Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services' chief US market strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or pans for the week ahead. Good morning, Dave. Before we talk about what’s on your radar this week, let’s unpack last week’s market activity. There was a lot of volatility, specifically a lot of intraweek rotation, and then a rally on Friday. So, give us a recap and tell us how stocks look today from a valuation perspective.
David Sekera: Good morning, Susan. Definitely a roller coaster of a ride. Last week started with a selloff, then we had a brief recovery, another selloff, and then another pretty strong recovery on Friday. The thing is, when I’m looking at what’s going on with the market, I would just note that last week, it was really much more of a broad-based selloff than what we had seen earlier this year. For the week, growth stocks as a category were down 4.2%, and value stocks, now they still outperformed, but they were also down 3.3%. Now, year to date, value has significantly outperformed. It’s up about seven tenths of a percent. As growth stocks are down a lot, they’re down almost 10% year to date. From a valuation perspective, although growth stocks have fallen that 10%, we still recommend to investors to be underweight growth and overweight value. From our point of view, value stocks are still much more attractively priced at this point in time.
Dziubinski: In last week’s episode of The Morning Filter, Dave, you said you were looking for the market to go down another 5% before putting new money into the market. What do you think after last week’s activity?
Sekera: Well, we certainly got pretty close. By Thursday’s close, the market was down 4.4% on the week. In fact, at that point it hit official correction territory, meaning that stocks had sold off a total of just over 10% from their recent peak. Just for background, it’s a 20% decline from their highs when it’s considered to be a bear market. But then we got that big bounce on Friday. So on a week-over-week basis, at the end of the week, we’re only down about 2.25%. Year to date, the US market, as measured by the Morningstar US Market Index, is down 4.2%.
The question is, was Friday’s recovery really a bottom or is it just a head fake? Is this just a technical bounce coming off of that correction level or is this the beginning of a real recovery? We’ll see how stocks trade in the next couple of days. I think if we were to hold those gains from Friday, the market’s probably going to be OK until we have earnings startup again, and then we’ll see where it goes from there. But to the downside, if the market does turn downward, again, I’m no technical analyst, I don’t even pretend to be one. But taking a look at the charts here, it looks like probably the next support area on the S&P 500 is about that 5,400 area, which would be down another 4% from Friday’s close.
Dziubinski: We’ve seen a sizable pullback in AI stocks this year. Give us a little recap of where things stand today.
Sekera: As painful as the selloff might feel, the market really needed it in order to let some steam out of those AI stocks. So, what we’re seeing this year is the market is unwinding some of the speculative excesses that we had last year. Of course, if you remember last year, returns were especially concentrated. Over half the total market return in 2024 was driven by just 10 stocks. When I do an attribution analysis thus far this year, seven of those 10 stocks are now down more than the broad market. And when I look at each of those seven, each of those are tied to AI and have been AI plays. And when I look at AI stocks, in general, they’re down anywhere from 15% to 20%. Many are firmly in that correction territory. In fact, that’s even like bear market territory on those individual stocks. And there’s even a couple that are down you even more than that.
Dziubinski: Given that we’ve seen AI stocks at least fall into the correction if not greater territory, do you think they have more room to fall?
Sekera: To be perfectly honest, the short answer is it’s impossible to know what the market is going to do over the next day or two or even the next week. But I would say that from a valuation point of view, as a group, I don’t think AI stocks have gotten necessarily cheap enough yet in order to bring in value investors. And from a catalyst point of view, it doesn’t seem like we really got the capitulation, really got the washout that you would want to see to get rid of all of the speculative excesses that were there. Yet when I take a look at it from a valuation point of view, generally most of these are now trading much closer to their fair value. A few have even fallen enough that they’ve gone from overvalued into undervalued territory.
Dziubinski: That’s a perfect segue into the next question, Dave. Are there any opportunities in that AI stock sector industry today?
Sekera: There’s a few. The three I’m going to highlight first is going to be Amazon AMZN that’s now rated 4 stars and trades at an 18% discount. The next one is ServiceNow NOW. That’s actually fallen about 30% from its high, so that’s enough to be a 4-star-rated stock at a 15% discount. Then lastly is Marvell MRVL. Marvell has fallen about 45% from its recent high. That’s enough to put it in 4-star territory at a 24% discount. And, of course, we still like both Microsoft MSFT and Alphabet GOOGL, both of those being rated 4 stars.
Dziubinski: All right, so let’s look ahead. On the radar this week, we have the Fed meeting. And we had some good news last week with the CPI and PPI numbers coming in better than expected, but the expectation for this week’s meeting is still no rate cut. And what about May?
Sekera: I think the Fed meeting is going to be just very uneventful. As you mentioned, the market’s not expecting and we’re not expecting any kind of cut to the federal-funds rate. Having said that, the US economics team is still projecting that next cut will be at the May meeting. They’re forecasting a total of three cuts for the year and then still looking for ongoing rate cuts into 2026. As you mentioned, both CPI and PPI both came in better than expected. So hopefully this is just the indication that inflation is continuing to moderate here, which of course is the same as our forecast from our economics team.
We’ll be listening for commentary from Chair [Jerome] Powell. Personally, I don’t expect to hear anything particularly interesting from him. I think he’s going to get a lot of questions regarding tariffs, and I suspect his answer is going to be as much of a nonanswer as he can give, probably just kind of making that typical commentary, “Yes, the Fed will monitor the situation as it develops and if tariffs impact the economy or inflation, we’ll respond accordingly.” But I don’t think he’s going to give any kind of preview into necessarily what they might be thinking.
Dziubinski: Well, you brought up tariffs, Dave, so I have to ask you. Tariff news will likely continue to be on the radars of investors. Any new thoughts to share on the topic, given that tariffs seem to be driving, or at least that’s what the financial media is saying, so much of the market’s uncertainty?
Sekera: Nope. I mean, in my opinion, for now, I still think we’re hearing a lot more noise than seeing signal. I think we need to get a lot more additional clarity as to the status of the negotiations and get more specifics as far as what they’re actually negotiating. Now, you mentioned how the mass media out there has really been harping on tariffs and talking about them a lot, and a lot of articles talking about tariffs being the reason for the selloff. I would actually highlight an article that John Rekenthaler just published last week on Morningstar.com. The headline is, Tariffs Aren’t the True Cause of the Markets' Selloff. And the thrust of his article is he focused on the fact that the selloff has been concentrated mostly in tech, whereas if the tariffs really were or the market was going to price in the tariffs leading to a recession, he thinks the selloff would’ve been much more broad-based.
Actually, I agree with him quite a bit on the main points in his article. I would actually take it one step further and opine that I think it’s really been about the market’s recalibration of valuations on AI stocks. When I look at AI stocks they all pretty much peaked that week, in fact, maybe even that Friday before the weekend, when the DeepSeek headlines came out, and AI stocks have been pretty much in a downward trend ever since then. According to our valuations, those stocks at that point in time were at best fully valued. And at worst, most of them were getting into pretty far into overvalued territory. And as we talked earlier, most of those are down 15% to 20% or more. So, yes, getting back to John’s point that this is much more of a risk-off-driven market, but I’d say I think the risk-off catalyst was really driven by that recalibration of expectations in AI.
Dziubinski: All right. So on the earnings front, we have General Mills GIS is expected to report this week. Why is this one you’re watching?
Sekera: General Mills stock in and of itself is a 4-star-rated stock, trades at a 16% discount, and has a 4% dividend yield. It’s a company we rate with a narrow economic moat. The stock has a Low Uncertainty. But I’m looking at it from the perspective of most of the food manufacturer stocks that we cover are undervalued. Some of them are even more undervalued than this one, but I’m trying to listen for any kind of positive commentary we might hear about the food manufacturers being in a position to start taking additional pricing. So I think for these kinds of companies, for the food manufacturers, we need to see them starting to bring margins back toward the historical norms. I think we need that to happen for these stocks really to start to perform to the upside. But until then, stocks generally are trading at a pretty wide margin of safety from their intrinsic valuation, and they’re ones where you just get paid to wait as they all have pretty high dividend yields.
Dziubinski: And we also have FedEx FDX reporting this week. What’s Morningstar think of this stock heading into earnings?
Sekera: Now, from a point of view of valuation, really it’s not very interesting. It’s a 3-star-rated stock, trades only a little bit under our fair value, but this is one I want to listen to management commentary. I think from an economic point of view, I think it’s going to be very interesting. Yeah, I just want to hear any commentary they might have about shipping activity, both on a business-to-business as well as to the consumer. And I think that provides investors a really, a good real-time economic barometer as far as which way the wind might be blowing in the larger economy.
Dziubinski: Let’s move on to some new research from Morningstar. We’ll start with a couple of companies that reported earnings last week. Now, Adobe ADBE stock was hammered after earnings. It seems like management’s outlook for the current quarter disappointed the market. What was Morningstar’s take on the results?
Sekera: We thought earnings were good. Guidance came in line with our expectations. The company reaffirmed its previously issued outlook for fiscal 2025. So our analyst, he said he didn’t make any significant changes to his financial model. So, we maintained our fair value of $590 per share. When I look at the week and how things traded over the week, their earnings came out I think Thursday morning. And of course, the market got hit really hard on Thursday. To some degree maybe it was just a part of the selloff that we just had the negative market sentiment overall across all of the market. Now, the stock did rebound a bit on Friday with the rest of the market. So this might be one where it wasn’t necessarily idiosyncratic to the company as much as it just was moving with the broad market.
Dziubinski: The stock looks attractive from Morningstar’s perspective?
Sekera: We think so. It’s a 4-star-rated stock, 33% discount. Now, it’s a company that doesn’t pay a dividend, so maybe not necessarily one that dividend investors would have an interest in, but it is a company we rate with a wide economic moat. Although as a tech company, it does have a High Uncertainty Rating.
Dziubinski: We also had Dollar General DG report earnings last week. The stock rallied almost 7%. So what did Morningstar think of that report?
Sekera: We actually thought this one was mixed, so the results were modestly better than expected. But when we listened to the management outlook for 2025, we thought that outlook was really lukewarm. Overall, I’d say the story here and the investment theme is still the same. Higher sales growth has been coming in the lower-margin consumable area. We’re seeing lower sales in the high-margin discretionary area. So, we’re getting that negative mix shift, and I think that’s exactly what the market has been pricing in. But we think the stock is very undervalued, provides a lot of upside once consumer spending starts to normalize, once wages catch up to inflation and you see that spending go back toward those high-margin discretionary goods.
Overall, it’s a 5-star-rated stock at about a 30% discount to fair value, a company with a narrow economic moat and a Medium Uncertainty Rating. Looking at the trading action here, hopefully, to me that’s a sign that maybe the market is starting to realize that this stock is undervalued. And then lastly, just one other takeaway here, talking to the analysts on this stock, he thinks that as far as tariffs are concerned, when I look at the dollar stores, he thinks that Dollar General would be less impacted the Dollar Tree DLTR.
Dziubinski: Verizon VZ stock was a pick of yours on last week’s episode of The Morning Filter, and the stock took a tumble last week after the company suggested during an investor conference that first-quarter competition was more intense than they had expected. What was Morningstar’s take on that news? And is Verizon still a pick?
Sekera: It is still a pick. It’s a 4-star-rated stock at an 18% discount, provides a 6.2% dividend yield. Now, this news was a bit of a surprise to me that Verizon noted that the wireless competition was more aggressive than usual into the first quarter. I think Verizon specifically noted that their competitors' holiday promotions extended into this year, and so they had to respond with their own promotional activity. Even so, both Verizon and AT&T T have reiterated their forecast for the full year despite this tough environment.
I’d recommend to our viewers here to take a read of the note on Morningstar.com from Mike Hodel. He’s the equity analyst who covers the stock. He noted a couple of things. One he likes seeing this quick competitive response among the wireless competitors, and he thinks that that will just reinforce to them the futility of trying to use promotions to gain share over the longer term. So again, the investment thesis here is that the industry is becoming much more of an oligopoly that they’ll compete less on price over time, which will allow margins to expand. So, net-net we ended up leaving our fair value unchanged even after that news.
Dziubinski: Let’s take a question from one of our YouTube viewers last week who asked what Morningstar’s Uncertainty Rating is and how investors can use it?
Sekera: I would think of our Uncertainty Rating as a way to describe our ability how much we think we can accurately assign a fair value rating on a stock. As you can imagine, some companies are just much more hard or much harder to forecast what their future free cash flows are going to be than others. One example we use all the time is going to be a company like Coca-Cola KO that has a Low Uncertainty Rating. The end of the day, we’re pretty confident we’re going to be able to forecast our revenue and earnings pretty close to what the actual results are going to be over the longer term. Whereas you take a company like Tesla TSLA that has a Very High Uncertainty Rating, that’s just going to be one that’s just naturally very hard to predict. The number of EVs that are going to be sold in the future, understand changes in consumer preferences, understand how the macroeconomic outlook might change that company’s sales over time. Plus, it also has a lot of other emerging product lines, whether that’s full self-driving insurance and so forth.
That Uncertainty Rating at the end of the day is used to drive the ranges that we use above and below our fair value to determine our star ratings. So essentially it’s a way that we try and provide a risk adjustment to our fair value to take into consideration wanting to have a greater margin of uncertainty when the company has that High Uncertainty Rating. So that way, you want more margin of safety to the downside to buy the stock, but then you’ll let that stock run higher to the upside before we recommend selling it. Whereas with those Low Uncertainty stocks, you don’t need necessarily that same range of where the stock is trading compared to our fair value.
Dziubinski: We’ve arrived at the picks portion of this week’s program. This week you’ve brought us some stocks that are down significantly this year, but that Morningstar thinks are being unfairly punished. And your first pick this week is a stock you alluded to earlier in the program, Marvell Technology. Give us the highlights.
Sekera: Taking a look at the chart here, the stock peaked at $126 a share back on Jan. 23. It’s now down 45% since then. Looks like it closed on Friday at $68.75. Our fair value is $90 a share. So, it trades at a 24% discount, putting it in that 4-star territory. It’s a company with a narrow economic moat, although High Uncertainty being in the technology sector. The moat sources here, there’s two: intangible assets as well as on networking just because of their chip design. And we think that that moat enables the company to be able to compete at the cutting edge of the semiconductor technology area.
Dziubinski: As you pointed out, Marvell is way off its peak from earlier this year, but fundamentally, Morningstar doesn’t think there’s been any change to the company’s long-term prospects?
Sekera: Reading through our note here, the last earnings report, we actually thought was a little bit better than what we expected. Offsetting that guidance was a little bit less than what we had forecast, but it just wasn’t enough to change our intrinsic valuation. Taking a look at some of the fundamentals here, sales for data center and AI are the primary drivers of the company. In fact, that’s becoming an increasingly dominant piece of their business. We still forecast significant sales growth over the next couple of years. In our model, it looks like we’re projecting earnings of $3 at this fiscal year. With the stock where it is, that puts it at about 23 times forward PE, and with the amount of growth we’re looking for, that PE ratio does quickly step down from there. Looking at earnings next year of about $4 a share, so that’d be 17 times. And then earnings to go to $5 a share thereafter. So, again, trading at 14 times that year’s earnings as well. I like seeing that progression of earnings growing and that PE coming down pretty quickly.
Dziubinski: Your second pick this week is Wayfair W. Run through the numbers.
Sekera: Five-star-rated stock, trades at over a 50% discount from our fair value. Now, it is a stock that doesn’t pay a dividend. And I’ll just note, this is not one of my typical picks if the company does not have an economic moat, it does have a Very High Uncertainty Rating on the stock as well. But it just appears to me that this discount to fair value is one of the higher ones across our coverage. I think this is one where that discount to fair value is more than enough to be able to cover for the lack of the moat and that Very High Uncertainty Rating.
Dziubinski: Wayfair stock is down about 28% this year, and again, Morningstar stood firm on its fair value estimate on the stock. So the stock, as you pointed out, looks really undervalued. Give us the story on this one, Dave.
Sekera: Well, the story is it’s going to be a very volatile stock. So, I think you have to have it in that kind of portfolio where you can understand that it can trade around quite a bit in the short term. And this may be a stock that it’s going to take a while for it really to work to the upside and start getting anywhere near our fair value estimate. When I look at this company over the past five years, it’s one of those ones that really was significantly impacted by the pandemic. Of course, in 2020 sales skyrocketed, they were up 55%. And of course, that was just because everyone had to shop from home as we had all of the shutdowns, but unfortunately, it’s just been sliding ever since.
Of course, we also had all the shipping bottlenecks in the supply chain distortions that really impacted their sales as well. When I look at what’s going on today, the housing market overall does continue to languish, in our view. We’re looking at a slight decline in the top line this year in our model, but we’re only looking for 2.5% to 3.5% annualized growth rates thereafter. So, really not looking for any kind of big rebound or anything like that. Jaime [Katz], who covers the stock for us, she noted they’ve already cut their expenses out of their business, really trying to get their business in line for that current operating area. And, in fact, she thinks that there would be a lot of fixed-cost leverage here. So, once that top line starts to grow again, looking for that margin expansion. Now, the other part that’s going on here that I think is really impacting the stock will just be what the potential impact of tariffs could be on the business.
So Jaime’s noted here that the company really is just an e-commerce site. It’s just going to pass through those tariff costs. Essentially what they’re doing is they’re just charging a fee on each of the sales that gets completed over their website. What she thinks happens here is that tariffs increase. It’s either one of two things: Either manufacturers will have to accept lower margins, or they’re going to raise their prices. So, if they raise their prices, consumers, she thinks will still stay on the Wayfair site, but they’ll just end up purchasing those same types of items, but from lower-cost or those vendors that are willing to eat the margin compression. When I look at the stock, it’s only trading at 22 times our EPS forecast this year of $1.43, that drops down to 15.5 times next year’s EPS forecast of $2.05.
Dziubinski: Your next pick this week is another name we talked about earlier this morning, Adobe ADBE. Run through the numbers.
Sekera: So Adobe is a 4-star-rated stock, trading at a 33% discount from our intrinsic valuation. Now, it doesn’t pay a dividend, but it is a company we rate with a wide economic moat based on switching costs. And the stock does have a High Uncertainty Rating because it is in the technology sector.
Dziubinski: Adobe stock is down about 28% since mid-December. So talk about how Morningstar’s long-term thesis for Adobe differs from that of the market.
Sekera: We think the market is probably pricing in a little bit of our bear case here, which is that artificial intelligence could eliminate the need for the Creative Cloud over time. We don’t think that’s true, specifically, Adobe’s new products are gaining traction. Dan Romanoff, who covers the stock for us specifically, has pointed out Adobe Acrobat AI assistant Firefly and Gen Studio. In fact, he thinks Firefly leaves Adobe pretty well positioned for the growth in AI. And he notes, he thinks the company’s probably still at pretty early stages of monetization of AI within their businesses. Currently, they’re generating about $125 million in annual recurring revenue, which it looks like Adobe expects that to double or at least double by the end of this year.
Dziubinski: Your next pick is a retail REIT. It’s Macerich MAC. Tell us about it.
Sekera: Four-star-rated stock, trades at a 28% discount to fair value, 4.1% dividend yield. Now, it is a company we rate with no economic moat, but that’s pretty common among the real estate sector, and it’s a stock we rate with a High Uncertainty.
Dziubinski: After a nice runup in the second half of 2024, Macerich is down double digits this year. Why do you like it?
Sekera: It’s actually been a long time since we’ve talked about Macerich. I look back through the archives here and we first recommended the stock back on the March 6, 2023, show. Stock’s up 56% plus the hefty dividends that they pay. And then we re-recommended the stock again back on April 22, 2024; the stock’s up 20% plus dividends since then. The stock did hit that three-star-rating territory last December. Now, as you mentioned, the stock has pulled back year to date and it does look much more attractive to us once again.
For the people who don’t know this name, it is a small-cap REIT that invests in Class A shopping malls. The investment thesis here is we still have a positive view on Class A shopping malls overall. These are the malls that have become much more experiential over the last decade. They’re much less reliant on retail sales. They’ve repositioned their portfolios so that they have many more things that are in the malls that can’t be replicated online. So, restaurants, gyms, doctor offices, movie theaters, things like that. That’s all helping to continue to keep foot traffic coming to those malls. This is one where it’s just a combination of being able to buy a stock at what I consider to be a pretty attractive discount to fair value and has an attractive dividend yield.
Dziubinski: Your final pick this week is PG&E PCG. Give us the key metrics on this pick.
Sekera: I’ll admit, probably not necessarily my favorite utility, but I think this pick just highlights just how overvalued most of the rest of the utilities sector is today and just how hard it is to find value among utilities. You really need to go deep into these story stocks. If you want to find undervalued utility stocks today. It’s a 4-star-rated stock at a 12% discount. Now, it does pay less than a 1% dividend yield and one of the very few utility stocks we rate with no economic moat, although the stock does have a Medium Uncertainty.
Dziubinski: Well, as you alluded to, the utility sector is outperforming the broad market this year, but PG&E is down about 16% this year. So what’s going on?
Sekera: This is a stock that’s not going to be for the faint of heart. The company is a regulated utility, but it’s located in central and northern California. So, the risk here is going to be wildfire. I had a pretty lengthy call last week with Travis Miller. He’s the equity analyst who covers the company for us. What he told me is that California is what’s called a strict liability standard for the utilities. If their equipment is found to have started a fire, they are liable for the damages, even if the utility wasn’t negligent and had taken precautions to try and keep from starting those fires.
What California did a number of years ago is in order to help be able to protect these companies, and really in order to assuage a lot of the concerns of the rating agencies, they created a wildfire fund. So that fund has up to $21 billion of authorized capital. That fund right now is half funded in cash and the other half is authorized to sell bonds if they need it. The concern here is that the recent California fires in Southern California could end up depleting the amount of that fund. Now, PCG itself doesn’t have any exposure or any liability there, but I think the market is very concerned that the liabilities for those fires might be high enough really to eat up much if not all of that $21 billion.
Travis thinks that if those damages were to deplete that fund, California would probably just expand the amount of bond authorization to be able to replenish the total authorization of that fund. So essentially, part of the reason he thinks that is that the credit rating agencies were the ones that really required California to create and maintain this fund for them to be able to maintain their investment-grade ratings on the California utilities. And without investment-grade ratings, it’s really hard to run and make a utility profitable if it’s rated below-investment-grade or junk.
Dziubinski: That’s an interesting story, Dave. I can see where it’s probably not your favorite utility, as you said, but quite a story. All right. Well, thanks for your time this morning, Dave.
Sekera: Of course.
Dziubinski: 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 week for a special viewer mailbag episode of The Morning Filter on Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a super week.
Got a question for Dave? Send it to themorningfilter@morningstar.com.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
