5 High-Conviction Stocks to Buy I July 13, 2026

[00:00:00] Susan Jabinski: hello welcome to the morning filter podcast i'm susan jabinski with morning star 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 morning star research and a few stock ideas now we have one programming note to share we will be dropping a bonus episode of the morning filter on thursday focused on dividend stocks dave and i will be talking about how dividend stocks have done this year and what's driven that performance and then dave will share his top dividend stock picks for the rest of the year so be sure to tune in good morning dave you keeping cool in these dog days of summer [00:01:08] Dave Sequeira: good morning susan i'm doing great how about yourself you know i'm doing as best as we can [00:01:13] Susan Jabinski: in the middle of july so uh anyway let's let's start off this week uh talking about an update on the war [00:01:20] Dave Sequeira: and oil prices well unfortunately there's still more military exchanges going on between the u.s and iran overall it just seems to me the u.s and iran continue to disagree on whatever it was that each of them think that they agreed to in the first place you know in the truce in my mind as far as the status of the strait of hormuz it's still especially unclear as to how open it is or isn't you know at this point in time now having said all that the markets are taking this recent military action in stride what we're just seeing is that there's less and less of a market reaction every time we have some of these military exchanges so i think it's just the expectation that this is going to be a limited exchange straight will open back up and oil will start flowing again so just looking at the pre-open in the markets this morning oil it's only up a couple of dollars it looks like we're around 74 a barrel last i checked and stocks taking it in stride pre-market s p 500 futures down a little bit in the red but i don't think it's really all that much about the stock market you know if you take a look at the korean stock market now that's one that we've highlighted before has just skyrocketed you know over the past year it's just up huge huge amounts really based on two stocks both memory semiconductor stocks so the adrs of sk hynix were down nine percent now that's a company that just issued those adrs here in the u.s last week and the korean stock market overall because of that one and then the other memory stock is down nine percent overnight so i think that's really taking a lot of [00:02:52] Susan Jabinski: air out of the market this morning all right so let's look to the week ahead on radar we have inflation numbers coming out so david what are the expectations here when it comes to inflation and do you think these reports will move the market this week or not i doubt that they're going to move the market all [00:03:09] Dave Sequeira: that much unless they come out really far from consensus in one direction or the other now of course you have to remember with inflation there's two different ways that they report it you have your headline inflation and then your core inflation so headline inflation measures total inflation you across the board versus core inflation in which they strip out the most volatile components of inflation such as food and gasoline now the economists consider to be core inflation a better picture of what's going on with long-term inflation trends just because it doesn't get swung as rapidly you know back and forth as what you see with like gasoline and food prices so as far as expectations for the week for cpi the month over month consensus it's looking for down one-tenth of a percent which would be a big improvement versus the prior month in which it was up a half of a percent on a year-over-year basis the consensus is looking for to drop slightly to 3.9 percent versus 4.2 percent so the right direction but still you know way too high at this point now core unfortunately looks like it's going the wrong way on a month-over-month basis consensus is looking for an increase of three-tenths of a percent slightly faster than last month in which it registered up two-tenths of a percent and the core year-over-year consensus is up 2.9 percent that's essentially the same as where it was last month so i think the takeaway here unfortunately is that while headline looks like it's slowing probably because oil prices had been coming down over the past month you know that core inflation still way too high and unfortunately it looks like it might be rising even faster so if that core inflation number comes out too high i think the market reaction could be a negative just because it could mean that the fed does have to increase rates and not only increase rates but pulls forward the probability of when they increase rates as well as how much they may have to raise rates overall [00:05:03] Susan Jabinski: all right well we also have earning season kicking off this week with the big banks reporting so what are you going to be listening for from the banks and could there be any surprises [00:05:12] Dave Sequeira: i don't think there's going to be any surprises i think overall just expect very solid earning reports coming out of the banks so just a few things i think that if you're an investor in the banks you really need to be listening for so the first would be just how much would net interest margins be under pressure if short-term rates you know raise much further so we are expecting that the fed will have to raise rates you know later this year if you look at the short end of the yield curve we've seen that anywhere from you know six month to two-year t-bills you know falling and price meaning rates are going up i'm also listening for if there's any meaningful impact on consumer health from the higher oil prices any change in the rate of defaults or bankruptcies you know is that increasing for more normalized rates i want to hear what's going on with the outlook for fee income trading income both of those should look this pretty good this past quarter as well but i'm also really curious if there's going to be any color that they're going to give for investment banking income for the rest of the year of course we've already had the spacex ipo but you have a lot of these other ai companies also talking about coming public in the second half of the year you know if so that should be a big boost for their investment banking [00:06:22] Susan Jabinski: income and then talk about big banks from a valuation perspective dave as we head into earnings is there [00:06:28] Dave Sequeira: anything attractive not really i mean they're mostly fairly valued banking bank america is just cheap enough to be a four-star rated stock personally i'm not a big fan of bank america there's other banks i'd rather invest in if i want to put some money there yeah outside of banks looking at the rest of the financial sector you know if you look at the investment banks morgan stanley goldman sachs they're a little overvalued at this point you know trading within two-star territory so if you're looking for somewhere to put new money to work out highlight names like lpl financial that's one that we've recommended in the past that's a five-star rated stock and then lastly it's still and we've cautioned people in the past about the traditional insurance companies that we think those valuations are too high you know those are still depending on which insurance company you know two star one star rated stocks [00:07:14] Susan Jabinski: all right well we have a couple of semiconductor companies reporting this week asml and taiwan semiconductor now both stocks are up quite a bit this year and neither looks like a bargain so [00:07:24] Dave Sequeira: what are you going to be listening for here i look at these companies as just being early reads in the reporting season for what's going on with semiconductors and in this case what's going on with ai specifically now of course revenue and earnings for both of these companies should be especially strong what we've seen is over the past quarter or two you know the ai build out boom has led to a shortage and of course you know gpus and other semiconductors that are used for artificial intelligence but it's really no longer like just the memory stocks that we've seen skyrocket this year but even like the cpus that are used to manage ai workloads are also in shortages as well that's a big reason why we've seen stocks like amd and intel also do as well as they have so i think that what's going on is we're expecting and we're already seeing to some degree a significant increase in semiconductor manufacturing companies just trying to add additional capacity whether that's you know building you know additional lines in existing facilities or even building out entirely new facilities altogether i know companies like micron are already out there doing greenfield projects you know building new fabs so i think that the companies that provide the manufacturing equipment that makes the semiconductors you know look pretty good here so of course the question is especially with these stocks already being you know slightly overvalued you know how much and for how long are we going to see this excess demand for that manufacturing and building out those facilities yeah how much visibility do we have and how long is this going to last until we get to the point that there's enough new manufacturing capacity in semiconductors you know before that [00:09:04] Susan Jabinski: spending slows johnson and johnson reports earnings this week now this is one that's been one of one of your favorite core stocks but today it's trading pretty far above morningstar's fair value estimate of 190 dollars so dave get us up to date on what's been going on with the stock and if there's anything in particular you're going to be watching for on the earnings front so in my mind this is a core [00:09:28] Dave Sequeira: holding type of stock one that you know i think works for pretty much you know anyone's portfolio when you're putting together you know that core base of your portfolio specifically with j and j you know we rate the company with a low uncertainty a wide economic moat has a somewhat attractive dividend yield it's in the defensive sector and you know used to trade at a pretty attractive margin of safety below fair value so this is one that we recommended you know four times back in 2024 and for a while it was really just a coupon coupon clipper the stock went nowhere really until fall of last year and then all of a sudden the star stock really started to work i don't know what the specific catalyst was that really started to get j and j to move you know up and to the right but it's up 62 over just the past 52 weeks it's up 24 just this year alone so at this point it's now trading at a 36 premium to fair value puts it well into one star territory so i guess when i'm really thinking about you know this earnings call i want to listen and compare it to our own write-ups i just don't know if we're missing something that's going on here or if this is just one of those cases that you know sometimes a stock starts to work you get some upward momentum and the market just ends up taking it too far to the upside so just trying to understand if there's really something here that we should be reevaluating our fair value on this stock or if this is one where even though i think it's a core holding type of stock now might be a pretty good time to at least lock in some of those profits so that way you've got some dry powder and if you do get a pullback in the stock you know you can go ahead and reload at lower levels [00:11:08] Susan Jabinski: just as an aside doesn't it seem crazy that a core stock is up 60 in like eight or nine months like what what world are we living in that seems really crazy anyway you know i don't know i mean [00:11:22] Dave Sequeira: it's just like i said it's just yeah is there something that we're missing i don't know i mean the analyst that covers it she's a great analyst i mean she's probably one of the better analysts on our team but the same point in time you know maybe there's something that comes out on the earnings call that was below the radar that maybe we need to incorporate or like you said sometimes stocks just end up moving and they just move too far and it's just like a pendulum crazy 60 is crazy for a [00:11:48] Susan Jabinski: core stock anyway moving on um let's talk about some new research for morningstar and we're going to start with nike's earnings now morningstar trimmed its fair value estimate by a few dollars uh and now assign it a fair value of 94 per share so unpack nike's results and tell us what you think of the [00:12:06] Dave Sequeira: stock today so it's an interesting reaction after earnings so you got a little pop after earnings but then it quickly ran out of steam and i would say it's within a range of you know where it's been since the first initial pop now if you look at that short term chart you know that stock has not been able to break through you know that recent june high on that longer downward trend so from a technical point of view you know that's not a great look in my mind now as far as the fundamentals of the company we did lower our fair value that's just to account for weaker than expected short-term performance and unfortunately the fundamentals are still going the wrong way here now nike provided update and guidance you know they brought their revenue down to a low to mid single digit decline for the first quarter of fiscal 27 and for the first half of fiscal 27 as a reminder their fiscal year ends in i think it's may 31st so we're just at the beginning of their fiscal year for 2027. now i'm guessing that this probably wasn't as bad as what the market was prepared for which is why we got that slight pop but when i look at the stock here it's not cheap it's currently trading at 26 times our fiscal year 2027 estimates so in my mind i think the market is already giving nike the benefit of the doubt so it's trading at 14 times our 2028 earnings estimate which is much more attractive on that valuation basis compared to the 2027 earnings valuation now to get to that 28 2028 earnings estimate yeah we're modeling in five percent revenue growth for next year we're looking for the operating margin to expand at 12.3 percent that's a significant increase for what we're looking for this year which is only 6.8 percent in fact that 12.3 percent would get you much closer to normalized historical operating margins so and for me i'm still looking for evidence of that long-term turnaround and for that normalization to occur once you start to see that happen i think there is a lot of upside potential in this stock but until then it seems like the market maybe the market's getting comfortable with the valuation here but again you got to believe in the fiscal year 2028 story for the valuation to make sense [00:14:24] Susan Jabinski: a report surfaced last week that meta platforms will be renting its excess artificial intelligence compute capacity to external customers so what do you make of that dave this was a really interesting development [00:14:37] Dave Sequeira: and i think the market's still trying to wrap its arms around what exactly it means so from the investors i've spoken with and the analysts on the street i think there's really two camps of thought so the first camp is that investors had been concerned about meta's ability really to generate you know long-term returns on all of the capex spending that they're making today you know people thought there was a bit of a lack of clarity as far as you know how they're going to monetize all this infrastructure spending so in this case you know what the company is doing is just selling kind of that excess capacity they have here in the short term until they end up using that capacity you know themselves over the long term and monetize it the second camp out there is that this is just indicative too much excess capacity in ai compute already today and thus far maybe this is actually a harbinger that there's just enough capacity out there already and so this could indicate that they're going to have to start slowing that capex spending because you can't build you know too much excess compute now in and of itself our analysts didn't think that this was meaningful to meta's evaluation yeah we still think that meta has you know a long way to go to be able to match the capabilities of the other hyperscalers so we didn't change our valuation on this and in our view we think this is probably more that first camp where they're just you know selling off some of that short-term excess capacity until they start using it up themselves over the next couple years [00:16:06] Susan Jabinski: so we didn't change the fair value on meta on this news but does the stock still look undervalued [00:16:11] Dave Sequeira: well not as undervalued as it was so the stock yummy it's up 18 since they made just that announcement so it's still at a 21 discount still enough to put it in four-star territory but not anywhere near that margin of safety we thought that stock was trading at prior to the announcement [00:16:29] Susan Jabinski: okay well let's talk about scott's miracle grow this was a former pick of yours and the company announced that its ceo was stepping down immediately so what could this you know ceo change mean here and do you still like scott's miracle grow as an investment i found that this was odd compared to [00:16:48] Dave Sequeira: how most companies usually announce when they have changes in management at the ceo level so the headlines say this was a pre-planned succession event that the coo is now taking over i was surprised that it took effect immediately usually when this happens usually there's a transition period you know a couple of months where they've made the announcement the old ceo is still there hands over the reins to you know whoever's taking control as opposed to you know it occurring you know immediately now looking at the ceo he originally joined the company in april of 2023 as an executive vice president was then quickly promoted to ceo in 2024 and then they added the president title uh to him you know back in 2025 so it appears as though i mean he has been groomed to take over so this may not necessarily be nefarious as far as the timing and something else you know going on there so we'll see exactly what comes of it now i think what's going to be most important here is i talked to south he's the analyst that covered it and i think there's an analyst day that comes up here on august 4th so this is a stock where at this point i think it's going to be especially instructive you know to either you know listen to that analyst day read the transcript thereafter you know go through the powerpoint slides and really listen for what the new ceo is going to be focused on so one of the things about this company is that we did have a poor capital allocation rating on the company the reason being is that the prior ceo a lot of times he just took big swings at trying you know new and different business lines in order to try and diversify their revenue sources was never very successful at that and that was that poor capital allocation rating because they ended up burning through capital on those unsuccessful ventures in this case you know we think that the company is you know has a very good lawn care business and if the new ceo is focused on really just the execution of that business in and of itself it might be pretty good for their margins might [00:18:50] Susan Jabinski: be pretty good for their valuation for the long term now comcast announced that it's separating its media and its broadband businesses so what do you make of the split and of the stock now this is interesting [00:19:04] Dave Sequeira: in that i'm pretty sure this is the first time you and i have ever talked about comcast so comcast stock is currently a five-star rated stock trades at over a 40 discount to fair value we rate the company with a medium uncertainty and we assign it a narrow economic moat and in fact this has been a four or five star rated stock i think since 2021 but the stock has been on really just a long-term downward trend over you know the past four or five years and we've also lowered our fair value estimate a couple of times you know over that same time period as well so i'm just wondering thinking about you know this catalyst here is now really the time to start taking a second look at this company has it finally fallen enough that it's getting to the point that it's cheap and of course the question here is will separating the business really be the catalyst that's needed to unlock the shareholder value that our analyst team sees here so i just kind of want to quickly go through the story here there's still going to be a lot you know yet to come but if i look at the top line it's gone nowhere for the past five years our forecast is for it to fall two and a half percent this year another one and a half percent the year thereafter we're looking for earnings this year of only two and a half dollars looking for that to fall a couple cents you know next year but the company's only trading at nine and a half times earnings has a high dividend yield at 5.6 and it also still has enough free cash flow after that to still buy back stock now another multiple we don't talk about very often is ev to ebitda essentially what's the enterprise value of the company as compared to the amount of free cash flow that can generate in this case based on where it's trading in the stock market it's under six times now typically when i see something like that that indicates to me that like private equity should be taking a look at the company because they could easily leverage that company up i mean there's a lot of debt there it's maybe two or three times levered but they could still add a couple of turns to that buy out the company for very little equity and then just be able to suck all that cash out of the company perfect setup for private equity shops unfortunately in this case brian roberts owns a very small percent of the company but has 33 of the voting rights so you'd really have to have a like a large activist investor come in here take a very large position in the company and be able to get other shareholders on board to be able to force you know any kind of sale to a private equity shop so yeah as you remember i did do a short stint early in my career doing investment banking purely a size i hated to investment banking it was an awful job but it did teach me a lot of things about like how private equity you know looks at these type of things and in this case when i look at the valuation of the company it's just too cheap and it's just too low for nothing to happen at this point so personally i'm working on sharpening my pencil right now i do want to talk to mike hodl so i'll interview him and we'll put that up on the morning filter probably not until after you know earnings season but i do think this will be a good one that we can really dig into you know what's going on you know what the future competition is going to be you know what spacex might be doing as far as you a broadband service and starlink and how that may or may not you know interrupt the company's business so we'll get to a much longer in-depth you know conversation on this one so not a stock i'm necessarily willing to put out there as a pick just yet but certainly one that based on the valuation [00:22:36] Susan Jabinski: you need to do a much deeper dive today all right well more to come on comcast then all right time for our question of the week now as a reminder if you have a question for dave send it to our inbox you can reach us at the morning filter at morningstar.com now this week's question is from jeff who wants an update on one of your prior picks verizon jeff is asking if you still like the stock after it got dropped from the dow jones industrial average and as it faces new competition from spacex yeah i mean it's [00:23:08] Dave Sequeira: still a pick it's a four-star rated stock trades at just over 20 discount to fair value we rate the company with a medium uncertainty we assign it a narrow economic moat so i quickly spoke with mike holdall last friday he's our communications analyst that covers verizon and it's interesting if you look at the stock performance this year is actually doing very well earlier this year right up until the point that spacex filed their s1 now we don't think that spacex will end up becoming a direct competitor to verizon in the traditional wireless business and mike outlined just a number of different reasons why he didn't think that that's going to occur you know a couple of different things like you know they just don't have the spectrum to be able to do it today there's a lot of upfront costs that they would have to spend on it in order to be able to get themselves prepared to do traditional wireless so we don't think that's going to happen and in fact you know the government just had a spectrum auction out there and the company didn't bid very aggressively at all so it doesn't look like they're trying to buy that spectrum today now as far as like their technology goes you know in our view the satellites just can't match you know the kind of capacity that you can see that the cell phone towers or the terrestrial towers provide you know the attributes that you need to be competitive in traditional wireless you have to be efficient those cell phone towers you know i mean you can have you know the fiber backhaul uh reuse spectrum you have especially high density for the amount of spectrum that you have you know a lot of different things that you just don't see in the current satellite technology today so for the foreseeable future yeah we think that the satellite technology is probably more what they have is like a coverage layer provider so for example i think t-mobile you know has partnered with spacex with um the satellite provider there provides like internet coverage for those areas that you don't have terrestrial coverage so i think the risk here to a verizon is really more about customer coverage in those rural areas you know historically verizon was always known as having the best geographical coverage but now if you have that satellite coverage in some of those areas that you didn't have coverage by the other wireless providers you know you don't have that same kind of competitive advantage but it's probably not a large enough percentage of verizon's overall business to be [00:25:31] Susan Jabinski: meaningful to the valuation all right well it's time for the stock picks portion of our program now dave's picks this week are stocks that he has high conviction in meaning that these are stocks we've talked about before that dave continues to pound the table on all of these stocks also appear on morningstar analysts new list of top stocks for the third quarter dave's first pick this week will surprise no one it's microsoft it's microsoft dave give us the highlights and it's not just me susan it's [00:26:02] Dave Sequeira: not just me i mean it's a high conviction pick from our technology team as you noted i mean it's still on our quarterly best picks list so it's not just me it's the overall team still has a lot of conviction in microsoft you know for the long term valuation still remains very low it trades at a 36 percent discount to fair value it's a five-star rated stock medium uncertainty wide economic moat and in fact it has three of the five moat sources being cost advantage network effect and switching costs [00:26:35] Susan Jabinski: now we've talked about microsoft a lot in the past and you even did a bonus episode of the morning filter about microsoft with morningstars analyst who covers the company but remind us anyway why you like [00:26:47] Dave Sequeira: it and what we think the market's missing here sure i mean i'll provide a quick synopsis here but i would really recommend if you have an interest in microsoft if you haven't watched it already you know i did a deep dive interview with dan romanoff i think it was about a 45 minute long interview it was on may 27th so you can find that at whichever you know platform you use to pull up our podcasts and we just went through each of microsoft's different business lines its competitive advantages you know we discussed at length or capex spending on ai and how it'll benefit the company over time and went through a number of different forecasts you know for his you know company view whether it's the revenue margin earnings and so forth i mean overall when i look at microsoft i think that the company has a lot of different ways that they will be able to benefit from artificial intelligence you know both to the upside if artificial intelligence is everything everything that everyone claims that it is and i also think it has a lot of different parts of their businesses that are natural hedges to the downside if ai doesn't develop the way that people thinks that it does as far as our forecast you know our five year compound annual growth rate for revenue 15 percent looking at earnings compound annual growth rate of over 16 company trades at only 22 times or 2026 earnings estimate that falls to just under 20 times the 2027 earnings estimate and if you look at historically like that pe multiple or that forward multiple over time i would say right now it's either at the bottom of the range that it's traded in or even below the bottom of the range that it's traded in over the past so definitely one to take a look at [00:28:25] Susan Jabinski: okay your second high conviction stock pick this week is charles schwab run through the key metrics [00:28:32] Dave Sequeira: and it's only a 12 discount right now but it is a high conviction pick unfortunately the stock just popped here over the past you know a couple of weeks but still four star rated stock medium uncertainty wide economic moat with that wide economic moat being based on cost advantage [00:28:48] Susan Jabinski: now the stocks haven't you kind of a sluggish year so given that why is it a high conviction pick today [00:28:54] Dave Sequeira: well it was just added to the third quarter best pick list and in fact you know this isn't the first time that we've highlighted schwab as a pick it was a pick a couple of times back in 2023 when it was really trading at a much bigger discount i would say since then over the past three years i mean the trend here has been pretty much solid and steady growth both the stock price you know moving up over that time period as well as moving up our fair value as well so the stock did sell off earlier this year in february i think the reason it probably slid is because you saw the probability of the fed increasing the fed funds rate increase for the second half of this year of course schwab makes a lot of the money on the float that they're able to play pay relatively low deposit rates so again it's like a bank you know they don't have to pay that much for deposit rates and then they can reinvest in higher yielding you know short-term assets so the concern here is that if they have to pay higher deposit rates that that lowers that net interest margin but we think the market overly penalized the stock too far to the downside in fact it's coming back pretty quickly i think it was up six percent you know just last week alone so again just a quick synopsis of the company they're not just a retail brokerage i mean they've really grown they've expanded into a lot of other areas over the past couple of years they have a big mutual fund distribution arm they have proprietary low-cost asset management products they do lending they have retirement accounts you know they do wealth management now as well you know as far as the wealth management business they've been one of the premier asset gatherers over the past couple of years so we're already taking into consideration a reduction in that net interest income you know this year so if the result you know we brought our earnings you know down to 595 from 611 not necessarily a huge decrease and then we're looking for it to start growing again thereafter so even taking into consideration that reduction in earnings the stock models out relatively cheap long term we're looking for like a 15 annual earnings growth rate from 2028 to 2029 stocks only trading at 17 times our 2027 earnings estimate all right your next high conviction pick is broadcom give us the rundown on this one so broadcom trades at a 38 discount to fair value five star rated stock it is one we rate with a high uncertainty but that's really just a factor of being in the technology sector we assign a company a wide economic moat being based on switching costs and [00:31:24] Susan Jabinski: its intangible assets so why do you have high conviction on broadcom stock today dave so this [00:31:30] Dave Sequeira: one remained on the quarterly best picks list and when i think about their business overall i think they're really in a good position today so broadcom makes custom ai accelerators which are called xpus xpus are used to optimize ai workloads which of course everyone's trying to make ai as efficient as possible today and generally our analyst thinks that the market is underestimating the amount of growth in xpus over the next couple of years in fact he thinks the company's guidance is pretty conservative you know they're looking for over 100 billion dollars in ai revenue in fiscal 2027 our forecast is higher in fact if we go to 2028 we're modeling in 200 billion in ai revenue in fiscal 2028 and he thinks he has a very high visibility of that forecast based on what's coming out of anthropic and open ai and the amount of xpus you know that they're going to be ordering from the company and then more recently also pointed that apple and broadcom recently announced a renewed chip supply agreement through 2031 as well so this is what a stock i really consider to be what's called garp g-a-r-p that's growth at a reasonable price looking at our forecast here our five-year compound annual growth rate for revenue 40 percent looking for our five-year compound annual growth rate for earnings 46 percent stocks trading at 35 times our 2026 earnings estimate that may sound high but that drops all the way down to 21 times our 2027 earnings estimate based on the amount of growth that we see here all right clorox is your next pick so tell us about it so clorox stock still rated five stars trades almost a 40 discount to fair value has over a five percent dividend yield we rate the company with a medium uncertainty we assign a wide economic moat that wide moat being based on cost advantages and intangible assets now dave there are plenty of [00:33:28] Susan Jabinski: undervalued stocks in the consumer space so why is clorox your high conviction pick here [00:33:34] Dave Sequeira: i mean it's one of the highest conviction picks from our consumer analyst team you know in general it's been on the best picks list we're continuing to keep it on the best picks licks best picks list got a little tongue tied here so i think the biggest reason that we have a lot of conviction on this one is i think that this one is being overly penalized by the market because of just how much noise there's been you know over the past five years but we do think it's really more noise than signal now in this case the company has suffered several setbacks but when i look at what those setbacks are it's nothing that changes like really the long-term earnings potential for the company so first of all we had the pandemic volumes you know skyrocketed margins expanded but then of course once the pandemic peaked and started coming back down you know you had that post-pandemic pullback because everyone loaded up you know all of the clorox products in their pantry used them up for you know the next couple of years so we're just really getting at the point where we see really much more normalized household inventories then like a lot of these other consumer product companies 2021 2022 we had very high inflation and they weren't able to raise prices as fast as inflation was going up so that also put pressure on their margins unfortunately the company did suffer a cyber security breach as well as an aside good example of why i like cyber security stocks but again just another thing that really ended up you know putting pressure on the company in the short term and then most recently the ceo announced a resignation due to health issues so we have some management turnover going on as well now let's just kind of run through the numbers here so first of all you know clorox fiscal year end is june 30th so we are in fiscal year 2027 right now so last year for fiscal 2026 revenue declined nine percent that's not as much of a concern as you think it is part of the decline in revenue is because they rolled out a new erp platform in 2025 that's an enterprise resource planning platform i'm sorry that rolled that out in fiscal 2026 which pulled sales forward into fiscal 2025 so we're looking for that sales to rebound this year as inventory levels normalize and then we're looking for revenue to grow four percent you know thereafter we're also looking for the operating margin to start improving this year as well based on that normalization so taking a look at valuation here the company's only trading at 13 times our fiscal 2027 earnings estimate so that tells me that the market is looking for either earnings decline or for earnings over the longer term to be stagnant at best so in this case any kind of sign that the company's earnings are going back to more of that normalized type of growth really i think can cause this stock to rally quickly all right and then your final high [00:36:36] Susan Jabinski: conviction pick this week is devon energy so give us the bird's eye view so devon is back to trading at [00:36:42] Dave Sequeira: a 23 percent discount to fair value you know having sold off a little bit with oil prices when they came down it's enough to keep it in four star territory pays two and a half percent dividend yield again it's another one with a high uncertainty but of course the high uncertainty is really because it is a commodity oriented company we assign the company with a narrow economic moat based on its cost advantages [00:37:05] Susan Jabinski: so then why do you have high conviction in devon energy stock today dave i mean devon has long been [00:37:11] Dave Sequeira: one of the picks from our energy team for domestic oil exploration and production you know of course you know we've talked about exxon a lot over the years and why that's kind of my favorite pick for energy overall but you know with exxon trading at fair value i'm looking for a stock trading at a margin of safety and devon is really the one that probably has the best combination we see of valuation and dividend potential it's one of the lowest cost producers in the us along the shale cost curve in fact our analyst team noted they think the break-even cost for the company is only 44 you know per barrel they've got 17 years remaining of drilling inventory and what we consider to be very high quality acreage has a pretty strong balance sheet overall management has been disciplined with their capital allocation over the years so this is one we're even using what i consider pretty modest oil price projections we do expect over the long term oil prices come down this still models out as being very undervalued and lastly one of the things i like about it too is that i think that you do have a bit of a downside hedge here that if the stock were to sell off any faster than the rest of the emp stock market i think this is one that would be a buyout target from some of the large global majors [00:38:27] Susan Jabinski: all right well thanks for your time this morning dave viewers and listeners who'd like more information about any of the stocks they've 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 and in the meantime please like this episode and subscribe have a great week [00:38:59] Speaker ?: you you