3 Stocks to Buy and 3 Stocks to Sell for July I June 29, 2026

[00:00:00] Susan Jubinski: Hello, and welcome to the Morning Filter podcast. I'm Susan Jubinski with Morningstar. Every Monday before market open, I sit down with Morningstar Chief U.S. Market Strategist Dave Sequeira to talk about what's been going on in the market, what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. Now, before we begin, we have a programming note for viewers. We will not be streaming a new episode of the Morning Filter next Monday, July 6th. We're taking some extra time off to celebrate the 4th of July holiday. And speaking of time off, welcome back, Dave. Glad you decided not to stay in Italy permanently. [00:01:06] Dave Sequeira: Buongiorno, Susan. You know, it's amazing just how fast 10 days in Italy can go by. Got back from Italy, came over this past weekend to come visit my parents for a little bit. Unfortunately, tried getting my car started yesterday. That was no bueno, did not go. So we're doing the podcast here from Wisconsin today. So we'll see how it goes. Unfortunately, I also don't have my reading glasses. So if I'm a little rusty this morning, please forgive me today. [00:01:35] Susan Jubinski: Well, we're just glad you're back, Dave. So, all right. So let's start by talking about last week's market activity. Now, we really saw quite a bit of a tech stock pullback last week. So walk through what happened. And again, you know, given where we are from a valuation perspective with tech stocks, would you expect some additional pullback? [00:01:54] Dave Sequeira: Yeah, I mean, so the tech sector fell just over 5% last week. And in fact, if you look at the sector and look at the individual stocks, it's pretty much all the tech stocks were down across the board. But as you'd expect, you know, the biggest detractors to the index were also the largest of the market cap AI stocks. So, for example, NVIDIA was down almost 9%, Broadcom down 11%. Companies like Oracle, Western Digital, those were down about 20% each. But the thing is, you also have to remember, even after this sell off, the sector is still up 15 and a quarter percent year to date. So I think there's a couple of things going on here. So first, I think it's just natural profit taking. I mean, we've had some huge gains in some of these stocks over a relatively short period of time. So to some degree, I think people are just locking in those gains. I think there's also some indigestion going on with the SpaceX IPO. I think that was down 17%. So I think that took some of the speculative air out of the tech sector. And as a reminder, I did do an interview with Nick Owens. He's Morningstar's equity analyst that covers SpaceX, talking about, you know, what the company does, you know, his valuations, his forecast, why we think that stock, you know, even at this level, is significantly overvalued. If I remember correctly, that was the June 8th episode of The Morning Filter. And then lastly, I think the sell-off also had a lot to do with international markets. So a lot of international markets sold off last week as well. So, for example, the Kospi, that was down 7%. That's the index for the South Korea market. But yet, even after that little bit of a pullback, that index is up over 100% in just the past six months. Over the past year, it's up 173%. So huge gains there in South Korea. You know, Japan was down a bit as well. That was down about 3%. Again, that's one where it's up 37% just over the past six months. That one's up 73% over the past year. But you have to remember, in those markets, and especially Korea, they're highly leveraged to memory semiconductor stocks. Those are up just ridiculous amounts, you know, over the past, you know, six months, past couple of years. So, again, I think it's just some profit-taking, you know, in those markets. You know, as far as where does the tech sector go here, you know, in the short term, you know, who knows? I mean, it remains to be seen. But as far as valuation goes, it is starting to look more attractive, you know, once again. Currently trades at a 13% discount to a composite of our fair values, but not nearly as undervalued as it was at the end of March when we were recommending the overweight technology stocks. At that point, it was trading at a 23% discount. So, you know, if we do see much more of a sell-off from here, it becomes, you know, more and more of a buying opportunity, you know, for the sector. And, you know, just highlighting, you know, some of those stocks that trade at the greatest discounts by market capitalization that are really going to impact the sector going forward. You know, Nvidia, at this point, is now trading at a 30% discount to fair value. Microsoft, 38% discount. And Broadcom, a whopping 44% discount to fair value. [00:05:00] Susan Jubinski: Wow. All right. Well, let's pivot and get caught up with oil and oil prices. Where do they stand this morning? [00:05:07] Dave Sequeira: So, I took a quick look. I mean, oil prices, you know, WTI is trading at about $70 a barrel this morning. So, it's still a little elevated over where oil prices were prior to the beginning of the Iranian conflict. You know, they're at $67 back then. Unfortunately to me, I still think the situation is clear as mud. You know, the U.S. and Iran are both disagreeing on whatever it was that they said that they agreed to. Over the weekend, there were several different military actions. You know, last I saw in the news that the truce is supposedly back on again. So, again, at least, you know, things are better now than they were during the hottest part of the conflict. But in my mind, it's still not totally resolved at this point. And we haven't gotten to that new normal. [00:05:49] Susan Jubinski: So, then, given that, Dave, what are your expectations for oil prices ahead? And what impact do you expect oil to have on inflation? [00:05:57] Dave Sequeira: Yeah. I mean, honestly, it's just impossible to know what oil is going to do in the very short term. Of course, it's just going to depend on the status of the military conflict, whether or not oil tankers are crossing the Strait of Hormuz. At this point, it sounds like they are continuing to cross, and that's what brought prices down. But with storage levels being so depleted, I think this renewed supply really just starts to refill the tanks at this point. And, of course, the impact of high oil prices is going to be with us for a while. You know, it's going to keep headline inflation up, you know, for at least the next couple of months at this point. And, of course, those higher prices also disproportionately negatively impact, you know, lower income households. So, I think that's going to be weighing on the economy for the next couple of quarters as well. It just takes a long time for wage inflation to, you know, catch back up to that headline inflation to get purchasing power, you know, back where it should be. But, again, it's all about positioning, you know, looking for those individual stocks that are still undervalued at this point. You know, when we look at our longer term forecast for oil, haven't changed anything there. Our mid-cycle oil price forecast for West Texas is still $60 a barrel, $65 for Brent. So, longer term, we still expect oil prices to continue to come down from here. But, yeah, a lot of those stocks still look attractive to us. [00:07:18] Susan Jubinski: Now, speaking of inflation, last week's PCE number was in line with expectations. So, anything in that report stand out to you? [00:07:27] Dave Sequeira: Nothing really in particular stood out all that much, you know, when you look at, like, the individual contributors. You know, core PCE was up 3.4% on a year-over-year basis. That's higher than the prior month when it came in at 3.3%. And, of course, you know, for me, it's really all about headline PCE. That was up 4.1%. That was a pretty big increase from the prior month when it was at 3.8%. So, again, with oil prices coming down, that should let some of the steam out of headline inflation. But it's just going to take a while for that really to dwindle anywhere near back towards, you know, the Fed's 2% inflation target. I think it's also going to take a while before that is no longer, you know, weighing on the economy over the next couple of quarters. [00:08:10] Susan Jubinski: You've been saying for a while that you thought the Fed might raise interest rates later this year. And, you know, that's what new Fed Chair Warsh sort of hinted at after the recent Fed meeting. So, what's the market pricing in today? [00:08:23] Dave Sequeira: So, as far as, you know, the short term, the market's currently pricing in a 30% probability of an increase to the Fed funds rate as soon as the July meeting. Now, that was actually under 10% probability just a month ago. So, that is increasing, you know, pretty quickly. You know, as far as looking out through the rest of the year, there's now a 77% probability of at least one hike as of the December meeting. Could even be multiple hikes, you know, by the end of the year. You know, that was less than a 50% probability just one month ago. And the other thing I'd highlight is the two-year U.S. Treasury. So, the yield on that has been climbing. It's now over 4%. So, as the market prices in, that higher probability for interest rate hikes by the Fed, you know, that really impacts, you know, the two-year Treasury. In fact, the yield on the U.S. Treasury right now, it's currently at the highest it's been since early 2025. [00:09:15] Susan Jubinski: All right. Well, let's move on to talk about the week ahead. We have non-farm payrolls coming out on Thursday. What do you think, Dave? Are these worth keeping an eye on? [00:09:24] Dave Sequeira: Nah, probably not. I mean, we've talked about all the problems with payrolls, you know, multiple times in the past. Honestly, I've kind of stopped focusing on what those payroll numbers are. In my mind, to some degree, they're just non-meaningful. I mean, when you look at what the revisions are in those numbers, you know, both on a month-to-month basis, as well as the annual basis when they revise them. They're just so far off from what those original prints are that I don't think it really helps you gauge what's going on in the labor market. So, no, I'm not really going to pay attention to it. [00:09:57] Susan Jubinski: All right. On the earnings front, they've kind of slowed to a trickle, but we have a couple of notable names that are going to report this week. And the first is Nike. Morningstar assigns a $97 fair value to the stock. And the stock is having, it seems like we always say this, the stock's having another horrible year. It's down something like 75% from its all-time high. So, Dave, is there any hope for Nike? Any chance this could be the bottom finally? [00:10:25] Dave Sequeira: I don't know. I mean, we'll see. I mean, yes, the stock is significantly undervalued. It is a five-star rated stock, trades over a 50% discount to our fair value, has a 4% dividend yield, so that looks pretty attractive as well. Our analytical team still has faith in the company overall. We've continued to rate it with that wide economic moat, meaning we think the company has long-term, durable, competitive advantages. But at this point, I just haven't seen or heard anything that's going to be any different than the comments we've made when we've talked about this stock, even from the last earnings report. Pulled up our model, our earnings forecast for this year is $1.51 per share. So, with where the stock is trading, that means it's trading at 27 times this year's projected earnings. In my mind, that's just not cheap, especially for a company whose top line has been contracting since 2023. So, of course, the real question here gets to, you know, when can Nike start getting back towards more historically normalized, you know, type of operating results? So, if you look at the past couple of years, their earnings in 2023 and 2024 were three and a quarter and three and three quarter, you know, per share, respectively. So, when they can start moving back to those kind of earnings levels, then, yes, the stock is very undervalued. It trades at only 11 and a half times the average earnings for those years. But here, fundamentally, in the short term, I think they're probably still going to have a negative impact from the tariffs. You know, from what I can see and hear, it sounds like they're still losing some market share to other brands like On Running and Boca. Product development, you know, our analysts just, you know, kind of note as being somewhat lackluster here in the short term. Overall, still struggling, you know, with China. You know, I think, you know, as much as the consumer here in the U.S. might also be under a lot of pressure, I think the consumer in China is struggling quite a bit, you know, as well. So, really, yes, if we can get any kind of indication that, you know, we're hitting the bottom, that Nike's starting to, you know, right the ship at this point, I think the stock has a lot of room of upside. But for now, until I see that really starting to come through the numbers, I just don't want to get caught up in this downdraft. [00:12:38] Susan Jubinski: All right. Well, we have a former pick of yours, Constellation Brands, reporting this week. And we haven't really talked about Constellation Brands in a hot minute. There's been some change in Morningstar's thesis when it comes to the company and Morningstar's fair value estimate on the stock. So, walk us through all that. [00:12:56] Dave Sequeira: Yeah, I mean, there's a lot that's changed there. So, the analyst that was covering Constellation Brands is no longer with Morningstar. So, it is under new analytical coverage, you know, at this point in time. So, what happened here is after the last earnings report, you know, kind of the new analyst took, you know, like a deep dive into what's going on, both at the company individually, as well with, you know, the sector overall. And he did take the fair value down somewhat substantially, down to 170 per share from 220. Now, we did recommend this at a very wide margin of safety from our prior fair value. So, at this point, even after that fair value cut, it is still a four-star rated stock. It's still a four-star rated stock, but now it's only at about 14% at discount. Again, with the company, the crux of the matter really is, you know, alcohol consumption in the U.S. is continuing to recede. And, you know, the company is, you know, acknowledging that in their results, you know, they cut their fiscal year 2027 guidance. So, essentially, you know, on the top line, they're looking for, essentially, you know, flat results, you know, overall. So, if they're putting through some price increases, but their top line is flat, that means that they're still looking for a decrease in volumes, you know, over the course of the next, you know, year or so. You know, their operating margin, you know, they cut that to 32% from 33%. It's kind of, you know, you get that negative leverage with, you know, the top line being stagnant. And they also withdrew their 2028 guidance. So, again, you know, I think the company is also having a difficult time really trying to understand, you know, how much more consumption can fall before it starts to bottom out. You know, longer term, you know, we ended up, you know, reducing some of our estimates. You know, we reduced our long-term sales estimates to 3% from 4%. And even then, you know, we still think it's going to take several more years here in the short term before we get to that new steady state going forward. And we've also reduced our mid-cycle operating margin to 31% from 34%. So, I'd say it's the combination of bringing that long-term expectation down for the top line with a lower margin, which has resulted in that fair value decrease. [00:14:59] Susan Jubinski: Well, let's pivot over to some new research from Morningstar. Micron reported pretty outstanding results last week. So, what's Morningstar's take? [00:15:08] Dave Sequeira: Yeah, I mean, the results that they're posting are just crazy when you look at these numbers. I mean, their revenue was up almost 350% on a year-over-year basis. You know, their gross margins, you know, expanded. They were coming in at 85%. I mean, comparatively, that was only 39%, you know, a year ago. So, again, it's one of these situations where there is just so much demand, not enough supply. They can charge whatever price they want to charge, and people are paying for it. And it appears, you know, that's what we're going to see here, you know, going forward for, you know, some period of time. You know, the growth guidance that they gave, you know, implies, you know, more growth, more margin expansion. And, you know, overall, the longer-term outlook, though, is still the same. So, what happens here is, you know, we're still trying to figure out, you know, just how much more can growth increase here for the next, you know, second half of this year and into 2027. But we still think that by 2028, new capacity is going to come online. As that new supply comes online, that's going to put pressure on pricing, put pressure on margins. So, those will come down in 2028, you know, and thereafter. But in the meantime, you know, we did increase our 2027 results, you know, pretty substantially and brought up our, you know, expectations for the second half of this year as well. So, that led to a pretty substantial increase in our fair value. But even after we boosted our fair value, it still trades at a 33% premium. It's enough to put it in two-star territory. So, as far as, you know, the stock price goes, this is one where there's so much momentum. We're still looking for growth, you know, in the results over the next, you know, couple of quarters. So, that could still push the stock price, you know, even higher and further above kind of that new, you know, fair value increase. But yet, this is one I'm going to caution investors, you know, once the stock cracks, you know, for whatever reason, you know, this is one that once it starts to fall, I think it gaps down pretty quickly. [00:17:06] Susan Jubinski: All right. Well, McCormick, which is a former pick of yours, reported last week. So, Dave, unpack the takeaways on this one and tell us whether the stock looks attractive. [00:17:16] Dave Sequeira: Yeah, I mean, we had a nice little pop in the stock after earnings. I think it was up, you know, over 5%. Earnings came in. I mean, they weren't necessarily stellar, but I think that they were just pretty darn good for what you expect in the food sector today. Organic sales up 2%. Gross margin expanded by 270 basis points. And I think for McCormick, and one of the reasons I think that we like this stock overall is the way that their portfolio is positioned has really been able to help them out. So, again, they're positioned both across, you know, individual retail consumer as well as institutional markets. They have, you know, a great lineup of product, you know, their portfolio of products. So, I think that combination has really been able to help support with what's going on in the food market, you know, today. So, essentially, you know, the stronger areas, you know, we're more than able to offset, you know, some of the weaker areas that we've seen. Even after that 5% pop, stock's still at a 21% discount, puts it well into four-star territory. We rate the company with a medium uncertainty. We assign it a wide economic moat. Got that almost 4% dividend yield here. Now, I'll note this is not necessarily one of the cheapest of the food names out there. You know, there are others that are more undervalued. But, again, this is one, even when I look at some of those more undervalued food names, I think we find attractive because I think we also have some of the most confidence in our forecast and in the company here. [00:18:39] Susan Jubinski: Now, Morningstar held its fair value estimate on Adobe at $380 after earnings. Stock, you know, on the surface looks really undervalued according to Morningstar. But, again, here's another stock, kind of like Nike, that's, you know, just having a horrible year and is also down more than 70% from its all-time high. So, Dave, what's your take on Adobe today? Is this a value opportunity or a value trap? [00:19:06] Dave Sequeira: All right. Well, that's kind of a loaded question there. [00:19:08] Susan Jubinski: Yes. [00:19:09] Dave Sequeira: So you have to remember, so the software industry overall, I mean, they're all getting hit. So the market is still very concerned about, you know, how artificial intelligence is going to impact, you know, the software companies, how much is AI going to disrupt or maybe even totally displace, you know, their business models. And I'd say when I look at the software companies, Adobe is one of the ones that I think the market has the greatest amount of concern. And so that's why we've seen that one perform the way that it has. Now, fundamentally, Adobe and pretty much all of the software companies are still doing very well here in the short term. You know, revenue came in better than expected. It was up almost 13%. Operating margin, you know, came in, you know, kind of within the guidance levels. I mean, that's at 44.5%, so very strong margins. Annual outlook, I mean, generally there were some offsets here, but overall, you know, that came in a little bit higher. So a little bit of increase, you know, in the short term for guidance. And I think the problem with here, this one too, is it's not just, you know, the AI. So what happened is, you know, Adobe also announced that the CFO was leaving. I think the CFO is going to, you know, Marvell. And in this case, you know, the timing for that CFO leaving is just particularly bad for the company. The company's in the process right now of also searching for a new CEO. The CEO had announced, I think, you know, a couple of months ago that he was going to resign. So the company's looking, you know, to fill his seat as well. So unfortunately, kind of during this whole, you know, AI transformation, you know, the company is going to be replacing both the CEO and the CFO. So I think that's going to be, you know, something that really weighs on this stock, you know, for a while. So as far as, you know, is this stock a value trap or not? Well, honestly, I mean, it really is going to depend on how AI plays out in the next, you know, probably three to five years. Our investment thesis overall still remains that we think companies like Adobe is going to be able to use artificial intelligence to add more economic value to their products. So we're not looking for these companies, you know, to be totally disruptive or, you know, have, you know, their product, you know, really kind of get competed away. And in that case, if we're right, you know, this company is significantly undervalued. We're forecasting, you know, five-year compound annual growth rate for earnings of, you know, 13%. Stock only trades a little over eight times our 2026, you know, earnings estimate. But of course, if we're wrong and AI really does, you know, displace, you know, Adobe's current product lineup, then yes, then in that case, you will see those earnings, you know, deteriorate over time. And yes, it would be a value trap even at that low of a valuation. [00:21:50] Susan Jubinski: All right. Well, it is time for our question of the week. And as a reminder, if you have a question for Dave, send it to us at our email address, which is themorningfilteratmorningstar.com. All right. This week's question comes from an unnamed Lulu stockholder. Basically, the viewer would like an update on your take on Lululemon. And Dave and I intentionally held this question until after Lulu reported earnings. So maybe start with that, Dave. How did earnings look? [00:22:17] Dave Sequeira: I would say the results were mixed at best. So if you look at revenue, it came in, you know, up 4%. And most of that really came from China. So China is 19% of their sales. And that was up 30%. So doing very well there. And in fact, they're doing very well in their other international markets as well. You know, that's 13% increase in revenue. And that's, you know, about 15% of kind of their total revenue overall. The problem is, you know, they had a 3% decline in the Americas. That is, of course, you know, their largest geographic area. That's, you know, 66% of revenue overall. So I think the market is really focused in on that decline and waiting to see them, you know, be able to halt that decline and start moving back up again. Unfortunately, margins also get hit pretty hard. The operating margin, you know, contracted by 200, I'm sorry, by 730, you know, basis points. So again, margins, you know, really getting hit. And unfortunately, the company also noted that results, you know, were continuing to get weaker over the course of this past quarter and are weak coming into this quarter as well. So that led them to lowering their guidance for 2026. So as far as sales growth, they're now looking for that to be, you know, flat to down 1%. Their prior guidance was looking for a 2% to 4% increase. And they brought their earnings per share down to a range of, you know, 1095 to 1115 per share. You know, prior to the cut, their earnings guidance was 1210 to 1230 per share. So a pretty big cut, you know, in that earnings guidance, as far as like the valuation goes, I mean, that trades at about 10 and a half times the midpoint of that newly lowered guidance. So certainly looks like the market was very unhappy with the results and unhappy with what's going on with the company, you know, overall. [00:24:05] Susan Jubinski: All right. So then let's look at the bigger picture, Dave. So what's really going on with Lululemon now? I think, you know, the company, since we last talked about it, named a new CEO, right? [00:24:15] Dave Sequeira: Yeah, and the market is really not enamored with the new CEO, you know, that they picked. Now she is coming from Nike, but, you know, Nike in itself hasn't been doing, you know, all that great, you know, as well. At Nike, she most recently served as the president of the consumer product and brand. And I think the market right now is really looking at her as being much more of a product person. And what I mean by that is if you think about Nike and how they market themselves, you know, they heavily rely on athlete endorsements. It's a brand where you're really trying to convey like aspirational competitive success. So really a very competitive type of product, which to some degree is like the opposite of how you market Lululemon. You know, the brand image there, when you think about it, it's much more about lifestyle, much more about wellness. And so I think in this case, she's going to have her work, you know, cut out for her, really trying to make sure that she understands, you know, how to be able to market, you know, Lululemon and what those products mean to their customers as compared to how you traditionally try and market, you know, athletic shoes and running shoes. And so I think she's got her work cut out for her and she's definitely going to have to do a lot to be able to convey to the marketplace that she really understands Lululemon. [00:25:35] Susan Jubinski: Now, Lululemon is trading way below Morningstar's $280 fair value estimate. So why is Morningstar's take so different from the market? And do you think there's an opportunity to put new money to work with Lululemon? [00:25:50] Dave Sequeira: Yeah, I mean, short answer is yes, it still looks like there is a pretty good opportunity to put new money into this name. However, just kind of like we've always talked about before, you know me, I always like to put in like a partial position to start. And then that way you have the dry powder, the dollar cost average, you know, in going forward. When I look at our projections here, I'm just going to kind of run through what's in our model today and what our fair value is based on. So we're looking for stagnant revenue, you know, this year, you know, maybe, you know, up or down like a percent or two. But then we're looking for a rebound by 2027, getting back to a 4.4% growth rate. And then looking essentially for like a 6%, you know, annualized growth rate, you know, thereafter. So much more kind of that normal historical kind of growth rate that they've, you know, been able to post in the past. Now, as far as margin go, we're looking for contraction, you know, this year. We're looking for the operating margin to contract the 16.1%. Now, that's down from 19.9% last year. You know, when I look at the longer term for this company, they've averaged about 21%, you know, over the past, you know, decade. So, you know, even looking forward, you know, we're only bringing that margin up to 16.7% in 2027, you know, up to 19.7% in 2028, and then getting back to 20.8%. So that normalized margin, you know, by, you know, our out years. Now, as far as earnings go, you know, after the decline this year, we're looking for that to rebound by 13% next year, 32% in 2028, and 18% in 2029, as the operating margin expansion leverage, you know, really is able to juice those earnings, you know, the next couple of years. So if our analyst is correct, you know, with his assumptions and his projections, I mean, the company's only trading at just over nine times his 2027, you know, earnings estimate. So what that tells me is the market is still pricing in, you know, continued earnings erosion from where we are here today. So this is one of those stories where if the company can just halt, you know, the bleeding and just, you know, even keep where earnings are today, you know, it looks pretty attractive, you know, just on kind of that stagnant basis. And if the company can turn things around and start growing again, this one has a lot of upside to our analyst fair value estimate. [00:28:12] Susan Jubinski: All right. Well, it is time for the picks portion of our program. Since we're about to close the books on June, Dave has brought us three stocks to buy for July and three stocks to sell. So we're going to start with the buys this week, Dave. First buy is Alphabet. Now we've talked about the stock quite a bit over the past year or two, but briefly give us some of the key metrics. [00:28:34] Dave Sequeira: So the stock's trading at a 22% discount, it's rated four stars. You know, we assign the company a medium uncertainty. We rate it with a wide economic moat. And in fact, I'd say it's probably one of the widest economic moats of our coverage. In fact, it's one of only two companies that we use four of the five moat sources, you know, in order to get to that wide moat rating. [00:28:58] Susan Jubinski: Now, Alphabet had been on, you know, quite a run, but pulled back recently. So why the pullback and why do you like it? [00:29:06] Dave Sequeira: Yeah. So month to date, it is down 11%. And, you know, it's down enough that it is back into that four-star territory. So I think there's a number of things, you know, going on. So first of all, here in the short term, you know, there was news out there that two of the senior artificial intelligence researchers, you know, that were at the company left to join competitors. You know, it's a hit to the company. But overall, our analyst doesn't think that that in and of itself is really all that meaningful to their AI efforts. But I'd say probably more broadly what we've seen, especially in the technology sector, yes, Alphabet is technically in the communication sector, but I think more people still look at it as a tech stock. The stocks of what they call receivers, you know, have been heading higher. So what we've seen over the past, you know, month is that those companies are the ones that sell AI equipment. So those that are ones getting actually paid, those stocks continue to keep ramping up higher. But the stocks of the payers, you know, those companies that are, you know, paying or buying, you know, that AI equipment, you know, those purchasing the artificial intelligence, you know, semiconductors and equipment, the hyperscalers, you know, have all been selling off. So to some degree, the market is starting to price in that maybe the hyperscalers are getting out a little bit too far, you know, over their skis, that they're spending so much money that they may not necessarily get enough of an economic value out of it over time, you know, to make that spending worthwhile. Now, as far as Alphabet goes, it is one of the few tech companies that we see is really having what we call that full integrated AI stack. I mean, it's involved in, you know, the energy sector, it's involved in chips with its TPUs, it's involved in, you know, the AI infrastructure with Google Cloud. I mean, they've got their own AI models, you know, with Gemini, they've got, you know, the ability to monetize AI in their apps with like search and YouTube and so forth. So overall kind of no matter how AI ends up playing out over the next couple of years, we think that they're positioned to be able to take advantage of it along these different multiple business lines and different products. So in my mind, I still think it's a core stock, you know, type of holding, you know, trades at 23 times earnings. So not necessarily cheap, but we're looking at 18% five year compound annual growth rate on the top line, looking at 20% earnings compound growth rate over the next five years. So even at that 23 times multiple, you know, in our DCF model, the company still looks very attractive here. [00:31:37] Susan Jubinski: All right, your second stock to buy is a name I don't think has ever been a pick before, and that's Palantir. So give us the highlights. [00:31:45] Dave Sequeira: Well, I mean, not only was this never a pick, but in the past, but this is one you and I have talked about just how overvalued it had been and actually had been a sell just not even, you know, that long ago. You know, at this point, the stock is down 28% month to date. I think it's down about 45% from its November 2025 high. So at this point, it's fallen enough that it's now pushed it into four star territory, trades at a 26% discount. Again, this is one where I think you need to have a very good risk appetite if you're going to get involved. We rate the company with a very high uncertainty. This is, you know, one where the value of the stock really is based on all of the growth. But having said that, we do award the company a narrow economic moat. So we do see the company as having a long term durable competitive advantages for at least the next 10 years. [00:32:35] Susan Jubinski: So Dave, why has the stock been falling and how does Morningstar's opinion on Palantir differ from that in the market? [00:32:43] Dave Sequeira: So again, I think it just all comes down to it's a matter of what kind of valuation you put on there and what your projections are for, you know, the next five years. So just to put it in context, so in our model, we have a 45% compound annual growth rate for revenue over the next five years. So putting that in the context, you know, their 2026 revenue was $7.8 billion for fiscal 2027. We're projecting that to go all the way up to $11.4 billion. If you go to the out years of our explicit forecast period by 2030, that's $28.8 billion. So essentially, 2026, almost $8 billion, going up to almost $29 billion by 2030. Now, as far as earnings go, very similar compound annual growth rate, looking for 41% over the next five years. Again, to put that in context, $1.29 in 2026, growing all the way up to $3.84 by 2030. So just, you know, tremendous growth, you know, over the next five years, but it doesn't stop there. So when I look at some of our outer years after that, you know, we're still projecting our average growth rate of about, you know, 25% for the next five years thereafter. So it's one of these ones where, you know, the growth rate is so strong for so long, you can't really use, I think, you know, traditional valuation metrics like price to earnings, price to sales, you know, and things like that. You know, this is one of those cases where I think you really have to have that discounted cash flow model. That's the only way you can really capture and come up with what you think the present value of that, you know, lifetime of future, you know, free cash flow is going to be. So in this case, you know, this is one where it's, you know, looking attractive, but again, you really got to believe the story to get involved in this stock. [00:34:32] Susan Jubinski: All right. Your next stock to buy requires a good stomach there, Dave. It's Salesforce. So run through some of the key numbers on this one. [00:34:41] Dave Sequeira: Yeah. And again, you know, it's hard to talk about this one because I mean, admittedly, we've been, you know, we've been long and wrong about this one for quite a while. Well, but for our tech team, it's still, you know, one of their best ideas. And as far as, you know, the software sector goes, it's still the one I think that they have, you know, the most confidence in, you know, their long-term outlook and how this company is going to work out over time and utilize, you know, artificial intelligence and how that's going to change, you know, their business model. And they're going to change with it. So at this point, five-star rated stock trades at over 40% discount to fair value, high uncertainty, you know, narrow economic mode, but again, probably the poster child of, you know, starting with a relatively small position and having that dry powder just to be able to dollar cost average into it, you know, on the way down. But at the same point in time, you know, the stock has had a couple of instances where you've gotten a pretty decent pop, where, you know, if you did dollar cost average down, you've had some instances to be able to take some profit, you know, along the way as well. So again, with as much as this one has dropped, you know, just over the past month, you know, you're kind of getting that opportunity to try and buy some stock here on the cheap. [00:35:51] Susan Jubinski: Yeah, and Salesforce really has gone through the ringer along, of course, with other software stocks due to those concerns around AI disruption. So delve a little bit more about why this one is a pick, still remains a topic for our analysts and for you. [00:36:06] Dave Sequeira: Yeah, yeah, I mean, so very poor performance, you know, month to date. It's down 17%. I mean, it's down 56% overall from its December 2024 high. So with as much as it fell this month, that was enough now to push it into five-star territory from four-star territory. Overall, I mean, still no change in our long-term investment thesis, really no change in our forecasts. Yeah, among the software stocks, this is the one that our team has the most confidence in. Fundamentally, the company is still doing, you know, very well here in the short term. Fundamentals look very strong. And if you look at, you know, some of the AI portions of their business, like AgentForce and Delta, I'm sorry, Data360, I mean, their annual recurring revenue is still up over, you know, 200%, you know, year over year. You know, last quarter, they noted that revenue was up 12%. Their fiscal 2027 guidance was increased, you know, slightly. You know, as far as valuation metrics go, I mean, this company trades at 11.4 times our earnings estimate for this year. So again, that current price is telling me in that current PE valuation that the market is still looking for a very significant contraction, you know, over time. And it's just one of these ones where, you know, if they can just, you know, keep revenue and earnings, you know, not only, I mean, growing, but I mean, even if revenue and earnings were to somewhat stagnate here, you know, at that 11.5 times, you know, PE, I still think the stock looks, you know, undervalued here. So this is one where, you know, if you think the same kind of lines that we do, that companies will use AI to increase the economic value of their products, and that they'll, you know, continue to keep their customers, a lot of these software stocks look very undervalued. If you've got the opposite opinion, you think AI is going to disrupt or displace a lot of these software companies, then yes, they probably still have, you know, further to fall. [00:37:59] Susan Jubinski: Alright, so those are the buys for July. Let's get to the sales. The first stock to sell for July is Applied Materials. Morningstar's fair value estimate on the stock is $470. So why sell, Dave? [00:38:13] Dave Sequeira: This is just a matter of this one has run so far so fast. I think it's just a good opportunity to take some profits. It's up almost 40% month to date. Over the past 52 weeks, it's up over 240%. So that's enough that it's now moved into two-star territory from three-star territory. You know, trades at a 33% premium. We rate the company with a high uncertainty and a wide economic moat. And again, it's not like we're not projecting this company to just have, you know, incredible growth over the next five years. I mean, the company did just over $28 billion in revenue in 2025. We're modeling that by 2030, that's going to be over $60 billion. So more than double earnings per share, you know, even more leverage than that. I mean, the company did $9.40 in 2025 in EPS. We're projecting that to go up to $27, you know, in 2030. But again, when you look at the valuation here, even with all of that growth modeled into our discounted cash flow model, the stock is still trading at too high of a premium, you know, in our view. So this is one where, you know, when things start to slow down and you kind of start reducing that PE ratio, which is over 55 or 50 times today, this is one I'm also concerned about, you know, has that high probability of gapping down to the downside. [00:39:33] Susan Jubinski: All right. Your next stock to sell is another tech stock. It's Teradyne. Morningstar assigns a $275 fair value estimate on the stock. So why is this one to pull back on? [00:39:45] Dave Sequeira: I mean, a similar story. I mean, it's up 17% month a day. It's up 384% just over the past, you know, 52 weeks. So again, it's moved up so far so fast. It's now in one star territory after being in two star territory. Stocks at almost a 60% premium to our fair value. And again, we're modeling in, you know, huge growth here over the next five years. Revenue in this case was a little over $3 billion in 2025. We're looking for that to increase to, you know, $7.6 billion in 2030. You know, earnings per share in 2025, you know, almost $4 a share. We're more than quadrupling that by 2030, getting up to, you know, $16.30 per share. You know, the company's currently trading at over 62 times, you know, this year's earnings estimate. So this is one where, you know, at the current valuation that the market places on it, you know, they're valuing it at, you know, even higher growth rates than what we've got in our model today. [00:40:43] Susan Jubinski: All right. And then your final stock to sell is not a tech stock. It is not. It is American Airlines. A Morningstar pegs the stock at a $10 fair value. And it's trading well above that. So how does Morningstar's thesis differ from that of the market when it comes to American Airlines? [00:40:59] Dave Sequeira: Yeah, I mean, this stock is trading at a huge premium to our fair value. I mean, almost 80%. Now we rate the company with the very high uncertainty, no economic moat. And really, when you think about it, it's all due to just being in the airline industry overall that we just don't think allows companies really to be able to position themselves with an economic moat overall. Now, it's interesting if you look at the chart here, you know, over kind of the past, you know, a couple of years. I mean, initially the stock and all the airline stocks got hit pretty hard after the conflict with Iran started, but it bottomed out at the end of March. Now, since then, you know, the stock has been recovering. You know, this month it's up 22%. Stock's up over 60% over the past, you know, 52 weeks. And I think a lot of the pop that we got here in the short term is, you know, following the agreement with Iran, the market is pricing in, that they're going to be able to make, you know, windfall profits here in the short term. So, of course, once oil prices started going up, the airlines all ratcheted, you know, their tickets up higher as well to account for those high oil prices. And now the oil has subsided, you know, they're going to be able to keep all that additional margin as oil prices and jet fuel are going to be lower by the time those flights, you know, actually take off. But again, that's all just really short-term machinations. It doesn't change kind of that long-term business model overall. So airlines have definitely seen a benefit from an increase in desire to travel over the past couple of years. You know, initially it was just kind of that pent-up demand, you know, after the pandemic, but a lot of that demand has really continued. And it's just, you know, economics 101. I think, you know, to some degree, people still value experiences more than stuff, but we still see travel, you know, remaining higher in the short term. And there's just not enough supply out there. So, of course, you know, without enough new supply coming online, that increase in demand has led to better pricing and margins. But overall, we think airlines is just a no-mote business. We expect that over the next couple of years, you'll see, you know, more and more supply for airlines and routes and so forth, you know, to come online. And as those operating conditions change, you know, you'll end up having, you know, less profitability. And that's just going to erode the margins over time and bring those valuations down. [00:43:18] Susan Jubinski: All right. Well, thank you for your time, Dave. Viewers and listeners who'd like more information about any of the stocks Dave talked about today, can visit Morningstar.com for more details. Now, we hope you'll join us again in two weeks on Monday, July 13th for our next episode of the Morning Filter podcast. We'll be here at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe and have a great 4th of July, everyone. [00:43:48] Speaker ?: We'll see you next time. We'll see you next time.