5 Stocks to Buy Before the Next Market Rotation I June 8, 2026

[00:00:00] Susan Jabinski: Hello and welcome to the Morning Filter Podcast. I'm Susan Jabinski with Morningstar. Every Monday before market open, I sit down with Morningstar Chief U.S. Market Strategist Dave Sequeira to talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. Now, before we start, there are a couple of housekeeping items. First, I hope to see some of you at the Morningstar Investment Conference in Chicago on June 17th and 18th. We'll be taping a segment for the Morning Filter at the podcast booth on Wednesday at 2.35 Central Time. I'm sitting down with Morningstar Senior Technology Analyst Will Kerwin to talk about many of the tech stocks he covers, which include Apple, Marvell Technology, Broadcom, and others. There's a link in the show notes with more information about the conference and how to register. And second, Dave and I are pre-taping today's episode on Friday, June 5th, before market open, so our comments don't reflect anything that's happened since then. And why are we doing that? Well, Dave is taking some well-deserved time off for a couple of weeks, but we'll somehow manage here on the Morning Filter without him. We have a couple of special episodes in the works while Dave is out, so please continue to tune in. All right, Dave. Well, I'm clearly jealous, so share with everyone what you're going to be doing on this well-deserved break. [00:01:48] Dave Sequeira: You know what? Almost 28 years and three kids later, my wife and I are finally making it back to Italy, our first time since our honeymoon in 1998. [00:02:02] Susan Jabinski: That's fantastic. [00:02:04] Speaker ?: Yeah. [00:02:04] Susan Jabinski: Have a great time. But before you go, I need to ask you some questions about the market and stocks. [00:02:11] Dave Sequeira: Market? What market? What stocks? Who knows? [00:02:14] Susan Jabinski: Yeah. Clearly, hopefully Dave doesn't have like one foot in vacation mode already. Okay, so let's get down to business. Starting with what's on radar this week on the economic front. Now we have a couple of inflation numbers coming out. So what do you think investors should be watching for here? [00:02:31] Dave Sequeira: So the question isn't, you know, is inflation going up or not going up? It's going up. So the question really is, you know, is this going to be a temporary increase in inflation or will this dissipate once oil prices finally start to fall whenever we get some sort of agreement, you know, with Iran? I mean, the real question being here, you know, is inflation at this point already starting to become embedded and does it actually start to continue to keep persisting, you know, even after inflation falls? And of course, if inflation, you know, persists afterwards, that's certainly going to be, you know, a big negative for both the economy and I think, you know, the stock market. So I think, you know, you're going to see a lot of analysis out there between the difference between headline inflation and core inflation. So everyone is going to be really watching to see if inflation is starting to bleed into core from headline at this point in time. Now, I think core is probably still under control for now, but of course, you know, the higher oil stays for longer, it's eventually going to bleed into core inflation as well. And then the other thing to keep your eye on is going to be PPI. I don't know if we talk about PPI all that much, you know, PPI, of course, being a leading indicator for CPI. But really the thing to watch here most closely is going to be on input costs for manufacturers, some of the ISM numbers, you know, ISM being the Institute for Supply Management. You know, they've been noting that, you know, a lot of manufacturers are telling them that not only are energy prices increasing, but they're just seeing a broad increase in commodity costs across the board, which means that it's not just energy. We are seeing inflation across all commodities, you know, at this point in time. So again, I'm very concerned about inflation. You know, I really hope that we get to the point where oil starts coming down meaningfully in the short term. If it's not, I think inflation, not only is it going to be here for months to come, it could be quarters to come as it works its way through the economy. [00:04:29] Susan Jabinski: Well, given that, Dave, the Fed meets later this month for the first time with Kevin Warsh is Fed chair, meaning is, of course, a little bit of a way out. But, you know, as of today, what's your expectation for that meeting? [00:04:41] Dave Sequeira: I mean, as of today, I still think the Fed is on hold for the foreseeable future, which is, you know, what you and I have been talking about for quite a while. You know, inflation is heading higher. It's going to stick around for a while. But if you look at the economic indicators, you know, the economy is doing fine, pretty well. You know, if you look at the Atlanta Fed GDP now, you know, that's telling us the economy is running at about a three percent run rate right now. So, you know, better than kind of that long term two percent that I think our economists expect, but not necessarily, you know, too hot at this point in time. I think the bigger question there with the economy is, you know, just how much of it right now is really being driven by the AI build out boom. And if that starts to slow, what happens with the rest of the economy? But for now, I think the Fed, it's probably more likely that they would have to be in a position to potentially raise rates, you know, later this year, you know, if inflation comes in too hot and or the economy starts accelerating from here, I think that they would have to bolster in the Fed funds rate. So at this point, you know, we'll see what happens. But I think they're doing a lot of nothing for right now. But I do have a bet for you. So with, you know, Chair Walsh, you know, conducting the meeting, I'll bet you right now you will not hear the word transitory this time around. [00:05:52] Susan Jabinski: Well, we will see. You'll probably still be in Italy. So I'll listen in and let you know how that bet turns out when you get back. All right. Well, the big news in the stock market this week, of course, will be SpaceX's anticipated IPO. It looks like as of right now, SpaceX is pricing its IPO at $135 per share, which translates to a valuation of about $1.8 trillion. Now, late last week, Dave sat down with Morningstar analyst Nick Owens, who covers SpaceX, and they talked about the company's economic moat, Morningstar's forecasts for revenue and margins, and what Morningstar thinks the company is really worth. Take a listen. [00:06:36] Dave Sequeira: Nick, thank you very much for joining us today. I know you've got an extremely busy calendar with everything going on. But so we've got the SpaceX IPO coming. We saw your note that you put out on Morningstar.com about it. So first of all, can you just really give us kind of that 30,000-foot view on what all does this company do and maybe kind of explain a little bit each of their main business segments? [00:06:58] Speaker 3: Absolutely. And so I cover aerospace and defense. And until February, I would say SpaceX was mostly an aerospace and defense company, mostly aerospace, really. They have a rockets business. They have a satellite communications business, which we think of as Starlink. And then now in February, they bought the ex-AI company from Elon Musk, which is looking into AI, AI infrastructure and potentially AI infrastructure in space. So those are the three buckets. And it's a sort of a fast-moving target given some of the growth rates. [00:07:34] Dave Sequeira: Can you give me a little bit more detail about like those three main business lines? [00:07:38] Speaker 3: Yeah. And so in 2025, the rocket business did $4 billion in revenue. Starlink did $11 billion. And the AI business posted $3 billion in revenue. And about half of that is advertising from Twitter. So that's really like the startup version. And I think what most people may not realize is just how big Starlink has gotten. It's a really money spinner. And we see a very highly profitable growth coming out of there for years. [00:08:09] Dave Sequeira: Okay. Now, of course, we wouldn't be Morningstar if we didn't talk about our economic moat rating. So in this case, I was hoping maybe not only could you describe what one economic moat rating for the entire company is, but the primary moat sources that kind of back up that moat rating. But I'm also curious, too, how do you really derive a moat rating for the entire company when you have three such very different types of businesses that make up the overall company? [00:08:34] Speaker 3: Yeah. There's a lot there. And I actually am really glad to be able to rely on the Morningstar methodology around moats, which I think is really rigorous. So given those three buckets, what I'll tell you is the first two, the rockets, the actual designing and making of the rockets and launching them, and the Starlink business, which uses satellites that are lifted on the SpaceX rockets, we believe those have a cost advantage. And that's one of our core moat sources. And within that, the two sort of flavors of that cost advantage are the R&D. Basically, they've built and tested these rockets to be able to lift more per kilogram than other rockets, and that gives them an operating cost advantage. And then they also have done it more often. They've gone down the learning curve. They've launched hundreds and hundreds of times more than the nearest competitor and launched thousands of more satellites than the nearest competitor. And so their average cost is lower. Their economies of scale have been, I think, firmly established. And so those two, let's say, if they were standalone, would have characteristics of what we would describe as wide moat businesses. The wrinkle, if you will, is that the stated purpose of the IPO is to raise money to invest mostly in AI, the next phase, if you will. And the jury's out, I would say, on whether XAI or the SpaceX AI business has a moat and or what it might be. There's some scenarios in which it might benefit from some cost advantage like Starlink in terms of putting thousands of satellites in space and so forth, but that's far from certain. And they're going to go spend, let's say, tens of billions of dollars to find out. And so in our methodology, the risk of value destruction that might happen from that scenario, let's say, overshadows some of the characteristics, the wide moat characteristics of the other businesses. So we net it out to a narrow moat rating for the company, particularly even though the XAI business is not a huge piece of the business today. The plan investment and the capital deployed will make it a bigger piece in the future. So in a normal conglomerate, let's say we had three businesses about equal size and one was wide and one was narrow and one was none, we'd probably end up at narrow for those averaging reasons. This is a little different, but worth, I think, acknowledging the core moat around their capabilities around launch is really quite impressive. [00:11:11] Dave Sequeira: Okay. Thank you. Now, of course, when we're talking about valuation and Morningstar, when we think about the value of a stock, it is the intrinsic valuation of the company ends up being the present value of all the future free cash flow that the company is going to generate. So I guess even before we get into how you're valuing the company, how do you come up with forecasts for this company? I mean, are you really trying to forecast three individual companies and roll that up into one? How do you drive that top line number overall and at each one of those segments? [00:11:40] Speaker 3: The answer is yes. It's much easier to look at this as three pieces because they each have different economics. And so for the rocket launch, it's how many rockets, at what cost times how many payloads. And for Starlink, it's sort of subscribers, right? And we have done some work on sizing what we think is, let's say, our view on the market opportunity there. Some of the numbers that are in the registration statement are very ambitious or sort of aggrandized in terms of they might soak up all telecom spending globally. We don't need to believe any of that to get to a pretty healthy growth rate and a good business in Starlink for XAI spent a lot of time building out, let's say, a version of what that business could look like. And really has is hinged on this idea of can there if a commercial data center in space or GPU cluster in space is is viable, what might it cost to own and operate and what might be, let's say, market rates for for AI compute. And, you know, spanning that out, I think we did 15 years just to see how it looks. And again, there's scenarios there. So so we are able to do forecasted cash flows for all three. And then we did probability weights on these sort of upside, downside and basic case scenarios, which really hinge on what might happen at the AI division. [00:13:18] Dave Sequeira: And we were talking earlier about when we talked about the rockets division earlier, I believe you said that you can look at the launch schedule that's already out there and get a pretty good idea. And how far out into the future does that launch schedule typically go? [00:13:29] Speaker 3: I mean, there's a there's a FAA schedule there approved, I want to say, years in advance. Beyond that, we have a forecast that is more or less from the company's stated plan. So they have plans for how many Starlink satellites they want to put out there. And then you have how many fit on a rocket, how many rockets do they own, how many rockets do they have to build to basically continue building out the Starlink constellation. Most of the stuff that that SpaceX puts up in space are Starlink satellites and then they kind of rent out the extra space to others. And that's its own strategy in terms of decreasing their costs by by increasing their volume in a way in house. But so that's where the forecast for that comes from. And there's one key assumption that that the Starship, the newest, biggest rocket that they had a test flight for the other day, that top stage has to be reusable for some of these numbers to really pan out. The idea is to be able to fly the same actual rocket, which is, you know, the space shuttle was the last time we had a upper stage reusable. But it had to go into the shop for months and months to have tiles replaced and so forth. So the goal, the engineering problem at hand is, can you have an upper stage that's reusable in hours? And I think there's a realm it's within the realm of possibility. It's just engineering. It's thermal resistance and metallurgy and, you know, things that I don't have expertise in, but I think is doable. And so if you believe that, then you get to these scenarios where it's worth, you know, that they can launch thousands and thousands of satellites, sometimes launching the same rocket multiple times a day. [00:15:15] Dave Sequeira: Well, that actually goes right into my next question and talking about costs. So it's really the similar question. So you've gone through like how you forecast revenue. So how do you think about forecasting, you know, the operating margin? How do you think about it? Not only for forecasting, you know, maybe here in 2026, but trying to think about what's the path of that margin, you know, over the next couple of years, maybe getting out. Through like your five year forecast period. [00:15:38] Speaker 3: So, um, again, on the, on the, on the rocket launch, it's relatively straightforward, especially from my perspective, covering other sort of airspace manufacturers. And given the volumes that we're talking about, again, if you assume viability of, of a reusable upper stage, then you're just looking at a, a manufacturing sort of supply chain. And, and, and, and cost curve where there's some savings, every doubling of how many you make manufacturing. And then there's the actual launch cost fuel and so forth, where, because the new starship has a launch bay or a cargo bay. That's so huge. The average cost to lift something into space goes down per kilogram every time they do it. And that this is an important part of what SpaceX has already achieved. You know, if you compare to the space shuttle, the launch cost today is, is 95% lower than it was then and continuing to go down. And so things that you wouldn't be, you know, if you have a business plan that you want to do bio biology experiments on a satellite in space. And then you got a quote 10 years ago for how much that would cost to launch, you'd say, well, nevermind. But now, um, all kinds of things are possible because of that, that dollar launch cost comes down. And so that's an interesting feature. And then that dollar launch cost comes down for Starlink to put the, the radio satellites up there. So, um, for, for, for, for space, that's, that's a fairly straightforward model. We, we, we, we can look at manufacturing costs and these average launch costs, and it's really dividing, let's say by the kilogram capacity of the rocket. Then on the satellite side, telecoms is interesting because once you have the network set up, you know, traditionally we look at things like fiber optic or mobile cell towers. But there's an analogy here to a, a, a, the satellite constellation, the cost to add a customer is very, very, very low. So the incremental profit from, from growing your subscribers and, and, and services is, is, is, uh, very attractive. Um, and the other interesting aspect that we found is when you think about say cell towers or fiber, the investments that you have to make to go reach. You know, another 10,000 homes or something they apply in that, you know, zip code. Whereas if you put a hundred new satellites up to widen your, your, the available capacity or spectrum of, of that network, everyone on earth could potentially be benefiting from those. Cause they're spinning around and, you know, they, they, they switch to other zones and, and provide coverage wherever they are. So, um, that is like dividing by a higher denominator in terms of the ROI for those investments. So that's, that's an interesting aspect of how we modeled out the potential profitability for Starlink on the XAI side. Still, um, it's, it's, it's, it's just far less certain. Um, we think that, um, it is also within the realm of engineering possibility to put a data GPUs in, in a satellite. They have solar cells. We think they can do sort of heat dumping on the backs of the solar panels. Uh, and the open question is whether it's, you know, enough, uh, economic savings versus a terrestrial data center for it to be, let's say, compelling or just interesting. Um, in, in, in this sort of moonshot scenario that we modeled, we're saying it's compelling. They might have some incremental cost advantage because sun is brighter above the atmosphere or solar power is free versus let's say natural gas or whatever on the ground, et cetera, et cetera. Um, uh, uh, but, but even on a sort of, um, good enough, we think there's a sort of a niche that they could potentially, uh, serve where you have this, let's say. Economically reasonable computing capacity in orbit, uh, it probably wouldn't have the same, uh, fast latency that your, your neighborhood data center would. Uh, but so there's going to be tons and tons of demand for AI computing that might be like overnight jobs or our, our, you know, our delay or what have you. I mean, the delays are not that long, but categories of AI work that could make sense for this network, uh, are what we modeled in. [00:19:49] Dave Sequeira: All right. Let's get down to the brass tacks. So we've talked about how you forecast revenue. We've talked about margins. So maybe let's just get to your valuation, you know, in your base case, based on, you know, your forecast and your analysis, you know, what do you think the intrinsic value of the company is today? And I guess, you know, the biggest question there too, then is what do you think really differentiates, you know, your base case, kind of some of those probability weightings that you've done versus, you know, what they're talking about that IPO being priced at in the market. [00:20:18] Speaker 3: Yeah. So the, the, the base case, we didn't really change our scenarios for rockets and satellites that much. So those two together add up to about $611 billion of enterprise value in our model. Um, let's say across the board, then it really, the question mark, the uncertainty in my view was around what could the AI business be worth and, and basically putting out there that there's some unproven things. So, uh, I'm starting to think of this as, or express this as like a nested probability of does Starship turn out to be reusable, let's say, and really scalable and do data centers in space end up, uh, mapping out in terms of, I think that the engineering is probably doable. The question is just, does it, does it, is it commercially, uh, uh, successful or, or reasonable? So we assign a 7% probability of both of those being true, what we call the moonshot scenario. And that actually gets us to a $1.9 trillion enterprise value, which is very close to what they're talking about raising, uh, you know, pegging the, the, the, the, the enterprise value at the IPO. And, um, let's say if, if, if the data centers in space are completely unviable. Uh, which is, uh, w w w well, if we think there's a 43% chance that not both of those will be true, um, and, and that they would actually spend some money to find out about the data centers in space, but then they would stop. And so that kind of subtracts a little bit from our base case scenario, but we think the, the most likely scenario is what we're calling a minimum viable product where they do have, uh, data centers in space. They may not be compellingly cheaper, but that they fill a nation and they work. And that, um, those three added up is what got us to the $780 billion average, uh, or weighted average, uh, enterprise value, which happens to come in very close to half of what the IPO price is. But I think the way I would kind of reframe that in specifically the Morningstar point of view, we talk about margin of safety and, and so forth. If the IPO is at 1.8 or 1.9 trillion market value and our upside scenario, which we think, you know, has some, some dependencies on it, uh, is about the same number. What that's saying is as a disinterested investor who's looking for margin of safety, you wouldn't necessarily pay full value, uh, for, for that scenario, but that's what the IPO investors are. Let's say being asked to do, right. Pay me for what it could be worth worth in the best case scenario. And that I just think that's, that's one way to think about it. Um, so we took the, the, the, the weighted average and that gets you to a lower number. [00:23:03] Dave Sequeira: Okay. Now, and I'm also thinking about when this IPO does occur, stock is now free to trade on the short term. I see a whole bunch of different technical reasons out there, which are going to influence how that stock trades in the short term, more than what the long-term intrinsic valuation of the company may be. So, you know, in the months after the IPO, maybe even like the next year or two after the IPO, like, is there anything specific that you would really tell investors that they should be watching for that could maybe sway, you know, how that stock, you know, could trend either, you know, up or down both from our own intrinsic valuation point of view, as well as how the market may price it. [00:23:40] Speaker 3: Absolutely. So, uh, I think I should answer that in two parts. So that fundamentals, the, the things to look at our progress on Starship, you know, reusability, whether that's announcements or demos for, for better heat shielding, et cetera, the, the more certain that becomes over the next eight, two, three years, then these probabilities go up, uh, uh, probability of success, let's say. Uh, and similarly on the data centers in space, again, the engineering we think is inside the realm of the possible. The question is what's the incremental cost and, and how that works through a commercial model for that. Um, and I think we'll know more inside of two or three years, uh, how those play out. So that's, and so those, the changes in those probabilities, as, as we get news, let's say, would change our fair value. [00:24:24] Dave Sequeira: Um, and in many cases, probably quite substantially then. [00:24:27] Speaker 3: Yes, and that's, that's, what's, uh, particularly exciting about a company at this stage of growth and in this sort of moment, right? Like, you know, uh, uh, takes more to move the needle on some of my other companies than just changing your probability. Um, the, you know, especially, I guess, because of the range of the outcomes, you know, we have negative 85 billion in the no go scenario. And, uh, uh, I think it's 1.3 trillion on top of the 600 in the, in the upside, in terms of things that could move the stock price. Um, and, and, and milestones to look at, I would simply think of that as, as in terms of supply and demand, um, they're only selling a couple of percent of the company here in, in, uh, what we think is next Friday. Uh, and there's more where that came from. There's lots of investors who've invested as, as a private entity in the company over the years. And they, they, most of them have, you know, agreed to lock up. So they're, they're 180 days out, or in the case of the chairman, Elon Musk, a year out, but there's still supply. Um, and then there's also, I would argue, unprecedented demand or fervent demand, right? So it's part of the AI trade, the AI story, uh, and you will have some portion of index funds, um, buying it because it's going to be included in the NASDAQ 100, I think 15 trading days. So those are things to watch and some of them are unprecedented. Um, you know, the, the price of a stock is set by the marginal buyer and, um, you know, also what's, what's frankly, par for the course on an IPO, a part of what you are, um, hiring the investment banks to run the books for is they, they, they, they can intervene in the market. They, they, they, they, you know, they, they want to, let's say smooth out supply and demand, you know, over trading sessions and so forth, especially if they know that some more, some more shares are going to come online, or if there's another buyer who's going to take some of them out of circulation, et cetera. So, um, uh, you know, can we use the, the old phrase of the markets, uh, a, a voting machine in the short term and a weighing machine in the longterm where things stand today, the market conditions seem quite favorable for an AI related, uh, stock. And, and I think there'll be plenty of demand, you know, almost for the foreseeable. Um, and again, they're only floating a few percent of the company today. Um, but there's going to be supply and, and it's an explicit aim of some of the existing investors to, you know, liquidate, uh, or at least diversify, uh, their holding some of them and holding it for, for almost two decades. So, um, that's just something to bear in mind, you know, as the market unwines and, and basically what we conclude is at the IPO on the day of, I don't see there being any margin of safety to that price. Um, and it is more likely than not in my view that investors, especially long-term investors will have an opportunity to buy at a better margin of safety. [00:27:21] Dave Sequeira: Got it. Well, thank you very much, Nick. I really appreciate your time and also really liking your article too. So I think investors really would behoove them to read it on morningstar.com, but in there too, I think one of the big takeaways is it's not like we don't believe in the company overall. When I look at a lot of the revenue forecasts you have out for 2035, you know, in many cases, they're multiple times, you know, greater than the amount of revenue this year. So I think, you know, that additional clarity that you provide in the article, I think will really help, you know, investors kind of encapsulate their own view, you know, as well as kind of understand what it would take to actually get to what that market price is today. [00:27:56] Speaker 3: Thanks, Dave. Thanks for having me. [00:27:58] Susan Jabinski: All right. Well, that was some good stuff. Yeah. There's a link in the show notes to Nick's analysis on SpaceX for those of you who, who are interested. All right, Dave, let's get to some other new research from morningstar and we'll start with one of your longtime favorite names in cybersecurity and that's Palo Alto networks. Now, results came in pretty strong and the stock, you know, it initially rallied after hours, but then it kind of pulled back. So what morningstar think of the results? [00:28:27] Dave Sequeira: I mean, from a fundamental point of view, like you said, it was pretty strong. I mean, revenue overall was up 31%. Now, specifically, the company called out their next generation annual recurring revenue of up 60%. Now, the operating margin was a little disappointing. It contracted 30 basis points, but at this point, I'm not all that concerned about that slight contraction. I mean, overall, when I read through our note, talk to our analysts, there's really just no change to our investment thesis overall. So in this case, when I'm looking at how the stock is trading, I think it's really still being impacted more by that on again, off again trade. You know, the sentiment that we have between, you know, AI hardware versus software, you know, still a lot of concerns out there that over time, AI is going to disrupt or displace, you know, software overall. So a lot of the days that you see the AI hardware stocks do very well, the software stocks, you know, all sell off. And conversely, when AI hardware doesn't do so well and sells off, that's when you see the strength, you know, in the software sector. So I don't think it really had anything to do with the company results, you know, per se. I think it's really just more about, you know, that thematic trading that we're seeing, you know, in the marketplace. Overall, we actually increased our fair value. You know, that was driven by an increase in both the short-term and median-term growth forecasts, specifically for their firewall business. You know, our analysts noted that he's just looking for firewall demand increase, you know, as data centers are being built out, they need more and more firewall security equipment. So that's a good tailwind for at least a multiple quarters yet to come for this company. [00:29:58] Susan Jabinski: All right, so Morningstar's new fair value on Palo Alto is now $285. So given that change in fair value, is the stock still a buy from your perspective? [00:30:09] Dave Sequeira: So I just have to, you know, first kind of just note here, I mean, even after this pullback, the stock is still up 50% year-to-date. So again, to some degree, some people probably just out there, you know, taking profit in this name. I don't think that this is like any big change in the trend and how this stock is going to trade. You know, at this point, it is a three-star rated stock. It's only a couple percent below fair value. Now, of course, we always prefer to have, you know, some sort of margin of safety. You really don't get that margin of safety in this name right now. But at the same point in time, you know, I'm a big fan of investing in the cybersecurity space overall. I think Palo Alto is one of the leaders here. So if you don't have exposure to cyber, you want to get some exposure, you could certainly start a small position here, you know, at fair value. But I would just leave enough dry powder so that if it does sell off, you know, then you can dollar cost average into the name. Or if you don't want that single stock exposure like we've talked about in the past, you could look to buy a cybersecurity ETF, the one that we've talked about in the past, the ticker is BUG, BUG. All right. [00:31:15] Susan Jabinski: So let's stay with the cybersecurity theme for another minute or two. We had CrowdStrike Report was down a bit after earnings. Morningstar raised its fair value estimate on the stock to $530. So, you know, unpack those results, what happened and how the stock looks from a valuation perspective after earnings. [00:31:35] Dave Sequeira: Again, strong fundamentally revenue up 26%. In this case, their adjusted operating margin actually expanded by five percentage points. And again, their annual recurring revenue, what they call ARR, was up 24%. So again, very strong, you know, top line growth. As you noted, we did increase our fair value. Really, that was just a matter of increasing kind of the long-term profitability and growth estimates. Your analyst team, you know, following the earnings in the conference call, they just have greater confidence in the AI strategy, AI-associated revenue here. You know, for example, they talked about AI detection and response. The ARR grew more than 250% sequentially. Having said that, after the fair value increase, it is still a two-star rated stock, meaning that we think it's trading, you know, on a risk-adjusted basis, you know, too far ahead of our long-term intrinsic valuation. [00:32:28] Susan Jabinski: The dot-com stock was down more than 12% after reporting. So, Dave, what unsettled the market there? And then, of course, what did Morningstar think of the results? [00:32:37] Dave Sequeira: I mean, the results themselves were fine. I mean, we thought they're in line with what our own expectations were. We thought the company gave, you know, what we would consider good guidance for the July quarter. You know, management maintained their own outlook. But I think right now we're just in an environment specifically for AI stocks where good enough isn't good enough. And in this case, because of that, the stock tanked. Everyone's looking for companies, you know, to continue to keep, you know, increasing their own guidance. And that's not what we saw here. In fact, our analyst thinks the company's actually guiding pretty conservatively. You know, the company had, quote, more than $100 billion in AI revenue for 2027. Our own forecast is for higher revenue than that in fiscal 2027. And we're looking for that to grow quite substantially. We're modeling close to $200 billion in AI revenue in fiscal 2028. Now, in this case, our analyst says he has a lot of confidence in those forecasts, you know, based on what he can see out there. He says he has pretty high visibility, you know, based on the forecasted growth for Anthropic and OpenAI XPU ramps. So, again, this is one where, you know, you've got a 40% compound annual growth rate for revenue over the next five years. A little bit of margin expansion on top of that gets you 46% earnings growth over the next five years on a compound annual growth basis. You know, stock, you know, maybe it looks a little expensive here based on 2026 earnings estimates of 35 times. But based on our growth estimates for 2027, that drops to 21 times. [00:34:07] Susan Jabinski: So then, Dave, you know, given those forecasts and Morningstar's, you know, valuation on the stock, is Broadcom attractive? [00:34:14] Dave Sequeira: It is. And, in fact, I think this is still, like, one of our top picks in the tech team's, you know, list. It's a four-star rated stock at a 37% discount. And this is one of those stocks, and we haven't talked about it in the past, and maybe we should do a future show on what GARP means, and that's growth at a reasonable price. And I think this really kind of fits that definition when you look at the amount of growth that we're modeling in over the next couple years and look at even though that P.E. ratio might be relatively high on a forward basis based on this year, just how quickly that forward multiple comes down in 2027 and 2028. [00:34:48] Susan Jabinski: All right. Well, I've just made a mental note of that, Dave. Future show, GARP. Got it. Okay. So, one of your picks, Berkshire Hathaway, was in the news last week after it actually made a couple of investments and put some of that massive cash stockpile to work. So, first, Berkshire bought Taylor Morrison Home. So, what are your thoughts on that acquisition? [00:35:10] Dave Sequeira: I mean, in the greater scheme of things, when you look at Berkshire and just the size of Berkshire, realistically, this really isn't all that meaningful one way or the other. Now, as far as like Taylor Morrison, that's not a company we covered, so I have no opinion specifically on the valuation there. But I think what's more interesting would be to try and know, you know, was this a purchase because, you know, Greg Abel is now making a timing bet on home building and the recovery there? Are they starting to see a recovery in home building, you know, here in the short term? Or is this maybe just a company where they've had their eye on it for a while? Home building, of course, you know, being somewhat in the doldrums, those home building stocks having relatively low valuation. So, maybe it's just a matter of they wanted to buy this company for a while now and now they finally got the opportunity to do that. But I think it's interesting because, you know, the company has a number of other positions in home building stocks. They own Clayton Homes, so this might be a case where maybe they actually have a little bit better insight than the market, you know, on the home building sector. [00:36:10] Susan Jabinski: That's interesting. They also have, I think, a couple of home building stocks in the public portfolio. So, you know, it'll be interesting to see if they do anything with those. All right. Yeah. Well, Berkshire's other big news this week was that it plans to invest an additional $10 billion in Alphabet as part of Alphabet's $80 billion announced equity raise. And, you know, Berkshire doing that will lift Alphabet's up to about a 9.5% weighting in Berkshire's portfolio. So, what are your thoughts on that one, Dave? [00:36:42] Dave Sequeira: Well, obviously now, you know, Alphabet is a core holding, you know, in their public equity portfolio. And I think this to some degree shows how management under Greg Abel is now more comfortable with investing in technology, you know, as opposed to historically, you know, they kind of steered clear that, you know, under Warren Buffett. So, we'll see if this is maybe a trend, you know, going forward. I also wonder, too, with Greg Abel taking the reins here relatively recently, I wonder if maybe he's starting to feel some pressure, you know, to put that huge cash pile to work. So, this might be a case where we start seeing a lot more of these larger investments over the next couple of months. [00:37:17] Susan Jabinski: All right. So, then just strictly from a valuation perspective, how's Berkshire look today? Would you still consider it a pick? [00:37:24] Dave Sequeira: Yeah. I mean, in fact, you can't be any more of a value stock than buying into Berkshire Hathaway. It's a four-star rated stock. It trades at a 7% discount. Now, a 7% discount may not necessarily sound like that much, but you have to remember, I think it's like, what, a third of their portfolio is in cash. Cash is always worth, you know, 100 cents on the dollar. So, the way I look at this, you know, that 7% discount really should be attributed mostly to the private equity portfolio that they own. So, that tells me you're buying that private equity portfolio at a much larger discount. [00:37:55] Susan Jabinski: All right. Well, speaking of picks, it's time for the stock picks portion of the program. Now, Dave recently published a new stock market outlook, and you can find a link to that in the show notes. Now, in that report, Dave's suggesting that investors return to a barbell construction with their stock portfolios. And today, that means taking some profits in that AI growth stocks portion of the barbell and investing the proceeds in value and energy. So, Dave's picks today are undervalued value stocks to buy to restore that balance in the barbell. Okay. Your first pick is Verizon. Run through the numbers on it. [00:38:33] Dave Sequeira: Yeah. And to be honest, it's been a while since we've talked about Verizon. Now, I can't remember when we first started talking about the wireless sector, but it was, you know, three or four years ago, I think, at this point. And our pick originally was AT&T, but then we swapped to Verizon after AT&T, you know, quickly moved up. So, I think the first time we recommended Verizon was on the July 2024 episode of The Morning Filter. We re-recommended Verizon a number of times in 2024 and in 2025. At this point, though, it still looks pretty attractive. It's at a 15% discount, puts it in four-star territory, still a very attractive dividend yield. It's over 6% at this point. And, again, medium uncertainty, narrow economic mode. So, again, it's just kind of got all of those, you know, traditional value play metrics that we're looking for. [00:39:23] Susan Jabinski: Yeah. You know, I mean, it definitely lands in that large value part of the style box and, again, has that great dividend yield cushion. Why else do you like it for the barbell in particular? [00:39:33] Dave Sequeira: Again, traditional value play. I mean, fundamentally, results, they're just kind of chugging along. Company is certainly not a fast grower. We don't expect it to be a fast grower. But when I look at our model here, I think it's still on the conservative side. If I look at the top line, our revenue five-year compound annual growth rate is only 2.4%. So, essentially, maybe just, you know, kind of the Fed's 2%, you know, inflation target plus a little bit. You know, earnings, we're looking for a compound annual growth rate of 8.3% because we are looking for margin expansion over the next five years. Now, I have to admit, our original investment thesis is probably playing out more slowly than what we expected. I mean, the wireless business is still very competitive. We expect it to remain competitive. We are looking forward to become more of an oligopoly over time. So, essentially, there's really only the three main wireless providers out there today. We expect over time they'll compete less on price, compete more on other types of, you know, factors in the wireless business. As such, we are looking for that margin expansion. Today, that stock only trades at nine times forward P.E. multiple based on what we're expecting for earnings this year. And like I said, you're still picking up over a 6% dividend yield. All right. [00:40:48] Susan Jabinski: And your second pick this week is from a sector that's considered defensive, and that's healthcare. The stock pick is Thermo Fisher Scientific. So, give us the highlights on this one. [00:40:58] Dave Sequeira: So, Thermo Scientific is a four-star rated stock, trades at a 14% discount, not much of a dividend, well under 1%. But I would also note the company does use a lot of its free cash flow to buy back their stock. I think, on average, they buy back, you know, 1% to 2% of the outstanding stock every year. And they do use other free cash flow to make smaller, you know, tuck-in acquisitions. So, again, you may not necessarily be getting anywhere near the dividend yield you would like to. But, again, this is a company that's always used their free cash flow, you know, very wisely. We rate the company with a medium uncertainty, and it does have a wide economic moat. [00:41:33] Susan Jabinski: Now, the healthcare sector overall is undervalued. So, why do you like Thermo Fisher specifically above other stocks in the sector? [00:41:41] Dave Sequeira: I mean, personally, I followed for Thermo a number of years. I've always thought that it's just been a very high-quality company. If you look to the price-to-fair value chart on Morningstar.com, and if you look over the past decade, there's only been a couple of opportunities where you could buy this stock at, you know, that discount at that margin of safety that got you into that four- or five-star territory. So, in this case, it's a large-cap value stock in the healthcare sector. Company sells scientific instruments, lab equipment, diagnostic consumables, life science reagents. So, again, to me, it's a very defensive type of name. Now, this was a five-star pick in mid-2025. Stock from there ran up 50%, got it well into three-star territory. And over the past couple of weeks, it's now given back some of that rally. To some degree, I think this is just a story where the market, for whatever reason, just isn't interested. It's not an exciting growth story right now, but the results were fine for the first quarter. Guidance may be a little subdued on China weakness. That wasn't necessarily a surprise to us. And, again, when I look at our forecasts, you know, going forward compared to what this company has performed at in the past, looks conservative to me. So, our five-year compound annual growth rate is only 5.5%. We're looking for some margin expansion as things normalize. So, our earnings five-year compound annual growth rate is 11.6%. And if you look at the multiples, pretty reasonable in my mind, you know, 19 times this year's earnings, 16.5 times next year's earnings. [00:43:13] Susan Jabinski: Well, your next stock pick is Duke Energy. It's from another sector that's traditionally been considered defensive, which is, of course, utilities. So, tell us about it. [00:43:22] Dave Sequeira: So, it's currently a four-star rated stock, trades at a 7% discount, has a 3.5% dividend yield. We rate the company with a low uncertainty and a narrow economic moat. [00:43:33] Susan Jabinski: Now, the utility sector is fairly valued, and Duke's a little bit undervalued. So, besides that relatively attractive valuation, what else do you like about Duke? [00:43:42] Dave Sequeira: So, well, first of all, Duke is the largest regulated utility by market cap. We think that they're generally located in very favorable regulatory environments. And one thing I like about this one versus some of the other utility stocks is a lot of the other utility stocks are still in overvalued territory. I mean, a lot of them have come down from where they were earlier this year, but they're still not attractive because we think that there's too much growth that's being priced into those stocks based on AI. In this case, Duke is not an AI play. Most of its jurisdictions, we think, are in areas where AI data centers are not being built, but they have very good demographic growth profiles. So, if you look at their business, I think over a third of their business is in North Carolina. Another quarter of it's in Florida. 12% in South Carolina, so all states that's seeing, you know, population and demographic growth. The other areas they're in are like Indiana, Ohio, and Kentucky. So, this is just a story between, you know, improving rate regulation, improving operational execution. You know, we are forecasting at the very high end of management's, you know, 5% to 7% annual earnings growth guidance. [00:44:49] Susan Jabinski: All right, next pick is a real estate investment trust. It's realty income. Give us the key metrics on it. [00:44:55] Dave Sequeira: So, realty income is a four-star rated stock at a 20% discount to our fair value, 5.4% dividend yield. We rate the company with a low uncertainty and no economic moat. But in this case, I'm not concerned about no economic moat because there's very few REITs, very few real estate plays that we do assign an economic moat. [00:45:15] Susan Jabinski: Now, you know, real estate's having a decent year, but the sector overall is trading below Morningstar's fair value. So, given that, why is your pick realty income specifically? [00:45:27] Dave Sequeira: Well, like you said, I mean, real estate has actually been kind of, you know, very quietly having a very good year. If you look at the Morningstar U.S. REIT index, it's up almost 10%, you know, year to date. So, I think this is just one of those ones where it's been an undervalued sector, but it's been so overshadowed by the media focus on AI that people really haven't been, you know, paying attention to it. Now, in this case, realty income has been one of our go-to picks for a long time in the REIT sector. You know, the company has what we consider to be defensive characteristics. The type of leases, you know, that they sign are called triple net leases. So, essentially, they can directly pass through any of their own inflationary cost increases directly to tenants. There are also very long leases, so that does lower the risk of, you know, near-term lease reductions. Very broadly spread out. I think they have over 15,000 tenants. Generally, they're very service-oriented retail type of tenants. So, you know, the largest type is convenience stores. That's over 10% of their retail base. Then you have grocery stores for 8%, dollar stores for 7%, drug stores, maybe 6% to 8%, quick service restaurants, home improvements. So, again, these, in my mind, are very defensive type of tenants. I've talked about for years now how I prefer still steering clear of urban office space. Fundamentally, performance is in line. Last quarter, re-leasing spreads were up 3.4%. Leases to new tenants up 7.5%. We've seen the company make what we consider to be some pretty sound acquisitions at reasonable cap rates. And the stock's only trading at 13.5% price to funds from operations. [00:47:04] Susan Jabinski: All right. And your final pick this week is from the energy sector. It's Devin Energy. Give us the highlights. [00:47:11] Dave Sequeira: Yeah. So, Devin is a four-star rated stock at a 16% discount, 2.5% dividend yield. Although I would note that they have what's called a fixed plus variable dividend model. So, as oil prices are high and they have more free cash flow, they will pay a variable dividend on top of that fixed dividend. Now, we do rate it with a high uncertainty, which, of course, in the energy sector and being an oil producer is not surprising. But we do rate it with a narrow economic moat, you know, based on their cost advantages. [00:47:41] Susan Jabinski: So, talk a little bit about why energy may still be attractive this year, you know, given current events. And then explain why Devin is your pick specifically. [00:47:50] Dave Sequeira: Well, if you remember coming into the year in our 2026 outlook, we noted that energy was one of the most undervalued sectors. And as part of the original barbell strategy, we started the year off with in the value sector, we highlighted, you know, energy as being one to overweight. Then on the March 30th episode of the morning filter, it was when we recommended to start selling those energy and those value stocks to be able to reinvest into the growth category, specifically tech and AI, because value had done very well at that point. It was up, you know, three to four percent, whereas growth stocks and AI and tech stocks had really gotten hammered. And it was just at that point, the valuations were telling us to change that barbell into being overweight growth stocks. Now, at this point, you know, we have seen energy stocks, you know, sell off off of their highs. You know, energy prices, oil prices still above $90 a barrel. So, we're now at the point where some of these energy stocks are starting to look attractive again. So, I think this is one where Devin has long been kind of that go-to pick here. I mean, originally it was Exxon, but once Exxon moved into three stars, you know, we moved to Devin. And, you know, we've talked about this one many times in the past. I don't think there's a lot of need to cover, you know, old ground. I think in my mind, this is more about managing your portfolio positioning than it is about Devin, you know, specifically. So, in this case, I think you can repurchase the stock here cheaper than, you know, where we had recommended to sell it at, you know, end of March, you know, beginning of April. And, in this case, you know, if we do have a resolution with, you know, Iran in the near term and oil prices fall, I still don't think they go right back to pre-conflict, you know, type of levels. I think it'll take a while for oil prices to normalize. And in our model, I mean, we still look for oil prices well below even where they were, you know, pre-conflict levels. So, I think you still have a margin of safety in this name, even when oil prices come down. In the meantime, you know, if there's no resolution for a while, oil prices, you know, maybe move up higher as we start using up, you know, more and more storage and inventory. This would be the one that I still think has kind of that upside potential to get back to, you know, its highs, if not even go higher from there. [00:49:57] Susan Jabinski: All right. Well, thank you for your time, Dave, and have a wonderful break. We will miss you. [00:50:02] Dave Sequeira: Thank you. [00:50:03] Susan Jabinski: Viewers and listeners who'd like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. Now, we hope you'll join next Monday for the Morning Filter podcast at 9 a.m. Eastern, 8 a.m. Central. Next week, Dave and I already have a special episode for you, our audience in the hopper. We'll be talking about core stocks to buy at the right price. But until then, please like this episode and subscribe and have a great week. [00:50:31] Dave Sequeira: Arrivederci. [00:50:47] Speaker ?: We'll see you next week. Bye.