Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services’ chief US market strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or pans for the week ahead. This week, we’re shaking up the format a bit for the holidays.

We’re reviewing some of our best and worst stock calls from 2024, and we’ll share a few picks from 2024 that Dave still likes heading into 2025. But before we begin, a couple of programing notes. This is the final episode of The Morning Filter for Dave and I this year. Next week, we’re airing a special episode focused on dividend stocks, featuring an interview that I conducted with The Long View co-host Dan Lefkowitz.

On behalf of Dave and I, we’d like to wish viewers a very Happy Holiday and New Year. We’d also like to thank our video producer Scott Halver for not only waking up with us early on Mondays this year but also for troubleshooting more technical issues than viewers would ever know. Dave and I will be back with a new episode of The Morning Filter on Monday, Jan. 6, when we’ll talk about his 2025 outlook, and you won’t want to miss it.

Dave, you’re in the hotseat today for today’s episode. Before we get to your stock hits and misses. First, remind our viewers what Morningstar’s investing philosophy is really about. It’s not really short-term, is it?

Dave Sekera: That’s exactly correct. We’re just not traders, not traders at all. And people shouldn’t be thinking about my weekly picks as trades but really as being investments. Our recommendations are always going to be focused on where we see a stock trading at a significant margin of safety below its long-term intrinsic valuation.

And I think everyone always has to recognize there’s just always a lot of short-term noise in the marketplace that can impact where a company’s stock is trading. However, our view is that over time, a stock will end up converging toward its long-term intrinsic valuation. But depending on what’s going on in the markets, what’s going on with that individual story, it can sometimes take up to several years for the market really to truly understand the valuation of a stock and converge toward that valuation.

Again, we’re not looking to try and just skim a quick, small profit here and there but really to position one’s portfolio to take advantage of where we see large dislocations in the marketplace between value and stock price.

Dziubinski: If Morningstar’s approach is sort of long term, why are we dedicating an entire episode to the performance of your stock picks over just the short term? A year? Are you a glutton for punishment, Dave?

Sekera: Well, I wouldn’t say glutton for punishment. Again, it is just a good test for me to kind of review everything we’ve talked about over the year. But personally, I just think if someone’s going to take the time to watch The Morning Filter, I feel that we owe it to them to review what’s worked and what hasn’t worked.

And specifically where things haven’t worked. Why not? I think we owe people that explanation. We need to identify where we wrong? Did we change our assumptions and move our stock price closer to wherever it was trading in the market? Or has our equity analyst team got stood by their investment thesis and their assumptions.

And at the end of the day, look for those where we think either you should exit and just take the loss and move on or where we continue to think that we’re right and we still think that the market would come around to our point of view.

Dziubinski: Then let’s kick things off by looking at three of your stock picks that haven’t worked out, at least not yet. The first of those picks is Estée Lauder EL. This one seemed like a good pick early in the year was undervalued, wide moat, playing the rebound in China’s economy, which many market watchers were expecting to happen this year.

What happened?

Sekera: First, I actually want to give a little bit of background on Estée Lauder stock price. This stock was actually a 1-star-rated stock, our lowest rating in 2021. We thought at that point in time with the stock price as high as it was, that the market was overestimating the amount of long-term growth potential there.

What we saw is that once sales in China began to slow, or that growth rate began to slow in 2022 and 2023, that stock fell over the course of those two years. In fact, that dropped all the way down to being a 5-star-rated stock at the end of 2023. At that point, the stock looked like it had bottomed out, and we thought it was starting to move back up again.

And for all the reasons you mentioned, it looked like at that point in time probably a pretty good pick. Our investment thesis was essentially a play on the recovery of sales in China specifically, across the different regions. And unfortunately, I think this is just one where we tried to catch the falling knife too fast.

And we’ve been unfortunately long and wrong ever since. That stock price is down 45% since Feb. 12 when we recommended it. That’s of course, actually after I already have fund fallen, you have 45% in the prior 12 months. And disappointingly, you know, most recently the company also cut its dividend payment almost in half.

So, I think really what’s happened here is the economy in China, which was our main investment thesis, has been much more stagnant than expected, and sales have failed to reaccelerate, as we originally forecast.

Dziubinski: Morningstar cut its fair value estimate on Estée Lauder a couple of times in 2024. Does the stock still look undervalued after those cuts?

Sekera: Our current fair value is $162. That’s down from $200 when we originally recommended the stock. The first cut was in August, and the second cut was in the beginning of November. When I look at that cut in November, it’s really a couple of different reasons. We reduced our 2025 sales growth forecast to a negative 2% from being a positive 2%.

And specifically, we lowered our forecast in Asia primarily due to China to contract and 9% being down from originally only a 1% decline. And, overall, the end result was that our forecast adjusted earnings per share is to fall 5% versus originally being a forecast increase of 7%. But as I mentioned, and ultimately, the investment forecast from Dan Su, who’s our equity analyst that covers this stock is still that China will end up recovering.

So, long term, she maintained her 10-year forecast for a 6% annual sales growth, 15% average operating margins. And when I take a look at the average operating margin, it shouldn’t be that difficult for the company to get back to. This year the operating margin forecast is 11.2%. We’re expecting that to go up to 12.7% next year and get back toward that 15%, which is their historical average, by fiscal 2028.

And then lastly, just according to her model, this should be the low for our yearly earnings estimate. We’re looking for $2.55 a share, growing the $3.58 per share next year. Overall, the stock still trades is about half of what our long-term intrinsic valuation is, placing it well under that 5-star category.

Dziubinski: Then your second stock pick that hasn’t panned out this year was Crispr Therapeutics CRSP. A very different situation than Estée Lauder in terms of quality, right?

Sekera: Exactly. This is a company that we rate with no economic moat and also a Very High Uncertainty Rating. And I’d also note that this stock is the only one that’s down from our March 11 show. On that show, we highlighted for five different small-cap/mid-cap growth stocks. And I think really highlights why investors need to have a diversified portfolio, especially if you’re going to be involved in your kind of those small-cap and growth stocks where you can have a lot more volatility in their price.

This one is down, unfortunately, 43% since the March 11 show. But when I look at the other ones that we recommended on that show, since then Veeva VEEV is flat. ResMed RMD is up 26%. Chart industries GTLS up 36%, and Kellogg KLG up 43%. So, I think on an overall portfolio basis, those stocks have looked pretty good.

But unfortunately, this one has just gone the wrong way. So, we did lower our fair value on Crispr in November to $106 a share from $119. Just due to the change in our projections for Casgevy, which treats sickle cell disease, looking for a slower sales ramp than what we originally projected.

Overall, we still think that drug can become a blockbuster with over $1 billion in annual sales over time. But again, it’s a slower ramp-up now to get there than what we thought. And then lastly on the stock, I think it still has a lot of optionality embedded in it. I took a look at the balance sheet.

The company actually has $2.7 billion worth of cash on the balance sheet, but its market cap is only $3.7 billion. So, in our view, it looks like very little value is being applied to its early-stage pipeline candidates. Overall, thestock trades at a 57% discount to our fair value. Granted it doesn’t pay any dividend and wouldn’t expect this one to pay any dividend anytime soon.

But again, it’s still rated 5 stars.

Dziubinski: The last worst stock pick is APA APA. Talk a little bit about what happened with this one, Dave?

Sekera: Personally, this is actually my most disappointing recommendation of the year. Originally, after speaking with the analyst who had covered the stock, I really thought this one had just excellent risk/reward portfolio dynamics. We thought the stock was worth at least where it was trading. If not, we thought that there was still a margin of safety just based on the existing portfolio of assets that it had. And really, the big upside here was we thought the market wasn’t giving the stock any credit to the discovery in Suriname and its joint venture with Total.

The investment thesis here is that we expected that the JV would announce they were moving forward with that oil play by the end of the year. We think that could double APA’s production over the course of the next decade. So, again, why is this call gone against us?

A couple of different things. One, just a lot more uncertainty than what we originally expected regarding its assets in Egypt. I think perception of the market that its position in the Permian is really pretty mediocre at best. But probably one of the more disconcerting things that happened this year was an announcement that will cease all production in the North Sea by Dec. 31, 2029, well ahead of schedule.

That wasn’t anything that we originally contemplated when we looked at the stock. So the reason for that is that the UK-issued regulations that are going to require substantial new emissions control investments and facilities to operate beyond 2029. That combined with the financial impact of the energy profits levy is just going to make production of those assets uneconomic from 2029 going forward.

And then lastly, just getting back to our original investment thesis, APA and Total did announce an agreement to move forward with that Suriname play. We saw a tiny little bounce here in the stock price. But unfortunately it just gave that bounce up and even more since then. And I think it’s just a matter of considering oil from that play won’t begin really flowing until four years from now.

I don’t think the market’s willing to give the company the credit for that value of it just yet. In my mind, this kind of brings up the old adage: “What’s the difference between being early and being wrong? Nothing.” Overall, from the times that we recommended the stock it is down 25%.

Dziubinski: Morningstar’s also dropping analyst coverage of the stock of APA in 2025. Why is that?

Sekera: It’s just a matter of our equity research team just continually evaluating what our coverage is. We’ll make changes to focus on those companies and those stocks where we think we can add the most value to our clients by covering that stock. In this case, the analyst who originally covered APA transferred into another group within Morningstar last Septmeber.

So, we think our continuing efforts in this sector are going to be better directed at other stocks that we cover.

Dziubinski: Dave, let’s pivot over to three wins or stock picks that did in fact outperform after you picked them. The first is Norwegian Cruise Line NCLH. The stock is up 80% since August alone. What made you like it in the first place?

Sekera: It’s just a combination of the valuation we saw at that point in time as well as expecting it to be a turnaround story. We recommended the stock on the June 3 show. It’s up 56% since then. Back then, the stock was trading at a 45% discount to fair value. So, deep in undervalued territory. And as far as kind of the turnaround story, our analyst noted that a new CEO had taken the reins.

He was kind of a longtime insider within the company. He used to run the Norwegian brand specifically. And he just was doing a lot of things that we thought was going to help set the company up to take it to the next level over the course of this year and going forward.

And then fundamentally, our analyst noted she saw very good momentum in bookings. She noted that pricing was still increasing at a healthy rate. Cruises were still a lot cheaper back then than land-based vacations. And generally, I think we just thought that the concerns surrounding the consumer had weighed on the stock too much earlier this year, which we thought was ill-founded. As Norwegian’s demographics really skew much toward the higher end of cruising passengers, as opposed to companies like CCL [Carnival], which are more toward like the lower-end consumer.

Dziubinski: Why do you think that Norwegian Cruise Line’s stock performed so well, and is it still attractive today?

Sekera: Sometimes it’s hard really to know what the market sees and what it doesn’t see. I think this just might be a matter of the market seeing the improving fundamentals that have been reported since then and to some degree now the market’s just catching up to the story. And then even more recently I saw a number of other research providers out there change their recommendations to buys over the past month or two, and so I think to some degree they’re probably now actually a little too late to the story.

The stock might still have a little bit more room to run here. It is still at a 15% discount, but it has moved up enough now to put it in the bottom of that 3-star territory.

Dziubinski: Insulet PODD was a stock you recommended at the tail end of the first quarter. Why did you like it back then?

Sekera: We recommended this one on the March 25 show. It’s up 65% since then. Back then it was just one of the most undervalued stocks within the healthcare industry. It was trading at a 32% discount to fair value. It’s a company we rated with a narrow economic moat. Fundamentally, we thought the company was doing very well.

We had no idea that it executed well on its most recent product launch. Kind of the overall investment thesis here was that the market was probably overestimating the potential impact of the GLP weight-loss drugs on reducing the number of diabetics in the future, whereas we had not changed our forecast for double-digit growth for this company.

Our analyst noted that even in an environment of slower rate increases for new cases of diabetes, there was still enough existing need out there really to support the growth of this company. And we also expected Insulet to be able to grow its market share over time. You know, and then lastly, Debbie Wang, who covers the stock, also noted she thought this one could actually be an attractive buyout candidate from another company like a Medtronic MDT or an Abbott ABT.

Dziubinski: As you pointed out, you know, the stock’s done really well. Is it still a buy?

Sekera: It’s currently rated 3 stars. Looks like it’s trading right about a 10% premium to our fair value. So, while it is a 3-star-rated stock, with as much as it’s moved up, I think I’d probably be a better seller at this point in time.

Dziubinski: Your last stock pick that we’ll talk about today that did really well in 2024 is Fortinet FTNT. And this is a stock in a sector that you talked about more than once in 2024. That’s cybersecurity.

Sekera: We’ve talked about cybersecurity and why I like the fundamentals there so much. Essentially my investment thesis for cybersecurity overall is that cybersecurity spending is a pretty small percent of an overall IT budget for a company. But, of course, it’s just of critical importance. I think it’s one of those areas that managers are not going to skimp on.

Even in an environment where they’re looking to cut costs. This is not one area that they’re going to cut costs. I think we recommended the stock twice. First on June 10 and then again on July 1. The stock’s up over 60% since then. But now that leaves it in 3-star territory.

Dziubinski: Talk a little bit, Dave, about maybe why the stock has done so well. Is this something that’s been company-specific or have all of the cybersecurity stocks done pretty well lately?

Sekera: Depends on which time frame you’re looking at. Since our recommendation, this really has been very much company-specific. Our analyst noted that the company has executed on its plan to really expand its business from its prior business of really just being focused on firewalls to include things like secure access service edge, security operations. From when we recommended it, it’s really outperformed all the other cybersecurity stocks.

So, while Fortinet itself is up over 60%, you know Okta OKTA is down 13%. You know, CrowdStrike CRWD down at 6%. Zscaler ZS flat. Check Point CHKP is doing OK. It’s up 13%. Palo Alto PANW up 15%. However, on a longer time frame, year to date, a number of the cybersecurity stocks have actually done pretty well. So year to date, CrowdStrike is up 40%.

Palo Alto up 35%. Check Point up 23%. And then some of the other smaller cybersecurity businesses. there are couple that we’ve talked about over time that have had more idiosyncratic issues. Those like Zscaler and Okta are actually both down 7% year to date.

Dziubinski: We also occasionally talk on The Morning Filter about stocks to sell. And some would argue that knowing when to sell a stock is actually more difficult than knowing when to buy a stock. Do you think that’s true, Dave?

Sekera: Like anything else, knowing when to sell is tough. And personally, that’s why I prefer when I’m investing to layer in and out of trades. Of course, when the stock is moving to the upside you’ve got good momentum. You don’t want to sell too early. You don’t want to leave your money on the table.

But at the same point in time, you know, you always want to take some profits because you don’t want to miss taking gains if that stock was to then just sell off for whatever reason. And of course, to the downside, you need to always determine are the fundamentals deteriorating? Are you actually better off you’re taking that loss and moving on?

Or do you think the market’s overreacting and now’s a good time to buy more to be able to dollar-cost-average down within your portfolio. With as much as the market has rallied, a rising tide lifts all boats this year. I’ll just note that pretty much anything I recommended to sell before July was really just a mistake.

When I look at all those sell recommendations, only one of them is down year to date. However, in my own defense, I would look at these and say only five of those 20 are higher than the market year to date. So, of those other 15, you probably were better off making some of those sales and just reinvesting that money in different stories.

If nothing else, at least maybe a broader portfolio to get the rest of that market return.

Dziubinski: Let’s talk about three stocks that you did suggest scaling back in during 2024 that just kept going up. The first stock that you suggested selling was Palantir PLTR. Ouch, Dave.

Sekera: I took a look at this one. This may have actually been like my worst all time sell call that I’ve ever made on the show. The stock is up 195% since that sell recommendation that we made on March 4. Now, over that same time period, we have increased our fair value by 40%.

But taking a look at that stock, it still trades at like a 200% premium to our $21 fair value. It puts it well into that 1-star territory.

Dziubinski: Why do you think Palantir stock just continued to rise. What’s the market expecting from the company that Morningstar just isn’t?

Sekera: I think it’s just a matter of with this really being so leveraged to the artificial intelligence story, the market is just pricing implicitly a huge amount of growth even faster than what we’re already pricing in. I took a look at our financial model here. Our estimate for revenue for 2024 is $2.8 billion. Our compound annual growth rate over the next five years is 23%.

That takes revenue all the way up to $6.2 billion by 2028. Our earnings estimate for this year is $0.41 per share. That means the company is trading at 142 times this year’s earnings. By 2028, our earnings per share is up to $0.87 per share. So, it still means that the company is still trading at 67 times our 2028 earnings estimate.

So, if you’re buying or holding that stock today, you’re really just making the inherent assumption that growth is going to be significantly much higher than what we’re currently forecasting over the next five years.

Dziubinski: Dell DELL was another stock that you suggested scaling back in that’s continued to do pretty well.

Sekera: This one we did recommend to sell on Feb. 5. That stock is up 46% since then. We recommended on April 15 to take profit once again; the stock’s up 7% since then. And then the last time we talked about it I think was on July 15. Now the stock is down 9% from then.

We’re seeing a little bit of volatility here now. But over the course of the year, I do have to admit we lifted our fair value by 160%. We increased our fair value up to $121 a share from $46. Most of that fair value increase actually came in August. That’s when we lifted our fair value from $65 to $112.

At that point in time, we transferred coverage of that stock to a new analyst, to Eric Compton, who is the director of the the technology team. I think maybe sometimes it’s just a matter of you need to have a new pair of eyes take a fresh look at a story and maybe ignore some of the other preconceived notions.

But it’s currently a 3-star-rated stock and trades pretty close to our fair value.

Dziubinski: Now, Dave, you said that Dell is rated 3 stars. What does that mean? Not a buy, but not a sell either.

Sekera: Three stars just means that for long-term investors, we would expect that they would be able to generate returns in line with the cost of equity over the long term. And of course, that also assumes that results for the company end up being pretty much in line with what our forecasts are.

Taking a look at our Dell model, our cost of equity for that company is currently 9%.

Dziubinski: Netflix NFLX is the final stock you suggested selling that continued to do well. Talk about what happened here. Is this one still a sell today, in your opinion?

Sekera: We originally recommended to sell that stock on June 3. The stock’s up 42% since then. Over that same time period, our equity analyst has increased our fair value estimate by 25%. But even so, with as much as it’s run up, it’s still a 1-star-rated stock trading at a 64% premium to our fair value.

Dziubinski: Still a sell on that one. Let’s move over to talk a little bit about some of your sell recommendations that did in fact work out. And they were good sell suggestions. The first is Arm Holdings ARM.

Sekera: Taking a look at the chart here for Arm, originally that stock pretty much doubled in February. We then recommended a sell and our March 3 show. Looks like the stock did end up selling off and fell throughout most of the spring. But then it started rally again in the summer. Then we recommended the sell on the July 15 show.

Stock then backed off again in the fall. And it’s really been in a trading range ever since then. Over the course of the year, we have increased our fair value up to $66 from $45. But where it is right now, it’s a 1-star-rated stock trading at 160% premium to our fair value.

Dziubinski: Still a sell on that one, too. OK. Next is Eli Lilly LLY. You recommended selling this stock a few times in 2024, Dave, maybe more than any other stock.

Sekera: I think you’re right on that one. It looks like I recommended selling Lilly four different times over the course of the show. Taking a look at our recommendations, first it was on Feb. 12. Now the stock is up since then, it looks like 7%. Reiterated the sell on the July 15 show. Stock is down 17% since then. Reiterated that sell again on Sept. 9; stock’s down 13%. And then lastly on Nov. 4. And the stock is down about 2% since then. But we still think that that stock is overvalued. It trades at a 36% premium to the fair value. Puts it in 2-star territory.

Dziubinski: Dave, give us a quick synopsis of why Morningstar still thinks this stock is overvalued.

Sekera: It’s still just a story of where we forecast very strong growth here in the short term for the next couple of years. But we think the market is just overextrapolating that short-term growth too far into the future. Overall, we do think Lilly is well positioned. We think they’re going to be the largest player in the GLP-1 weight-loss drugs.

We expect that to be a $200 billion global market by 2031. But in the medium term, we’re now starting to see this really move from a situation where it had been supply constrained and they could charge very high prices to a situation now where there is much more sufficient supply. Demand is still very high but not necessarily unlimited.

And then longer term is really where we have the biggest differential. We think it’s possible that there’s up to 16 different competitive drugs that could get approved and launched by 2029. Those are next-generation obesity drugs from other players such as Roche, Amgen, Pfizer, and AstraZeneca. If those do come online in the next three to four years, there’s going to be a lot more supply of other competitive drugs out there, which of course would then pressure both volume and price.

Dziubinski: You suggested selling Southern SO in September, I think it was. Why was it a sell candidate and how is it performed since?

Sekera: We recommended that on the Sept. 9 show as a sell. Looks like the stock is down 7.0% since then, whereas over that same time period the market’s up about 10.5%. When we go back to 2023, we thought the utilities sector had just fallen too much overall. Travis Miller, who covers utilities for us, noted last October that utilities as a sector was cheap on a valuation basis as he had ever seen over the past decade. Yet, the outlook was as positive as he had ever seen over the past decade as well. Now, utilities did start moving up late last year, caught a really big bid. over the course of 2024. A lot of people are using it as a second-derivative play on AI. Of course, artificial intelligence chips require multiple times more power than traditional computing chips.

However, the utilities sector is up 29%, 30% year to date. We now think the sector is actually overvalued. And when we recommended to sell this one, Southern was one of the more overvalued utilities stocks, and it’s still overvalued. It’s still rated 2 stars and trades at a 19% premium.

Dziubinski: Let’s wrap up today’s show with a few of your stock picks from 2024 that you still like today. The first up would be Bristol-Myers Squibb BMY. First, give us the key stats on this one.

Sekera: Bristol-Myers is a 4-star-rated stock, trades at a 15% discount, and has about a 4.5% dividend yield. A company we rate with a wide economic moat and a Medium Uncertainty.

Dziubinski: I think Bristol-Myers is up about 30% since you first recommended it, but it still looks undervalued. Why does Bristol-Myers remain a pick?

Sekera: I think the investment thesis here is really just as simple as we think the market’s underestimating the strength of their pipeline of next-generation drugs. Also, I think if you look at earnings this year, it’s going to give you a distorted look at the true earnings power of the company. I think you need to look past this year’s earnings.

There are a lot of accounting treatments for acquisitions that are undergoing there that are temporarily lowering earnings on a reported basis. But if you look at our 2025 earnings estimates, we think that’s going to be much more indicative of the normalized earnings power for Bristol-Myers. And right now the stock’s only trading at 8 times our 2025 projected earnings. So, it looks pretty cheap as a value stock.

In general, I’m also much more comfortable with Bristol-Myers. A lot of the pharmaceutical stocks, specifically those vaccine manufacturers, have been hit pretty hard since President Trump announced he would put RFK Jr. in charge of taking a look at a lot of the vaccine manufacturers, and to the best of my knowledge, I don’t think Bristol-Myers has any or at least not any significant exposure to vaccines.

Dziubinski: Verizon VZ is another pick of yours from 2024 that you continue to like. Run through the key data points on it.

Sekera: Verizon’s a 4-star-rated stock, trades at a 20% discount, a pretty hefty dividend yield at 6.4%. A company we rate with a narrow economic moat based on its cost advantages and efficient scale, and it has a Medium Uncertainty rating.

Dziubinski: Verizon stock has significantly lagged behind AT&T T and T-Mobile TMUS this year, so why do you still like it heading into 2025?

Sekera: Well, actually, AT&T originally was our stock pick back in October 2023. AT&T is up 60% since then, whereas Verizon’s only up 26%. And I talked to Mike Hodel, who’s our our coverage analyst here, and generally what he said is he thinks that the market really likes AT&T’s fiber strategy, which has really been much more about building it out rather than buying assets, which is what Verizon has done.

Plus, we have seen how better revenue and wireless customer growth at AT&T as compared to Verizon. But, overall, when I think about the US wireless industry and our investment thesis, it’s still the same that we expect that wireless is transitioning more into an oligopoly. We expect that over time, they’re going to compete less on price.

That allows margins to expand over time. So, at this point, with as much as AT&T has moved up, it’s a 3-star-rated stock. Whereas with Verizon lagging behind AT&T move, it’s still a 4-star-rated stock.

Dziubinski: Your final pick from 2024 that you continue to recommend heading into the new year is a smaller name, FMC. Give us the numbers.

Sekera: Five-star-rated stock, 50% discount, 4.3% dividend yield. A company we rate with a narrow economic moat, really based on intangible moat sources, primarily patents like coverage crop protection chemicals. Although it is a stock we rate with a High Uncertainty Rating.

Dziubinski: I think you recommended FMC a couple of times in 2024, and the stock’s really had kind of an up-and-down year. What’s your rationale on this one, Dave?

Sekera: The original rationale is that the backstory here is that fears of Covid-related supply chain disruptions and backlogs led customers to buy and hold excess inventory in 2021 and 2022. That essentially pulled forward a lot of future sales. As those fears subsided, customers used up all of that excess inventory in 2023. So, we had all of that destocking, which then pressured revenue.

Our thesis is that we’re now getting past that period of destocking. And as that ended, we would start seeing the company’s sales and profits bounce back in the second half of 2024 with then larger growth coming in 2025. And to some degree, it looks like that investment thesis over the past couple of quarters is starting to play out.

If you looked at last quarter earnings report and our note, we noted that they beat the Street estimates on both the top and the bottom line. Adjusted EBITDA came in up 15% year over year. Plus, looking forward, management guided to a 19% increase in revenue for the fourth quarter, and even more encouragingly, half of that growth is now starting to come from new products.

Our analyst noted that tells him that the new products aren’t just necessarily cannibalizing its existing products but also driving incremental growth from its competitors.

Dziubinski: Thank you for your time this morning, Dave, and I’ll see you in the new year. Viewers who’d like more information about any of the stocks Dave talked about today can visit morningstar.com for more details. Be sure to catch next week’s special edition of The Morning Filter focused on dividend stocks and then tune back in for Dave’s 2025 Market Outlook on Monday, Jan. 6 at 9 a.m. Eastern, 8 a.m. Central.

In the meantime, please like this video, subscribe to Morningstar’s channel, and have a great holiday season.

Got a question for Dave? Send it to themorningfilter@morningstar.com.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.