5 Stocks to Buy That We Still Like After They’ve Run Up

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 pans for the week ahead. So, Dave, Happy Earth Day. You have a crowded radar this week on both the earnings and the economic front.

First, this is an important week in terms of earnings. In fact, we have six companies reporting this week that are among the biggest contributors to the market’s returns this year, right?

David Sekera: Hey good morning Susan. Yeah. Actually what’s happened is, we’ve had a selloff this month. And what’s happened is that’s actually caused the market to become even more concentrated. So when I look at the numbers through last Friday, the top 10 stocks right now are responsible for 98%. So almost all of the market return thus far this year.

And in fact, when I look at Nvidia, that alone accounts for 35% of the market’s return, through last Friday. And of those 10 as you noted, six report this week. So, there could potentially be a lot of volatility in the market this week whether or not those companies could potentially miss earnings or provide any guidance that might be weaker than what the market expects.

Dziubinski: So let’s talk specifically about the tech and tech-related market movers that are reporting this week, because investors will want to get updates on their AI plans. Let’s start with Tesla, which is having a tough year.

Sekera: Yeah. So AI … I mean, we’re not to the craziness of the 1990s’ dot-com bubble just yet. But it is starting to feel a little bit like that. And I think it’s not just these companies, but I think a lot of companies out there all want to now be viewed as some sort of play on artificial intelligence.

So I think what you’re really going to start hearing this quarter, and maybe the next couple of quarters, is a lot of companies are going to talk about AI. But as an investor, I think you really need to have a skeptical ear, really listen for those companies that talk about it but don’t necessarily have a clear path as far as how AI’s either going to bolster their results or expand their margins.

I think you really need to listen for those companies that have very specific plans that they’re actually executing on, and then how those companies plans are going to drive revenue growth and/or margin expansion. So the first company I’m really going to be listening for this week is going to be Tesla. Now, Tesla has been a very especially volatile stock thus far this year.

But I think you have to remember the value of Tesla isn’t necessarily the number of cars it’s going to sell this year or even next year, but how much of market share, how many cars is that company going to sell five years from now or 10 years from now? Plus, Tesla does have a lot of other businesses as well.

and just how much are those businesses going to grow. Now Tesla, when I look at the stock chart over the past year, as recently as last July, that stock was a 2-star-rated stock. It’s fallen at 50% since then. It’s now fallen enough that it actually just tripped into 4-star territory, trading at a 25% discount to fair value.

Now 2024, it just generally has been a pretty disappointing year for electric vehicle growth. So on the call, a couple of the things I know our analyst team is going to be listening for: First is an update on the status and the timing of the Model 2. And that’s going to be their low-cost vehicle platform that’s scheduled to begin sales in the second half of 2025.

There are some rumors that we’ve been hearing out there that they could potentially be canceling that platform. So again, that’s certainly one we’re going to be listening for. We also want to hear any updates on the status of full self-driving. And then lastly I just want to see if they give any kind of better clarification on their long-term strategy.

Yeah, we think Tesla might be in the midst of starting to shift that strategy, starting to focus more on profit per vehicle and getting away from your growth at any cost. And they might just look to stay in kind of this range right now, this 1.6 to 2 million deliveries per year, and really look to focus on improving the profitability, improve their charging business, really rolling out that full self-driving, as well as building out their insurance business and some of those other businesses they have like energy generation and storage.

Dziubinski: And we also have Meta reporting this week. And that’s a pretty different story here than with Tesla as far as performance goes this year. Meta stock is having a great year.

Sekera: Yeah. So while Tesla is starting to look undervalued, Meta has really gone the other way. In our view, it’s now swung way too far to the upside. When you look at this stock chart over the past year and a half, a year and a half ago, you couldn’t even give away Meta stock.

It was hated so much. It was a 5-star-rated stock. Was trading well under half of its fair value. That stock’s now up over 300% from those lows. So it’s now a 2-star-rated stock. Trades at a 24% premium to fair value. I think Matt is going to have to really put up some really good numbers and some strong guidance.

Otherwise I think this is one that is at risk.

Dziubinski: And rounding out the tech names reporting this week, we also have Microsoft, Alphabet, and Amazon reporting. How do these three stocks look heading into earnings? And what are you going to be listening for?

Sekera: Right now, I’m kind of just grouping all three of those stocks together. They’re all rated 3 stars. Alphabet still is trading at about a 10% discount to fair value but really within that fair value band. I think this quarter is kind of one of those quarters where you just want to hear no news. No new news is good news kind of thing.

Yeah, I’m assuming that they’re probably all going to come in in line, probably slightly better than expected. The economy’s been relatively strong. I think we’re going to look for continued growth in that cloud business, relatively stable to slightly improving margins. So I think that if they can all come in within those kind of parameters, it should look fine.

Dziubinski: Now ExxonMobil reports earnings this week, too. And this stock’s up more than 20% for the year to date and has also been a sizable contributor to market performance this year. So how does it stock look from a valuation standpoint heading into earnings?

Sekera: Well, first of all, I think we just have to look at energy as a sector. And it’s really been on a wild ride over the past year. In fact, just a really wild ride really since the beginning of the pandemic. When I look at the energy sector, in early 2023, it was actually one of the more overvalued sectors. Got hit pretty hard.

It dropped enough that by mid-March we actually moved to an overweight recommendation, then traded right back up into overvalued territory. Then it sold off in the winter. And coming into 2024, in our outlook, we noted it was again one of the more undervalued sectors. So among the global majors, it’s really been our go-to stock. As far as Exxon goes, the stock has risen enough year to date. It’s now back in that 3-star range. Trades at about a 10% discount to fair value. So I just note overall the sector’s really caught a pretty strong bid over the past 4 to 6 weeks. It’s now at fair value. Having said that, I still like the energy sector here.

I think it provides a good natural portfolio hedge for any further geopolitical risk as well as an inflation hedge.

Dziubinski: Now we had Verizon report this morning, and AT&T is reporting later this week. Why are these names you’re watching?

Sekera: Well we’ve talked about these names a lot. So people that have watched our show, you will note these are stocks that we noted fell deep within that 5-star territory last year. So we did talk about our investment thesis on these stocks a number of times. It looks like Verizon reported this morning. The stock looks like it’s about up 1% to 2% premarket.

I looked up Verizon on our show. And it looks like we first recommended Verizon on June 1, 2023. It was a $35 a share. It a 5-star-rated stock. Trading at about a 37% discount to fair value. Kind of the synopsis here, and our investment thesis, is that we do think the wireless industry is undergoing a change right now, and it’s changing more like into an oligopoly.

We think that those companies are going to compete less on price going forward. That’s going to allow their margins to expand. In the meantime, you’ve been able to collect pretty decent dividend yield. But I would note, too, that this is also a good example of when you’re investing in individual stocks, I would look at starting with like a partial size position.

When you first start buying into an individual stock, leave yourself enough dry powder. So that way if after you make that first purchase, if that stock continues to fall, you’ve got the ability to layer in and buy some more. Of course, assuming that nothing has really changed in the underlying fundamentals and in this case, that’s what happened.

Verizon did drop to about $30 a share by October. Was trading at a 43% discount. However, the stock has moved up. At this point, Verizon is trading at about $40.5. Puts it in that 4-star territory. Still a 26% discount to fair value and a 6.6% dividend yield. And I just note generally AT&T has followed a pretty similar pattern as Verizon.

AT&T still rated 4 stars, trading at a 29% discount and a 6.8% dividend yield.

Dziubinski: So any other company is reporting this week that you’re keeping an eye on?

Sekera: Yeah. So first is going to be Biogen. That’s a 4-star-rated stock trades at a 37% discount. Although for dividend investors I’d note this company doesn’t pay a dividend. It is a company we rate with a wide economic moat. I note the stock has been under pressure. It is losing its patent on one of its drugs, and so it will be facing some competition here. But our team has noted that Biogen is in the midst of expanding its portfolio beyond multiple sclerosis into neurology, neuromuscular diseases, and Alzheimer’s. So I think the story here is that we think that the market currently underestimates Biogen’s pipeline. And the other one I’m going to be watching is RTX. Everyone’s going to know that one as Raytheon.

Last July, we first highlighted that that stock had plunged pretty dramatically. There was news out that their Pratt & Whitney engines were going to have to get inspected for microscopic cracks. We thought that selloff was overdone. Stock’s pretty much recovered since then, but it is still slightly undervalued at a 10% discount from fair value.

Puts that in that 4-star territory. Pretty average dividend yield at 2.3%. So taking a look at this company, it is interesting that of the defense companies, this one is actually more evenly split between commercial and defense. On the commercial side, they do have this Pratt & Whitney division. We think it’s still in the early innings of a pretty long ramp up for delivering of thousands of jet engines over the next couple of years.

And then on the defense side, one of the things that Raytheon does focus on is missiles, missile defense systems, secure communications. And I think with what we’ve seen in the Middle East, over the past couple weeks, I think those missile defense systems are really proving their value.

Dziubinski: So pivoting over to the economic front, we’re getting some important reports this week. The first being first-quarter GDP numbers. What’s the market expecting?

Sekera: Well, there’s two things going on. I mean the economy still has been holding up, I think, better than most people had expected. So when I look at the Atlanta Fed GDP now and that’s a model estimate based on economic metrics as they come out, that’s actually 2.9% right now. So very high number as far as economic growth.

The consensus thinks it’s actually coming in at 2.1%. The real story probably lies somewhere in between those numbers. And as just a reference, last quarter, the economy came in at 3.4%. So again, I wouldn’t be surprised to see your GDP come out maybe somewhere higher than consensus but probably below where the Atlanta Fed has it.

Dziubinski: The PCE number also releases this week. And this is the inflation metric that the Federal Reserve watches closely. So given that we had a higher than expected CPI number earlier this month and then an in line PPI number, what are the expectations for PCE?

Sekera: The consensus across the market right now is for core PCE to increase 3/10 of a percent on a month-over-month basis. So that’s going to put it in line with last month where printed but still lower than where it was in January. So not necessarily coming down like the way that people would expect it to come down. But at least if it comes in there, it’s not moving any higher.

Dziubinski: So if the PCE number runs hot, what does that mean for the probability for interest-rate cuts in 2024? Kiss them goodbye?

Sekera: Well, if it comes in higher than what the consensus is expecting, in fact, even if it comes in at consensus, I think a cut for June is probably going to be off the table. It’s going to push it back at least until July. Looks like the market is pricing in whether or not it’s July or September.

But again, I think it’s even possible that at this point, if it comes in higher than expected, it might push the Fed back until after the elections into their November meeting. Of course, it’s all just going to depend on what inflation does over the next couple of months. Whether it remains sticky on an ongoing basis depends on what the economy does, if the economy continues to keep holding up or not. If inflation moderates and the economy slows, which is our economics base case, or economics team base-case scenario, then we do still expect the Fed would still begin cutting the rates this fall.

Dziubinski: So let’s move on to some new research from Morningstar. And that’s research around companies that reported last week. Davem start with U.S. Bancorp, which is a regional bank you’ve liked. The stock slumped a bit after earnings, and Morningstar held its fair value estimate in place. What do you think of the stock today?

Sekera: Yeah it’s interesting. U.S. Bank stock initially it did sell off after earnings. But I would note it has rebounded some on Thursday and Friday, I think once people got their hands wrapped around what was going on here. The bank did lower its net interest income really on the assumption that short-term rates are going to stay higher for longer, at least for the near term.

But partially offsetting some of the net interest income, the company is reducing their expenses. Yeah. I’d also note here that total deposits has remained stable. So net/net with no impact on our longer-term assumptions, no material change to our long-term outlook. So, the stock here is still undervalued in our mind. Yeah. We still think it’s our go-to stock as far as the US regional banks.

It’s a 4-star-rated stock. Trades at a 24% discount, 5% yield. And of the regionals, it’s the only one that we do rate with a wide economic moat.

Dziubinski: Now what about regional banks in general, Dave? How did things look on earnings and forecasts?

Sekera: To be honest, from our point of view, not much really changed. Our fair values on these stocks were unchanged across the board. Generally we are seeing some pressure on net interest income margins, short-term rates being higher for longer but not enough that our team really changed their longer-term outlooks for these companies.

And like U.S. Bank, a lot of them are also working on bringing their expenses under control. So if anything, the expenses are coming down in line with the lower revenue guidance. I’d also say really no changes in loan-loss provisions, I think that’s pretty good news. It means that the banks aren’t preparing for any increase in defaults greater than what they already have baked in.

So when I look at the stocks that we cover here, it looks like M&T Bank and Fifth Third, those stocks perform the best. And really that’s because their net interest income guidance held up the best across the regionals. And then Northern Trust perform the weakest. That stock traded off the most. And it was just a matter of their net interest income guidance was probably the lowest of the ones that reported.

Dziubinski: Netflix reported great results, but full-year guidance suggested that growth is probably going to slow in the back half of the year. And then the company also announced that it’s going to stop reporting subscriber numbers in 2025. The stock tumbled. What’s Morningstar think of the results, the forecast, and any change to the fair value estimate after earnings?

Sekera: That was a pretty big selloff. I think the Netflix stock traded off, I think, slightly over 9%. And as you mentioned know the guidance reflects a pretty strong deceleration in subscriber growth for the second half. And in fact, that was one of the main reasons why we thought that stock was overvalued, why it was rated 2 stars going into that earnings announcement. In our prior notes, our analyst team had noted that in our forecast, we thought that that pop that we saw in subscriber growth in the first quarter was not necessarily going to last as much or as at least as long as the market was overextrapolating in the market’s valuation.

And as you noted, management also announced that they’re not going to report subscriber growth going forward. My assumption is that the Netflix management is really probably undergoing a change in their business strategy at this point. Getting away from that focus on subscriber growth and probably toward improving their profitability going forward. Having said all that, even after the selloff, it’s still a 2-star-rated stock. Trades at a 26% premium to our fair value.

Dziubinski: Yeah. So no bargain there. OK, ASML stock got knocked around a bit after it reported earnings, but Morningstar raised its fair value estimate on the stock. What happened? And do we think the stock is a buy today?

Sekera: ASML was another 2-star-rated stock before its earnings report I think that one was down over 10% last week. So for those viewers that aren’t familiar with the company, ASML makes the equipment in order to make semiconductors. And in fact, they actually kicked off the rally in semis stocks last quarter after it reported just record new bookings.

They came in much higher than I think anybody had forecasted. Now those bookings did come in especially weak this quarter. So it looks like it’s now leading the selloff last week in those same semi stocks to the downside. I think the market is realizing that was really just a one time path that we saw in those bookings.

Essentially what happened is there was a big pull forward, ahead of US sanctions in which the US is not going to allow the company to export certain type of semi equipment to the Chinese customers. So, again, we don’t think that this was really an indication of a rebound in the semiconductor business in the first quarter.

So more of a normalized kind of pattern going forward. But even following that pullback, stock is still overvalued in our view. Actually looks like it’s now getting into that 3-star territory but probably toward the top of that 3-star range.

Dziubinski: Now United Airlines reported last week, and the stock took flight. It gained more than 18% in one day. But Morningstar trimmed its fair value estimate. Why?

Sekera: Yeah, you’re not kidding. That stock really took off. The results came in slightly better than expected, but when we revised our model, I note that our analyst team really increased their capital expenditure budget. And that forecast was what really led to that decline in our fair value estimate. That stock now is trading at 2 stars, at a 47% premium to our fair value.

But one of the things I really thought was interesting is that our analyst noted that on the earnings call, United’s CEO discussed why he thought United had an economic moat based on a couple of things: its customer proposition, their network, their loyalty program, and so forth. And our analyst noted, while that is true to a limited degree, we still view the entire airline industry as having economic moat really based on the underlying fundamental competitive dynamics of that industry.

So I think this is just one of those times that the airlines are doing very well here in the short term, but over the long term, we just don’t expect the United or the airline industry overall to be able to outearn its cost of capital. So this is one that I would highlight for investors, maybe sharpen up your own pencil.

If this stock is something that you’re involved in, this might be a pretty good opportunity to take some money off the table and lock those profits in.

Dziubinski: Now, in last week’s episode of The Morning Filter, you talked about Johnson & Johnson, which reported. Looked like kind of a noneventful report, with no change to Morningstar’s fair value estimate. Do you still like the stock at today’s price?

Sekera: JNJ took a little bit of a dip, but then it rebounded right afterward. Yeah, I’d say the reason the stock is trading where it is right now, at least in our view, is that they are going to face some competition this summer. There is a biosimilar product coming out for one of their larger drugs, and that will be a drag on growth here in the short term.

But our analyst team forecast that they do have enough product growth in the other areas to offset that sales decline. So in my opinion overall when I look at JNJ, I think it’s a core holding type of stock. It’s a company that we do rate with a wide economic moat. In fact, according to Damien Conover, who’s our head of our equity team for our healthcare sector, he notes he thinks JNJ has one of the widest moats in the healthcare sector.

It’s also a company that we rate with a Low uncertainty. It’s currently rated 4 stars, trades at a 10% discount to fair value, and has a 3.4% dividend yield.

Dziubinski: All right. So we’ve arrived at the picks portion of our program. And this week you’ve brought viewers five stocks that you’ve recommended in the past that you still like today even after they’ve runup. So we’ll call these stocks “Repicks.” So your first repick on the list is Macerich, which is a REIT focusing on high-quality malls.

How much has it returned since you first picked it? And why do you still like it today?

Sekera: We first highlighted Macerich on our March 6, 2023, show. And as you noted, it’s a small-cap REIT, but it does invest in your Class A shopping malls, so the highest-quality shopping malls, those that have the best locations. And our thesis here is that we had a pretty positive view on specifically the Class A malls.

We’re looking for the rebound in foot traffic after the pandemic and that’s played out. But even more importantly, a lot of these models have become more experiential over the past couple years. There are a lot less reliant on just retail sales in the stores. So they reposition their portfolios to things that can’t be replicated online.

So you see a lot more restaurants, gyms, doctors’ offices, movie theaters, things like that within those malls. So since we recommended it on that show, the stock is up 27% since then. Plus, you’ve also clipped, I think, a 5.6% dividend yield over the past year as well. Now, I would note we slightly decreased our fair value over the past year, but at this point it’s still a 4-star-rated stock, trading at a 36% discount. Still provides a 4.5% dividend yield.

Dziubinski: Your next repick is another REIT: Host Hotels & Resorts. How’s it done since you first picked it? And why do you still like it?

Sekera: Yeah. So this one also was a pick from our March 6 show last year. Host is one of the largest owners of luxury and upscale hotels. Again another rebound on normalization kind of thesis, specifically, in business and leisure travel. I also like the company just because it is a bit of an inflation hedge.

Hotels are able to quickly pass through their own cost increases to their customers. So since we noted on that show, the stock is up 10%. So a pretty decent return although nothing too stellar. But you’ve also collected 5.3% worth of dividends plus a special dividend over that time period. So the stock was up higher—it did slide 10% over the past month to month and a half. A lot of that is because the market is now pricing in interest rates, potentially staying higher for longer. Of course, REITs are negatively correlated with interest rates. So that’s pushed the stock down a little bit here. So right now the stock’s at a 25% discount. Puts it in that 4-star territory. Still getting a pretty good yield at 4.3%.

Dziubinski: So your third repick this week is Lyft. And here’s a company that hasn’t yet turned a profit but has been trimming its losses.

Sekera: Lyft we highlighted on our March 13, 2023, show the stock was trading just somewhere I think with an eight handle back then. And again it was another play on kind of that postpandemic consumer normalization. Stock is up 90% since then. Now over the past year we have lowered our fair value. We’ve dropped it down to $25 a share.

And I think this is a really good example of why you want to buy stocks that have very high uncertainty ratings and a pretty large margin of safety from their intrinsic value just because there is a wide range of potential outcomes on these type of stocks. And I think you can see that in our fair value estimate and how we’ve changed that fair value estimate over time.

But even at this lower fair value estimate, it is still a 4-star-rated stock at a 35% discount.

Dziubinski: Next up is Fidelity National Informational Services. This tech stack isn’t much of a bargain compared to some of your other picks this week. How’s the stock done since you first talked about it, and why do you still like it today?

Sekera: Yeah, so I think this was our pick on our March 20 show, 2023. At that point in time it was a 5-star stock and a 38% discount. Company that people may not necessarily have heard of. It’s kind of more in the background, but they do payment processing for banks. They do recordkeeping and other services for investment firms.

Plus they also have a payment processing business for retailers. Now this one sold off pretty hard if you remember when the regional banks all dropped, after Silicon Valley Bank was put into receivership. This got pulled down with it back then. The stock since then has risen 37%. Still trading at a 12% discount, 2.7% yield, but enough to put it in that 4-star territory.

Dziubinski: And then your last repick this week is Eastman Chemical. Why?

Sekera: Yeah. So that was a pick from our March 27, 2023, show. There’s a 5-star stock, trading a 38% discount at that point in time. And really we thought all the specialty chemical companies a year ago were undervalued. The market was pricing in a much higher probability of a potential recession. Whereas we were in that soft landing camp, which is, of course, where we are still in our economic outlook right now.

So we expect the underlying business should hold up even in an economy that’s slowing, but not necessarily recessionary. Plus, we do think over the long term that Eastman will benefit from the long-term secular growth into electric vehicles. So the stock is up 20% since we first highlighted it, but it’s still at a 23% discount from fair value, puts it in the 4-star territory and does have a 3.4% dividend yield.

So I just note here, we didn’t really dive too deep into the specifics on any one of these stocks on the show this time, just because I think the show is getting a little lengthy here because of everything else we were talking about. But of course, viewers can go to Morningstar.com and do a deeper dive into our research and our valuations, which I would certainly recommend before you ever invest in one of the picks that we note on our show.

Dziubinski: Well, thanks for your time this morning, Dave. We hope you’ll join us next week for The Morning Filter, 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.