Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I sit down with Morningstar Research Services Chief US Market Strategist Dave Sekera to discuss what’s on his radar this week, some new Morningstar research, and a few stock picks or plans for the week ahead. But before we begin this week, I want to let viewers know that Dave will be taking a few well-deserved weeks off in August.
He’ll be back live with me on Monday, Aug. 29, but your August won’t be completely Dave-less. Dave and I have some special episodes and surprises planned for viewers in the next few weeks. So we hope you’ll stay tuned. Now let’s get to what’s on your radar this week, Dave, and that’s the Federal Reserve meeting. Now, no one’s expecting any change to interest rates.
What will you be listening for?
David Sekera: Hey. Good morning, Susan. But when I think about the Federal Reserve, one thing I always think about is they never want to surprise the markets by making a change to monetary policy without really letting the markets know ahead of time what they’re thinking, what they’re going to be doing. So at this next meeting, I think what the Fed’s going to do is they’re going to intimate to the markets that they’re getting prepared in order to start loosening monetary policy, most likely at the September meeting, which is still our base case.
So I think they’ll make some updates to the language in their published statement. But really, I think that’s what people are going to be listening for in the Q&A from Chair Powell after the meeting. So I think he’s going to note there that the Fed is probably getting more confidence. The confidence that it’s talked about that it needs that inflation is on that long-term downward path.
And I think he will try to indicate that the Fed is going to be ready to start easing monetary policy here in the near term. Now the hard part for him, it’s going to be interesting to see how he talks about the economy. We had that second-quarter GDP print which came out much higher than anybody expected.
So I think he has to acknowledge that the GDP in the second quarter was higher than expected, but somehow still balanced that with the view that the Fed does think that current monetary policy is restrictive. And of course, the economy, we do expect that will weaken in the second half of the year and into 2025.
Now, as far as that second-quarter GDP print, just a quick aside there: Our economics team they actually thought that the economy is really probably stronger in the first quarter than what the first-quarter GDP print came in at. But at the same point in time, they don’t think the economy is as strong as that second-quarter print.
So there were a couple of different measurements that they considered to be noisy. So I think that some of those probably were not recognized in the first quarter, came through in the second quarter, and that’s what bumped up the second quarter GDP number. So realistically, I think investors probably should average those two quarters together in their mind to think about how the economy was running in the first half of the year.
But our base case is still that we’re looking for the economy to slow over the next couple of quarters, really be relatively stagnant in the first half of 2025, and then start to reaccelerate in the second half of 2025 once the Fed cuts that we expect this fall really to start impacting the broader economy.
Dziubinski: So anything else on the economic front you’re watching this week, Dave?
Sekera: On Friday we’ve got payroll numbers. We’ve got unemployment. In my mind, that’s only going to be meaningful if they were significantly different than what consensus expectations are. When we look at the companies that we’ve got coming out with earnings next week and then with the Fed meeting, I think the market’s going to be so focused on those that I think these numbers will essentially be on the back burner.
Dziubinski: Now we have a full slate of earnings this week from Big Tech and tech-related companies. So let’s run through those one by one. Now I think Microsoft is reporting on Tuesday. Now of course Microsoft has been an early leader in AI. So what are you going to be looking for in the earnings report? And what does Morningstar think of the stock ahead of earnings?
Sekera: Well going into earnings the stock is currently rated three stars. I mean it’s pretty much right at our fair value. Of course it’s a company we rate with a wide economic moat and a medium uncertainty. But as you mentioned I think the market’s still just going to be hyper focused on anything to do with artificial intelligence.
Personally, I’m going to be listening very closely to any commentary they have on their capital expenditures, spending plans, specifically on their AI buildout. Now we think that that’s going to remain relatively high. And in fact, this past week, Alphabet mentioned on their call, they still think the risk is to the downside to underspending on AI as opposed to overspending.
So I’m assuming we’re going to hear more of that kind of commentary as well. Now fundamentally for Microsoft in and of itself, I spoke to Dan, who’s our analyst on that one. In his mind, he thinks that the single most important data point is going to be the growth in their Azure business.
That’s its cloud business. It grew 31% year over year last year. I think guidance is looking for another 30% to 31% growth this year. And of course, it’s really AI that’s been driving that growth and still expected to drive that growth further and faster over the next couple of quarters. Now Microsoft, this is actually their fiscal fourth quarter.
So they don’t have a year-end calendar. They use a different fiscal year-end. So they might have some commentary for their outlook for all of fiscal 2025. I think that will be really interesting, both from the perspective of how they may view the US economy, but also really more importantly, their view of the global economy.
Now, they typically don’t give any numbers surrounding kind of their outlook for the full year, but certainly expect to hear some color from their point of view. And then lastly of course, what their guidance is going to be for next quarter., both for revenue and their view of operating profits.
Dziubinski: Now Meta also reports earnings this week. And, speaking of AI spending, the company announced in its first-quarter earnings report that it was expecting to make a big investment in AI before it was really going to be seeing the fruits from it. So what are the key things to listen for from Meta this quarter? And how does the stock look heading into earnings?
Sekera: Yeah. Heading into earnings I think you need to be really cautious of this stock. It’s currently a 2-star-rated stock. It’s probably trading at about a 15% premium to our fair value. Now it’s interesting that stock is up 30% year to date. Although I’d note just in like the last week or two kind of with this market rotation out of these kind of AI names. It’s now 15%, off of those highs. So we’ll see going into earnings. Now with Meta, the stock sold off after the first-quarter earnings. And a lot of that was because they had ramped up their spending on their own AI initiatives.
And at that point in time, we were saying that it’s a necessary spend. But investors I think are very wary of Meta and their capex spending. Of course, you had a couple of years ago, they wasted just a huge amount of money on the metaverse program, which, at the end of the day, appears like that’s come to naught.
So I think investors are very careful about capex spending here. So if it comes out too much higher than expected, that could be a negative. Now, fundamentally, as far as kind of their core business, we want to listen for how much growth there is on their daily average users.
There are some concerns there that maybe growth for Facebook and Instagram are close to peaking at this point in time, so could see a slowdown in growth there. We’ll listen for how things are going for ad pricing. Now pricing for their ads did increase last quarter and that’s after two years of declines. So the question here is can it continue to keep rebounding.
And of course another one of the strikes against Meta over the past couple of years have been a lot more privacy restrictions that have been put in place by not only governments but Apple and some of the other cellphone users out there. So again, I want to hear from Meta if they’re making additional progress in their ability to target users and measure their ad effectiveness.
And then lastly, any discussion from Meta on how they really plan on monetizing artificial intelligence. At the end of the day, that’s still really the crux of the matter with AI—how do we turn all of this capex spending into new revenue and/or how is it really going to improve their operating margins and get that return on invested capital over time?
Dziubinski: Now, we also have Apple reporting this week. And even after you referred to the pullback in some of these Big Tech names, even after that pullback during the past couple of weeks, Apple still looks overvalued. So what are you going to want to hear from Apple?
Sekera: Yeah I’d be cautious of this one, too. Another 2-star-rated stock. It trades at a 30% premium to our fair value. Now interestingly—this stock, it rose pretty substantially following their developers’ conference call in June. We held our ground. We left our fair value unchanged. There was really nothing in their AI announcements that led us to revise our assumptions.
So I think this quarter, there’s really going to be a very strong focus on their iPhone sales. Here in the short term, we think that there’s going to be some headwinds. It might be pretty sluggish this quarter and next, specifically there’s been pretty sluggish sales overall in China. And we just expect there’s going to be slower purchasing before that iPhone 16 with its new AI capabilities rolls out this fall.
Now I would note, when we look at our fair value and think about our assumptions, our analyst thinks he already has a pretty positive view on the handset cycle for both fiscal 2025 and fiscal 2026. And at this point in time, that new AI offering just didn’t lead us to increase our current assumptions.
So we do think that for long-term investors, the stock is overvalued.
Dziubinski: Now we have Amazon reporting this week. What are you going to be listening for here when it comes to AI and the business in general, and how does this stack look heading into earnings?
Sekera: So it’s trading at just a very slight discount to our fair value. Puts it smack-dab right in the middle of that 3-star territory. Again everyone wants to hear about AI, specifically how much is that accelerating AWS, their cloud business. But I think fundamentally people with Amazon always want to hear about the long-term profitability of Amazon, really turning their spending into actual dollars and free cash flow at the end of the day.
I know Amazon’s been doing a lot of work on their network. Talking to our analysts here, he thinks that profitability may actually surprise to the upside this quarter. So there could be some upside surprises there. Taking a look at their ad business, a lot of ongoing strength there. In fact, I think their ad business is a lot stronger than what you see from a lot of other ad providers online.
And I would just note, too—the advertising business, that was really one of the real deep strengths of this company over the past couple of years that we’ve really kind of hinged our long-term assumptions on. It was one of the reasons that we really stuck with this stock back in 2022. The market was panicking.
Everything was selling off. This stock went deep into that 4-star territory. I think it may have even touched 5 stars. And it was that ad business that really gave us the confidence kind of in the long-term assumptions that we had here. And of course, lastly with Amazon, I want to hear about the consumer behavior in the retail business.
Now we expect revenue will be in line at this quarter. But as you and I have talked about for I think it’s been several months now that we’ve seen a lot of anecdotal evidence that middle-income consumers appear to just be getting up more and more tapped out. So want to see if Amazon is seeing the same in their online sales.
Are we seeing the same kind of shift in consumer-spending patterns? Are we seeing people get away from discretionary, spending more on staples instead? Are they maybe shifting away from branded products into private-label products? And I think we’ll get a really good picture from Amazon, as far as how we might see that play out over the next couple quarters.
Dziubinski: And then finally this week, investors are going to be hearing from two chipmakers that would like to grow their share in the AI market, and that’s AMD and Intel. So what does Morningstar think of each as we’re heading into earnings for those?
Sekera: Well, I think these two companies are actually on a different path right now. Now, it’s interesting. Both stocks are rated 3 stars. AMD is trading pretty close to fair value. It is a company we rate with a narrow economic moat. Although as a tech company, we do rate it with a High Uncertainty Rating. Now long-term, our team expects AMD will end up becoming the number-two player in designing and manufacturing AI chips.
But it’s still a ways away before that really becomes a meaningful part of their business and their growth over time. And Nvidia, of course, does have the first-mover advantage. Nvidia has been doing a great job of maintaining , that advantage. So AMD’s got some catching up to do there.
So I think the focus for AMD this quarter is going to be on its GPU revenue. Those chips that are currently used for artificial intelligence. We’re actually looking for an increase in their guidance there. It was a $4 billion guidance for 2024. So we want to see if AMD is seeing a pickup in their own AI products.
Now, Intel is a different story. Again it’s a 3-star-rated stock, close to fair value. But it is a company that we rate now with no economic moat. Also a High Uncertainty. I think the concern here is that Intel appears, has really fallen behind in the semiconductor upgrade cycle. They’ve been spending a lot of capex trying to catch back up.
In the short term, over the next couple of years, it’s probably still going to be the leader in traditional semis used for PCs and servers and so forth. But I know our analyst is concerned that Intel’s best days just may be behind it. My concern is this might be one of those names that could be transitioning from what we consider traditional tech into legacy tech.
So we’re going to be listening for any commentary on progress on the manufacturing front to see if they’re starting to catch up with Taiwan Semiconductor. And then listen for any guidance on PC and server sales. I think there’s some risks to the downside there here in the short term, just because we do have this slowing economy, both here in the US as well as globally.
And we’re also just seeing a shift in their customers’ spending going away from traditional servers and that capex being used in AI instead.
Dziubinski: All right. Well, busy week ahead. So let’s pivot over to some new research from Morningstar. And that’s Tesla reported its earnings last week. The stock fell afterward. Yet Morningstar maintained its fair value estimate on the stock. So why the pullback in the market? And why does Morningstar think there’s an opportunity here at this point with Tesla?
Sekera: I mean, to be honest, I don’t think we’re surprised by the pullback that we saw here after earnings. And I think we spoke about this the other week. We just don’t know why that stock surged, I think it was like over 30%, in late June up to early/mid-July. So not necessarily a surprise based on the fundamentals here. The stock still trades at a 10% premium to our fair value. But that only puts it in kind of the middle of the top part of the 3-star range. As you mentioned, our fair value is unchanged. Results at the end of the day largely came in line with our expectations.
Now granted, operating profit was down 33% year over year, largely due to lower prices and lower volumes. But sequentially it was up 37% versus the first quarter. And a lot of that actually was driven by some other areas of their business. They had strong performance in their energy generation and their storage.
So some areas that were help to them to be able to offset what’s going on in the EV market. But most importantly, in our view, Tesla says that they’re still on track for rolling out their affordable vehicle program in 2025. I think we’re hinging a lot of our long-term view on the ability of these low-cost vehicles to really ramp up the demand for electric vehicles over time.
We forecast the affordable vehicles will help drive double-digit growth by 2026 for Tesla. Now the takeaway here for long-term investors. And again when you think about Tesla you really have to have kind of that long-term view on electric vehicles overall within the global auto market. I talked to Seth—the end of the day, he still hasn’t changed our long-term assumptions for EVs.
By 2030, we’re still expecting about two thirds of all new global auto production will be electrified, whether that’s a battery electric vehicle or a hybrid.
Dziubinski: All right. Well, Morningstar edged up its fair value estimate on Alphabet after earnings. And here, too, the stock actually pulled back after earnings. So what’s the market missing here, and is there an opportunity in the stock today?
Sekera: Yeah I think the pullback here is just a matter of maybe some profit-taking, with kind of the underlying dynamics in the market of the underlying rotation out of growth into more value-oriented stocks. So this is one where maybe the stock could just run a little too much too far over the course of the year.
Trades at only a just a very slight discount to fair value. Puts it really close to the middle of our 3-star-rating territory. And as we discussed last week, taking a look at the results, ad growth came out strong as what we expected it to be. Growth in their cloud business accelerated again.
In fact it looks like it ramped up to that fastest pace of growth that we’ve seen over the past 18 months. Our analysts really noted that their AI tools seem to be spurring broader cloud adoption among their clients. But to me, probably one of the most important comments on the conference call was their just kind of offhand comment that the risk in artificial intelligence right now to them is not spending too much but not spending enough.
And I think we’re hearing that with some of the other earnings that we’re hearing out there as well. We got good bookings here on Taiwan Semi and ASML the other week. So, still AI spending here in the short term still growing as hot as everybody’s expected it to be. Fundamentally, I would say we’re still seeing good search business, good ad business. A lot of concern here has been that maybe other AI providers like ChatGPT might be taking some of their search demand. We’re not seeing really any strong evidence of that yet. I think really the only negative you could come away with from them this quarter was their YouTube advertising growth slowed to 13% from 21%.
But again, not enough really for us to change kind of our long-term investment thesis on that company.
Dziubinski: All right, Dave, we have to talk about UPS. UPS suffered its worst daily loss on record after earnings. And then Morningstar trimmed its fair value estimate on the stock to $150 from $158. So walk us through that earnings report. Walk us through Morningstar’s fair value change, and tell us whether the stock looks undervalued today.
Sekera: Yeah, unfortunately, I just have to admit we really called this one wrong. We thought this earnings report actually was going to be a catalyst in order to send the stock higher. Instead, the stock went the opposite direction and plunged after earnings. So let me just start on the good news front.
The domestic ground volumes did increase. We’re seeing stabilization in their international packages. But unfortunately revenue came in much lower than expected. And talking to our analysts that covers the name. he’s really pointing out that there was a big mix shift and a shift into lower-priced delivery services. And that caused them also to have problems with their operating margins.
So the operating margins, that also came in below expectations on a combination of the lower margins that they earn based on more people using lower-priced delivery services instead of the higher-cost ones. And it just appears that they weren’t able to offset the high wage inflation as much as we would have thought that they would have with some of their efficiency measures and some of their headcount reductions.
So overall, we actually lowered our 2024 domestic margin assumptions, but really more importantly to the fair value, we also reduced our long-term profitability forecasts. And that’s what drove the reduction in our fair value here. Now having said all that, it appears maybe the market is overreacting to the downside a bit too much. Stock’s now at about a 15% discount to our fair value.
So it does put it in a 4-star territory. Now it does pay a pretty hefty dividend yield of 5.1%. So I think this might be a story of where it might take a while for the stock really to start moving back to the upside. I think the market’s going to want to see kind of that ongoing rebound in delivery growth but really want to see margin improvement before we can really see the stock start to move back up. So for investors in this one, I would say it’s one where if you own it, I would probably continue to keep owning it. It is undervalued. If you’re patient enough, this might be a good one to maybe start building a position into because at least, if nothing else, you’re going to earn a pretty high dividend yield until the stock does start to work to the upside.
Dziubinski: Now, Morningstar thought that NXP Semiconductors was one of the more attractively priced chip stocks heading into earnings. Now, the stock fell after reporting earnings. But we stood by our fair value estimate. So similar question here, Dave—is there a buying opportunity, and how does our opinion on the company’s earnings differ from what the market thought?
Sekera: Yeah. So at the end of the day, the second-quarter results were actually just fine. We didn’t have any problem with that whatsoever. But the third-quarter guidance here was below our own expectations as well as the Street expectations. Specifically they’re seeing weakness in the automotive and the core industrial end markets. Both of those markets facing increasing headwinds out there.
So I guess kind of the good news here is that we actually heard a similar story from STMicroelectronics. So I think maybe this is some anecdotal evidence here that the economy specifically, at least in autos and industrial and markets, maybe might be slowing more than expected. So I guess the good news here from the perspective of NXP and investors is that the slowdown here really seems to be much more due to the economic cycle.
We don’t think that NXP is losing market share to other competitors. And since it doesn’t change our fundamental view of the underlying business and how they’re positioned and their competitiveness, we held our long term assumptions here unchanged. And so our fair value was unchanged. So at this point the stock does trade at a 23% discount to fair value.
Puts it in the 4-star range. Only a 1.6% dividend yield but to be honest for a lot of tech stocks that’s really not that different from what you would expect. Again, I think this is also another story where the stock might be undervalued here. But I think the market might want to see improvement in global auto sales and industrial activity before the stock can really start to climb back up again. So probably one for more-patient type of long-term investors.
Dziubinski: All right. Well, it’s time to move on to Dave’s stock picks of the week. Today, Dave, you’ve brought viewers five stocks to buy and hold for the long term. You think of these stocks as great core holdings—type of companies that investors might want to own over very long stretches of time. But some investors would say that not all of these picks look terribly undervalued.
What say you?
Sekera: I mean, first of all, even before we get into the picks, I just do have to admit we still think that the market is currently overvalued here, not as overvalued as it was mid-July. We have a bit of a pullback but still above a composite of where our fair values are.
Now it’s not as overvalued but it’s still pretty close to as overvalued as it was at the beginning of 2022. Now at that point in time we actually advocated investors to underweight equities. But we’re in a different market now, and it’s some different dynamics. So I think we are in a market where it can stay overvalued unless there is some kind of specific hard catalyst that’s going to cause the market to correct.
And I want to take a minute to explain my thought process there. So in the beginning of 2022, in our annual outlook, we noted that the market was going to have to face four headwinds over the course of that year. We were projecting inflation to go up. We were projecting interest rates to go up.
We expected the Fed to start tightening monetary policy, and we were looking for the rate of economic growth to slow. Of course all of that played out over 2022. The market really took a hard hit. Probably took too hard of a hit. Bottomed out at pretty low valuations in October. And of course we’ve been off to the races ever since.
But when I look at the market today and I look at those four headwinds, three of those headwinds are actually tailwinds right now. So we’ve got inflation continuing to moderate. We expect interest rates to be on a multiyear decline. We’re looking for the Fed to start easing monetary policy. So the only one of those four headwinds today is the slowing rate of economic growth.
So I think part of the reason that we’re seeing this market rotation right now is investors do want to stay fully invested at whatever their target allocation is for equities. But again, getting increasingly cautious that the growth stocks and the tech stocks in particular do have very high valuations and could be at risk of earnings slowdown in the second half of this year. So really and again I’m sorry this is a long explanation, but one way to keep yourself fully invested is to have that core portfolio of high-quality stocks, those stocks that have an economic moat, whether it’s a narrow moat or a wide moat, maybe stick with those stocks that have, for the most part, Low or Medium Uncertainty Ratings. Stocks with pretty solid dividends.
And be prepared then to add to those positions if they do selloff with any kind of market correction.
Dziubinski: All right. So your first stock to buy and hold for the long term is Johnson & Johnson. Big name in healthcare, wide economic moat, not ridiculously cheap, but it is a core holding you like. Why?
Sekera: Yeah. And this stock’s already had a bit of a nice run here in July. At this point it’s only a couple percent undervalued. Taking a look at the chart, it looks like it might actually be moving into that 3-star territory from 4 star. As you mentioned, pretty healthy dividend yield, a little bit over 3% right now.
Again a stock with a Low Uncertainty Rating and a wide economic moat. And in fact, with the economic moat here, according to Damien Conover, who’s the head of our healthcare equity analyst team, he thinks that Johnson & Johnson has one of the widest moats in the healthcare sector overall. Now the stock was trading at a discount earlier this year.
The reason for that is they are going to face some competition from a biosimilar product in one of their more important products. This will be a drag on growth here in the short term. We’ve already factored that into our model. And in fact when we look at the research and development pipeline, our analyst team forecasts some other new product growth will offset that competition.
Net-net, when I look at our assumptions in our financial model here, I think they’re actually relatively conservative. Like our five-year annual compound annual growth rate on the top line’s only 2.3%. We’re only looking for 4% average annual earnings growth. Yet the stock is trading at under 14 times this year’s earnings estimate and about 13 times next year’s earnings estimate.
So again I think just a good solid core pick that you can really use in your portfolio as kind of the basis of your investments.
Dziubinski: Now your second core stock pick this week is Exxon Mobil. Here’s an example of Big Oil that remains completely committed to oil and gas. Stock looks reasonably undervalued, too. So tell viewers why you like it.
Sekera: Yeah. Four star rated stock 15% discount 3.25% yield. Narrow economic moat. , from my point of view, what’s not to like about it? , it’s our pick among all of the global major oil producers of the global majors. We think that Exxon has just the best combination of production growth over the next five years.
The ability to increase margins as it brings new production on line. We see a very strong exploration program here. And we think they own the rights in a lot of different areas that has some of the better producing new discoveries. Now overall within energy, we actually have a pretty bearish view on the price of oil.
So our midcycle oil price forecast for West Texas Intermediate is $55 a barrel. Of course, oil is much higher than that right now. So in our model we use the two-year forward strip. And then we’ll decrease that over the next three years to that $55 a barrel in our five-year forecast period. But even when you put that into our model, the stock is still undervalued.
So I think this one actually has a lot of upside leverage. If oil prices, for whatever reason, were to stay higher for longer, worst-case scenario if oil prices do fall to that $55 a barrel price target over the next five years, you’re still buying a company that we think is trading at a pretty hefty discount from its fair value.
And then lastly, I would say energy provides just a good natural hedge in your portfolio. So again, if there were some sort of rebound in inflation, the geopolitical conflict spreads into other areas, I think energy and oil prices are going to hold their own in such a scenario.
Dziubinski: Your next pick is Alphabet. That’s a name we talked about already on the show today. So explain why it’s one of your core stock picks at current prices.
Sekera: It’s trading at about an 8% discount. Again it only provides a half a percent yield. But in the tech sector that’s what we’re seeing as kind of those average yields for these companies that are now starting to pay dividends. So it does put it in the 3-star territory, but you are at least buying it at a bit of a margin of safety for a company with a wide economic moat.
Now it does have a High Uncertainty Rating. But when you think about like their underlying business, that High Uncertainty Rating really doesn’t bother me here. When I look at Alphabet and specifically the Google business, they still just dominate the online search market. I think the introduction of generative AI probably adds some uncertainty. But we expect that at the end of the day, Google with just its vast data and information advantage that it has over other competitors, the amount of free cash flow, the amount of R&D that it does, the capex that it puts back into reinvesting in its business,
they’re going to be able to maintain that dominance over the long term. Still, seeing very good growth in the ad business, both across search as well as YouTube. The cloud business is growing very strongly from AI. That’s expected to continue for a while now. They just generate very strong cash flow.
I mean, for the most part, it’s still a company that’s still hitting on all cylinders.
Dziubinski: Now, Pepsi is another wide-moat stock that isn’t terribly undervalued. And the stock’s having kind of a tough year so far. So what’s the rationale behind this pick, Dave?
Sekera: The stock’s largely unchanged year to date. As you mentioned, it only trades a few percent below fair value. But again it’s a company with a wide economic moat, Low Uncertainty, pretty healthy dividend yield of just over 3%. So I think this is just a good solid consumer defensive name. When I think about Pepsi’s business between their beverages and their snacks I would just note that demand for snacks and beverages over time ends up being a relatively resilient throughout economic cycles.
So even if we are in an environment where middle-income consumers are under pressure and pulling back, we are comfortable with Pepsi and its business lineup for the long term.
Dziubinski: And then your last pick this week is Verizon. Verizon actually reported earnings last week. Stock slumped, and Morningstar made a teensy cut to its fair value estimate. So why did the market react the way it did to earnings? And why do you think Verizon is a good core stock pick today?
Sekera: To be honest, we didn’t understand why the stock sold off after earnings. I’d suggest reading Mike Hodel’s note on this one. Again, not sure what happened here, although it was kind of similar to last quarter: Their earnings came out. Stock slumped immediately thereafter.
We didn’t understand why. And then the stock ended up recovering thereafter. We thought pretty strong free cash flow. So again I think this is another one that can be a very good core holding in your portfolio. It’s a company that we rate with a narrow economic moat and a Medium Uncertainty. Stock trades at a 25% discount.
Puts it pretty well into that 4-star territory. Again, another stock with a very high dividend yield. So again, you can get paid while you wait on this one. 6.7% dividend yield. And I’d say our investment thesis here is that over the long term based on consolidation over the past decade that we’ve seen in the US wireless industry, going forward and we’ve actually started to see some indications of this, we expect the wireless providers to start acting a bit like an oligopoly. We expect that they’re going to compete less on price over time, and that’s going to allow their margins to expand.
Dziubinski: Well, thank you for your time this morning, Dave, and have a great break. We’ll miss you.
Sekera: Thank you.
Dziubinski: Viewers interested in researching any of the stocks that Dave talked about today can visit Morningstar.com for more analysis. We hope you’ll tune in for The Morning Filter again next Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this video and subscribe to Morningstar’s channel. Have a great week!
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