Plus, an update on tariffs, trade deals, and stocks that could benefit.
Today on The Long View, we’re featuring an episode from another Morningstar podcast, The Morning Filter, which you can subscribe to on Apple podcasts or wherever you get your podcasts.
Every Monday, Susan Dziubinski sits down with Morningstar Chief US Market Strategist Dave Sekera to discuss one thing that’s on his radar this week, one new piece of Morningstar research, and a few stock picks or pans for the week ahead.
On this week’s episode, Dave and Susan discuss the likelihood of the Federal Reserve cutting interest rates soon and which company earnings to watch for in the week ahead. They also talk about Adobe’s results, takeaways from Apple’s WWDC event, and other stocks in the news. And they welcome special guest Damien Conover, Morningstar director of US equity research, who covers which sectors and industries are most vulnerable to tariffs.
Episode highlights:
Why Good Inflation Numbers Won’t Spur the Fed to Act
Which Stocks in the News Look Attractive?
Tariffs & Trade-Deal Stock Picks
Stocks That Are Rallying & Have More Room to Run
Read about topics from this episode.
Learn more about Morningstar’s approach to stock investing: Morningstar’s Guide to Investing in Stocks
Read Dave’s latest stock market outlook: June 2025 US Stock Market Outlook: Has the Storm Passed?
Find out which sectors and industries would be hurt most by tariffs, according to Morningstar: Tariffs Would Likely Hit These US Stock Sectors the Hardest
Follow Dave on social media.
Dave Sekera on X: @MstarMarkets
Dave Sekera on LinkedIn: https://www.linkedin.com/in/davesekera
Christine Benz: Hi, it’s Chrisine Benz, co-host of The Long View podcast. Today, we’re bringing you a bonus episode from another Morningstar podcast we think you will enjoy: The Morning Filter. Every Monday, Morningstar Chief US Market Strategist Dave Sekera and Susan Dziubinski, investment specialist for Morningstar, talk about what investors should have on their radars for the week, can’t miss Morningstar research, and a few stock picks or pans for the week ahead. It’s a great listen, and we hope you like the show.
Susan Dziubinski: Hello and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday before market open, Morningstar Chief US Market Strategist Dave Sekera and I talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.
Well, good morning, Dave. Happy belated Father’s Day to you and to all of the dads in the audience.
David Sekera: Hey, good morning, Susan. Yeah, I hope everyone had as good of a Father’s Day as I did. Went out, got a ball game in the afternoon. Game went pretty well, unfortunately, for the Kane County Cougars, I don’t think that they were quite able to pull it out at the end of the game. And this morning, I’ve got my mug going from my middle daughter today and just a little preview, I will have a new mug for next week.
Dziubinski: Ooh, I’m excited to see what that Father’s Day gift mug looked like. All right. Well, sounds good. Now, before we get to the US economy and markets, let’s first talk about the escalating conflict between Israel and Iran. On Friday, we saw stocks pull back, oil prices rise, and the US dollar strengthen. Now, Dave, if the conflict continues to escalate, what might happen in the US stock market?
Sekera: I took a quick look through the headlines this morning. Unfortunately, it looks like the conflict is still ongoing. Looks like we’ve got attacks where both of them are still shooting missiles at one another. But the good news is, at this point, it appears as that at least the conflict hasn’t spread any further between just Israel and Iran for now. Took a look at the stock market futures—they’re actually in the green this morning, so we are seeing a bit of a relief rally that that hasn’t gotten any worse or spread to anywhere else.
But personally the thing I watch most closely for something like this is going to be spot oil prices, and the reason I’m watching that is I suspect that the people that probably have the most information, certainly the most on-the-ground information, coming to them is going to be global energy giants like BP BP, ExxonMobil XOM. They do have very large global trading desks. So that’s where I’m really watching for real-time information as to the status of the conflict. So if you were to see those oil prices spike, that’s certainly going to indicate things are getting worse but this morning, oil prices are subsiding as well.
Dziubinski: Then let’s talk about some economic news. The CPI and PPI numbers came out last week, and they were better than expected. But do they really mean anything given the continued uncertainty around tariffs?
Sekera: In my opinion, I don’t think so. I think we’re going to need to see at least several more months of data before people really understand what’s going on. That’s what I think the Fed is waiting for as well. So here in the short term, disinflationary forces have still been able to more than offset any of the impact potentially from tariffs. In fact, it just doesn’t appear like tariffs really are showing up all that much just yet. I think there’s really two questions out there right now most people are guessing at.
First, how much had companies been able to over-order inventory and supplies before the tariffs went into effect? Is that what they’re currently working their way through right now? Of course, then if so, how long is that going to last before they then run out and have to be able to order more, at which point in time we will see the tariffs coming through? And then finally, will they be able to restructure their supply chains to minimize tariffs?
The other really big question to us is, are companies actually eating the cost of those tariffs, not passing those costs through to their own consumers? And if so, how much of a damper is that going to then put on second-quarter earnings if they are eating those costs? Second-quarter earnings, of course, starting here in mid-July. Now, I would highlight that two weeks ago, FactSet put out an article. They noted that Street analysts were cutting their second-quarter earnings even more than usual. So is that because of a slowing economy? Is that because of the tariffs? Is that some sort of combination of the two? What I would just really caution investors that, with stocks getting back to their highs again, if we do have a soft earnings season, if we see growth slowing more than expectation, what is that going to do to stocks? Probably won’t be very good.
Dziubinski: Now, we also have the Fed meeting this week. Now, the market is pricing in no expectations for a rate cut, right?
Sekera: Correct. At this point, there’s essentially no probability embedded in the market futures of a rate cut here in June. I’m sorry, here in July. No, June. What month are we in again?
Dziubinski: But now my next question is about July. So what about the July meeting and onward? What’s the outlook for rate cuts for the rest of this year?
Sekera: Yes, I’m just pulling up the markets right now. And for the next meeting, which is July 29 and 30, right now there’s just under a 20% probability of a cut. The Fed, of course, skips their meeting in August. So the next one after that is going to be Sept. 16 and 17. There’s a 65% probability of a cut at that point in time. And I just note that here internally, Morningstar’s Chief US Economist is looking for a total of two cuts before the end of this year.
Dziubinski: Now, earnings season is winding down. Are there any companies reporting this week that you’re interested to hear from?
Sekera: There’s a couple. So one I’m really going to have a large focus on is going to be Lennar LEN. Now, Lennar is the second-largest homebuilder in the US, so really looking for insight from them as to strength of the new homebuilding market. Now, in April, they reported a pretty slow start to the spring selling season. They also noted there is an above-average supply of new unsold homes out there. Looking at our own forecast, we’re looking for housing starts to decline about 3.5% this year and another 1% next year. When I look at homebuilding stocks overall, I’d say somewhere in the 40% area since last fall, they’ve dropped. A lot of them were 2 stars. At this point, they’ve fallen enough that I think that they’re probably more fairly valued. There’s a couple that are undervalued right now.
I’d just caution, in my own mind, I think housing stocks are going to be a longer-term story. I think it’s probably going to take at least a few years for these to really work their way through the system. We do project the annual housing starts will end up exceeding one and a half million by 2028 to 2029. But I think that for these kind of stocks really to start turning around and working, you’re going to need to see demand bottom out, start moving back up, and that may not be until 30-year mortgage rates start coming down as well.
Another one I’m going to look at is going to be CCL, that’s Carnival Cruise Lines. Now, I did do a little digging through the archives, but if you go back into our Wayback Machine, you’ll see this was one of the very first stocks that we recommended on The Morning Filter back in Feb. 6, 2023. I believe that was our third episode. It was a 5-star-rated stock back then. We reiterated that buy several times over the course of the year. Then in mid-2024, it looks like we swapped out for NCLH Norwegian Cruise Lines.
Now, looking at the charts, both stocks have risen enough that they both went into 3-star territory this January. Both have slid since then. They’re now 4-star-rated stocks. But again, these are very good bellwethers for consumer sentiment. Typically, I tend to ignore all the consumer sentiment surveys. I’ve always found that there’s just always been a difference between what consumers say versus what they actually do. And of course, vacationing, cruising, highly discretionary. So that’s where you really see whether or not consumers have that confidence to put down deposits ahead of time.
And then we have Darden DRI. So again, that’s kind of similar to Carnival Cruise Lines. Good indicator of consumer sentiment. Darden being the largest full-service restaurant operator in the US Eleven different restaurant brands. They have Olive Garden all the way up to the Capital Grille. So that really just helps give me a sense as to what’s going on from anywhere from middle-class consumers, all the way up to upper-end consumers.
And then Kroger KR, I’ll probably take a quick look at that. I won’t spend a lot of time. Just if there’s any indication from them what they’re seeing with consumer purchasing habits, because of course that does have an impact on what it may mean for the dollar stores—of course, Dollar Tree, Dollar General, two stocks we’ve talked a lot about over the past two years.
Dziubinski: Let’s talk about some new research from Morningstar about stocks that were in the news last week. Start with Adobe ADBE, which reported earnings. Seems like Morningstar’s analyst was pleased with the results, yet he brought down his fair value estimate on Adobe stock by $30. So why the fair value clip, and do you still like the stock?
Sekera: Well, I would just note this is actually a pretty good example of why when you’re looking to buy stocks, you want to buy stocks that do trade at a pretty significant margin of discount below what we think intrinsic valuation is. So that gives you a good cushion that if your assumptions change and if you do reduce what you think the intrinsic value of the stock is worth, you still are owning it at a discount from that long-term intrinsic valuation.
Now in this case, yeah, the numbers were pretty good. It was the fourth-consecutive quarter that revenue beat our expectations. Management raised its full-year guidance on both the top and the bottom line. But as you noted, we did lower our fair value a bit down to $560 a share from $590. Just taking a look at our note here, essentially Dan reduced his growth assumptions by about 30 basis points a year over the next five years. Having said that, we’re still looking for average annual top line growth of 10% per year over the next five years. So in this case, I need to touch base with Dan this week, kind of find out what in his mind was slightly different than before the call. But at this point, it’s still a 4-star-rated stock at a 30% discount.
Sekera: On last week’s episode, we talked about Chewy CHWY head of earnings, and you mentioned at that time how overvalued that stock had become. So the stock sold off by about, I think, 11% after earnings. What did Morningstar make of the report, and how does Chewy’s stock look from a valuation perspective after that pullback?
Sekera: Fundamentally, performance was good. Top line up 8%, operating margin expansion 120 basis points. The number of active customers up 3.8%. Really, all the reasons why we’d like this stock in the past. This is another one that you kind of have to go back to the Wayback Machine, but we had recommended this one, I think, first on Nov. 27, 2023. We reiterated that buy recommendation on June 10, 2024. But last month, that stock rose up into the 2-star category. We just think that the stock momentum went up too far, too fast. So really, after earnings, it just wasn’t able to keep up with what the valuation was pricing in. Having said that, even after the pullback, still looks pricey to us, a 2-star-rated stock at a 30% premium.
Dziubinski: Now, word on the street is that Papa John’s PZZA might go private. Now, you and I talked about Papa John’s on the Feb. 10 episode of The Morning Filter. And Dave, at that point, you made very clear that you are not a fan of the pizza. But what about the takeover deal talk, Dave? What do you make of that?
Sekera: First question I’d have for Apollo is, Have you done your due diligence? Have you actually tried that pizza yet? I’d make sure you do that before you put a bid in there. No, all kidding aside, we noted that even though I’m not a fan of the pizza, the stock was a 5-star-rated stock at a 40% discount. Looks like it’s up 30% since then. At this point, it’s 4-star-rated, 24% discount, so overall I would just say the buyout probably indicates our view that the stock is undervalued, but I’d also highlight, too, this isn’t just necessarily a slam dunk of a buyout deal. The company is already somewhat highly leveraged, so that could put a damper on them being able to structure a buyout of the company.
Dziubinski: All right, time for a pivot. Let’s talk about tariffs, trade deals, and the markets. President Trump’s pause on reciprocal trade deals with many countries, reciprocal tariffs, excuse me, with many countries is set to expire in less than a month, and at least that’s the status as of this morning while we’re streaming. Where do we stand right now on tariffs and trade deals after there were a few new developments last week?
Sekera: I don’t know, Susan. I mean, to some degree, it’s all still just clear as mud to me. I mean, all kidding aside, the court ruling allows the tariffs to remain in effect while the appeals process plays out so now the Trump administration at least still has the stick behind their carrot. We do have some momentum in initial discussions with China, but I would say all they’re really doing there is still just moving forward with previously agreed-to frameworks. I don’t necessarily know if there’s anything new going on there.
The Trump administration did state that as long as negotiations are going on in good faith and still moving forward, they may be willing to provide additional extensions. But from what I can see in the headlines, I just still don’t see a lot of clarity as to where we are exactly, like what the specific terms and conditions are that are being negotiated. So we will have the first tariff pause deadline coming up here pretty quickly. So July 9 is when the deadline will be up for the EU, India, Japan, Canada, and so forth. So as we get closer and closer to that, I wouldn’t be surprised to start seeing some market downward volatility. And then we have that second tariff pause deadline coming up Aug. 12 with China. So still have a lot of wood to chop going on with all of this.
Dziubinski: So, as Dave mentioned, there’s a good deal of uncertainty around where we’ll end up with tariffs. So given that, I sat down with Morningstar’s director of equity research here in the US, Damien Conover, to discuss what sectors and industries would be most and least vulnerable to a worst-case tariff scenario and what that impact could be on stock valuations. Here’s what Damien had to say.
Now, Damien, Morningstar’s equity research team recently published some new research examining the impact of tariffs on Morningstar’s valuation for stocks across sectors and across industry levels. And then you examined both the direct impact of tariffs and then that indirect impact of tariffs on economic growth. So first, outline the three scenarios that your team considered during this research.
Damien Conover: Susan, one of the things we’re finding is a lot of interest in potential pathways that we might go down because of the tariffs. And so we had our chief US economist look at three different scenarios that potentially could happen because of the tariffs. We took a look at a bear case, which we think is sort of the 25th percentile of likeliness to happen. The base case, which we think is most likely, that’s the 50th percentile of likeliness to happen. Then a bull case, an optimistic scenario, which will be about the 75th percentile of likelihood. And take a look at different tariff rates and different sorts of economic growth rates behind each one of those scenarios.
Dziubinski: And let’s focus, not to be negative, but let’s focus on sort of that bear case, the worst-case scenario that we would imagine from the tariff rates of, I think you said, 18% and the growth rate being the lowest.
You said that the two sectors in that scenario that would be affected most by tariffs would be consumer cyclical and basic materials. So give us an idea of what the bear case is for those two sectors and whether that’s largely due to the tariffs themselves or it’s due to, indirectly to, the tariffs and that impact on economic growth.
Conover: Yes, great question. When we think about that bear case, with tariffs going about 18% for the long term for the next five years, these are the two sectors we think are most at risk. So cyclicals, we think the valuation damage there, if we go down that bear case, it’s going to be over a 20% hit to valuation of that sector. It’s a big hit. This is a space where a lot of things are manufactured internationally. It’s really in the direct bull’s-eye of those tariffs. You think about all those tariffs, all that goods coming back, you’re getting hit with those tariffs. That’s going to be a pretty heavy hit.
Now, if we think about basic materials, it’s a little bit more of an indirect hit. This is an area where it’s very exposed to the overall economy growth, and in that bear case, we do have the GDP growth slipping quite a bit. And basic materials are going to have that amplified exposure there and sort of the secondary impact, not the direct impact of tariffs, but the slowing of the economy.
Dziubinski: Got it. So then what industries across different sectors would be most negatively impacted by tariffs in that bear-case scenario?
Conover: Yeah, so first to maybe unpack a couple of the sectors a little bit more by industry—so we think about cyclicals, this is an area, like I said, close to over a 20% hit to valuation. Retail, apparel, this is a very sweet spot for the damage of the tariffs. All, not all, but a very high percentage of that material is being manufactured internationally, and hit with the tariffs—that’s going to bring down the valuations for these companies.
When we think about basic materials, mining is an area where it has amplified exposure to a slowdown in the economy. So this is an area where we think over 20% hit the valuation for that specific industry.
If we get outside of those two main sectors of damage, one other area that is also very exposed to a bear case is the asset management group and this is one where you see the economy slowing, you see the market pulling back, and this is a basis-points business, where these asset managers typically charge money on a basis point how much assets they have, and when the market comes down that hurts them, and it’s sort of amplified in their margin structure. So three industries that I’d say are probably some of the most exposed in a bear case.
Dziubinski: So let’s talk a little bit about what’s the change then if it’s not the bear case, but it’s more of our base-case assumption? Are we still talking about, I’m assuming it’s still similar sectors and similar industries, but how bad could it get from a valuation standpoint?
Conover: Yes, so when we think about shifting from the bear case to the base case, the damage is typically reduced by about 10%. So, we talked about some of the worst-hit sectors in the bear case, cyclicals, basic materials, you add over a 20% hit to valuation. If we go close to a base case, which is still worse than where we were pre-April, the damage is closer to, close to negative eight to, call it, high-teens damage. So maybe call it a 10% delta of difference. So still a headwind for those particular sectors, but much more manageable in the base case.
Dziubinski: So let’s look at the other side of the coin and talk about sectors that actually look most tariff-resilient in our base case and our bear case, I guess. Let’s look at both. It’s not surprising. I did take a peek at the research, so I know that the sectors are traditionally what investors would think of as those defensive sectors, right?
Conover: Absolutely. So it’s going to be sort of your traditionally thought of as defensive spaces. We’re talking about utilities, we’re talking about consumer defensive, and healthcare. These are sectors that, regardless of the economy, people are still going to be purchasing those assets. The other thing that’s sort of unique about them is they are less exposed to tariffs. Think about healthcare, that’s typically more service-driven and even the pharmaceutical firms have a lot of manufacturing here in the US. When you think about utilities, that’s very localized, and then defensive as well. These are products that folks are going to have to buy regardless of the price, so these are sectors that we don’t expect a lot of valuation impact regardless of our scenarios but have very minimal exposure even under the base case.
Dziubinski: So what industries then that maybe within those sectors or outside of those sectors also look somewhat resilient?
Conover: Yeah, so a couple that I’d pull out from those sectors within healthcare—drugs is a space, again, where I talked about just briefly before, but this is an area where there’s incredibly strong pricing power there, and these firms can pass along any impact that they may have. And then on top of that, drugs are something that folks are going to have to buy regardless. And a lot of times they’re protected by the payment itself. Yes, there are copays, but insurance is picking up a lot of that.
Additionally, we get into utilities, regulated utilities, I think is a great area to be. This is an area where utilities are a little bit constrained in what they can charge, but they are allowed to have that spread and that spread should enable some pretty stable returns going forward.
If we think about the consumer defensive area, the beverage area is an area where there’s a lot of continual buying. The price elasticity for all those areas is pretty favorable for firms that, if they need to pass along pricing, they can, and a lot of times consumers are going to need to buy these things regardless of the market environment.
Dziubinski: So, Damien, as you noted, there remains so much uncertainty around tariffs today, where we’re going to end up and by when. So, what advice would you give investors today who are looking for new investment opportunities amidst all of this uncertainty?
Conover: Yes, great question. I’d highlight three key points. One, keep thinking about investing for the long term. There’s a lot of volatilities. The tariff news definitely caused increased volatility. But when you think about investing, think about the very long term, and that should set you up to work through these different volatilities.
Second point, I say take advantage of valuation opportunities. The volatility provides different entry points, and be aware of when things pull back for too much for too wrong of the reason, and it can be great opportunities to get into great stocks at discounted prices.
Then the third point I’d say is keep in mind the moat ratings on stocks. There are stocks, if you want to be more immune to the tariff news, you think about some of the wide-moat firms that have strong pricing power. These are firms that can pass along tariff increases by pricing to consumers. And because of their wide moats, they’re protected from some of the competition, and that can enable a little bit more safety when thinking about investing in this tariff volatility.
Dziubinski: So sounds like people should build wide-moat watchlists.
Conover: Absolutely.
Dziubinski: Good to see you, Damien. Thank you for your time.
Conover: Thanks for having me, Susan.
Dziubinski: Dave, on the May 19 episode of The Morning Filter, you shared a few stock picks of companies that should benefit from President Trump’s trade deals. And one of those companies was Boeing BA. Now, Boeing stock fell after the deadly crash of an Air India Boeing 787. So, is Boeing still one of your picks? And if it is, why?
Sekera: Boeing initially, actually the stock did pretty well after we first talked about it, but it did give back pretty much all of those gains after the crash. Now, this is a case I just highly recommend going to Morningstar.com and reading through Nic’s full note. The synopsis here is we did affirm our valuation afterward, but we will need to see what the results of the investigations will reveal over time before we really understand what it may or may not do to the long-term valuation of the company.
For now, Nic’s opinion is he thinks it’s pretty improbable that system design or manufacturing flaws were going to be the cause of the accident here. He doesn’t see necessarily a relevant connection between the aftermath of the two 737 crashes. So again, I would just highlight there’s going to be more here in Nic’s note on Boeing.
Dziubinski: Another of the Trump trade stocks that you talked about in May was Fluor FLR, and the stock’s up quite a bit since then. So talk a little bit about what’s driven that dramatic price movement in Fluor in just a few weeks, and is the stock still attractive?
Sekera: I’d love to take credit for this one, but I know better than that. And to be honest, I don’t really know what’s caused the stock to run up this far this quickly. As far as I know, and I did do a quick screen through the news headlines, I just don’t see any new news that would have specifically been a catalyst. But as you mentioned, the stock’s up 27% in just under a month. It’s actually now a 3-star-rated stock at a 7% discount.
If you did get involved in the stock, maybe now is a good time to at least take a little bit of profits off the table. And maybe you use something like Morningstar’s tools online to look through not only the fundamentals, but this might be a good case to pull up a couple of different technical indicator charts. And maybe if you want to play the momentum a little bit more to the upside, you can. But if you start to see that stock rolling over, start seeing that momentum fall, that might be a pretty good time to lock in some of those profits.
Dziubinski: Now, viewers have reached out with questions about your Trump trade deal stocks. Jim, one of our listeners, emailed us asking about whether GE Aerospace GE, RTX RTX, and Howmet might experience some of the same positive tailwinds that you’re expecting for some of the other Trump trade deal stocks. So what do you think? Are any of those three stocks attractive?
Sekera: Yeah, I mean, these are stocks that we took a look at at that same point in time. Now, we don’t have an official opinion on Howmet. We don’t cover it. But as far as GE and RTX, yes, generally they will benefit from the same tailwinds. But when I ran the screen, GE Aerospace didn’t make the cut. It was a 3-star-rated stock, trading pretty close to fair value. And RTX, while that is a stock we have recommended on The Morning Filter in the past, at this point it was a 3-star-rated stock at fair value. It’s up 6% since, and it’s now trading at the upper end of that 3-star range. It’s actually starting to get close to 2 stars at this point.
Dziubinski: All right, so neither of those sounds attractive. Keeping with the defense theme, reports surfaced last week that the U.S. Department of Defense had lowered the number of F-35 jets it was ordering from Lockheed Martin LMT. So did Morningstar make any changes to its outlook or fair value on the stock as a result?
And then, second question, is there an opportunity with Lockheed Martin stock today, either as a Trump trade play or as a long-term play on increased defense spending?
Sekera: Yeah, that’s another one covered by Nic Owens. That guy had a busy week last week.
Dziubinski: Nic’s been busy.
Sekera: Yeah, so no change to our fair value. Overall, the reduction here wouldn’t impact until 2020. Wait. Boy, both you and I need some extra coffee here this morning.
So reduction won’t impact the numbers until 2028 anyways. Not necessarily all that meaningful anyways when you look at it in context of the total quantity of F-35s that we think will ultimately be built. That current forecast is for $2,500 for the US and another $1,000 for other allied military services. So we just don’t see the reported order decreases really being meaningful overall in that context.
Now, following the rally on Friday after the initial reports of the Israeli attacks on Iran, the stock is now only trading at a 10% discount to our $539 fair value. It is still a 4-star-rated stock, but I’d note, it’s really on that border between 4- going into that 3-star territory.
Dziubinski: And a quick reminder for our audience, keep sending Dave and I your questions. You can reach us at TheMorningFilter@Morningstar.com.
All right, time for the picks portion of today’s episode of The Morning Filter. Today, Dave, you’ve brought us five stocks to buy that have rallied this year but that still look undervalued according to Morningstar. So your first pick this week is Nutrien NTR. Give us the highlights.
Sekera: Yeah, and thinking through these picks, sometimes you just get tired of trying to fight the tape and you need to go with what’s working. And that’s really what these are. These are all stocks that have already rallied, to some degree, pretty much outperforming the market year to date, but stocks we still think have further to go. Nutrien was actually a pick of ours back on the Jan. 8, 2024, episode of The Morning Filter. Stock slid a little bit over the course of the second half of last year. We reiterated our buy on the March 31 episode this year. And year to date, that stock is now up over 40%. It’s a company with a narrow economic moat, does have a High Uncertainty Rating but then again, pretty much most companies in basic material are going to have that high uncertainty.
Now, just to give a little peek behind the scenes for our audience here. So typically, Thursday, Thursday mornings is when we identify the stock picks that we’re going to use on the Monday morning episodes. The stock popped another 4% last Friday, so just enough to put it into that 3-star territory. It’s still at a 10% discount, and it does yield 3.5%.
Dziubinski: So then what’s been driving Nutrien’s stock return this year, and why do you think the stock still has some more room to run?
Sekera: Yeah, so from a fundamental perspective, our analyst team noted that we thought potash prices were at cyclical lows in 2024. Taking a look at the results, the first-quarter potash results did show sequential improvement over the fourth quarter of last year. And we, and it looks like the market as well, expect that positive momentum to continue.
So in the first quarter, we also noted that they had some relatively weak results in the agricultural retail business. That was due to poor weather in the beginning of this year that delayed the farmer planting season. We think that will be made up in the second quarter. So again, giving them good momentum coming into the year.
And longer term, we forecast ongoing price increases in potash, and we see pretty much very little direct impact from tariffs on this company. So when we look at their business, our analysts had noted that Nutrien’s Canadian-produced potash and nitrogen are currently exempt from US tariffs. So yes, we still think there’s more room to run. It’s still at a 10% discount. Chart looks like it has a lot of upward momentum to me. It’s just that at this point, with as much as it’s moved up here, it doesn’t necessarily provide that margin of safety we’re usually looking for for long-term investors. Not enough margin of safety to give it that 4 stars today.
Dziubinski: Your second stock pick this week is Barrick Mining B, which used to be Barrick Gold. Run through the key metrics on this one.
Sekera: Exactly. In fact, that ticker just recently changed to just the letter B. It used to be GOLD. It’s a 4-star-rated stock. Now, this one also popped just over 3% last Friday, so it’s just a hair over a 10% discount right now. And not much of a yield. It’s just a little bit under 2%. And as typical for most mining companies, no economic moat. But unlike a lot of the other ones, this one only has a medium uncertainty.
Dziubinski: Now, a lot of the gold-mining stocks look overvalued, according to Morningstar. So why does Barrick Mining still look undervalued? What’s the difference here?
Sekera: Yeah, so it looks like we first recommended the gold stocks back on the Jan. 8, 2024, episode of The Morning Filter. Our pick back then was Newmont Mining NEM. I think that one’s up 44% since then. A lot of these other gold stocks have moved even higher.
Now, Barrick has lagged all the other gold stocks, and this is really due to much more idiosyncratic issues than what we’ve seen with the other gold stocks. The company ended up shutting down its mine in Mali at the beginning of this year. That’s over some disputes that they had regarding tax and economic arrangements with the Mali government. They are currently in negotiations, and our analyst team expects production to restart in the next couple of months anyway. So that probably, or at least in our view, could be a catalyst for Barrick. They have removed the Mali gold mine from their 2025 output forecast. So once that comes back in, I think that’s a good catalyst for the stock to probably start taking its next leg up.
And then I also have to point out, our mining analyst overall is pretty bearish on the long-term price of gold. When I look at his forecast, his model incorporates gold prices to drop to $2,000 an ounce in 2029. So I’d just note that with this gold stock and a lot of the other gold stocks, if gold were to remain higher for longer, I think there’s a pretty good amount of upside potential from the current valuation.
Dziubinski: Your third pick this week is a REIT, American Tower AMT. Give us the bird’s eye view on this one.
Sekera: It’s a 4-star-rated stock at a 12% discount, provides a 3.2% dividend yield. Unlike most REITs, we do assign a narrow economic moat to this one, and it has a medium uncertainty assignment.
Dziubinski: Now, REITs as a group haven’t shot out the lights this year, but American Tower has done quite well. So what’s driving that performance, and why do you think the stock still has legs?
Sekera: Well, with American Tower, I think it’s interesting. This one really just shows how stocks can go in and out of style, in and out of favor by the market over the longer term. So if you look back at the price charts on this one, between 2019 and 2022, this stock was bouncing around between 2 stars and 1 stars. We could just never understand at that point in time why the market was valuing it so highly. And then that stock finally started to correct to the downside in October of 2022. It finally fell enough that it was a buy on our Aug. 14, 2023, episode of The Morning Filter. It then rose, hit our fair value on January 2024 at 3 stars, and now it’s dropped into 4-star category at the end of 2024. It’s rallied again. It’s now up 17% year to date.
In my mind, I think this is a good defensive real estate play. The company owns a portfolio of cellphone towers. In a recession, I think consumers will still be paying their cellphone bills. As far as the fundamentals, very strong same-store tower organic growth and service revenue expansion over the past couple of quarters. Seen some significant margin expansion as well.
Looking forward, based on their current capital allocation plan, we think that they can probably increase their dividend 5% per year through 2029. So a good one for people looking at kind of that dividend growth. And the company will still have enough cash to be able to lower their net debt leverage to under 4 times by 2029. It looks like it’s about 5 times today. And we also expect some share purchases over that same time period.
Dziubinski: Your next pick is ASML. Run through the key data points on this one.
Sekera: So it’s currently rated 4 stars. It’s at a 21% discount to our fair value, provides a 1.1% dividend yield. It’s a company that we rate with a wide economic moat, also High Uncertainty Rating. This one did pull back a bit last Friday, but it’s still up 10% year to date.
Dziubinski: So again, that’s a decent performance for ASML. Why do you think this performance can continue?
Sekera: So fundamentally, the global semiconductor industry has committed hundreds of billions of dollars to new fab construction over the next five years. Depending, it’s hard to get some of these estimates, but I mean, that’s like 800 billion of spending through 2030. And of course, ASML is the company that makes the equipment that actually makes the semiconductors, especially the higher-end semiconductors, such as those used for artificial intelligence. Specifically, this company is the leader in photolithography systems used for manufacturing semiconductors. So I just see a very strong tailwind behind this company for at least the next five years.
Dziubinski: And then your last pick this week is a name we’ve talked about several times before on The Morning Filter. It’s Medtronic MDT. So again, give us the recap on this stock.
Sekera: So Medtronic’s currently rated 4 stars, trading at a 22% discount to our fair value, provides a 3.5% dividend yield. It’s a company we rate with a narrow economic moat and assign a Medium Uncertainty Rating.
Dziubinski: Now, when you and I chatted last week about what your stock picks were going to be for this week’s episode, you mentioned that Medtronic has been one of those, and you called it a “patience stock.” So explain why it’s a pick this week and what you mean by a “patience stock.”
Sekera: One of the questions I’m often asked is, What does Morningstar mean by the “long term” when you’re talking about being a “long-term investor”? That’s a totally fair question to ask, and it’s also one which there really isn’t necessarily a specific definition. Overall, there’s always going to be a lot of noise in the marketplace, and that can keep a stock either well below or well above its long-term intrinsic valuation for quite a while. So in our opinion, it can take up to several years for the market really to kind of understand and figure out what that long-term intrinsic value is.
Now, corollary to that is that if after several years and there’s still that disconnect between our valuation with what the market is pricing it, I think it’s also up to us, it’s incumbent on us, really, to reevaluate our own analysis to determine if our investment thesis is correct or not. Sometimes when you identify value, you’re just going to have to wait until the market recognizes what that value is. Sometimes it requires a specific catalyst. Sometimes it’s just market rotation.
As you mentioned, in this case, we first recommended Medtronic in the middle of 2023. And that stock had been pretty much in a trading range ever since. In fact, over that time period, the stock is kind of unchanged from when we first recommended, at least you’ve clipped a nice 3.3% dividend yield since then. We are getting some momentum here year to date. It’s up about 9%. Fundamentally, we’re looking for relatively strong growth here. We’re looking for a top line forecast of 4.7% on average for the next five years. The company is only trading at 15 times this year’s earnings estimate, and they also have a $5 billion stock repurchase authorization out there. So I’m kind of hoping that that momentum that we’re seeing here in the short term is really the indication that there’s still some more longer-term upside potential toward our fair value.
Dziubinski: Well, thank you for your time this morning, Dave. Those who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. We hope you’ll join us next Monday for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.
Benz: That was The Morning Filter podcast. If you enjoyed the show as much as we did, please subscribe on Apple Podcasts, or wherever you get your podcasts. We’ll be back soon for the latest episode of The Long View. Thanks for listening.