped up our fair value estimate by 17%. Our fair value right now is 209 per share. In our view, the company is still just hitting on all cylinders. I mean, across search, advertising, YouTube monetization, their cloud business.

I mean, they’re doing very well across all of the three main business lines. So when I look at our fair value increase, I think the biggest part of that increase came from increasing our forecast for the long-term growth for its cloud computing business. And really, that’s just largely been in response to the ongoing strength that we see in demand from artificial intelligence.

So the thing that is really holding the stock back, which is kind of what you mentioned earlier, is a concern regarding any potential impact from any potential government regulations, whether here in the US or in the EU. But our opinion is that Google still will be able to maintain their dominance in their search and their ad business. If anything, greater than expected regulation probably more likely limits the ability of startups and smaller competitors to compete against Google.

They just don’t have that same financial scale and wherewithal that Google has to be able to reinvest in their business to address those type of regulatory issues. Net net, it’s a 4-star-rated stock. It’s back to a 21% discount to fair value. Company with a wide economic moat and a medium uncertainty, so looks pretty attractive to us today.

Dziubinski: Now your second pick this week is Microsoft. And now the company put up good numbers for the quarter and had good things to say about artificial intelligence-related demand. But it seems like Morningstar’s analyst is most excited about Azure growth in the second half of fiscal 2025, right?

Sekera: Exactly. And to some degree, this is a pretty similar story as what we’re seeing in Alphabet. That stock was down 7% since the end of June, whereas we bumped up our fair value estimate by 13%. As you noted, that fair value increase was really just due to even greater demand in Azure, its cloud business, than what we had been expecting.

AI-related demand still just exceptionally strong. We’re looking for that to accelerate into the second half of this year. And that led us to increase our revenue forecast for the medium term as well as increase our profitability estimates. So again, this is just another wide moat stock, medium uncertainty, rated 4 stars, currently trading at a 15% discount to fair value.

Dziubinski: Now your next pick is Kenvue. Now this is actually a big consumer name that isn’t actually a household name the way many of its brands are. Tell viewers about it.

Sekera: Kenvue is the consumer business that was spun off from Johnson & Johnson in May of 2023. Now, initially, the stock performed pretty poorly after that spinoff. In fact, it fell enough it got down into 4-star territory last fall. Looking at the charts, it’s bottomed out and has been rebounding up pretty nicely since.

But, even after coming up 20% since the end of June, we still think the stock has further to go. In our view, it looks like the story here has stabilized. Its business is beginning to turn around. We’re seeing margins starting to improve from the cost-savings programs that were announced last quarter.

And after earnings, we made some touch-ups to our model. We bumped up our fair value, it’s only 2%, but it’s at $26 a share. And when I open up and look at our model here, I think the assumptions appear pretty realistic. The compound annual growth rate for our five-year revenue forecast is only in the midsingle digits.

We are looking for margin expansion to increase to 20% by 2028. That’s compared to 16% last year. Over the long term, just things like the aging population, the premiumization of consumer healthcare products, growing emerging markets, that all provides pretty good long-term tailwinds for the company.

So it’s a wide-moat stock with the medium uncertainty. It’s rated 4 stars, trades at a 16% discount, and pays a pretty healthy dividend yield at 3.8%.

Dziubinski: So your fourth pick this week is oil giant Chevron. Now this one’s interesting because ExxonMobil has been your sort of go-to energy pick. So why Chevron today?

Sekera: Well I mean first I still think ExxonMobil is attractive. But in this case it’s just a matter of Chevron is just slightly more attractive on a relative value basis. So Chevron stock is down 6% since the end of June, whereas Exxon Mobil I think is up maybe 1% or so. So Chevron is currently rated four stars, trades at a 16% discount to fair value, pays a 4.5% dividend yield, whereas Exxon is now in that three star territory, even though it is at a 14% discount to fair value.

Their dividend yield looks like it’s a little bit lower at 3.25%. Either way, I’m not going to argue with Exxon versus Chevron. I just still think investors should have exposure to oil in their portfolios. I think it provides a good natural hedge in your portfolio for any additional geopolitical risk or if inflation were to make a comeback. Oil prices right now at $75 a barrel for WTI, pretty close to the bottom of the trading range that they’ve traded at since early 2021.

Now, the thing I would note here is that we do expect oil prices over the long term to fall. In fact, our long-term price forecast for West Texas is $55 a barrel, so, much lower than what we’re seeing in the marketplace today. So it’s one of these things where if oil were to stay here, or in fact, even move higher, I think there’s a lot of upside leverage in both of these names.

Dziubinski: All right. And then your last pick this week has been your go-to bank stock. It’s US Bancorp. Why do you still like it, Dave?

Sekera: US Bank has just been one of our top picks among the US regional banks since March 2023. And if you recall back then, that’s when Silicon Valley Bank failed, and we had the big blow up across all the US regional bank stocks. US Bank is the only regional bank that we rate with a wide economic moat.

It’s a stock with a medium uncertainty. Pays a pretty healthy dividend yield at 4.3%. When I take a look at our model here, I’d note credit metrics and capitalization are all pretty good for this company. At this point, we’re not seeing any signs of really any kind of substantial deterioration in their credit quality. And in fact, following the Federal Reserve’s stress test results, they actually increased their quarterly dividend.

So, again, long term, this is one where, I mean, with all the banks, but specifically with US Bank, as the yield curve steepens when the Fed starts cutting rates, we do think that will be a driver to expand its net interest margin. The stock is up 14% since the end of June but we think it’s still undervalued here at a 18% discount.

That puts it in that 4-star territory.

Dziubinski: Dave, thanks for your time this morning. And again welcome back. A programing note: Dave and I will be celebrating Labor Day next Monday. So there won’t be a new episode of The Morning Filter that day, but we hope you’ll join us for The Morning Filter again on Monday, Sept. 9 at 9 am Eastern, 8 am Central. In the meantime, please like this video and subscribe to Morningstar’s channel.

Have a great week!