4 Stocks to Buy for the Long-Term While They’re Still Undervalued I October 19, 2026

[00:00:00] Speaker 1: hello and welcome to the morning filter podcast i'm sarah hansen for morningstar sitting in for susan jubinski who's on sabbatical for a few more weeks i'm here on monday mornings to talk with morningstar chief u.s market strategist dave sequeira about key takeaways for investors in today's market what to keep on radar this week some new morningstar research and a few stock ideas as always before we get started we have one programming note we dropped a bonus episode of the podcast last week where dave and morningstar chief economist preston caldwell caldwell excuse me shared their podcasts for the fourth quarter they covered a lot of ground so if you haven't tuned in yet be sure to check it out wherever you get your podcasts okay great to see you dave good morning sarah how you doing doing great it's a beautiful sunny fall day here in new york uh let's let's wrap up the action in the market from last week uh we had some hot inflation data some volatility in chip stocks some motion in the treasury market so talk us through what was most important well i think [00:01:30] Speaker 2: the inflation metrics were pretty important last week so first of all cpi came out you know hotter than what consensus expected and when that print came out the 10-year initial the yield on the 10-year initially spiked it got as high as 5.32 percent but then the thing was as that yield was going up the equity markets were falling and as the equity markets were falling that then drove a you know flight to safety bid and the 10-year did come down after that now the day after cpi we get ppi and that also came in much hotter than expected the real concern there is ppi is often considered to be a leading indicator of cpi meaning it's showing that we still have a hotter cpi yet to come as well now it's interesting that following these inflation metrics the probability that the fed hikes in october is still pretty low it's only 15 but we did see that probability increase now up to 76 for a hike at the december meeting now the other thing is that even after that hotter than expected ppi came out the yield on the 10-year came down you know even further so i think the market's currently pricing in two things first that tighter monetary policy will end up slowing the economy down and that will then contain future inflation you know past what we're seeing right now and secondly there's just a lot going on in the equity market you know a lot of these commodity oriented tech hardware names have really been getting crushed we saw big rotation into value names but i think we're also probably seeing some rotation out of equity and into fixed income while the yields are still above five percent on the 10-year now as far as you know what the fed does whether they hike in october or december i don't think really means that much in and of itself our economist is still only looking for one more hike by the fed and then he thinks they'll be done tightening monetary policy after that point okay um so the other [00:03:21] Speaker 1: big piece of news aside from inflation we had last week was about anthropic um now they had their private investor day last week ahead of a very hotly anticipated ipo which will be sometime this fall um now this was a closed door meeting but what did we hear and what do you make of it [00:03:38] Speaker 2: so what i'm hearing is there's a lot of arguments out there whether their revenue is growing as fast as what a lot of people had expected or not i think the takeaway is you know whether or not they're mating it you know down to the last billion dollar you know annual revenue run rate they're still growing you know extremely fast at this point but i think just as important as the top line is that reportedly they're free cash flow positive and profitable at the gross margin line now as far as the operating margin goes there's a number of different adjustments that they make once they make those adjustments they're also reporting to be profitable at the operating margin level as well so what we're hearing is that the ipo is still likely scheduled in november that they'll probably start the road show at the end of october i think the other thing that our analyst team was hearing is that you know the current large language models out there are still seeing huge increases in the amount of usage so that's just going to bolster their fourth quarter numbers and expectations going into the end of the year specifically into the ipo as well now as far as the underlying business itself our analyst says you know he's still very cautiously optimistic about their long-term prospects and that we're still in the very early terms of you know enterprise adoption so again very long very fast growth path here but of course the question will always be all about valuation and of course we won't be able to put it into our model and really put our long-term projections in there to do our dcf analysis until that s1 is released a lot of discussion whether it's worth one and a half to two trillion dollars but you know until we can actually get the numbers ourselves we'll see yeah so something to [00:05:15] Speaker 1: watch there and somehow i doubt that will be the last the last news reporting rumors that we hear about anthropic before that s1 comes okay so let's move on to earnings we are really getting into the thick of it here with third quarter earnings season this week we're going to hear from some of the heavy hitters in tech so from those mega cap hyperscalers all the way to those data center infrastructure stocks that stocks that are really wrapped up in the ai trade let's start from the top who's on deck in [00:05:44] Speaker 2: big tech and what are you watching for so the first two to watch closely are going to be meta platforms and tesla now when it comes with meta i think it's going to be much more about ai utilization than it is necessarily about kind of the ongoing performance of the company with the ad business you know and so forth so specifically i think the market and investors are going to want to hear a lot more details and get a better idea of the outlook for muse and muse is their recently released ai personal assistant you know bot i guess it is that they released so when i think about the valuation for meta and i look at our model it's still really all about its ability to monetize ai across its huge subscriber base now interestingly this stock was a four-star rated stock for pretty much most of the year we had a very strong rally in september it's now moved up into the three-star range albeit it's still at the bottom of the three-star range but at least you know following that rally it's now in kind of that range we consider to be fairly valued so i think that with this one if there is positive guidance a lot of good you know market sentiment regarding meta and you know specifically muse i think there's still some upside here left to come having said that you know this stock is up 30 percent just since the beginning of september so i think there's you know very high expectations you know going into this call so if they're not able to beat those expectations then i'd say there is a potential we could see you know a good sell-off here so i'm really looking for some high volatility in that one you know as far as tesla goes you know i think yes we're going to want to hear about the fundamentals for their ev sales and their battery storage business you'll get an idea of the overall profitability but again this stock is really all about growth so i think the two big things people will be focused on will be the robotox robo taxi rollout whether or not they're hitting their goals as far as the number of cities that they want to roll out into and expanding the fleet in those cities and then more ideas as far as the timing on when the optimist robot will be ready for prime time and really be ready you know for first large scales and then lastly you know any free cash flow dynamics of course this is a company that's more than happy to be you know free cash flow negative as they're growing out but any discussion on when they might become you know free cash flow break even or positive i think that could be a big positive [00:08:04] Speaker 1: catalyst you know to the upside okay now so much of the market activity last week was driven by big moves in stocks that are kind of associated with the ai trade like those infrastructure and hardware providers semiconductors you know all those things that have been so volatile among those companies whose earnings should investors pay attention to this week well i think there's a couple things going [00:08:28] Speaker 2: on so it's really trying to understand like what the growth prospects and the dynamics are for a lot of the data centers so the one i think i'll be watching probably most closely is going to be a company called nebius that was a sell recommendation as recently as august 10th 2026 now here's a question for you sarah what's the difference between being early and being wrong that's a that's a really hard one in the stock market i don't know if it's easy so the answer for that is nothing so in this case i was a little early on the sell recommendation so we said sell on august 10th that stock then went up 40 percent just that week alone right up into my face okay so then on the august 17th episode of the morning filter we came back out and we reiterated our sell recommendation at that point now the stock is down 40 percent since then and of course it's coming down at that same percentage on the lower lower higher dollar amount so the stock is now down about 10 percent from when we first said you know to sell but of course we missed you know that huge run up just that week alone but then again even after being down 10 percent from when we said the sell it's still a two-star rated stock it's a stock with a very high uncertainty so i think there's going to be a lot of discussion regarding their free cash flow and what their financing needs are going to be in order to continue to build out the data centers and build out their business like they're planning on so the reason being that we saw not only you know huge volatility you know to the downside on that stock and some of its competitors last week but with a lot of these you know hardware especially the commodity hardware in the ai trade is a company called gartner published a report last week and essentially what their conclusion is that based on their assumptions of spending on ai and the potential revenue base that they see over the next five years or so they expect that there could be capital write downs of over four trillion dollars by 2032 so that really hit a lot of these stocks very hard but it wasn't just limited to the stock market so in the bond market company called core weave you know their senior bonds fell to below 80 cents on the dollar which means that they were trading at a 15 percent yield so using that yield in the maturity debate their maturity date depending on what you want to assume for loss given default now the market there is saying the cumulative probability of default by 2031 which is the maturity date on those bonds is now about 50 so in my mind that just tells me that the debt markets are now closed you know to this company and in fact not just core weave but you know all of their close competitors until something changes now what is that something remains to be seen i just note that nvidia does own 10 percent of core weave's stock so you know maybe they're able to step in with some sort of guarantees which of course would then you allow those bonds to trade up pretty substantially and then also probably bolster the stock price but we'll see i mean the market especially the fixed income market very leery about the near-term prospects for those companies and then the last one i'm going to watch will be western digital and western digital is just one of these ones i think is pretty emblematic of that commodity oriented tech hardware theme that we've been talking about you know this stock started the year at 150 dollars a share rose all the way up to 750 by june but it's been on a downward trend ever since it's currently 370 dollars per share puts it in three star range i'm just concerned that at this point there's such strong momentum to the downside the company really needs to come out with a very strong outlook to be able to sort of reverse that downward momentum and i think depending on how this one trades after earnings it probably likely impacts all of the other commodity oriented tech [00:12:18] Speaker 1: hardware stocks as well yeah makes sense everything's kind of tied up together these last couple weeks okay so outside of tech and ai what what earnings are you watching this week the other two i think [00:12:30] Speaker 2: should be gilead and thermoscientific both of those stocks have been prior picks on the morning filter over the past year or so you know at this point they're now up so much they are two star rated stocks so i think what i really wanted to hear from our analyst team is whether you know there's enough reason in these conference calls you know for them to maybe reevaluate some of their forecasts and you know adjust their model to see whether or not they increase their fair values if we don't see any fair value increases might be time to ring the bell at least on partial positions here lock in some of those profits because they have run up into two star territory and the other ones i think to watch are going to be the defense stocks we've got rtx we've got northrop we've got lockheed and these are stocks have been pretty volatile since the beginning of the conflict with iran you know we had the initial run-up the sell-off and they've kind of gone back and forth several times but at this point there's really been no change in our long-term investment thesis for the defense sector overall we still see a very long tailwind behind defense spending not just in the us but in the eu middle east a number of our other allies as well so they still look you know very undervalued across the board to us i think the big concerns in the marketplace are just you know how will drone warfare you know change defense spending over the longer term how might midterms you know impact spending over the next couple of months but neither of those are anything that we change that we think changes the overall level of defense spending over the next couple years so in this case i'm just going to be listening for a lot of the ongoing fundamentals maybe new resupply orders capacity expansions maybe some new platform contracts overall when i look at these companies they just look like they have pretty reasonable valuations pretty attractive dividends a fundamental tailwind so these are still that i think look very good for your [00:14:20] Speaker 1: portfolio great um let's rewind a tiny bit to last week we talked about what to watch from the big banks and now we have a bunch of those results in so what's your takeaway there dave you know really [00:14:33] Speaker 2: unfortunately i was kind of expecting to hear more but there's really nothing that came out that was all that interesting or all that different than what our analyst team expected you know i'd say generally the underlying banking businesses are doing pretty well we did see some weaker than expected revenue from their fixed income trading desks but again there was really nothing there that was meaningful enough to change our longer term intrinsic valuations the only other part i was really listening for was you know what's going on with the consumer and how their corporate credits are doing i'd say the takeaway from discussions there on credit provisions and losses is they're in just a normalized range they're not really building for any extra consumer or corporate credit stress so nothing really to report there yeah we made a couple of slight reductions in our fair value on bank america city and wells fargo a slight increase you know in jp morgan but nothing that really changed our views on those stocks and the valuations at this point both jp and city are three star rated stocks bank american wells fargo a little on the undervalued side you know at four stars but you know nothing that i'd really [00:15:39] Speaker 1: pound the table on right now well one one other stock that we have to return to this week is progressive you know that was a sell recommendation last week and it fell about eight percent after earnings though it did you know make up a little bit of ground following the report in the later half of the week so what's your takeaway there and do you want to take a victory lap at all well it's not so much [00:16:00] Speaker 2: that i'd take a victory lap on this one i mean this is one that we highlighted as being a good tax loss sale candidate last week when we were highlighting those that we thought would be you know good places to take your money off the table lock in those tax losses so you could use those against capital gains you know elsewhere in your portfolio and i would say that what we expected kind of came to fruition so in this case the earnings were strong our analysts is expected you know continued strong earnings but as we talked about what he's seeing is you know further signs that the favorable conditions that a lot of these insurance companies have had for the past couple years is really starting to come to an end now specifically with progressive he noted the growth and personal auto policies and force is starting to decelerate he thinks the opportunities for them to continue to keep taking market shares also probably coming to an end and then he also noted that pricing and personal auto insurance is declining so overall our fair value wasn't changed the stock is now trading i think in the very top of that three star range right between three star and two star so i still think this is one that's you know something you could use if you own it or maybe some of the other insurance companies where you have tax losses and then i think you can reinvest those proceeds into you know other businesses that are trading at a much greater margin of safety below our fair value [00:17:18] Speaker 1: okay now we also heard from asml which is one of those stocks you were watching to get an early read on the state of the semiconductor industry so what happened there with their results and what does it tell you about that kind of picks and shovels uh ai trade more broadly yeah it's actually interesting [00:17:35] Speaker 2: i mean the stock really didn't do all that much you know after the earnings announcement and that we ended up leaving our fair value unchanged as well so last week you know what you and i talked about was how investors would be really focused on growth in the backlog of their business but i think what i'm really hearing now is that the biggest problem that they're having is that they're just capacity constrained and so my understanding is you know for 2027 they're already completely booked up and if you look into 2028 i mean it sounds like they're very well booked and you know what capacity they have there in 2028 is also filling up fast so i think this is emblematic of what we've talked about on the morning filter for quite a while now is that you know with a lot of these ai equipment manufacturers and what you call it like the picks and shovels of ai you know the market and ourselves we're already pricing in just tremendous growth for 2027 and 2028 but we really need to have much better clarity on the outlook for 2029 and 2030 for these stocks really to appreciate any much more from where we are right now took a quick look at our model you know we are forecasting high 2027 and 2028 growth but then looking for it to slow pretty quickly thereafter so just to call out a couple of numbers here so for 2026 we're looking at revenue growth of 34 we're looking for 28 growth in both 2027 and 2028 but then for revenue growth to slow to only 11 in 2029 and 2030 i mean that still is huge dollar expansion so we're looking for a company that did 33 billion of revenue 2025 you know going all the way up to 88 billion by 2030 yeah we're still looking for ongoing margin expansion you know they did i think a little over 35 last year going all the way up to 39 this year expanding even further to 43 next year but then really only getting to about you know 44 you know thereafter so again kind of seems like as far as margin goes you know after next year they've kind of gotten as far as they can push it there now as far as the valuation for the stock you know this company did 24 and a half dollars in eps last year we're projecting 37.12 this year so the stock's trading at a very high p e ratio of 46 times that drops to 33 times our 2027 earnings expectation of 52.88 and then gets down to 24 times based on our 2028 earnings expectation of 70 dollars and 77 cents so even 24 times a two-year forward multiple is still a relatively high multiple you know for two years forward so i think the stock is pretty fully valued here you know based on those expectations and again you're going to need much better visibility into you know 20 29 and 2030 for these stocks really to take any kind of second leg [00:20:33] Speaker 1: upwards okay so staying with the semis and speaking of growth we heard from taiwan semiconductor manufacturing two last week which signaled much more aggressive capex spending in the coming years so curious what you make of that and what did you make of the report in general well i think you're [00:20:50] Speaker 2: absolutely correct that the biggest focus really was on the capex plans i mean this is a company that typically has been pretty conservative you know with their capex spending you know they're not going to be spending capex you know unless they really know that they're going to be able to utilize it and i think that's why there was such a focus here so essentially the short-term capex spending for like the remainder of this year was unchanged but as you noted they sigled a much more aggressive you know capex you know beyond that so i think to some degree that just confirms our projections with this company our 2028 capex estimate in our model is 98 billion that's up 53 percent versus what we're expecting here in 2026. now as far as the fundamentals go fourth quarter revenue guidance was a little bit above our forecast and we incorporated that into our model but overall for now our longer term you know estimates are unchanged our value on the stock is still a four-star rated stock at a 23 discount so to some degree i think this also kind of supports the theme that we've talked about as far as ai you know still sticking with those that we consider to be the technology leaders in ai and still steer clear [00:22:01] Speaker 1: of those that are the followers for ai great thank you dave and let's switch sectors we'll get a little breather from ai and let's move over to financials and we'll talk about schwab how did schwab fare in the third quarter and what does morningstar think of that stock now another one where i'd say there was [00:22:18] Speaker 2: really just not a lot really to say i mean we did uh note that we plan to lower our fair value but they're only going to lower it by like a low single digit percentage overall he noted that the core business is still healthy but we are modeling in a higher amount of longer term debt which we think will slightly compress the net interest margin over time so that is one reason that we brought down or will be bringing down our fair value by a little bit i think this is one that even though it is a four star rated stock i probably put it more on the one to watch list than necessarily you're having to buy the stock now yeah i just don't necessarily like buying into a situation where the stock is following and we're lowering our fair value at the same point in time so you know even though it's probably going to be in like that low kind of 20 you know discount to fair value this one might be one where you want more of a discount before you start getting involved okay thank you dave all right we're [00:23:14] Speaker 1: going to move on to our question of the week as a reminder if you have a question for the morning filter you can reach us at the morning filter at morningstar.com and this week's question or i should say questions probably are all about spacex we had a lot of reader interest in that stock after news that spacex had purchased wireless spectrum infrastructure seemingly with the aim of challenging those legacy telecoms like verizon t-mobile and at&t so with all that interest dave sat down with our analyst michael hodal last week who's the director of communication services equity research here and in this great video they unpack what that acquisition means and how it impacts morningstar's view on these stocks so let me [00:24:00] Speaker 2: throw it to david mike hey mike thank you very much for joining us as you can imagine we've gotten a lot of questions on the morning filter regarding what is spacex doing following the reports that they started buying some wireless spectrum so the first question i have for you is you know what do you think that they're doing you know in the wireless space and how does that then relate to their satellite network and some of the coverage that they're already able to provide there i think it's important first [00:24:27] Speaker 3: to distinguish what starlink is doing on the broadband side versus the wireless side so on the broadband side that's where the company's probably gotten the most attention it's where you're putting a dish on a house or on a portable an rv and you're getting broadband service uh from the satellite what we're talking about here is something a little bit different this is direct to the cell direct to your your cell phone your your smartphone your iphone what have you service from a satellite and what this service has been marketed as traditionally is infill for places where terrestrial networks don't reach so a national park or somewhere in the wilderness there's been a lot of talk that spacex wants to offer a more comprehensive wireless service and to do that they need network coverage in more densely populated areas so a satellite service doesn't have the capacity to serve lots of people in a small space and it also doesn't have the ability to penetrate walls so if you're indoors that signal from a satellite is going to have a hard time getting to you in a building somewhere and so what this latest move is intended to do is to provide starlink with the spectrum that it would need to build a network to get that in building coverage in particular and this isn't likely to be spectrum that's used from satellites it's more likely and spacex has said as much that they'll build an actual network with towers and rooftops and that sort of thing to use this spectrum again to provide that coverage layer that can reach consumers in buildings or in rural areas uh why that's interesting is we think starlink has most likely been trying to negotiate a wholesale agreement with one of the wireless carriers at t-mobile or verizon because that'd be a much more efficient way for starlink to fill in where its satellites can't reach the prospects of building a wireless network from scratch are extremely daunting it's you're talking billions of dollars for more spectrum more than what spacex has already purchased billions tens of billions of dollars to actually build the network and then billions upon billions of dollars to acquire customers provide them with own financing and the sorts of things that customers expect today so we think right now spacex is most likely trying to build up assets to make itself a credible entrant into the wireless market as a way of negotiating aggressively with one of the existing wireless carriers for capacity in those areas where its satellite can't reach [00:26:39] Speaker 2: reach so you think there's actually just more negotiation ploy than it is necessarily them really looking at we're going to go head to head against the incumbent wireless providers and build out our own complete network [00:26:50] Speaker 3: it could be a little bit of both i i think for starlink and and spacex they need to have some sort of fallback plan if they can't get an agreement with one of the major wireless carriers and the reason why that's important is all three of the the major u.s carriers again at&t verizon and t-mobile have formed a joint venture for dealing with satellite providers where they basically said we're not going to negotiate um independently and provide network access to somebody like starlink who can then just turn around and compete with us and by kind of collaborating in that way they've ensured that one of the companies one of the carriers doesn't break off and sign an agreement with starlink and leave the other two behind and so spacex starlink they need to have some kind of credible fallback plan to enhance their negotiating position and also to potentially go it alone if the set if if the telecom companies don't ultimately come to the table and agree to some sort of uh wholesale arrangement [00:27:44] Speaker 2: for starlink so thinking about where the three stocks at&t verizon t-mobile are trading today and based on your view as far as you know you think this is most likely going to be them you know collaborating with starlink as opposed to competing directly head to head like any of those [00:28:00] Speaker 3: stocks look interesting to you today and if so why yeah so the big thing we did in in light of starlink's latest spectrum purchase and it does make the company much more credible as a fourth entrant into the wireless market so we increased our morningstar uncertainty ratings on all three of the wireless carriers from medium to high so we're now looking for a larger margin of safety to our fair value estimates than we we had before this news broke now we haven't changed our fair value estimates because our base case is still that starlink won't ultimately enter the u.s wireless business but again the downside risk is there we've tried to capture that with our uncertainty rating so when i look at the three carriers today t-mobile actually looks the most interesting to me it's trading at about a 35 discount to our fair value estimate which is a wider discount than at&t or verizon the stock's actually offering a decent yield for the first time in its history of above three percent and they have the financial capacity to buy back stock pretty aggressively as well and i i like t-mobile's position in uh the fixed line business a little bit more than most people might expect you know i i think that some of the investments that at&t and verizon are making to expand their fiber networks actually will struggle to generate attractive returns on capital but again we i don't think t-mobile is quite yet at a large enough margin of safety to really pound the table on it but it's the one that i think looks the most attractive here understood well thank you very much i really [00:29:16] Speaker 1: appreciate your time of course thank you all right that was a great conversation thank you so much a lot to chew on uh thanks thanks again to both the analysts um moving on our final section our picks dave this week you've brought us four undervalued stocks to buy uh and i know that you want to emphasize that these names are long-term buys not just stocks to rent uh so let's jump right in with mondelese [00:29:43] Speaker 2: could you walk us through some of the key metrics there of course so mondelese stock is currently right at five stars it trades at a 17 discount from our long-term intrinsic valuation has a nice healthy dividend yield at 3.3 percent we rate the company with a low uncertainty rating we assign it a wide economic moat that wide economic moat being based on cost advantages and intangible assets and why is the stock a buy well it's not just a buy today this is one we've talked about a number of times it's been a pick a multiple times yeah on the morning filter you know over the course of this year and in my opinion when i look at the food sector and generally i think the food sector is trading at some pretty large discounts you know from our fair values but i think with mondelese it has you know the best combination of undervaluation dividend yield and more specifically probably the best outlook from a fundamental point of view because of the way they're positioned in more in emerging markets than just in developed markets now fundamentally this company has also been performing a lot better than a number of the other food names that we cover so like example you know last quarter they did 2.2 organic sales growth a lot of other companies had negative sales growth in north america they still had 3.4 organic sales growth a lot of the other north america food names really have been struggling to stay positive and we're also seeing sequential improvement into that second quarter number from the first quarter number so i really like kind of the fundamental point of view there now europe was still probably weaker than what we'd like to see but that wasn't necessarily enough to dissuade us you know from this name but as i said the real attraction on mondelese is its emerging market exposure that's about 40 percent of the total sales of the company it was up 7.4 percent in the second quarter and the real reason that i like that emerging market exposure is because it's not hampered by the glp ones and the growth in the glp ones and the negative impact that has to caloric intake that we've been seeing here you know in the united states as far as you know what are we pricing in here i think it's probably pretty modest forecast in our model you know for revenue we're only looking at a five-year compound annual growth rate of 3.3 percent so essentially inflation plus just a little bit of volume increase yeah we're looking for an operating margin this year 14.1 percent expanding to 15.1 percent next year and then up to 16 percent in 2028 so pretty good margin expansion but really that just gets you back to kind of normal historical operating margin levels you know if i look at the 10-year average for this company was 15.9 percent so i don't think we're expecting you know really the company to do that much better kind of than what they've done historically and then you know after this year we've got an average you know 9.2 percent earnings growth so the way it all lines up i still think this is a very attractive candidate even after we've already [00:32:34] Speaker 1: recommended it a number of times okay second on your list is bristol myers uh what does morningstar [00:32:40] Speaker 2: think of that stock so bristol myers stock is currently rated four stars it trades at a 15 discount and has a 4.2 dividend yield we rate the company with a medium of uncertainty we assign a wide economic moat based on its intangible assets and even more specifically you're going to be based on [00:33:00] Speaker 1: its patents on its drug portfolio now this isn't the first time that you've recommended bristol myers [00:33:06] Speaker 2: why is it still a buy in your book yeah i mean it's been a pick a number of times over the past two years it's really been one of my go-to picks for pharmaceuticals i mean unfortunately for investors today it's not nearly as much of a discount as where it's traded over the past couple years but again it's still enough that it looks attractive when we look at a lot of the other pharmaceutical stocks now what's going on with this one that you have to understand before you get involved is the stock market always hates stories where earnings are projected to decline but then the good point about that is it also means that valuations are going to be you know really low so in this case you know the market is certainly very focused on and pricing in the risk that as drugs come off patent over the next couple years you know the markets worry that they're not going to be able to replace you know that revenue and in fact to some degree that's what we're modeling in as well so you know for this year we're looking for earnings per share of six dollars and 18 cents getting up to six dollars and 70 cents in 2027 but then starting to decline as a number of their drugs come off patent so we're looking for earnings in 2028 to drop to five dollars and 82 cents fall further to four dollars and 89 cents in 2029 but then start expanding again as they have some drugs you know coming out by 2030 so we'll start looking for five dollars and four cents of earnings and growth you know thereafter so i'd say generally according to our analysts we think the market is just underestimating the strength of their pipeline of next generation drugs in fact there was some good news recently they announced a phase three trial for one of their drugs that met its primary endpoint for idiopathic pulmonary fibrosis so i think that's a good indication of their pipeline if you look at the stock today it's only trading at 10 times its 2026 earnings projection you know trades at 12 and a half times the low point in 2029 so that's when we expect earnings to bottom out and then start rebounding thereafter and as far as our dividend risk we don't foresee you know any cuts the dividends in our model are expected to increase slightly every year over our forecast period so again another one where i think you have to just understand the dynamics that yes over the next couple years you know you might see some earnings decline but as that drug portfolio you know and the pipeline there starts getting approvals it will start to rebound in 2030 and [00:35:25] Speaker 1: thereafter that's one of those where we where long term becomes very important buying for buying for the long haul and not renting um all right let's move to the defense industry you've brought us l3 harris can [00:35:38] Speaker 2: you walk us through the basics of that stock so l3 harris is currently rated four stars trades at a 27 discount from fair value has a two percent dividend yield we rate the company with a medium uncertainty we assign a narrow economic moat that narrow economic moat being based on switching costs and intangible assets [00:35:57] Speaker 1: now you've never recommended this one before so why is it on your radar right now i would say probably [00:36:03] Speaker 2: because it was maybe not quite on my radar in the past because it's much smaller than what we see you know from you know lockheed or northrop which is really where my focus on some of my prior defense picks you know have been and it's just a company where i like the portfolio setup the more that i look into it so a lot of you know what they work on are uncrewed aerial vehicles sensors avionics space-based systems missiles solid rocket motors so i think overall when you think about the change in how defense spending over time may evolve you know based on how using drones in war modern warfare tactics is also evolving especially with like the missiles and missile defense programs i think this is a company that is going to be well positioned to be able to benefit from that change in defense spending you know over the longer term when i look at our model you know our five-year compound annual growth rate for revenue is 5.8 we're looking for margin expansion from 11.6 this year to 14.7 by 2030 that's a little bit faster expansion than what we're currently modeling in for a company like you know lockheed martin so i like that extra margin expansion on the type of products you know that they manufacture overall it leads us to a five-year earnings growth of 13 percent trades at 2020 about 20 times our 2026 earnings estimate drops down to 19 times our 2027 earnings estimate so again when you put that all together it's trading at a pretty good discount but i think it's not only that i think it's going to get a lot more attention from the marketplace as the market is looking how defense spending evolves all right now last on your [00:37:43] Speaker 1: list is a utility tell us about alliant energy so alliant is trading at an 11 discount it's enough [00:37:50] Speaker 2: to put it in four star rating territory being a utility stock 3.1 dividend yield medium uncertainty with a narrow economic moat and like all the other utility stocks that narrow economic moat is based on [00:38:02] Speaker 1: efficient scale and why do you like alliant for the long term i like this one i mean i think this is [00:38:08] Speaker 2: actually you're getting like a second bite at the apple on this one so it was a recommendation at the beginning of the year you know the stock initially went from 65 to 78 that's enough to put it you know in three-star territory now with interest rates having risen over the past couple months the stock has back backed off now down to 67. so overall i still think that from a utility point of view it's you know well set up to be able to benefit from not only kind of like ongoing growth within their you know regulated utilities but still also be able to benefit from data centers you know and growth and data centers in the regulated areas you know over time you know right now we're forecasting earnings growth at the high end of management's guidance range of five to seven percent we're expecting growth to accelerate beyond 2027. the other company has a four-year capital investment plan of 13.4 billion that's up 24 from its prior plan so that indicates you know just how much more growth expansion they have you know there are three different data centers under construction a fourth with a signed agreement within the areas that they operate that's a total of you know three gigawatts of extra demand so that should drive 12 annual sales growth from 2025 to 2030 and even from there i mean there's an additional you know two to four gigawatts that we think could materialize beyond 2028 overall that really operates in some very constructive you know regulatory environments which we think benefits for investors over the longer term as [00:39:37] Speaker 1: well great well dave thank you so much for your time it was great to be here with you this morning viewers and listeners who'd like more information about any of the stocks that dave talked about today can visit morningstar.com for more details and we hope you'll join us next monday for the morning filter at 9 a.m eastern and 8 a.m central in the meantime please like this episode and subscribe hope everybody has a great week cheers dave thank you [00:40:13] Speaker ?: for more information about today's video and we'll see you next time on the next one and we'll see you next time on the next one and we'll see you next time on the next one