3 Stocks to Sell and 3 Stocks to Buy in August

Key Takeaways

• The drivers behind last week’s market activity.
• What the US supporting the Japanese Yen means for investors.
• Why European stocks are lagging US stocks this year and where the opportunities are today.
• Unpacking SpaceX’s SPCX results and stock movement.
• Which of these stocks look like buys after earnings: Advanced Micro Devices AMD, Palantir PLTR, Sandisk SNDK, or Western Digital WDC?
• Clorox CLX: Still a pick after earnings?
• Stocks to sell and stocks to buy this month.

In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss last week’s market activity and why investors should continue to monitor the Japanese yen. Special guest and Morningstar Europe market strategist Michael Field covers why European equities are lagging US stocks this year, which sectors and stocks in the region look most attractive, and what risks US investors who want to invest in international stocks should watch out for.

Sekera and Dziubinski reveal whether Advanced Micro Devices, Palantir and Clorox remain stock picks after earnings and if Sandisk and Western Digital still look pricey after their postearnings pullbacks. They wrap the show with three overvalued stocks to sell this month and three undervalued stocks to buy instead.

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 watch in the week ahead, some new Morningstar research, and a few stock ideas.

Well, it’s good to see you, Dave. Let’s get caught up on a few things from last week. We’ll start with oil prices in particular, and then last week’s market action more generally. Seems like it was a pretty strong week for stocks overall.

Oil and The Market

David Sekera: Hey, good morning, Susan. I mean, of course, the real question is, do we finally now have a long-term truce in place that’s going to hold, or is this just another one of these head fakes taking a look at oil prices? I think they’re about $85 a barrel at the end of July. After the most recent truce news, they dropped as low as $75 a barrel. That gave a pretty good tailwind to the market last week. Looking at the futures market this morning, looks like they’re back about $79 this morning. We’ll see where they go from here.

Now, taking a look at the action last week is really mostly all about the large-cap growth segment leading the market upward. It’s nice to see Microsoft MSFT finally starting to work. Of course, that’s a stock we’ve recommended a number of times over quite a while at this point. I think that stock’s up about 27% since earnings. Amazon.com AMZN, another stock we’ve talked about and have recommended at times in the past, that’s up also 21%.

Again, a lot of these big growth names really driving the market action higher. Having said that, even with the market hitting the highs here, I don’t know. In my mind, it kind of feels like this is much more of a momentum-driven rally than anything else, seeing a number of short squeezes going back on. At this point, I don’t know; I’m not necessarily really sure I’m ready to back up the truck on this one. The market’s still a little bit undervalued here, but not nearly as undervalued as it was just even two or three weeks ago.

US Supports the Japanese Yen

Dziubinski: All right. Well, I want to get your take on some news that came out early last week, and that was that the US and Japan had intervened to prop up the Japanese yen. Now, this is, of course, something you’ve talked about on the podcast before. You’ve actually suggested investors watch this in particular this year. First, tell us what happened last week.

Sekera: Yeah. If you remember all the way back at the beginning of the year in our 2026 outlook, we highlighted the Japanese yen and JGBs, Japanese government bonds, as being one of the potential systemic risks to the market this year. We talked about how it’s both a combination of the rate of weakening as well as the amount of weakening for the Japanese yen that really could drive that systemic risk.

Now, it has been weakening over the course of the full year to the point that the Bank of Japan and the US government both intervened in the markets. Essentially, they were selling US dollars in order to buy Japanese yen in order to strengthen the yen. The yen strengthened as much as 156 to the dollar. It had hit almost 164. At this point, we’re almost back to where we started the year. If you go back even further than that, it’s still weaker than where it was 52 weeks ago.

Now, I also assume that both of them were in the markets buying Japanese government bonds. For example, if you look at the 10-year JGB, the yield on that is 2.81%. It peaked at 2.9% a couple of weeks ago. Again, that’s still a lot weaker than where it was at the end of last year. At the end of last year, it was at a 2% yield. Of course, as yields climb, prices fall. For the year, investors in JGBs are still registering some pretty big losses.

Dziubinski: All right. Dave, walk through why this matters for investors, why it’s a risk factor for us to be monitoring.

Sekera: I think at this point you’ll want to watch it because if the Bank of Japan and the US government can’t control the rate and the pace of just how much the yen is weakening, I think that would be a really bad sign for the global markets for a number of different reasons.

First of all, that just is going to lead to much higher inflation rates in Japan. Japan, of course, has to import a huge amount of commodities to run its economy, specifically energy products. I think if that rate of weakening increases, you could see a big selling in JGBs. Of course, as prices fall, those yields continue to keep rising further and further. I think that would cause a lot of dislocation among global asset classes. Plus you’re just going to have a lot of realized losses overall.

But you also have the Japanese banks; they all own huge amounts of JGBs. On their balance sheet, while they may not necessarily have to recognize those losses on a mark-to-market basis, people are still going to know that they’re going to have big losses embedded on a mark-to-market basis on their balance sheet. Of course, that’s going to keep the Japanese banks from being able to lend as much as they had been in the past, leading to even further weakening in their economy.

Now, if all of that comes to fruition, then I think from the investor point of view, you’re going to start getting concerned about the credit risk of Japan overall. Japan’s debt/GDP is well over 200%. If that starts to go south, you could start to see essentially a debt spiral where they then have to continuously borrow more and more to pay that higher and higher interest rate. To put it in perspective, there’s about 8 trillion US dollars worth of JGBs outstanding. If we start seeing those JGB yields rise, prices fall, people having to start taking some losses on those, I think that does potentially lead to systemic risks if people really get concerned about the creditworthiness of Japan.

Dziubinski: All right. Well, we’re going to stick with an international theme for a little bit. Viewers and listeners, you’ve been asking us to talk more about international stocks on the podcast. Last week, I sat down with Morningstar Europe’s Market Strategist Michael Field for an update on what’s been going on in international markets this year, where he sees the opportunities and the risks, and some of his top stock ideas today. Michael and I talked on Thursday, August 6. Take a listen.

Michael, great to see you. Thank you for joining me today.

Michael Field: Certainly, Susan. Happy to be back.

2026 Europe vs. US Stock Returns

Dziubinski: Let’s talk about international markets. On paper, international stocks are outperforming US stocks this year, but that hasn’t been the case when you look specifically at Europe, right?

Field: No, exactly right. I think some of those numbers for international stocks are distorted by some of the outperformance of emerging markets, for instance. But Europe has actually tracked the US reasonably closely, albeit slightly underperforming. Europe’s up something like 10.5% year to date versus around 12.5% for the US. Pretty good performances all around, I would say.

Dziubinski: Yeah, for sure. Now, let’s talk a little bit about what might be driving that performance up for European stocks. Does the difference boil down to, you mentioned emerging markets; is it really a developed- versus emerging-market story? Does it boil down to a sector story? Is it both, or is it something else entirely?

Field: I think there’s a lot of nuance on it. Unsurprisingly, given everything that’s happened this year with the Iran war, there are a lot of moving parts to the equation. I think artificial intelligence has been a huge element to this. We can’t have a conversation without mentioning AI, and this is one specific instance where indeed we cannot—AI stocks have been performing really well of late, and the US obviously has a high concentration and a high exposure to those big Magnificent Seven names and AI firms.

If I look at the Stoxx 600, the main European index for the last quarter, the biggest performers within that index have all been exposed to AI, be they semiconductor stocks or others, but they’ve all been exposed to that theme. I think one of the big differences why Europe has underperformed the US, albeit marginally, is that we don’t have that exposure to those Big Tech giants that you can get through the US market.

Dziubinski: Got it. Then, let’s talk a little bit about valuations today. How do European stocks look relative to US stocks from a valuation perspective? Is there a sizable valuation gap between the two or not really?

Field: I think this is what’s going to surprise people; if I look at valuations, given how well markets have performed, given how well the US has performed, you might expect that markets are trading at kind of large premiums given all this talk of bubbles as well that we hear, but that’s certainly not the case. The US market is actually more attractive on the face of it than Europe at the moment. It’s trading at something like a 10% discount to our fair value estimate, and then Europe’s trading at something like a 4% discount to our fair value estimate. Is there a huge amount of value there? Certainly not in Europe, I would say, but it’s not expensive. That number probably belies the underlying story that if I break it down into sectors, which I know we’re going to talk about in a minute, there are a lot of opportunities there and much more attractive opportunities within individual sectors.

Finding Opportunities in Europe

Dziubinski: Let’s talk about some of the opportunities from a valuation perspective today in Europe. Let’s start, though, through the lens of market capitalization and style. Are large caps or small caps looking more attractive? More value-type stocks or growth-type stocks? Where’s the opportunity?

Field: I think it’s moved around an awful lot as well. I’m glad I update the numbers every now and again because the picture has changed dramatically in Europe. I think, until now, what I’ve been saying, or for the first couple of quarters of the year, is that small-cap stocks are really attractive in Europe, way more so than the US. Investors seem to have discovered a lot of those names or suddenly had a bit more faith in a lot of those names. You’ve seen the valuations of small-cap stocks improve or disimprove from an investor’s perspective over the last number of months. They’re more expensive now. I think if I’m looking at opportunities in Europe right now, a lot of it’s in the mid-cap space and a lot of it’s still in the value space. Some of those value stocks, some of those stocks that don’t really have the same growth profile, are the ones that are now looking attractive in Europe.

Dziubinski: Let’s pivot and move over to talk about sectors, which you alluded to, where there are some real opportunities. Talk a little bit about which sectors look particularly attractive. Talk about which ones maybe look particularly pricey. Also comment, Michael, on how the sector story, from a valuation perspective, differs in Europe than it does in the US.

Field: Yeah, certainly. Dealing with the most attractive first: Cheapest sectors in Europe right now, or the most attractive in our eyes, are certainly heavily weighted toward consumer. Both consumer cyclical and defensive sectors are the two cheapest in Europe at the moment, particularly the cyclical sector. It’s trading at something like a 16% discount to our fair value estimate. Despite the index as a whole being almost fairly valued, there’s still a very attractive opportunity within consumer cyclicals. Consumer defensive is still trading at a reasonable discount, something like around 9%. We’ve seen catalysts for improvement in that sector. We’ve seen improvements in some of those kinds of staple firms. They’re seeing more volume growth, pricing growth over the last earnings season. That means you’re not buying into something that’s never going to recover. We’re already seeing signs of recovery in that sector.

Lastly, on the other cheap sector we see in Europe, or attractive sector we see in Europe, is healthcare. It’s been a sector that has had a lot of overhangs for a while, most notably government regulation, fears around patents, things like this. What we’ve seen now over the last number of months is that there’s been a bit of a resurgence. Investors are starting to warm up to that sector again. Once again, earnings season has been pretty positive for a lot of these firms, so we still see a lot of attractiveness. In terms of overvalued sectors or less attractive sectors, there’s not a huge disparity in valuation in Europe. There are not a whole lot of sectors that I see that are way overvalued that I’m going to tell you to stay away from. Even sectors that saw a huge run, like energy, are around fairly valued. Similarly with financials, maybe a few percentage points overvalued.

The only one that’s getting a little bit heated in Europe is tech. It’s trading at something like a 10% premium to our fair value estimate. At the same time, that’s still not in the territory that we’re getting worried at this point. And then, to your question about how it differs: A lot of the valuations correlate to some degree. I would say if you’re looking for areas of differentiation, consumer defensive, we spoke about being cheap, is actually a lot cheaper than the US. One of the reasons is we don’t have the huge giants like Walmart and companies like this with those high valuations that are dragging things above the average. The other one is in tech as well, tech in the US; because we’re quite bullish actually on the Mag Seven names and a lot of the AI names, we think there’s huge potential there for growth. They’re actually trading at cheaper valuations in the US than some of the tech names we have in Europe. It’s a very mixed picture.

Global Market Risks

Dziubinski: Got it. Let’s broaden things out, Michael, and talk a little bit about what you think the main risks that US investors who are investing globally should have on their radars for the remainder of the year.

Field: I think it’s surprising to some degree. I mentioned valuations aren’t expensive, right? At the same time, given all the risks that we have in the world currently, I would not have expected equity markets to be as buoyant as they are. I would’ve expected investors to be a little more circumspect, a little bit more concerned about the dangers at hand. What we’re seeing is the risks that are still in the background—things like inflation, potential for interest rates to increase—those concerns are slowly fading, but I think it’s something that people should still have in the back of their minds. When this whole Iran war kicked off, we really thought that interest rates might rocket, have to rocket to make up for inflation, which we expected to go through the roof across the board. And inflation hasn’t been that bad in the US or Europe, actually.

In Europe, it’s only maybe 2.6%, 2.7% at the moment. In the US, it’s not much different. That’s quite positively surprising. But the danger is, the longer this crisis continues in Iran and in the Middle East with the Strait of Hormuz being closed one week and open the next, the danger is the disruptive effect that’s going to have on the global economy will eventually take hold. Maybe inflation hits new highs as a result of that, and interest rates need to go up. I think investors can ignore it for a long time, but as soon as interest rates start going up, that’s when it starts damaging the economy and when we all need to worry a little bit. I’m not trying to sound the alarm bell right now, but it’s something to keep in the back of our minds to stop us getting carried away, essentially.

Undervalued European Stocks to Buy

Dziubinski: Got it. All right, let’s get some stock ideas, some investment ideas from you today. Let’s talk about some undervalued stocks that you like that are easily accessible to US investors. What do you like?

Field: One thing US investors have looked to Europe for over the last year or two, and that’s not accessible in the same way in the US, is around defense stocks. One of the big stocks in Europe, Rheinmetall RNMBY, the German arms and defense manufacturer, has seen its stock price rise hugely over the last three or four years. It’s had a load of catalysts to do so. It’s been a major arms supplier for the Ukraine war, and the valuation and the share price rose as a result. Actually, what we’ve seen over the last six months is that the share price is pretty much halved from the highs.

If you look at our fair value estimate at the moment, we think the share could actually almost double from here. Despite the fact that there are some huge catalysts, despite the fact that European countries like Germany are going to take at least a decade just to restock the weapons they’ve already given to Ukraine, these shares, and specifically Rheinmetall, still aren’t pricing in some of these upsides that we’re seeing. Yes, there’s a bit of a cloud of doubt by investors at the moment as to whether that increased government spending can come through from NATO nations and, in particular, European nations, but we still see huge upside there. That’s the first one on the list.

Second of all, then we’ve got RELX RELX, and it is an Anglo-Dutch company that’s based more or less in the software data side of these things. We wrote a report, if you’ve been following our reports of late, about the “SaaSpocalypse,” and we mentioned RELX in this. We looked at the stock and decided, OK, it still very much has a moat. We think it’s going to do well. It’s got proprietary data. It operates in a huge number of different products like LexisNexis, which some people might be familiar with. It’s a pretty widespread product, and it falls under one of these categories within the software-as-a-service space that we don’t believe is going to be disrupted by AI or that embraces AI sufficiently as not to be disrupted. Yet its share price has still seen a fall alongside a lot of other software companies in that space. We now see a lot of upside for that stock. We think it’s robust. We think the results are still showing that up. That’s the second name in our list.

The final name in our list is in the utility space, but it’s actually a very interesting utility in case you think I was going to pitch you a boring stock here. This is National Grid NGG, the UK firm that’s in charge of the electricity grid essentially in the UK. Why that’s interesting is one, that the robustness and the reliability of its revenue stream is extremely high. People pay a taxation and it goes directly to this.

But why there’s a bit of a growth element to this, or why we think it’s interesting, is that in Europe, generally speaking, there’s been a huge refurbishment or commitment to refurbishing the national electricity grid to cope with the increase in renewable energy and how that’s going to have to shift as a result of this. What you’re seeing is a large investment by firms like National Grid that already has a kind of guaranteed return on capital attached to it. The growth profile for this company, we think, is strongly attractive over the next number of years. Something that will be interesting, particularly for US investors, is that this is one of the companies that pays a dividend that’s covered by cash flows, and it’s a dividend yield of north of 4%. It’s very attractive for a number of different reasons.

Dziubinski: Well, Michael, it was great catching up with you today. We will definitely be having you back on the podcast before the end of the year.

Field: Thanks very much, Susan.

SPCX Earnings, Stock Activity

Dziubinski: All right, moving on to some new research from Morningstar. SpaceX SPCX reported earnings last week for the first time as a public company. Stock pulled back after. Dave, how did earnings look, and did Morningstar make any changes to its fair value estimate on the stock?

Sekera: Well, honestly, with SpaceX, it should be a surprise to no one just how much revenue is growing. If you look at the second quarter, revenue is up 92% year over year, and that was really led by its AI solutions group. I think the revenue there grew by about sevenfold. Taking a look at some of the other divisions like Launch and Starlink, those were up 29% and 67% respectively. However, a lot of that was offset by higher research and development spending in order to be able to support that kind of growth. The company’s still registering operating losses. A lot of details in the stock analyst note written by Nicolas Owens. I’d say if you have an interest in SpaceX, go to the note, take a read through. But net-net, there was really no change to our forecast. Nicolas reaffirmed our $62 fair value per share.

I’d say the takeaway here, when you think about this company overall, is that the market’s just still factoring in much more optimistic scenarios specifically for Starship, a lot more greater commercial advantages for potentially those orbitable data centers that are talking about than we think is most probable. As a reminder, when you think about how to be able to value this company, you really have to do a lot of scenario analysis and come up with your probabilities for each of their divisions, trying to understand what is the potential for the total amount of growth over really the next five to 10 years. When you put that together on that probability-weighted basis, that’s really how we dial into our fair value estimate for this one.

Dziubinski: Let’s talk a little bit about SpaceX’s stock activity last week. It was a volatile week, of course, for the stock, yet it finished the week up almost 23% even after we saw some of those lockups expiring late last week. What do you make of it?

Sekera: This is one where you really need to divorce what’s going on with the fundamentals of the company and the valuation of the company versus how it’s going to trade in the marketplace because a lot of these technical factors like the lockups and when the lockups open up and how much of those restricted shares become available. In this case, I think it was about 20% of the restricted shares became available for sale. My understanding is that’s over 900 million shares. In this situation, you need to really figure out and think about, from a passive versus active standpoint, who might be buying and selling the stocks. If you think about passive funds and ETFs, essentially these are funds or investment styles where they’re trying to match an index. They have to buy and sell stock in the same proportion as that stock is a percentage of that index by market cap.

The question here becomes: Of all of these newly unrestricted shares, how many of them are sold by those people that own those shares versus how many are kept? And compare that with what percentage of the market overall in those indexes are passive and how much they have to buy versus how much is actively managed money out there in the funds, what retail investors are doing to be able to then absorb the amount of the shares that are being sold by those newly eligible shares. Again, there’s a lot going on here, a lot of machinations in the short term, which you just really don’t know. In this case, I think that there potentially could be a huge impact to the short-term trading of the shares, but overall, it’s not meaningful overall to what we think SpaceX’s long-term intrinsic valuation is worth. According to our analysis, it’s a 1-star-rated stock that trades at double our $62 fair value analysis.

Again, I would say if you’re really involved in SpaceX, you really need to understand what those fundamentals are, what your assumptions are as far as that long-term growth for this company. In this case, if you want to be involved in the company, I think you really kind of need to ignore what’s going on with the short-term trading patterns.

AMD: A Buy After Earnings?

Dziubinski: All right. Well, Advanced Micro Devices AMD stock was down 7% after earnings, but Morningstar maintained its $530 fair value estimate on the stock. Dave, unpack the results on this one. What didn’t the market like?

Sekera: Always hard to know what the market is assuming coming into earnings. I mean, you have consensus that gives you some guidance, but then there’s always the whisper numbers about how much the market is really trying to assume that a company, especially in a situation like this, can beat those whisper numbers. Now in this case, second-quarter revenue was up 50% year over year, and that was better than expectations compared with consensus. Of course, as we’ve talked about with AMD, it’s really all about their server CPUs. Revenue there was up 75%. There is a shortage with the AI buildout boom. People need those CPUs in order to be able to manage all those AI workloads. If you look at the revenue guidance for this quarter, they easily beat it.

Now looking forward, I think the market’s trying to understand how long they can keep posting these kinds of results. Our analyst noted a couple of positive aspects. In the fourth quarter, we think the company will start selling its first AI solutions rack called Helios. In 2027, we’re looking for server CPU business to be up 70%, the data center to be up probably over 100%. But I think it’s just a matter of the stock ended up just giving up some of those prior-day gains. I wouldn’t read too much into the movement in any one particular day. I mean, overall, that stock is still up year to date, 125%.

Dziubinski: Now, AMD has been a stock pick of yours in the past. Is it attractive on pullback?

Sekera: It was a pick, but it was a pick a while ago. I have to mention, I think it was in January 2025. We actually picked it twice over the course of that month. Stock, I mean, it’s up 300% from the first time we picked it in January. Stock sold off in January, and so it’s up now 350% since that second time we listed it as a pick. Stock has skyrocketed since then, to the point that it was actually trading at a 10% premium at the end of June. We’ve had a pretty big pullback here. Last I saw, it pulled all the way back to $483, which compares with our $530 fair value estimate. It’s now at a 9% discount, which puts it still in that 3-star territory. At this point, I would say, for lack of a better way of putting it, it’s a hold. We would expect that over the longer term, investors should be able to generate returns consistent with its long-term cost of equity, but certainly not anywhere near as undervalued as what we thought it was back at the beginning of 2025.

SNDK, WDC: Earnings Takeaways

Dziubinski: All right. Well, we saw a couple of other members of the “triple-digit club” report last week. Sandisk SNDK stock fell about 7% after earnings, and then Western Digital WDC was down 13%. Morningstar didn’t make any significant changes to its fair value estimates on the stocks, and both stocks still look overvalued. What are your takeaways here, Dave?

Sekera: Again, it’s kind of a similar story. I mean, the market knew that revenue growth here was going to be exceptionally strong for both of these companies. We’re expecting operating margin for both just on the amount of fixed-cost leverage that they can get with revenue growing as fast as it is. As we’ve talked about before with these companies and really all of these commodity-oriented tech hardware companies, while there are shortages in both the memory and hard disk drives, demand for the AI buildout boom is still exceptionally high. These companies can charge whatever they want to charge. They’re getting huge margins. The question becomes, at what point—or it’s really a combination—at what point does supply increase enough and/or demand starts to fade? If you look at Sandisk, for example, we forecast that peak to be in early 2028, and then look for a downturn in 2029 and into 2030.

I would just say that if this growth lasts longer than early 2028, our fair value could actually be too low here in this case. However, if it rolls over faster than 2028, our fair value is probably too high. These are ones where it’s really very difficult to try and dial into our specific fair value because there’s just a really wide range of probabilities of outcome here over just the next couple years, much less trying to understand what the long-term intrinsic valuation is based on the present value of the future free cash flow of the entire lifetime of these companies. Just taking a look at the charts here, both stocks peaked in June. Sandisk has sold off down 48% from its highs. Western Digital down 42% from its highs. They’ve fallen enough that they’re now in that 3-star range. Although I’d note that Sandisk is still in the upper end of that 3-star range. Both of these, with that negative momentum and the growth that’s built into these prices, I’m still pretty leery of these stocks, even though they’ve fallen as much as they have.

PLTR: Still Attractive?

Dziubinski: All right. Well, Palantir PLTR was one of your stock picks on the June 29 episode of The Morning Filter, and the stock was up nearly 30% after the company reported blowout results. You’re looking like a hero on this topic, Dave. Now, Morningstar held its fair value estimate at $153. What did Morningstar think of the report?

Sekera: I mean, just phenomenal numbers when you really break them down. Just record growth rates in the second quarter. US commercial revenue up 150%. Revenue from the US government up 90%. Record-high operating margins coming in at 62%. Free cash flow margins, 63%. Really everything we’re looking for coming to fruition this past quarter. Our analyst really notes that the company’s competitive advantage lies in its ontology. Really just the ability for this company to connect data across lots of different parts of an organization, but most importantly, be able to turn that into actionable decisions. In our view, we think that’s a highly differentiated capability that even today’s frontier AI models can’t currently replicate. Now, having said that, no change to our longer-term assumptions, and as such, no change to our fair value estimate at this point.

Dziubinski: Where is Palantir’s stock trading? Is it still a buy?

Sekera: No. I mean, unfortunately, after that spike, I think it’s up almost 50% since we made that recommendation, which puts it in 3-star territory. It’s actually trading at about a 12% premium. At this point, with that much of a spike, even though it’s a 3-star-rated stock, it is at a premium. Personally, if you’re involved in this one, I wouldn’t argue against taking some profits here.

CLX Earnings Review

Dziubinski: All right. Well, another of your picks reported earnings last week, and that’s Clorox CLX. The stock was up a bit after earnings, and Morningstar held its fair value estimate at $155, but the stock still looks really undervalued. What do you make of the results and the market’s response to them?

Sekera: I mean, I was actually quite pleased with the market’s response, seeing that stock move up a bit after the results, because from the headline point of view, the results actually kind of sounded really not all that good. I mean, we had organic sales continuing to decline, but of course, as we’ve talked about before, the company had that ERP inventory buildup last year. We’re now finally starting to lap that. I’d say that organic sales going forward, we’re looking now for some expansion from here on out. I think to some degree, that’s what the market was pricing in when we saw that stock pop like that.

Now, as far as gross margin, again, it sounded bad. It compressed 370 basis points. Really just a result of negative fixed-cost leverage based on lower volumes that were being sold. Of course, we also had inflation still slightly outpacing the cost savings that the company’s able to make internally. Again, when we talk about stocks, it’s all about looking forward. Our fiscal 2027 guidance, I think, looks quite positive for the company. The company’s calling for 3.5% to 4.5% organic growth, looking for $576 a share in adjusted earnings. It puts it at about 18 times forward earnings. Maybe not necessarily that cheap on that P/E basis, but based on that continued growth that we’re modeling in, if you look at our fiscal year 2028 earnings estimate of $750 a share, that brings that P/E ratio down to 14 times, which I think starts looking much more attractive.

As far as taking a look at the stock chart and how the stock has traded, it looks like to me it’s bottoming out as far as early May. If you look at that chart as it’s going back up, it’s hitting higher lows. And as you hit those higher lows, that’s a good sign to me that maybe the worst is finally behind this stock.

Dziubinski: All right. Well, it is time for our stock picks for the week. Today, Dave has brought us three stocks to sell in August and three stocks to buy instead. We’re going to cover the sells first.

Stock to Sell: CIEN

The first stock to sell is Ciena CIEN. Now, Ciena has been on your sell list before. What do you have against it, Dave?

Sekera: Well, I mean, overall, it’s still a 2-star-rated stock, trades at over a 50% premium to fair value, and does not pay a dividend. We rate the company with a very high uncertainty and a narrow economic moat. Now, I’ve got nothing against the company overall. It’s just that I lump it in with all of these other commodity-oriented tech hardware companies. Specifically, they make high-speed optical connectivity. They’ve been a huge beneficiary of this AI buildout boom. But we think the market just got carried away here with the amount of growth that they’re posting. It was a sell recommendation on May 4. We are, I think, about within a month of being able to top tick this one. It’s down 23% since. Yet when you look at this chart, it’s still up over 330% just over the past 52 weeks. Based on our valuations, we still think it has further to fall from here.

Now again, I want to put some context around this one. If you take a look at our model, we are assuming huge growth in our forecast. The company did $4.8 billion worth of revenue last year in 2025. Over the next five years, we’re modeling in over 18% compound annual growth rate, which means by 2030, we’re modeling in $11 billion of revenue. That’s 2.25 times higher than what they did last year. But even in our discounted cash flow model, when you put that in there, it’s still a way too high of a valuation. If you’re looking at P/E multiples, I mean, it’s trading at 64 times our 2026 earnings estimate. Again, even with that 18% compound annual growth rate, looking at revenue being up over 2.25 times stock, in our view, still trading way too high even after having sold off and rolling off from here.

Stock to Sell: NBIS

Dziubinski: Now, your second stock to sell in August also has ties to the AI trade. It’s Nebius Group NBIS. How overvalued is this one?

Sekera: Significantly. It trades at a 57% premium to our fair value, putting it well into 2-star territory. Again, another company doesn’t pay a dividend at this point because it’s in such a high-growth mode. Very high uncertainty on this one, and of course, no economic moat. Now, when I think about this company and read through our write-up, I’d say in my mind, I think there are a lot of red flag warnings on this one. The company itself is considered to be a vertically integrated cloud provider. They focus on AI and high-performance computing. The company designs and operates data centers across Europe and the US.

Well, first of all, you just have to make huge assumptions as far as the amount of growth that this company can grow. As far as who this company is, they’re actually a carve-out from a Russian tech firm called Yandex. That carve-out was made following the sanctions that were put in place after the Ukraine-Russia conflict started. I’m very leery of the carve-out from that Russian firm overall. Again, this is another one where even though we have in our model huge growth estimates built in, still way too high a valuation over what that growth is. This company did $530 million of revenue in 2025. Again, that’s million with an M. We’re expecting them to do 2026, $4 billion worth of revenue. We have a five-year compound annual growth rate of 122%. So that means by 2030, revenue would be all the way up to $29 billion. Again, they did only $530 million last year.

Taking a look through the model, they’re not going to be earnings positive until 2028 at best. We have them being free cash flow negative until 2030 because they’re spending so much money on capex every year building out their business that they’re going to be subject to continually having to raise money in the debt markets. If there’s any kind of issue with the debt markets between now and 2030, they could be subject to not being able to generate, or I’m sorry, not be able to raise as much debt as they need to fund that buildout. Again, just taking a look at where the company is trading in the marketplace, we have negative earnings for the next couple of years. You really need to look at those out years. Even by 2030 with all of that growth built in, they’re trading at 36 times our 2030 earnings estimate.

Stock to Sell: DAL

Dziubinski: Wow. OK. Well, your final stock to sell in August is Delta Air Lines DAL. Is this simply a call based on valuation, or is there more to the story?

Sekera: I would say a little bit of both. I mean, it is a 1-star-rated stock, so we do think it’s significantly overvalued at this point. Again, being an airline, it’s a very high uncertainty rating on the stock. With all of the airlines, we just don’t think that you can build an economic moat in that sector, so it’s rated a no-moat company. Now, in my mind, when I think about airline stocks, I really don’t think they’re appropriate for buy-and-hold type of investors. This is one of those areas I think what you want to do is rent stocks as opposed to own stocks. What I mean by that is this is the kind of company where you’re going to have huge swings in that stock price over a full economic cycle. These are ones where you want to buy when they’re oversold to the downside. They’re trading at very undervalued levels. But then when the pendulum swings too far to the upside, you want to sell these stocks when they fly too high. In fact, Delta was a pick of ours back in 2022 and in 2023. It was really a pandemic recovery play, but with as much as that stock’s traded up, it’s now in the area where it’s too expensive and really should be taking profits.

Overall, travel demand we think is finally peaking after the pandemic. I think high fuel prices, which haven’t really started to hurt ticket sales, probably will start doing that in the second half of the year. We’re forecasting margins, which have been very high over the past couple of years, will probably start to normalize over time. Taking a look at where it’s trading, it trades over 17 times our 2026 earnings estimate, which I think is really just too high for this type of cyclical company.

Stock to Buy: NOW

Dziubinski: Well, we’ll move on to your stocks to buy in August, and we’re going to start with ServiceNow NOW. Run through the numbers on it.

Sekera: ServiceNow is a 4-star-rated stock trading at a 24% discount. Doesn’t pay a dividend. If you’re a dividend investor, it may not necessarily be appropriate for you. Of course, being a technology stock, we do assign it a high uncertainty rating. In this case with the company, we also assign it a narrow economic moat.

Dziubinski: Of course, we’ve talked on the podcast before about how Morningstar thinks that the selloff that we had seen earlier this year in software really had been overdone, so why ServiceNow specifically today?

Sekera: Well, a number of different reasons. We talked about it a couple of weeks ago; the results came out, and they were better than expected. We had a slight increase to guidance. Overall, just really no change in our investment thesis. Longer term, we think that this company’s probably going to be a key software beneficiary of AI. We’ve noted that the deals with five or more AI products grew 5.5 times year over year, over a billion dollars in annual contract value, and sequential growth is still accelerating. Fundamentally, we still see a lot of runway for growth here, even though the market is still very concerned about AI potentially disrupting the type of business here. This is another one. Our tech team has it as one of their best picks for the sector, specifically Dan Romanoff. He’s the equity analyst that covers this one. I’m just going to read a quote here from him specifically.

He thinks the company is, “One of the best blends of growth and margins in enterprise software, and results continue to show AI is not hurting the firm’s fundamentals.” I think with what’s going on, what I’ve seen in the market over the past couple of weeks, underneath the surface, we’ve started to see some of this rotation out of a lot of these AI hardware stocks, specifically a lot of the AI hardware stocks that are more commodity-oriented in nature. I think the expectations there, people are finally realizing that they just got too overextended. Of course, if there’s any kind of hiccup with as high as those valuations are, a lot of those stocks could continue to fall and, in many cases, drop precipitously from even where they are now. Overall, I think that as people rotate out of those stocks and you still want to be in the tech sector, I think software should be a beneficiary of that type of rotation.

Stock to Buy: MDLZ

Dziubinski: All right. Your next stock to buy in August is a former favorite, and that’s Mondelez International MDLZ. Give us the highlights.

Sekera: Mondelez stock is a 4-star-rated stock, trades at almost a 20% discount to fair value. Pretty good dividend yield at 3.2%. We rate the company with a low uncertainty and assign it a wide economic moat.

Dziubinski: Why do you like Mondelez specifically today?

Sekera: I mean, overall, it’s got pretty good momentum. The stock is up 16% year to date. We saw give back some of the gains following earnings, but I don’t think that weakness was actually about the earnings. I think it was much more about a slight rotation we saw over the last week to week and a half out of some of the defensive stocks that had been doing pretty well and go back into a lot of these, what I call “go-go” momentum names in AI. I think that momentum’s probably about run its course at this point. Fundamentally, the company’s doing very well. I think it’s actually doing better than a lot of the other food companies that we follow. Organic sales were up 2.2%. Specifically in North America, it was up 3.4%. That’s good sequential improvement from the only half of a percent that they posted in the first quarter.

Europe, unfortunately, still has relatively weak performance. But if you remember when we’ve talked about this company before, my real attraction here is the emerging-market business. It’s about 40% of their total sales. That’s the highest as a percentage of sales in emerging markets compared with the other food companies. In this case, that’s up 7.4%. I still think that this company will benefit from that sales growth in the emerging markets over the longer term. To some degree, I’m almost just kind of waiting for Europe to bottom out and move up. When that happens, I think that’s going to be another catalyst for this stock to the upside.

Stock to Buy: MDT

Dziubinski: Your final stock buy this week is Medtronic MDT. What are some of the key metrics on this one?

Sekera: Medtronic stock is currently rated 4 stars, trades at a 22% discount to fair value, pretty attractive dividend yield at 3.3%. We rate the company with a medium uncertainty and a narrow economic moat.

Dziubinski: Yeah, and Medtronic’s one of those companies that’s really prioritized dividend growth on top of it all, in addition to the dividend being attractive. Besides that, what else is there to like here?

Sekera: Well, I think what I like the most is I’m really starting to see fundamentals finally starting to improve, which is what we’ve been expecting for a while. I’m kind of relieved to see that that’s finally coming to fruition as we have expected. Specifically, the company’s commercializing several key technologies that have been under development for a while, and now we’re finally starting to see that in the results. Their fiscal fourth quarter revenue up 7%, operating income up 29%. Our analysts specifically called out cardiac rhythm and heart failure as well as acute care and monitoring categories, both registering some double-digit growth. I think this should allay a lot of the market concerns about some of the softness that we’ve seen in their more mature product lines really over the past year, maybe even two years at this point. Taking a look at our forecast, we do expect those new products to drive the top line.

We’re looking for 5% average revenue growth over the next couple of years. As that happens, we’re looking for some gradual operating margin expansion as well; you combine that, and you’re getting over 8% earnings growth over the next five years on average. The stock trades under 15 times our fiscal 2027 earnings estimate. Taking a look at the chart, this is another one where it looks to me like it’s probably bottomed out in June. If you look at the trading pattern, if you look at when it sells off, it’s selling off less each time, so you’re putting in those higher lows. I like that nice kind of upward trend with those higher lows being put in.

Dziubinski: All right. Well, thank you for your time, 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 again 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.