3 Stocks to Sell and 3 Stocks to Buy in August I August 10, 2026

[00:00:00] Speaker ?: We'll be right back. We'll be right back. We'll be right back. We'll be right back. [00:02:00] Speaker 1: We'll be right back. We'll be right back. [00:02:59] Speaker 2: Another one of these head fakes. Taking a look at oil prices, I think they're about $85 a barrel at the end of July. After the most recent truce news, they dropped as low as $75 a barrel. So that gave a pretty good tailwind to the market last week. Looking at the futures market this morning, looks like they're back about $79 this morning. So we'll see where they go from here. So we'll see where they go from here. Now, taking a look at the action last week is really mostly all about the large cap growth segment really leading the market upwards. It's nice to see Microsoft finally starting to work. Of course, that's a stock we've recommended a number of times over quite a while at this point. I think that stock's up about 27% earnings. Yeah, Amazon, another stock we've talked about when we've recommended at times in the past, that's up also 21%. So again, a lot of these big growth names really driving the market action higher. Now, having said that, even with the market hitting the highs here, I don't know, in my mind, it kind of feels like this is much more of like a momentum-driven rally than anything else. Seen a number of short squeezes going back on. So at this point, I don't know, I'm not necessarily really sure, you know, ready to back up the truck on this one. You know, market's still a little bit undervalued here, but not nearly as undervalued as it was just even like two or three weeks ago. [00:04:18] Speaker 1: All right. Well, I want to get your take on some news that came out early last week. And that was that the U.S. and Japan had intervened to prop up the Japanese yen. Now, this is, of course, something you've talked about on the podcast before. You've actually suggested investors watch this in particular this year. So first, tell us what happened last week. [00:04:37] Speaker 2: Yeah, if you remember all the way back at the beginning of the year in our 2026 outlook, we highlighted, you know, the Japanese yen and JGBs, Japanese government bonds, as being, you know, one of the potential systemic risks, you know, to the market this year. And we really talked about how it's both, you know, a combination of the rate of weakening as well as the amount of weakening for the Japanese yen that really could drive that systemic risk. Now, it has been weakening over the course of the full year to the point that the Bank of Japan and the U.S. government both intervened in the markets. Essentially, they were selling U.S. dollars in order to buy Japanese yen in order to strengthen the yen. So the yen strengthened as much as 156 to the dollar. It had hit almost 164. So at this point, we're almost back to, like, where we started the year. But if you go back even further than that, it's still weaker than where it was 52 weeks ago. Now, I also assume that both of them were in the markets of buying Japanese government bonds. So, for example, if you look at the 10-year JGB, the yield on that is 2.81%. You know, it peaked at 2.9%, you know, a couple of weeks ago. But again, that's still a lot weaker than where it was at the end of last year. At the end of last year, it was a 2% yield. So, of course, as yields climb, prices fall. So for the year, investors in JGBs are still registering some pretty big losses. [00:05:58] Speaker 1: All right. So, Dave, walk through why this matters for investors, why it's a risk factor for us to be monitoring. [00:06:05] Speaker 2: So I think at this point, you'll want to watch it because if the Bank of Japan and the U.S. government can't control the rate and the pace of just how much the yen is weakening, I think that would be a really bad sign for the global markets, you know, for a number of different reasons. So, first of all, that just, you know, is going to lead to much higher inflation rates in Japan. Japan, of course, has to import a huge amount of commodities to run their economy, you know, specifically energy products. And I think if that rate of weakening increases, you could see a big selling in, you know, JGBs. And, of course, as prices fall, you know, those yields continue to keep rising, you know, further and further. I think that would cause a lot of dislocation among global asset classes. Plus, you're just going to have a lot of realized losses overall. But you also have the Japanese banks, you know, they all own huge amounts of JGBs. So on their balance sheet, while they may not necessarily have to recognize those losses on a mark-to-market basis, you know, people are still going to know that they're going to have big losses embedded on a mark-to-market basis, you know, on their balance sheet. So, of course, that's going to keep the Japanese banks from being able to lend as much as they had been in the past, leading to even further weakening, you know, in their economy. Now, if all of that comes to fruition, then I think from the investor point of view, you're going to start getting concerned about the credit risk of Japan overall. Japan's debt to GDP is well over 200%. So if that starts to go, you know, south, you could start to see essentially a debt spiral where they then have to continuously borrow more and more to pay that higher and higher interest rate. Now, to put it in perspective, there's about $8 trillion U.S. worth of JGBs outstanding. So if we start seeing those JGBs, you know, yields rise, prices fall, people having to start taking, you know, some losses on those, I think that does potentially lead to systemic risks if people really get concerned about the creditworthiness of Japan. [00:08:01] Speaker 1: All right. Well, we're going to stick with an international theme for a little bit. Viewers and listeners, you've been asking us to talk more about international stocks on the podcast. So last week, I sat down with Morningstar Europe's market strategist, Michael Fields, for an update on what's been going on in international markets this year, where he sees the opportunities and the risks, and some of his top stock ideas today. Now, Michael and I talked on Thursday, August 6th. Take a listen. Michael, great to see you. Thank you for joining me today. [00:08:34] Speaker 3: Certainly, Susan. Happy to be back. [00:08:36] Speaker 1: Now, let's talk about international markets. Now, on paper, international stocks are outperforming U.S. stocks this year, but that hasn't been the case when you look specifically at Europe, right? [00:08:48] Speaker 3: Oh, exactly right. So I think some of those numbers for international stocks are distorted by some of the outperformance of emerging markets, for instance. But Europe has actually tracked the U.S. reasonably closely, albeit slightly underperforming. Europe's up something like 10.5% year-to-date versus around 12.5% for the U.S. So pretty good performances all around, I would say. [00:09:10] Speaker 1: Yeah, for sure. Now, let's talk a little bit about what might be driving that performance up for European stocks. You know, does the difference boil down to, you know, you mentioned emerging markets. Is it really a developed versus emerging markets story? Does it boil down to a sector story? Is it both, or is it something else entirely? [00:09:29] Speaker 3: So I think there's a lot of nuance on it. And unsurprisingly, given everything that's happened this year with the Iran war, there's a lot of moving parts to the equation. So I think AI has been a huge element to this. We can't have a conversation without mentioning AI. And this is one specific instance where indeed we cannot, that AI stocks have been performing really well of late. And the U.S. obviously has a high concentration and a high exposure to those big MAG7 names and AI firms. If I look at the Stock 600, the main European index for the last quarter, the biggest performers within that index have all been exposed to AI, be they semiconductor stocks or other. But they've all been exposed to that theme. And I think one of the big differences why Europe has underperformed the U.S., albeit marginally, is that we don't have that exposure to those big tech giants that you can get through the U.S. market. [00:10:24] Speaker 1: Got it. So then let's talk a little bit about valuations today. So how do European stocks look relative to U.S. stocks on a valuation perspective? Is there a sizable valuation gap between the two or not really? [00:10:37] Speaker 3: So I think this is what's going to surprise people. But if I look at valuations, given how well markets have performed, given how well the U.S. has performed, you might expect that markets are trading at kind of large premiums, given all this talk of bubbles as well that we hear. But that's certainly not the case. The U.S. market is actually more attractive on the face of it than Europe at the moment. It's trading at something like a 10 percent discount to our fair value estimate. And then Europe's trading at something like a 4 percent discount to our fair value estimate. So is there a huge amount of value there? Certainly not in Europe, I would say. But it's not expensive. And that number probably belies the underlying story, right? That if I break it down into sectors, which I know we're going to talk about in a minute, there's a lot of opportunities there and much more attractive opportunities within individual sectors. [00:11:27] Speaker 1: So then let's talk about some of the opportunities from a valuation perspective today in Europe. Let's start, though, through the lens of market capitalization and style. You know, are large caps or small caps looking more attractive, more value type stocks or growth type stocks? Where's the opportunity? [00:11:44] Speaker 3: So I think it's moved around an awful lot as well. So I'm glad I kind of update the numbers every now and again, because the picture has changed dramatically in Europe. I think until now, what I've been saying or for the first couple of quarters of the year is that small cap stocks are really attractive in Europe, way more so than the U.S. But investors seem to have discovered a lot of those names or suddenly had a bit more faith in a lot of those names. So you've seen the valuations of small cap stocks improve or disimprove from an investor's perspective over the last number of months. They're more expensive now. So I think if I'm looking at opportunities in Europe right now, a lot of it's in the mid cap space and a lot of it's still in the value space. So some of those value stocks, some of those stocks that don't really have the same growth profile are the ones that are now looking attractive in Europe. [00:12:34] Speaker 1: So let's pivot and move over to talk about sectors, which you alluded to is where there are some real opportunities. Talk a little bit about which sectors look particularly attractive. Talk about which ones maybe look particularly pricey. And then also comment, Michael, on how, you know, does the sector story from a valuation perspective differ in Europe than it does from the U.S.? [00:12:57] Speaker 3: Yeah, certainly. So I think, okay, dealing with it, the most attractive first. Cheapest sectors in Europe right now are the most attractive in our eyes are certainly heavily weighted towards consumer. So both consumer cyclical and defensive sectors are both the two cheapest in Europe at the moment, particularly the cyclical sector. It's trading at something like a 16% discount to our fair value estimate. So despite the index as a whole being almost fairly valued, there's still a very attractive opportunity within consumer cyclicals. Consumer defensives is still trading at a reasonable discount, something like around 9%. And we've seen catalysts for improvement in that sector. We've seen improvements in some of those kind of staple firms. They're seeing more volume growth, pricing growth over the last earnings season. So that means you're not buying into something that's never going to recover. We're already seeing signs of recovery in that sector. And then lastly, on the other cheap sector we see in Europe or attractive sector we see in Europe is healthcare. So it's been a sector that have had a lot of overhangs for a while, most notably, you know, government regulation, fears around patents, things like this. But what we've seen now over the last number of months is that there's been a bit of a resurgence. You know, investors are starting to warm up to that sector again. And once again, earnings season has been pretty positive for a lot of these firms. So we still see a lot of attractiveness. In terms of kind of overvalued sectors or less attractive sectors, there's not a huge disparity on valuation in Europe. There's not a whole lot of sectors that I see that are way overvalued that I'm going to tell you stay away from. Even sectors that saw a huge run, like energy, are around fairly valued. Similarly with financials, maybe a few percentage overvalued. The only one that's kind of getting a little bit heated in Europe is tech. It's trading at something like a 10% premium to our fair value estimate. But at the same time, that's still not in the territory that we're getting worried at this point. And then to your question about, you know, how does it differ? A lot of the valuations kind of correlate to some degree. I would say if you're looking for kind of areas of differentiation, consumer defensive, we spoke about being cheap, is actually a lot cheaper than the US. And that's one of the reasons is we don't have the huge giants like Walmart and companies like this with those high valuations that are dragging things above the average. And then the other one is in tech as well. But tech in the US, because we're quite bullish, actually, on the MAG-7 names, a lot of the AI names, we think there's huge potential there for growth. They're actually trading at cheaper valuations in the US than some of the tech names we have in Europe. So it's a very mixed picture. [00:15:37] Speaker 1: Got it. So let's broaden things out, Michael, and talk a little bit about what you think the main risks that US investors who are investing globally should have on their radars for the remainder of the year. [00:15:49] Speaker 3: So I think, you know, it's surprising to some degree. I mentioned valuations aren't expensive, right? But at the same time, given all the risks that we have in the world currently, I would not have expected equity markets to be as buoyant as they are. I would have expected investors to be a little more circumspect, a little bit more concerned about the dangers at hand. And what we're seeing is the risks that are still in the background, things like inflation and potential for interest rates to increase. Those concerns are slowly fading. But I think it's something that people should still have in the back of their minds. So when this whole Iran war kicked off, we really thought that interest rates might rocket, have to rocket to come, you know, to make up for inflation, which we expected to go through the roof across the board. And inflation hasn't been that bad in the US or Europe. Actually, in Europe, it's only maybe 2.6, 2.7 percent at the moment. In the US, it's not much different. So that's quite positively surprising. But the danger is the longer this crisis continues in Iran and in the Middle East, with the Strait of Ormuz being closed one week and open the next, the danger is the disruptive effect that's going to have on the global economy will eventually take hold. And maybe inflation, you know, hits new highs as a result of that and interest rates need to go up. And I think investors can ignore it for a long time, but as soon as interest rates start going up, that's when it starts damaging the economy and when we all need to worry a little bit. So I'm not trying to sound the alarm bell right now, but it's something to keep in the back of our minds when we, you know, to stop us getting carried away, essentially. [00:17:29] Speaker 1: Got it. All right. Let's get some stock ideas, some investment ideas from you today. Let's talk about some undervalued stocks that you like that are easily accessible to US investors. What do you like? [00:17:41] Speaker 3: So, you know, one thing US investors have looked to Europe for over the last year or two, and that's not accessible in the same way in the US, is around defense stocks. So one of the big stocks in Europe, Rheinmetall, the German's arms and defense manufacturer, has, you know, it's seen its stock price rise hugely over the last three, four years, right? It's had a loaded catalyst to do so. It's been a major arm supplier for the Ukraine war. And the valuation and the share price rose as a result. But actually, what we've seen over the last six months is that share price is pretty much halved from the highs. And if you look at our fair value estimate at the moment, we think the share could actually almost double from here. So despite the fact that there's some huge catalysts, despite the fact that European countries like Germany are going to take at least a decade just to restock the weapons they've already given to Ukraine, these shares, and specifically Rheinmetall, still aren't pricing in, you know, some of these upsides that we're seeing. So, yes, there's a bit of a cloud of doubt by investors at the moment as to whether that, you know, increased government spending can come through from NATO nations and in particularly European nations, but we still see huge upside there. So that's the first one on the list. Second of all, then, we've got Relix, R-E-L-X, and it is a kind of an Anglo-Dutch company that's based more or less in the software kind of data side of these things. And we wrote a report, if you've been following our reports of late, about the SaaS-pocalypse, and we mentioned Relix in this. We looked at the stock and decided, okay, it still has very much has a moat. We think it's going to do well. It's got proprietary data. It operates in a huge number of different products like LexisNexis, which some people might be familiar with. It's a pretty widespread product. And it falls under one of these categories within, you know, the SaaS space that we don't believe is going to be disrupted by AI or embraces AI sufficiently as not to be disrupted. But yet, its share price has still seen a fall alongside a lot of other software companies in that space. And we now see a lot of upside for that stock. We think it's robust. We think the results are still showing that up. So that's the second name in our list. And then the final name in our list is in the utility space. But it's actually a very interesting utility in case you think I was going to pitch you a boring stock here. This is National Grid, the UK firm that's in charge of the electricity grid essentially in the UK. And why that's interesting is, one, that the robustness and the reliability of its revenue stream is extremely high. You know, people pay a taxation and it goes directly for this. But why there's a bit of a growth element to this or why we think it's interesting is, look, in Europe, generally speaking, there's been a huge refurbishment or commitment to refurbishing the national electricity grid to cope for the increase in renewable energy and how that's going to have to shift as a result of this. So what you're seeing is a large investment by firms like National Grid that already has a kind of guaranteed return on capital attached to it. So the growth profile for this company, we think, is strongly attractive over the next number of years. And something that will be interesting, particularly for you and investors, is that this is one of the companies that pays a dividend that's covered by cash flows. And it's a dividend yield of north of 4%. So it's very attractive for a number of different reasons. [00:21:12] Speaker 1: Well, Michael, it was great catching up with you today. We will definitely be having you back on the podcast before the end of the year. [00:21:18] Speaker 3: Thanks very much, Susan. [00:21:21] Speaker 1: All right, moving on to some new research from Morningstar. SpaceX reported earnings last week for the first time as a public company. Stock pulled back after. So, Dave, how did earnings look and did Morningstar make any changes to its fair value estimate on the stock? [00:21:36] Speaker 2: Well, honestly, with SpaceX, it should be a surprise to know just how much revenue is growing. If you look at second quarter, revenue is up 92% year over year. And that's really led by its AI solutions group. I think the revenue there grew by about sevenfold. Take a look at some of the other divisions, like Launch and Starlink. Those were up 29% and 67% respectively. However, a lot of that was offset by higher research and development spending in order to be able to support that kind of growth. So the company is still registering operating losses. A lot of details in the stock analyst note written by Nick. So I'd say if you have an interest in SpaceX, go to the note, take a read through. But net net, there was really no change to our forecast. Nick reaffirmed our $62 fair value per share. I'd say really the takeaway here when you think about this company, overall, the market is just still factoring in much more optimistic scenarios, specifically for Starship, a lot more greater commercial advantages for potentially those orbital data centers that they're talking about than we think is most probable. As a reminder, when you think about how to be able to value this company, you really have to do a lot of scenario analysis and come up with your probabilities for each of their divisions, trying to understand what is the potential for the total amount of growth over really the next five to 10 years. And when you put that together on that probability-weighted basis, that's really how we dial into our fair value estimate for this one. [00:23:09] Speaker 1: So let's talk a little bit about SpaceX's stock activity last week. It was a volatile week, of course, for the stock, yet it finished the week up almost 23%, even after we saw some of those lockups expiring late last week. So what do you make of it? [00:23:23] Speaker 2: So this is one where you really need to divorce what's going on with the fundamentals of the company and the valuation of the company versus how it's going to trade in the marketplace because a lot of these technical factors like, you know, the lockups and when the lockups open up and how much of those restricted shares become available. So in this case, I think is about 20% of the restricted shares, you know, became available for sale. My understanding is over 900 million shares. So in this situation, you need to really kind of figure out, you know, and think about from a passive versus active standpoint, you know, who might be buying and selling the stocks. So if you think about passive funds and ETFs, you know, essentially these are, you know, funds or investment styles where they're trying to match an index. And so they have to buy and sell stock at the same proportion as that stock is a percentage of that index by market cap. So the question here becomes of all of these newly unrestricted shares, you know, how many of them are sold by those people that own those shares versus how many are kept? And compare that to what percentage of the market overall in those indices are passive and how much they have to buy versus, you know, how much is, you know, actively managed, you know, money out there in the funds, you know, what retail investors are doing to be able to then absorb, you know, the amount of the shares that are being sold by those newly eligible shares. So, again, there's a lot going on here, you know, a lot of machinations in the short term, which you just really don't know. Now, in this case, I think that there potentially could be a huge impact to the short term trading of the shares. But overall, it's not meaningful overall to what we think SpaceX's, you know, long term intrinsic valuation is worth. And according to our analysis, you know, it's a one star rated stock trades at double our $62 fair value, you know, analysis. So, again, I would say if you're really involved in SpaceX, you really need to understand what those fundamentals are, what your assumptions are as far as that long term growth for this company. And in this case, if you want to be involved in the company, I think you really kind of need to ignore what's going on with the short term trading patterns. [00:25:37] Speaker 1: All right. Well, Advanced Micro Devices stock was down 7% after earnings, but Morningstar maintained its $530 fair value estimate on the stock. So, Dave, unpack the results on this one. What didn't the market like? [00:25:52] Speaker 2: You know, always hard to know what the market is assuming coming into earnings. I mean, you have consensus that gives you some guidance, but then there's always the whisper numbers about, you know, how much the market is really trying to assume that a company, especially in a situation like this, you know, can beat those whisper numbers. Now, in this case, second quarter revenue was up 50% year over year, and that was better than expectations, you know, compared to consensus. And, of course, as we've talked about with AMD, it's really all about their server CPUs. Revenue there was up 75%. There is a shortage with the AI buildup boom. People need those CPUs in order to be able to manage all those AI workloads. And if you look at, you know, the revenue guidance for this quarter, you know, they easily beat. Now, looking forward, I think the market's trying to understand, you know, how long they can keep posting, you know, these kind of results. You know, our analysts noted towards, you know, a couple of positive aspects, you know, in the fourth quarter, we think the company will start selling its first AI solutions rack called Helios. You know, 2027, you know, we're looking for, you know, server CPU business to be up, you know, 70%, the data center to be up probably over 100%. But I think it's just a matter of, you know, the stock ended up just giving up some of those prior day gains. So I wouldn't read too much into, you know, the movement in any one particular day. I mean, overall, that stock is still up year to date, 125%. [00:27:16] Speaker 1: Now, AMD has been a stock pick of yours in the past. So is it attractive on pullback? [00:27:23] Speaker 2: So it was a pick, but it was a pick a while ago. I have to mention, I think it was in January, 2025. We actually picked it twice over the course of that month. Stock, I mean, it's up 300% from the first time we picked it in January. Stock sold off in January. And so it's up now 350% since that second time we listed as a pick. Stock has skyrocketed, you know, since then to the point that it's actually trading then at a 10% premium at the end of June. We've had a pretty big pullback here. Last I saw it pulled all the way back to 483. That compares to our $530 fair value estimate. So it's now at a 9% discount, which puts it still in that three-star territory. So at this point, I would say, you know, for lack of a better way of putting it, you know, it's a hold. You know, we would expect that over the longer term, you know, investors should be able to generate returns consistent with its long-term cost of equity, but certainly not anywhere near as undervalued as what we thought it was, you know, back at the beginning of 2025. [00:28:22] Speaker 1: All right. Well, we saw a couple of other members of the Triple Digit Club report last week. Sandisk stock fell about 7% after earnings, and then Western Digital was down 13%. Morningstar didn't make any significant changes to its fair value estimates on the stocks, and both stocks still look overvalued. So what are your takeaways here, Dave? [00:28:43] Speaker 2: And again, it's kind of a similar story. I mean, the market knew that revenue growth here was going to be exceptionally strong for both of these companies. You know, we're expecting operating margin for both just on the amount of fixed cost leverage that they can get with revenue growing as fast as it is. But as we've talked about before with these companies and really all of these commodity-oriented, you know, tech hardware companies, while there's shortages in both the memory and hard disk drives, you know, demand for the AI build-out boom is still exceptionally high. So these companies can charge whatever they want to charge. They're getting huge margins. So the question becomes, at what point, or it's really a combination, at what point does supply increase enough, you know, and or demand, you know, starts to fade? So if you look at Sandisk, you know, for example, you know, we forecast that peak to be in early 2028, and then look for a downturn in 2029 and into 2030. So I would just say that, you know, if this growth lasts longer than early 2028, our fair value could actually be too low here in this case. However, if it rolls over faster than 2028, our fair value is probably too high. So these are ones where it's really very difficult to try and dial into, you know, our specific fair value because there's just a really wide range of probabilities of outcome here over just, you know, the next couple years, you know, much less trying to understand what the long-term intrinsic valuation is based on, you know, the present value of the future free cash flow of the entire lifetime, you know, of these companies. You know, just taking a look at the charts here, both stocks peaked in June, Sandisk has sold off, you know, down 48% from its highs, Western Digital down 42% from its highs. So they've fallen enough that they're now in that three-star range, although I'd note Sandisk still in like the upper end of that three-star range. So, you know, both of these with that negative momentum and the growth that's built into these prices, you know, I'm still pretty leery of these stocks, you know, even though they've fallen as much as they have. [00:30:41] Speaker 1: All right, well, Palantir was one of your stock picks on the June 29th episode of the Morning Filter, and the stock was up nearly 30% after the company reported blowout results. So you're looking like a hero on this stock pick, Dave. Now, Morningstar held its fair value estimate at $153. So what did Morningstar think of the report? [00:31:03] Speaker 2: I mean, just phenomenal numbers when you really break them down. I mean, just record growth rates in the second quarter, U.S. commercial revenue up 150%, revenue from the U.S. government up 90%, record high operating margins coming in at 62%, free cash flow margin 63%. So really everything we're looking for, you know, coming to fruition this past quarter. You know, and our analyst really notes that the company's competitive advantage lies in its ontology. Really just the ability for this company to connect data across lots of different parts of an organization, but most importantly, be able to turn that into actionable decisions. And in our view, we think that's a highly differentiated capability that even today's Frontier AI models can't currently replicate. Now, having said that, no change to our longer term assumptions, and as such, no change to our fair value estimate at this point. [00:31:57] Speaker 1: So then where is Palantir Stack trading? Is it still a buy? [00:32:01] Speaker 2: No, I mean, unfortunately, I mean, after that spike, I think it's up almost 50% since we made that recommendation, puts it in three-star territory. It's actually trading at about a 12% premium. So at this point, with that much of a spike, even though it's a three-star rated stock, it is at a premium. So personally, you know, if you're involved in this one, I wouldn't argue against taking some profits here. [00:32:24] Speaker 1: All right, well, another of your picks reported earnings last week, and that's Clorox. The stock was up a bit after earnings, and Morningstar held its fair value estimate at $155, but the stock still looks really undervalued. So what do you make of the results and the market's response to them? [00:32:40] Speaker 2: I mean, I was actually quite pleased in the market's response, you know, seeing that stock, you know, move up a bit, you know, after the results, because, you know, from the headline point of view, the results actually kind of sounded really not all that good. I mean, we had organic sales, you know, continuing to decline. But of course, as we've talked about before, the company had that ERP, you know, inventory buildup last year. So we're now finally starting to lap that. So I would say that organic sales, you know, going forward, you know, we're looking now for some expansion from here, you know, there on out. And I think to some degree, that's what the market was pricing in when we saw that stock pop like that. Now, as far as, you know, gross margin, again, it sounded bad. It compressed, you know, 370 basis points and really just a result of negative fixed cost leverage based on lower volumes that were being sold. And of course, we also had inflation still slightly outpacing the cost savings that the company's able to make internally. But again, when we talk about stocks, it's all about looking forward. And so our fiscal 2027 guidance, I think, looks quite positive for the company. You know, the company is calling for, you know, three and a half to four and a half percent organic growth, looking for $576 a share in adjusted earnings. So it puts it at about 18 times forward earnings. Maybe not necessarily that cheap on kind of that PE ratio basis, but based on kind of that continued growth that we're modeling in. If you look at our fiscal year 2028 earnings estimate of 750 a share, you know, that brings that PE ratio down to 14 times, which I think starts looking, you know, much more attractive. You know, as far as taking a look at the stock chart and how the stock has traded, looks like to me it's bottoming out as far as like in early May. And so if you look at that chart as it's going back up, you know, it's hitting higher lows. And as you hit those higher lows, that's a good sign to me that maybe the worst is finally behind the stock. [00:34:36] Speaker 1: All right. Well, it is time for our stock picks for the week. Today, Dave has brought us three stocks to sell in August and three stocks to buy instead. So we're going to cover the sales first. The first stock to sell is Sienna. Now, Sienna has been on your sell list before. So what do you have against it, Dave? [00:34:55] Speaker 2: Well, I mean, overall, it's still a two star rated stock, trades at over 50 percent premium to fair value and does not pay a dividend. We rate the company with a very high uncertainty and a narrow economic moat. Now, I've got nothing against the company overall. It's just I lump it in with all of these other commodity oriented tech hardware companies. Yeah, specifically, they make high speed optical connectivity. They've been a huge beneficiary of this AI build out boom. But we think the market just got carried away here with the amount of growth that they're posting. It was a sell recommendation on May 4th. We were, I think, about within a month of being able to top tick this one. It's down 23 percent since yet when you look at this chart, it's still up over 330 percent just over the past 52 weeks. And based on our valuations, we still think it has further to fall from here. Now, again, I want to put some context around this one. If you take a look at our model, we are assuming a huge growth in our forecast company did four point eight billion dollars worth of revenue last year in 2025. Over the next five years, we're modeling in over 18 percent compound annual growth rate, which means by 2030, we're modeling in 11 billion dollars of revenue. That's two and a quarter times higher than what they did last year. But even in our discounted cash flow model, when you put that in there, it's still a way too high of a valuation. You know, if you're looking at P.E. multiples, I mean, it's trading at 64 times our 2026 earnings estimate. So, again, even with that 18 percent compound annual growth rate, looking at revenue being up over two and a quarter times stock, in our view, still trading way too high, even after having sold off and rolling off from here. [00:36:38] Speaker 1: Now, your second stock to sell in August also has ties to the A.I. trade. It's Nebius Group. So how overvalued is this one? [00:36:46] Speaker 2: Significantly trades at a 57 percent premium to our fair value, puts it well into two star territory. Again, another company doesn't pay a dividend at this point because it's in such a high growth mode. Very high uncertainty on this one. And, of course, no economic moat. Now, when I think about this company and read through our write-up, I'd say, in my mind, I think there's a lot of red flag warnings on this one. You know, the company itself is considered to be a vertically integrated cloud provider. They focus on A.I., high performance computing. The company designs and operates data centers across Europe and U.S. So, well, first of all, you just have to make huge assumptions as far as the amount of growth, you know, that this company can grow. As far as who this company is, they're actually a carve-out from a Russian tech firm called Yandex. That carve-out was made following the sanctions that were put in place after the Ukraine-Russia conflict started. So, I'm very leery of the carve-out from that Russian firm overall. And, again, this is another one where, even though we have in our model huge growth estimates built in, still way too high of a valuation over what that growth is. This company did $530 million of revenue in 2025. Again, that's million with an M. We're expecting them to do 2026, $4 billion worth of revenue. We have a five-year compound annual growth rate of 122%, so that means by 2030, revenue would be all the way up to $29 billion. Again, they did only $530 million last year. Taking a look through the model, they're not going to be earnings positive until, you know, 2028 at best. We have them being free cash flow negative until 2030 because they're spending so much money on CapEx every year, you know, building out their business that they're going to be subject to continually having to raise money, you know, in the debt markets. So, again, if there was any kind of issue with the debt markets between now and 2030, you know, they could be, you know, subject to not being able to generate, or I'm sorry, not be able to, you know, raise as much debt as they need, you know, to fund that build-out. And, again, just taking a look at where the company is trading, you know, in the marketplace, we have negative earnings for the next couple of years, so you really need to look at those out years. Even by 2030, with all of that growth built in, they're trading at 36 times our 2030 earnings estimate. [00:39:10] Speaker 1: Wow. Okay. Well, your final stock to sell in August is Delta Airlines. So, is this simply a call based on valuation, or is there more to the story? [00:39:21] Speaker 2: I would say a little bit of both. I mean, it is a one-star rated stock, so we do think it's significantly overvalued at this point. Again, being an airline, it's a very high uncertainty rating on the stock. And with all of the airlines, you know, we just don't think that you can build an economic moat in that sector. So, rated a no economic moat company. Now, in my mind, when I think about airline stocks, I really don't think they're appropriate for buy and hold type of investors. This is one of those areas I think what you want to do is rent stocks as opposed to own stocks. So, what I mean by that is, you know, this is the kind of company where you're going to have huge swings in that stock price over a full economic cycle. So, these are ones where you want to buy when they're oversold to the downside, they're trading at very undervalued levels, but then when the pendulum swings too far to the upside, you want to sell these stocks when they fly too high. So, in fact, Delta was a pick of ours back in 2022 and in 2023. It was really a pandemic recovery play, but with as much of that stock's traded up, it's now in the area where it's too expensive and really should be taking profits. Overall, travel demand we think is finally peaking after the pandemic. I think high fuel prices, which haven't really started to hurt ticket sales, probably will start doing that, you know, in the second half of the year. We're forecasting, you know, margins, which have been, you know, very high over the past couple of years, will probably start to normalize over time. Taking a look at where it's trading, it trades over 17 times our 2026 earnings estimate, which I think is really just too high for this type of cyclical company. [00:40:57] Speaker 1: All right, well, we'll move on to your stocks to buy in August, and we're going to start with ServiceNow. Run through the numbers on it. [00:41:06] Speaker 2: So, ServiceNow is a four-star rated stock, trading at a 24% discount. It doesn't pay a dividend, so if you're a dividend investor, it may not necessarily be appropriate for you. And, of course, being a technology stock, we do assign it a high uncertainty rating. And in this case, with the company, we also assign it a narrow economic mode. [00:41:23] Speaker 1: Now, of course, we've talked on the podcast before about how Morningstar thinks that the sell-off that we had seen earlier this year in software really had been overdone. So, why ServiceNow specifically today? [00:41:35] Speaker 2: Well, a number of different reasons. So, again, you know, we talked about a couple of weeks ago, you know, the results came out. They were better than expected. We had a slight increase to guidance. And, overall, just really no change in our investment thesis. Longer term, we think that this company is probably going to be a key software beneficiary of AI. We've noted that the deals with, like, five or more AI products grew, you know, 5.5 times year over year. Over a billion dollars in annual contract value. Sequential growth is still, you know, accelerating. So, fundamentally, you know, we still see a lot of runway for growth here, even though the market is still very concerned about AI potentially disrupting, you know, the type of business here. This is another one. Our tech team, you know, has it as one of their best picks for the sector, specifically Dan Romanoff. He's the equity analyst that covers this one. I'm just going to read a quote here from him specifically. He thinks the company is, quote, one of the best blends of growth and margins in enterprise software, and results continue to show AI as not hurting the firm's fundamentals. So, I think with what's going on, what I've seen in the market, you know, over the past couple weeks, underneath the surface, we've started to see some of this rotation out of, you know, a lot of these AI hardware stocks. Specifically, a lot of the AI hardware stocks that are more commodity-oriented in nature. I think the expectations there, people are finally realizing that they just got to be too overextended. And, of course, if there's any kind of hiccup with as high as those valuations are, a lot of those stocks could continue to fall and, in many cases, drop precipitously from even where they are now. So, overall, I think that as people rotate out of those stocks and you still want to be in the tech sector, I think software should be a beneficiary of that type of rotation. [00:43:22] Speaker 1: All right. Your next stock to buy in August is a former favorite, and that's Mondelez International. Give us the highlights. [00:43:29] Speaker 2: So, Mondelez stock is a four-star rated stock, trades at almost a 20% discount to fair value, pretty good dividend yield at 3.2%. We rate the company with a low uncertainty and assign it a wide economic mode. [00:43:42] Speaker 1: And why do you like Mondelez specifically today? [00:43:45] Speaker 2: I mean, overall, it's got pretty good momentum. I mean, the stock is up 16% year-to-date. We saw it give back some of the gains following earnings, but I don't think that that weakness was actually about the earnings. I think it was much more about a slight rotation we saw over the last week, week and a half, you know, out of some of the defensive stocks that had been doing, you know, pretty well. And go back into a lot of these, what I call a go-go momentum names, you know, in AI, I think that momentum's probably about run its course, you know, at this point. So, fundamentally, company's doing very well. I think it's actually doing better than a lot of the other, you know, food companies that we follow. You know, organic sales were up 2.2%. Specifically, in North America, it was up 3.4%. That's good sequential improvement from the only half of a percent that they posted in the first quarter. Europe, unfortunately, is still relatively weak performance. But if you remember, when we've talked about this company before, my real attraction here is the emerging markets business. It's about 40% of their total sales. That's the highest percentage of sales in emerging markets compared to, you know, the other food companies. And in this case, you know, that's up 7.4%. So, I still think that this company will benefit from that sales growth, you know, in the emerging markets over the longer term. So, to some degree, I'm almost just kind of waiting for Europe to bottom out and move up. When that happens, I think that's going to be another catalyst for the stock to the upside. [00:45:12] Speaker 1: Your final stock buy this week is Medtronic. So, what are some of the key metrics on this one? [00:45:18] Speaker 2: So, Medtronic stock is currently rated four stars. Trades at a 22% discount to fair value. Pretty attractive dividend yield at 3.3%. We rate the company with a medium uncertainty and a narrow economic moat. [00:45:31] Speaker 1: Yeah, and Medtronic is one of those companies that's really prioritized dividend growth on top of it all, in addition to the dividend being attractive. So, besides that, what else is there to like here? [00:45:40] Speaker 2: Well, I think what I like the most is I'm really starting to see fundamentals finally starting to improve, which is what we've been expecting for a while. So, I'm kind of relieved to see that that's finally coming to fruition, you know, as we've expected. You know, specifically, the company's commercializing, you know, several key technologies that have been under development for a while. And now, we're finally starting to see that in the results. Their fiscal fourth quarter revenue up 7%, operating income up 29%. Our analysts specifically called out cardiac rhythm and heart failure, as well as acute care and monitoring categories, both registering, you know, some double-digit growth. So, I think this should allay a lot of the market concerns about some of the softness that we've seen in their more mature product lines, really, over the past year, maybe even two years at this point. Taking a look at our forecast, we do expect those new products to drive the top line. So, we're looking for 5%, you know, kind of average revenue growth over the next couple years. As that happens, we're looking for some gradual operating margin expansion as well. So, you combine that, you're getting over 8% earnings growth over the next five years on average. Stock trades under 15 times our fiscal 2027 earnings estimate. Taking a look at the chart, this is another one where it looks to me like it's probably bottomed out in June. If you look at the trading pattern, if you look at kind of when it sells off, it's selling off less each time. So, you're putting in those higher lows. So, I like that nice kind of upward trend with those higher lows being put in. [00:47:09] Speaker 1: 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. We hope you'll join us again next Monday for the Morning Filter podcast at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. And have a great week. Thank you. [00:47:29] Speaker ?: Thank you. Thank you. Thank you.