5 Stocks to Buy That Defy Value vs. Growth I July 20, 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's been going on in the market, what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. Now we have two programming notes to share. First, we dropped a bonus episode of the Morning Filter last week focused on dividend stocks. So if you haven't done so already, be sure to check out that episode wherever you get your podcasts. And then keep an eye out this week on Thursday, because we'll be dropping another bonus episode of the Morning Filter. We're trying to keep Dave really busy. The upcoming bonus episode is actually a replay of Dave's third quarter stock market outlook webinar, where he was joined by Morningstar economist Preston Caldwell. Dave and Preston shared their outlooks for stocks, bonds, inflation, interest rates, and the economy for the rest of the year. So be sure to tune in. All right, Dave, good to see you. Let's start by talking about last week's market activity. Stocks finished the week down about one and a half percent, but tech stocks were down more than three and a half percent. So walk us through kind of what happened and why you think it happened. [00:01:44] Dave Sequeira: Good morning, Susan. You know, when you look at the broad market movement and you look at those individual stocks that move the most, both those that move to the downside as well as some of the ones that move to the upside, it's still all about the longer term outlook for artificial intelligence. So I'd say last week, you know, in addition to those of us that had to deal with all the smoke coming down from the Canadian wildfires, I think the medium term and the longer term for outlook for artificial intelligence also was becoming increasingly hazy. You know, a lot of the things I'm hearing about that there's just a lot more focus on just how expensive artificial intelligence is. Yeah. A lot of users are talking about that. It's not necessarily producing the results that they're looking for and that they have to use increasingly larger numbers of tokens in order to be able to generate what they're looking for from artificial intelligence. Now, I'm also hearing increasing concerns about, you know, Chinese competition out there. You know, a lot of that seems to be getting better, but at the same point in time, it's also becoming cheaper. So I think that's a big concern from the market. And then lastly, you know, there's also discussion that there might already be enough compute capacity out there for what's currently needed. So I think when you look at things like meta talking about selling, you know, AI capacity and cutting their token prices, it's really causing a lot of concerns in the marketplace about whether or not that CapEx spending that people expect for 28 and 29 really is going to hold up or not. Now, of course, offsetting that, we had a lot of companies talk about, you know, AI on their earnings call. We had a couple of early indicators out there still showing that, you know, CapEx spending plans, at least for 2027, are still rising. The infrastructure for the buildout boom, still full speed ahead. Adoption rates generally still growing for artificial intelligence. So there's still definitely a long runway ahead. So it's a matter of looking at that price volatility, really just indicating kind of that back and forth, you know, risk on, risk off sentiment for these artificial intelligence stocks. [00:03:44] Susan Jabinski: All right. Well, let's talk inflation for a minute. We had CPI and PPI numbers come out better than expected last week. So what did the market make of it and what could these numbers mean for the Fed this year? [00:03:57] Dave Sequeira: So when you take a look at the numbers and break it down between both the headline and the core, it shows that, you know, inflation was slowing pretty rapidly last month. Now, as far as what the market took out of it, you know, essentially what they said is we still think they're going to be Fed future rate hikes in the future, but at this point, not necessarily here in the short term. So before the release, it was about a 50% probability that the Fed was going to hike as soon as this meeting here in July. That's fallen all the way down to now being below 15%. But for the September meeting, there's still a 50-50 probability that they may hike at that point in time. And the market's still pricing in one, if not necessarily two hikes before the end of the year. So we saw a big pop, you know, well, not big, but we saw a pop in stocks when those numbers, you know, first came out, but they quickly faded. And I think there's really two main reasons. So one, of course, one month is not necessarily indicative of a trend. And in fact, oil prices have started to move, you know, back up again. So the lower inflation this past month, it doesn't eliminate the need for rate hikes. It just pushes them back until maybe, you know, later this year. And second, I'd say inflation, I think it's just low on the list of market concerns right now. You know, we're going into earnings season. We've got to figure out all the implication for the earnings reports, both on, you know, the individual companies as well with the market. Really, it's just grappling with what those implications are for artificial intelligence, just trying to understand, you know, of all the AI growth that people are expecting, yeah, how much is already priced in and whether or not there's still further room to run. [00:05:28] Susan Jabinski: Well, you mentioned earnings season. So that's a good segue because we do have that heating up this week. So let's talk about some companies you're keeping on radar, starting with Alphabet. Now, Alphabet's been a pick of yours, and the stock is trading at a discount to Morningstar's $433 fair value as we head into earnings. So what are you going to want to hear about? [00:05:48] Dave Sequeira: I think it's too early for the company really to be talking about any 2027 guidance or color at this point in time. So I think the market's really just going to be focused on the status of their AI models, trying to find out what the rollout schedule is or their timing on new models that might be coming to the market, and then get a better understanding of the accuracy, the efficiency, and the performance metrics of what those new models are going to be, just so they can compare them against, you know, some of the other models that are out there. Other than that, you know, just kind of like the regular update on the impact of AI on search and monetization, still, you know, trying to understand kind of that revenue path and the guidance for Google Cloud. That's where they host artificial intelligence for their clients. Then lastly, I think more details on external sales for TPUs. I think that's going to be a big one for the semiconductor sector, just to see how much more of that they're now selling into, you know, third party and clients, as opposed to just using it for their own needs. [00:06:45] Susan Jabinski: Now, Tesla reports this week, too, Morningstar thinks Tesla is worth $450 per share. So what should investors be looking for here? [00:06:54] Dave Sequeira: When it comes to Tesla, I think there's always two kind of trains of thought that you need to take as far as like how that stock is going to perform and any potential changes to the fair value. So, of course, you know, there's exactly what's going on with the numbers. So you have to look at it from that financial perspective. So we already know that, you know, second quarter auto deliveries were pretty strong. So I know our analyst team wants to figure out what exactly the financial impact of the strong deliveries are. You know, we should see pretty good fixed cost leverage, which should improve, you know, some of the margins. So we'll see if that pans out or not. We want to get a better understanding on the free cash flow metrics. You know, the company has a big CapEx cycle that they're really ongoing, but even more that's probably going to be spent coming up, you know, specifically on full self-driving and the Optimus robots. But it's not just all about the numbers, of course, we've talked about Tesla. It's really a story stock at the end of the day. So that short term trading is really about the story. So in this case, you know, we want to get an update on Tesla's robo taxi rollout plans, what's going on with the geographic expansion, the cyber cab, and then also get some updates on when full self-driving version 15 is going to be released. And then any other updates they might have on the Optimus humanoid robots. [00:08:09] Susan Jabinski: Now, Intel also reports this week. Now, the stocks pulled back a little bit during the past month, but it's nevertheless, it's one of those triple digit returners this year. So what are you going to be watching for with this one? [00:08:21] Dave Sequeira: Yeah, I mean, first of all, you have to kind of put what's going on with this company over the past couple of years in the context to understand what people are really going to be concerned about for the quarterly earnings. So the company really has missed out on the artificial intelligence semiconductor race. This stock had been in a pretty long term downward trend. You know, it peaked in 2021 and just kept moving down until it bottomed out in July 2025. And then this year, the stock started to recover. In fact, it doubled. It was around $50 in April. You know, it peaked at $100. Now it's just below $100. So the reason for that is really because of what's going on with the AI build out boom. It's led to a shortage in the CPUs. Those CPUs, of course, are needed to efficiently manage AI workloads. So coming into this quarter, I think the big question is going to be what's going on with their gross margins and any gross margin guidance that they can provide. So what I want to understand with this company is this similar to a lot of these other commodity oriented hardware tech companies where the shortage is allowing them to charge any price that they want, or in this case with the CPUs, is there more limited pricing power? We also want to get an update on the outlook for that CPU demand, just trying to understand, you know, how much longer that shortage is going to last before we can see supply catch up. So when I look at our current forecast here, you know, we're currently projecting, you know, CPUs essentially to double for the next couple of years. [00:09:49] Susan Jabinski: So then, Dave, you know, based on the run up in the stock and, you know, the answers to those questions you just posed, you know, how could this stock, you know, how could Intel trade after reporting? [00:10:02] Dave Sequeira: So this is one where you have to remember, we do assign the company with a high uncertain. I'm actually sorry. It's actually a very high uncertainty rating. So our fair value right now is $90 a share trades like around 95. So a little bit above what we think the stock is worth, but still close enough that it's a three star rated stock. Now, I would say because of that very high uncertainty, I really wouldn't be surprised to see, you know, any large fair value changes here, both to the upside as well as potentially to the downside. And that's what the market's looking for, too. So I took a quick look at the options market last Friday. The implied vol on the couple of week options right now is 120. So very elevated. And if you run the math behind that, that tells me that the market is pricing in, you know, either up or down move of up to 17% over the course of this week. [00:10:53] Susan Jabinski: Now, Charles Schwab is a recent pick of yours. The company will hold its quarterly investor day this week. Stock looks slightly undervalued heading into earnings. It's trading below Morningstar's $117 fair value estimate. So could there be any surprises here or probably not? [00:11:10] Dave Sequeira: I mean, there always can be. But in this case, I'd say probably not. You know, for them, their earnings reports tend to be pretty low volatility events. So in this case, you know, we'd be looking for things like, you know, net new asset growth, client cash balances, trading activity. Now, in this case, trading activity should be pretty strong. A lot of retail trading going on in the marketplace over the past quarter. And then lastly, like net interest margins, you know, any kind of guidance there with what we've seen going on with the yield curve and what the Fed may or may not do over the second half of the year. But when you think about the stock and really how it's been trading over the past year, to some degree, it's kind of got caught up with these other stocks where people are concerned about how AI may disrupt or displace their business over time. So in this case, if management can give any kind of clarity on how they think things like, you know, financial advice might change over time if artificial intelligence is used in order to give financial advice to clients or some of the changes in like the, you know, the back end of like using AI to sweep cash into higher yielding alternatives away from bank accounts, how that might impact their net interest margins. But yeah, other than them talking about artificial intelligence and how that may impact their business, I think it probably should be pretty low volatility event. [00:12:27] Susan Jabinski: Okay, now we have alternative asset manager Blackstone reporting this week. So why is this one on your radar, Dave? [00:12:34] Dave Sequeira: Well, a couple of different reasons. So this is a stock that we recommended back, I think it was on the March 9th morning filter. And I'll admit, this is one where I think I got more lucky than, you know, was smart on this one. Part of the investment thesis then is we just thought there was just too much negative sentiment in the private credit markets, even with this negative IM on kind of what still needs to go on there. The stock just went down, you know, too far, too fast at that point in time. Then earnings came out. The stock had a nice pop afterwards. It moved from a four star into three star. So, you know, we quickly recommended in April to take the money and run, you know, on that one. So in this case, I'd say it's not that I'm interested in Blackstone in and of itself. All that much is really just trying to understand and listen for what's going on with private credit in those parts of their portfolios. So the questions here are, you know, how's the fundamental performance of those issuers in private credit doing? And then I also want to understand what's going on with pricing of those assets in those portfolios. Of course, being private credit, there's no public market. So I suspect that we could see a lot of write downs in a number of those positions, or at least we should be seeing some write downs in a number of those positions. You know, especially because I'm hearing that the SEC is taking a much closer look in pricing of those portfolios as well. So I mean, net net, in my opinion, I do think that private markets could be a systemic risk if we see them sell off too far too fast. And in this case, if you think about what's going on over the past 10 or 15 years, private credit has just become an increasingly larger portion of how a lot of highly levered companies, you know, fund themselves. And so if that funding were to dry up, you know, it would be bad for those individual companies. I think it'd be bad for the economy overall. And I do think it would end up being a big headwind to further growth in the stock market. So it's just one of these cases where I think there are a lot of losses there. Those losses will need to get recognized over time. It just becomes how quickly do they need to, you know, take those losses here in the short term, or can they end up, you know, really kind of taking these losses and pushing them out over the next couple of quarters and try and, you know, do it so they don't have to take, you know, too much all at once. [00:14:52] Susan Jabinski: All right. Well, we have a trio of defense names reporting this week in Northrop Grumman, Lockheed Martin, and RTX. Now Northrop and Lockheed look undervalued as we head into earnings, while RTX is about fairly valued and all three stocks did well in the first quarter, but have since pulled back. So Dave, tell us what's been going on with defense and why you're watching these names this week. [00:15:14] Dave Sequeira: Well, we're watching all three names because at some point in time, all three of these stocks have been recommendations on the morning filter. I think the very first one a couple of years ago was RTX, but then that ended up going up into three stars. So at that point, we then swapped out for, I think, Northrop or Lockheed. And, you know, all of them, as you noted, had done pretty well for probably the past year or so. And in fact, they did very well coming into this year. But then they ended up selling off in March. And honestly, I don't know what it was that triggered these stocks to sell off over the past couple of months. Overall, there's still just a good long term tailwind here. I mean, defense spending is doing nothing but heading up in the U.S., Europe, Middle East, rest of the world. So with that tailwind behind, I think all of these still look attractive in our mind. So I'll just be listening forward. Just is there anything different on the conference call than what's currently in our investment thesis? And if not, then I still think that Lockheed and Northrop look like pretty attractive picks here. [00:16:14] Susan Jabinski: All right. Well, let's move on to some new research from Morningstar. Start with your key takeaways from big bank earnings last week. So what'd you think? [00:16:23] Dave Sequeira: Well, I mean, as we talked about last week, our team was looking for pretty solid to even strong earnings reports. And I would say the earnings reports that came out were actually exceedingly strong. So in this case, the strength really came from two different divisions. It came from the investment banking and the equity capital markets groups. Now, I also think that those should have pretty good results for the second half of the year, as we expect a couple of other AI companies and a couple of other companies, you know, to go public as well. However, when you think about the value of the big banks, you know, the short-term excess returns that you get in those groups really aren't something that's going to change the long-term valuation of the bank all that much. When you think about banks and where they make their money and where the long-term value is coming from, it's still all about net interest income. Now, this past quarter, net interest income was relatively weak, maybe even kind of flat. And considering, you know, the Fed is now going to hold off on raising rates, you know, that should bolster it in that interest income for a couple of more months. But it really doesn't change how we think about the long-term value of these companies. Now, we did make a couple of small fair value increases. JP Morgan, Bank of America, Wells Fargo. But when I look at those small fair value increases, they're really just kind of in line with what you would expect those to go up over the longer term, in line with kind of that annualized, you know, cost of equity type of analysis. We did lower the fair value on Citibank by a couple of dollars just to increase our forecast for some higher expenses. But it wasn't anything that really is indicative of a change in the story overall. [00:18:00] Susan Jabinski: All right. And viewers can visit Morningstar.com to see the details of those fair value changes. All right. We also had a couple of tech names reporting last week. Morningstar raised its fair value estimate on ASML by quite a bit after earnings. So walk us through the results in that fair value hike. [00:18:18] Dave Sequeira: I mean, the results in and of themselves, very strong. But when I think about the fair value and why we hiked it as much as we did, it wasn't about the quarterly earnings. You know, the company is talking about increasing the capacity that they have for the amount of throughput. So when our analysts, you know, incorporated that higher capacity into the model, that's really what drove, you know, that fair value increase. So in this case, they're increasing capacity by 30% in 2027. And I think they're potentially increasing capacity by another 30% in 2028 as well. Now, we think that that 2027 capacity is essentially already booked. And we estimate that about 30% of that 2028 capacity increase is probably already booked as well. So when we made those increases in our model, taking it out the next couple of years, we increased our revenue forecast all the way out to 2030. So for example, our 2030 revenue forecast, you know, was 60 billion, which was the high end of their longer term guidance. We're now expecting that to be 70 billion. So it's really that capacity increases incorporated into our model that drove that fair value change. [00:19:27] Susan Jabinski: All right. Now, Morningstar also raised its fair value on Taiwan Semiconductor after earnings by 27%. So now we peg that at $534 per ADR. So how did the results look for Taiwan Semiconductor and why the fair value boost? [00:19:42] Dave Sequeira: Again, results were very strong. But the story here isn't about, you know, the historical results. It's all about even greater than expected future growth. So again, we updated our model and we took into account, you know, an increase in the company's revenue guidance. I think they increased their revenue guidance for this year to being over 40%. But even a bigger impact than that was that the company increased its 2026 CapEx budget by $8 billion, up to $62 billion, essentially a 15% increase. Now, in this company's case, management is known to be pretty conservative. And so I think there's probably even more CapEx and more capacity increases, you know, yet to come in the second half of the year. And our assumption is that the CapEx increase this year is because they're already talking to their clients, already talking to the hyperscalers. And so I'm assuming that those hyperscalers are also increasing their 2027 budgets, which is what the company is planning for right now. [00:20:42] Susan Jabinski: All right. And viewers and listeners, I didn't have this information. And my question and I should have, we did increase that ASML ADR fair value to $2,050 per share. So that's our fair value. So, Dave, now we raised, you know, these fair value estimates on both of these stocks, yet I think they both pulled back after earnings. So why do you think there was that disconnect? [00:21:05] Dave Sequeira: I think there's a couple of things going on here. So from that fundamental point of view, I mean, the market's already priced in just the exceptionally strong growth that we're looking for here in the second half of this year. And to some degree, I mean, these companies have already scheduled their production runs for 2027 for their clients. And I think the market's probably already priced in that as well. So at this point, I think it's now starting to be coming about trying to forecast 2028 revenue in earnings. And I think the market volatility and prices indicates that there's a pretty wide range of assumptions right now for 2028. Now, from a technical point of view, I think there's a lot of overhang in our market because of what's going on in the Korean stock market. The Korean stock market has just been on a tear for really the past year and a half to two years, you know, and it's led to a lot of speculative activity. And if you look at the Korean market, you know, over 50% of the market cap is just two stocks. So if you think the U.S. market's concentrated, you know, that can't even hold a candle to what's going on in the Korean stock market. And those two companies, of course, are Samsung and SK Hynix, which are both memory semiconductor companies. And we all know that those stocks are up a couple hundred percent each year to date and even more than that over the past 52 weeks. So the Korean stock market peaked a couple of weeks ago. It's down enough that it's now technically in a bear market. I think it's down about 25% off of its high. We're hearing a lot of reports out there that a lot of margin accounts, you know, ended up getting called in. So essentially that's probably led to a lot of forced selling over the past couple of weeks. But the same point in time, even with that market being down 25% year to date and having forced sellers, it's still up 50% year to date and it's doubled over the past 52 weeks. [00:22:57] Susan Jabinski: All right. Let's talk about IBM. Now, IBM released some preliminary second quarter results and they were not good. The stock fell 25%. So, Dave, what happened and what did Morningstar think? [00:23:11] Dave Sequeira: So I'm sorry. So IBM, I mean, they missed expectations both on the top line and the bottom line. And if you go to the transcript of the call and after talking to our analysts, it sounds like management was really blaming this shift on a change in the timing of their clients' CapEx spending on mainframes away to other areas like servers, storage, memory, and so forth. So is that shift in timing as well as a shift in spending towards cybersecurity that hit the results this quarter? So the big question will be, is this just a timing differential? Are these sales still going to occur over the next couple of quarters? Or for some reason, are these sales actually just lost for good with how things are changing with artificial intelligence versus mainframes? Now, our analyst thinks this is just a delay in sales, not a cancellation. So as such, he left our fair value unchanged at this point in time. So the big risk is if these sales are actually canceled and not coming back, then I do think there is a pretty good downside risk to our valuation from here. [00:24:17] Susan Jabinski: All right. Now, we don't often talk about insurance stocks because they're very often overvalued. But let's talk about Progressive. The stock was down 9% after earnings, but Morningstar held its fair value estimate at $191 per share. So what happened here? [00:24:34] Dave Sequeira: Well, I mean, as you mentioned, the insurance sector is overvalued. It's been overvalued for quite a while at this point in time. So names like Progressive, MetLife, Allstate, Chubb, all two-star rated stocks for the most part. I think some of them may even have moved up into one-star territory. And essentially, it's just as simple of a story as a lot of these companies were pushing through very high premiums and increasing their revenue by a lot over the past couple of years. But we think that, again, it's a very competitive industry. And while you can get those short-term increases in premiums, over time, that's just going to have to slow. So in this case, I think it's just as simple as seeing more normalization in the amount of premium growth. And so the market right now just has to readjust lower to be able to take those lower growth estimates into consideration. [00:25:23] Susan Jabinski: Now, PayPal finished the week up 22% last week after it received a buyout offer from Stripe and a private equity firm. Morningstar's fair value estimate on PayPal is $80. So Dave, what are the details of the deal? And what does Morningstar think of the offer? [00:25:41] Dave Sequeira: So the buyout bid is at $60.50 per share. And it looks like it's a pretty solid bid in that they already have committed financing from the banks to be able to close this if the company were to agree to being bought out. In our view, I mean, we think this does make strategic sense. If you add PayPal's volume to their volume, they would get pretty good fixed cost leverage, could lead to scale-based cost advantages, which maybe could end up helping drive an economic or a long-term durable competitive advantages here. And I would say the buyout offer is attractive when you compare it to where the stock has been trading. But it dropped quite a bit in February. In fact, it dropped down into like the low 40s. But the stock was actually around $60 at the beginning of the year. And that buyout bid is well below our $80 fair value. So in this case, you know, if it turns out that the board is open to selling the company, I think there's a pretty good chance there might be a lot more further upside here because we think, one, the company is undervalued compared to our long-term intrinsic valuation. But also at the same point in time, if they put the company up for auction, I think you could see other potential bidders get involved here. Or in this case, yeah, I think they would just have to negotiate a higher price in order to sell the company. [00:26:55] Susan Jabinski: Now, SpaceX fell below its IPO price last week. The stock, of course, still looks overvalued according to Morningstar because we assign it a $62 fair value estimate. So Dave, are you surprised by this fall? [00:27:09] Dave Sequeira: I mean, that's kind of a yes and no type of answer. So I mean, from a fundamental point of view, I would say, no, we're not surprised. But at the same point in time, there's so many vested interests out there that want to keep that stock price high above the IPO price that I am surprised that the stock fell as much as it has as quickly as it has. And I think the problem here is that this could cast a negative sentiment over the IPO space for the rest of the year. And so a lot of those AI companies that are looking at coming public in the next couple of months might not necessarily be able to do so. Or if they try coming to market, they're not going to get anywhere near the valuation that they thought that they were going to get. Now, as you noted, our fair value is $62 a share. And I just want to caution people that when you think about our fair value, it's not like we're not pricing in a lot of growth here. We're just not pricing in anywhere near the amount of growth that the market is currently pricing in. And again, just to run through some of the numbers here. I mean, the revenue for the company last year was $18.7 billion. You know, we're modeling $37 billion this year. We're expecting it to grow all the way to $73 billion by 2030. I mean, that's almost four times growth from 2025 to 2030. You know, as far as earnings, you know, it was negative last year. We're looking for break even this year. We're only looking for $0.90 per share though in 2030, which of course means that they're paying a huge P/E multiple on that stock today, you know, based on that earnings estimate. So I just say with this one, if you do have an interest in the stock, we did a short interview with Nick Owens. He's the equity analyst that covers the company on the June 8th episode of The Morning Filter. So it might be worth, you know, going to that section and watching that interview with him. [00:28:50] Susan Jabinski: All right. What is time for our question of the week? If you have a question for Dave, you can reach us at our email address, which is TheMorningFilter@MorningStar.com. Now this week's question comes from someone I'd consider to be a long time friend of Morningstar, BK. BK has reached out to many columnists and analysts at Morningstar over time. So it's really nice to be able to answer one of BK's questions on The Morning Filter. So the question is, what to do if all of your holdings are gains and you have no losers to sell? [00:29:22] Dave Sequeira: Well, that is a really high quality problem to have. [00:29:26] Susan Jabinski: But that's what you get when you use Morningstar for as long as BK has, right? [00:29:31] Dave Sequeira: Oh, well, unfortunately, I don't have a specific detailed answer for BK. And it's just one of these things where I can really give, you know, some ideas of how to think through it. But of course, you know, we can't give financial advice to any individuals here. We can only give kind of general recommendations. But of course, like anything else, it's going to depend on a lot of different factors. So in this case, I would say, first of all, talk to your tax advisor. There might be different things that they can look at your portfolio and figure out what they could do to move things around or at least figure out where to take gains in order to minimize, you know, the tax costs here in the short term. From my point of view, from a fundamental point of view, first thing you need to do is look and see which stocks are the most overvalued. And maybe from a technical perspective, you know, which ones are the most overextended at this point in time from there, you know, kind of look in which accounts do you own those overvalued and overextended stocks? Are they in retirement accounts or are they in taxable accounts? Overall, how do those stocks fit in with kind of that general portfolio? What was the part that they played within your portfolio? I mean, was there a specific diversification that we were getting from owning those stocks? Also depends if they're short term gains or long term gains that makes an impact, you know, as far as like the amount of taxes that you're going to be paying on it. And then you also have to think about are there going to be any changes in your own personal tax situation or tax rate going forward? You know, are you maybe getting closer to retirement where you're going to have, you know, lower taxes than maybe while you're working? You know, do you have any intention of moving to lower tax states or, you know, whether or not you donate to charities? You know, in this case, you know, maybe you could donate some of that appreciated stock and get the charitable write off. And then if there's, you know, any estate tax, you know, planning implications here as well. Once you kind of have that better holistic view, understand, you know, the tax and the investment implications, then I think you can decide, you know, what to sell, how much to sell out of what accounts you can sell from. And of course, you don't always really need to sell an entire position. You know, you can always trim. So I think of it really in, you know, three different buckets. So there's going to be the sell now bucket. These are the stocks that are clearly the most overvalued, especially if any of them have, you know, deteriorating fundamentals. You know, your first sell is going to be your best sell here. And then also just, you know, trying to understand from a portfolio position, you know, are there other better opportunities where you can put that money to work today? Second bucket is going to be those where you want to trim the position. You don't necessarily want to sell out. Maybe this is an example where the position has just become too large of a percentage of your portfolio overall. These are the ones that I consider to be, you know, maybe good company, but expensive stock. Then there might be those that, you know, you just want to hold despite gains. You know, anyways, these are those, you know, long term, high conviction compounder type of stocks. Maybe they're modestly overvalued, but still have a long reinvestment runway. And once you kind of put in those three buckets, then I think it makes it pretty clear which ones you might want to take, you know, some profits on to some degree. I think, you know, one of the bigger mistakes investors can make is holding on to an overvalued stock solely to avoid paying taxes. Sometimes you just got to bite the bullet and pay that capital gains tax and move into maybe some more undervalued opportunities. [00:32:54] Susan Jabinski: All right. Well, before we get to your picks this week, Dave, let's talk a little bit about how, based on valuations, you think investors should be thinking about that barbell structure for their stock portfolio that you've been talking about this year. We're going to cover that more, you know, in the bonus episode that people can watch this week. But, you know, let's touch on it briefly before we get to the picks. [00:33:16] Dave Sequeira: Yeah. And I mean, just to put it in context too, I mean, there's been a very quick pace in how our change or how our recommendations have changed, you know, really since the beginning of the year. You know, as you mentioned at the beginning of the year, we recommended that barbell shaped portfolio being overweight value, overweight growth, underweight core. The reason being is, and we had outlined a whole bunch of reasons why we were expecting a lot of volatility over the course of this year, and that you could use that barbell and readjust that barbell as volatility occurred to be able to take advantages of dislocations, you know, in the market. Of course, you know, February and March, we had a big sell off in the market. Now, the value part of that barbell actually not only held up, but it was up a couple of percent. Whereas, of course, those growth stocks, tech stocks, AI stocks got hit, you know, pretty hard to the downside. So end of March, you know, coming into Q2, we recommended to take profit, you know, in the value category and put those proceeds back to work in the growth category, overweight growth, especially those tech stocks and AI stocks that got beat up the most. Now, you know, after that, the market rallied very quickly. And by the end of May, at that point in time, we recommended then take profit in that overweight in the growth category, specifically those AI and tech stocks, you know, they got beaten up too much and now probably rose to the point that they were back to fair value. And then it was time to go back to that barbell once again. Now, looking at how valuations have changed over the course of June and beginning of July, it looks like now is actually a good time to be an equal weight across value core and growth. When I look at the price to fair values and the discounts, they're all similar enough that there's really no reason to overweight or underweight each, any one of those categories. And overall, the risks in the second half of the year at this point, feel a little bit more balanced than they did at the beginning of the year. And of course, then by having that equal weight, you are then positioned to be able to reallocate to any one of those categories, you know, if we have any other [00:35:18] Susan Jabinski: further dislocations in the second half of the year. All right. So given that, your picks this week are undervalued stocks that have a combination of growth and value characteristics. They're sort of a blend. Now, your first pick this week is Intercontinental Exchange. Tell us about it. [00:35:34] Dave Sequeira: So it's a five star rated stock, trades at a 22% discount to fair value, has a one and a half percent dividend yield. It's a company we rate with a low uncertainty and a wide economic moat, that wide economic moat being based on cost advantages, network effect and intangible assets. And I'd note too that this, if you look at the Morningstar, the nine box style box, you know, this stock falls in that mid cap core category. [00:36:00] Susan Jabinski: Now stocks down more than 10% this year. So what's been going on with it and why do you like it? [00:36:08] Dave Sequeira: So I'd say a big portion of the reason for the sell off in this company is it's just been lumped in with all of these other companies where people are concerned that artificial intelligence may disrupt their business in some way, shape or form going forward. In our view, our investment thesis here really is unchanged, even when we can conceptualize how AI, you know, may or may not impact, you know, trading going forward. Overall, the company is the dominant futures exchange globally, especially in energy contracts. When we think about the economic moat here, we think that their liquidity based network effects are nearly impossible for AI to try and replicate or disrupt. Again, for trading, you really need to have, you know, the clearing and the collateralization requirements. We think that creates a barrier to entry from artificial intelligence. And then lastly, the company has a huge amount of proprietary pricing and market data and a world of artificial intelligence. When everybody is going to be basing, you know, all of their AI searches on public data, we think that proprietary data is actually even worth increasingly more over time. And then lastly, you know, it's just the part of the New York Stock Exchange. And when you think about the New York Stock Exchange and the specific proprietary data that has, we still think that this company has those long term durable competitive advantages that you're able to buy at a pretty attractive discount in today's market. [00:37:29] Susan Jabinski: And your second pick this week is a REIT American Tower. Give us the highlights. [00:37:35] Dave Sequeira: Four star rated stock, 24% discount, attractive dividend yield at 4.1%. We rate the company with a medium uncertainty and a narrow economic moat, that narrow moat being based on efficient scale and switching costs. And similar story, if you look at the Morningstar style box, this one falls into that mid cap core category. [00:37:55] Susan Jabinski: Now, REITs have done, you know, reasonably well this year, but American Tower has been kind of flat. So why is this one attractive? [00:38:02] Dave Sequeira: When I take a look at the entire category of real estate investment trusts, I mean, all the cell phone towers have been selling off. And to some degree, I think a large portion of that is just because people are concerned about how SpaceX may disrupt or displace kind of that traditional wireless business over time. I've talked to Mike Holdell about that, and he just doesn't foresee that anytime soon. When he thinks about the cell coverage that SpaceX can provide today and where it's going, he thinks it's more of an overlay than it is necessarily a replacement for traditional wireless. So in this case, you know, they can use it in those rural areas that you don't have cell phone towers, but in like, you know, urban or suburban areas, you're still much better off. The economic value still really provides, you know, a big advantage for those cell phone towers where there's enough density that you can really get a lot of fixed cost leverage off of those towers that you don't get from satellite coverage. [00:39:02] Susan Jabinski: And Mike Holdell is Morningstar's communications sector director. All right, your third pick this week is a name we've touched on earlier in the program. It's Northrop Grumman. So run through the key metrics on this one. [00:39:14] Dave Sequeira: Stock's trading at almost a 20% discount to fair value. It's enough to put it in four-star territory. Somewhat attractive dividend yield at 1.8%. We rate the company with a medium uncertainty and a wide economic moat, the wide moat being based on switching costs and intangible assets. And once again, if you look at where it's placed in that Morningstar style box, it falls once again into that mid-cap core category. [00:39:40] Susan Jabinski: So why do you like the stock now? [00:39:43] Dave Sequeira: So when I think about the trading pattern for this stock, I mean, this was a prior pick in 2025. You know, it traded up pretty substantially since then. In fact, it went into two-star territory in March, which of course, anytime something hits two stars is usually a pretty good indicator to take at least, you know, some of the profit off the table. But the stock sold off too much to the downside. So I think this is giving you that ability to, you know, if you sold some of that stock or just hadn't gotten involved in it, a good ability to be able to pick some up at a pretty good margin to safety from its fair value. When I look at the earnings report from Q1, results were just fine. In fact, our analysts noted that, you know, the company had reached agreements to accelerate production of the Sentinel ballistic missiles, accelerate the production of the B-1 bombers. So fundamentally, I think everything is still going well here for the defense companies and for Northrop, you know, overall. We think that it bodes well for the company's ability to meet our forecast. So I still think that there's, you know, further upside in this stock. [00:40:43] Susan Jabinski: All right. Your next pick this week is Hershey. Give us the bird's eye view on this one. [00:40:48] Dave Sequeira: So Hershey's currently trading at a 25% discount with that being a low uncertainty stock. That's more than enough to put it in five star territory. Attractive dividend yield at 3.4%. We rate the company with a wide economic moat based on cost advantages and intangible assets. And if you look at the Morningstar style box, once again, this one falls into that mid cap core category. [00:41:12] Susan Jabinski: Of course, rising cocoa prices and consumer belt tightening have hurt Hershey's. So why do you [00:41:18] Dave Sequeira: like the stock? I think this is another instance where you can kind of double dip on a stock that we've recommended in the past. So it was a pick multiple times in 2025. Generally, the stock had moved up and to the right since we were making those recommendations. But then the stock peaked this year. I think it was like maybe in February or March running, you know, well into that two star territory. And in this case, it's sold off and it's overcorrected to the downside. So I think you're getting that opportunity that if you took some profit, you know, you can move back into that equal weight or maybe even overweight position. As you mentioned, you know, the stock is very correlated to cocoa prices. Cocoa prices had skyrocketed in 2023 and 2024, but then they declined throughout the year in 2025, bottomed out. And now they're starting to creep, you know, back up again. I'd say at this point, they're still pretty far below where they peaked out in 2024. So we don't necessarily see this as something that's going to disrupt their gross margins all that much here, you know, in the short term, you know, depending on the type of chocolate, you know, and the amount of cocoa that you use, it's typically only like 20 to 50% of cost of goods sold. So yeah, a little bit of margin pressure, but not enough really to change that longer term investment thesis. I just note, I mean, Hershey has dealt with high prices in cocoa before they're going to have to deal with high prices in cocoa at points in time in the future. But it's one of those things that really impacts every chocolate manufacturer out there. So it's not, you know, endemic just to Hershey. When you think about the company overall, 36% market share in the U.S. chocolate market. I mean, that compares to, you know, 29% of its closest competitor, which is Mars. But really, I mean, the rest of the market, the remaining, you know, branded and private label competitors all have very low market shares out there. So that's part of the reason that we look at this company as having long-term durable competitive advantages. And it's not necessarily expensive, trades at 20 times our 2026 earnings estimate, drops down to 18 times our 2027 [00:43:18] Susan Jabinski: earnings estimate. All right, your last pick this week is Amazon. Give us the key points on this one. [00:43:25] Dave Sequeira: So it's trading at a 12% discount. It's enough to put it in four-star territory, not a dividend stock. So if you're a dividend investor, it may not necessarily be right for you. We rate the company with a medium uncertainty and a wide economic moat. And in this case, I would note that it's only one of two companies out there that have four of the five moat sources. So in this case, cost advantage, switching costs, network effects, and intangible assets. And if you look at the Morningstar style box, this one falls into that large cap core category. [00:43:58] Susan Jabinski: So Dave, you know, a double-digit discount's pretty good. So I'm not going to say it's not a bargain, but, you know, talk a little bit about why specifically it's your final pick this week. [00:44:06] Dave Sequeira: So it kind of also goes back to when you and I talk about core stocks. So in this case, I differentiate between a core stock for your portfolio versus how a company may fall into that core category in the Morningstar style box. So the Morningstar style box is broken out between value, core, and growth. So a core stock in the style box is one that has some attributes of growth stocks, some attributes of value stocks, but not necessarily enough that it falls into one of those two categories. And so it kind of ends up in that core category. Now, when you and I have talked about core stocks and think about like your portfolio, those core stocks are the ones that have attributes of, you know, a long-term hold position. I mean, the kind of stock that you want to own through economic cycles, the kind of stock you want to own through different market cycles. It's the stock that really forms the basis of your portfolio that you can then build other positions around. You know, there are companies that have a very long runway for growth, companies that have long-term durable competitive advantages, companies with strong balance sheets. And in this case with Amazon, I mean, the company's still continuing to hit on all cylinders. I think there's still a long runway, still very much upside from AWS. That's its AI platform. You know, margins here can continue to keep improving, you know, in the retail business. We think the advertising business is very valuable. So overall, we're still looking for just very kind of stable growth, both on the top line, looking for that continued margin expansion over time. So in my mind, I still think Amazon is kind of one of those core stocks for your portfolio, as well as it's a core stock in the Morningstar style box. You know, taking a look at, you know, our model here, I mean, the company we're averaging, you know, 15% earnings growth over the next, you know, five years, and you're getting it at a bit of a discount to its historical multiples where it's trading today. So it's trading at 30 times our 2026 earnings estimate. But if you look at kind of the historical average of where it's traded over the past five years, it used to trade much closer to 40 times. And over the past 10 years, it was trading at 57 times. So that 30 times multiple may look expensive. But when you start thinking about the type of average earnings growth that we're looking for, and how it's traded in the past, it looks attractive to [00:46:30] Susan Jabinski: us here today. All right, well, thanks for your time this morning, Dave. Viewers and listeners who'd like more information about any of the stocks they 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 9am Eastern, 8am Central. In the meantime, please like this episode and subscribe. Have a great week! [00:46:55] Speaker ?: Bye! Bye!