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.
Good morning, Dave. We have a lot on our radar this week in terms of the economy and earnings. But before we get to that, let’s first talk about what’s going on in the markets this morning. We’re seeing a global selloff in stocks on news that Chinese startup DeepSeq has developed an AI model, which is sparking concerns about competitiveness in AI. What’s your take?
David Sekera: Good morning, Susan. Everything looked fine when I went to bed last night, so I was pretty shocked to see just how much futures were down this morning before market open. In fact, it also looks like Nvidia NVDA is really getting hit pretty hard.
As you mentioned, the reason is the release of this DeepSeq AI platform, which is reportedly a Chinese platform. Personally, I actually don’t know that much about it. Initial reports are that it’s better, faster, and cheaper than US artificial intelligence, but I just don’t have any way of knowing at this time.
I did reach out to our sector director and our sector strategist for the technology sector. As soon as we hear something back, we can discuss it, hopefully, either maybe later the show or even certainly by next week. But what I really want to know here right now is: Is this really that much of a game changer? Whether or not we have any idea of what GPUs, what AI hardware that DeepSeq utilizes. Does it only utilize Chinese GPUs and hardware, or does it utilize American hardware as well? And really what I’m just trying to get at, would this potentially lower our assumptions on growth rates for those US companies leveraged to artificial intelligence?
Now as far as what’s going on in the market, if you remember earlier this month in January, we did publish our 2025 market outlook. At that point in time, the market was trading at a 4% premium. That’s the high end of the range that we consider to be fairly valued. The market has risen since then. As of last Friday’s close, we were trading it at a 6% premium. So, just starting to enter that overvalued territory.
When I’m looking at today’s action this morning, I think that the traders generally know that the market, and especially AI stocks are at pretty frothy valuations. I think what we’re just seeing this morning is people are just selling first and they’re going to ask questions later.
Dziubinski: All right. We’ll see how the rest of the day goes.
On the economic front this week we have the Fed meeting. The market’s expecting no interest-rate cut at this meeting. What are you going to be listening for, Dave?
Sekera: Right now the market is pricing it no cut at this meeting. That is our expectation as well. So, as always, we’ll be listening to the Q&A section afterward. Really just listening for cues as to what [Fed Chair Jerome] Powell and maybe the rest of the voting members are thinking.
I just look at the market right now pricing in only a 28% probability of a March cut. So, we could see some big moves in that probability depending on what he has to say. We’re actually still assuming another cut at that March meeting and then looking for cuts at every other meeting through the next couple of quarters. Our economics team is looking for multiple cuts over the course of this year. And that’s really based on their base case where they’re still looking for the rate of economic growth to slow the next couple of quarters and for inflation to moderate at least for the next couple of quarters as well.
Dziubinski: We also have the December PCE number coming after the Fed meeting this week. The last couple of reports we’ve seen inflation’s maybe a little bit stickier than many were expecting. What’s the market expecting for this week’s report?
Sekera: And that’s probably going to be the same thing. If I look at the consensus numbers here for core PCE, they’re looking for a slight increase going to two tenths of a percent increase on a month-over-month basis. It came in at one tenth of a percent last month. And then when we look at the consensus for headline PCE, they’re looking for an increase of three tenths of a percent on a month-over-month basis. So again, that’s slightly up from what we saw last month. And on a year-over-year basis, consensus is currently 2.6% as compared to 2.4% last month.
Dziubinski: Would you expect a lot of stock market volatility to the upside or to the downside depending on how these inflation numbers look?
Sekera: That’s really hard to say. Right now, I think generally the market’s going to be much more focused on earnings that are coming out this week, and we also have a boatload of upcoming earnings coming out the following week. So generally I think the economic metrics are going to take a bit of a back seat to what we see out of companies, not only from earnings but of course what kind of guidance numbers they give to us for the first quarter and for the full year. So to some degree, I think it’ll just matter whether or not this is a big divergence from consensus and if so, how much that divergence is.
Dziubinski: All right. Speaking of earnings, let’s segue to earnings this week. We have four of the market’s biggest companies reporting this week. Let’s walk through each of them. And we’re going to start with Apple AAPL. Apple stock hit an all-time high about a month ago. How does the stock look from a valuation perspective heading into earnings?
Sekera: A month ago when it peaked, I think it was trading at about a 30% premium to our fair value. It’s fallen about 14% since then, but we still think that it’s still overvalued even here. It’s a 2-star-rated stock trading at about an 11% premium to our long-term intrinsic valuation.
Dziubinski: Investors are, of course, going to want to hear more about Apple Intelligence during the call. What will Morningstar want to hear about from Apple this week?
Sekera: To some degree, it’s just going to be the usual things that our analyst team is going to be listening for: how handset sales are doing, what’s going on with the service revenue, getting some clarity on margins at this point and how that may change over the next couple of quarters and the next few years. Specifically, I think we want to hear about what’s going on with handset sales in China. We know that they’ve been losing some market share there. Maybe Apple will comment on what they’re going to do in order to try and defend their position in China to try and stop that market share losses.
And as you mentioned, just any additional details regarding Apple Intelligence, timing, things like that. And I think just really trying to get some sense of whether or not Apple Intelligence might actually be something that could reignite growth here in the short term.
Dziubinski: All right. We also have Microsoft MSFT reporting this week. Microsoft has been a stock pick of yours over the past few months. Do you still like the stock heading into earnings?
Sekera: We do. It’s a 4-star-rated stock, trades at a 9% discount to fair value. It’s a company that we rate with a very wide economic moat. The stock’s only a medium uncertainty rating, and generally, I’d say the company still appears that it’s been hitting on all cylinders across all of its different business lines. And we do think that it will be a long-term beneficiary from artificial intelligence in multiple different ways.
Dziubinski: We also have Tesla TSLA reporting this week. This stock’s up more than 65% since the election, so it must be overpriced heading into earnings, right?
Sekera: Exactly. And I would say actually very much overvalued. It’s trading at about double our fair value, which I think is about $210 per share. So, that stock is well into 1-star territory. In fact, when I look at our coverage, it’s probably one of the more overvalued stocks as compared to our valuation today.
Dziubinski: What’s Morningstar going to be listening for in this week’s report from Tesla?
Sekera: I reached out to Seth [Goldstein, Morningstar strategist] at the end of last week and there are a couple of things he’s going to be looking for. First, he’s going to be watching gross profit margins. Tesla delivered I think almost half a million vehicles last quarter, which I believe is a new record for them. So that should provide some pretty good fixed-cost operating leverage for the company. We could also see some benefit in their gross margins from decreases in material costs.
So, the question here might be how much could gross margin be offset just because of potentially lower average selling prices. If they’ve had to lower prices in order to move the cars off the lots. He’ll be listening for progress and timing on level 3 full self-driving unsupervised software. And then lastly, he mentioned that he’s going to be listening for updates and timing to launch Model Q later this year. That’s their smaller SUV. It’s priced in the mid-$30,000 range, and he thinks that that’s going to allow Tesla to be able to compete in the affordable SUV market. He does look at this as really being one of Tesla’s keys as far as growth in 2025 and beyond.
And then lastly, what’s going on with their energy generation and storage business? I think that part of the company’s business had some record battery storage deployments in 2024. They recently opened up a new factory in China that’s looking to double their production once that’s ramped up. So again, that could be another growth driver for the company.
Dziubinski: Meta META also reports earnings this week, and interestingly Morningstar raised its fair value estimate on the stock last week. Why the boost and is the stock attractive today?
Sekera: The boost was really just due to an increase in our 2025 US ad revenue assumptions, primarily due to advertisers looking to spread out some of their advertising budgets away from TikTok and onto other platforms. Our base case right now is that TikTok still remains operational in the US, but as far as what advertisers are doing, we’re expecting more ad dollars to flow toward Meta and some of the other social platforms as well. That did result in an increase in our fair value, but it’s trading at a 10% premium to our fair value. That puts it in the upper end of our 3-star range.
Dziubinski: What does Morningstar want to hear about from Meta during this earnings call?
Sekera: I think really it’s going to be a focus on capex. We also want to hear commentary on how their gen AI stands to improve targeting and content creation. So I think the market is still a bit concerned with Meta with its capex spend on AI. If you remember, they spent a lot of money on the metaverse that never really provided much of a return. So, it’s a bit of a show-me story as far as the market is concerned.
I want to hear any discussion regarding changes in their content moderation policy, and how the firm’s new moderation policy may not comply with the EU’s Digital Services Act.
And then lastly, we’re looking for commentary on whether or not the workforce reduction that they’ve recently announced is a first step toward more workforce reductions.
Dziubinski: We also have big oil companies reporting this week, including ExxonMobil XOM and Chevron CVX. What’s Morningstar’s take on the energy sector today?
Sekera: It’s pretty attractive, in our view. It trades at a 7% discount to fair value. That’s one of the more attractive sectors today. Plus, I think in regard to not just the valuation. I think there are a lot of good reasons to own energy in your portfolio. I think it provides a good natural hedge just in case inflation were to rebound and start moving up. It’s a good natural hedge to any kind of other geopolitical risks that might be out there and still provides pretty high dividend yields for your portfolio today.
Dziubinski: Heading in earnings Dave, do you prefer ExxonMobil or Chevron?
Sekera: At this point, I think Exxon. It’s a 4-star-rated stock, trades at a 20% discount, has a 3.6% dividend yield, and is a company we rate with a narrow economic moat and a High Uncertainty. If you’re more of a dividend investor, Chevron has a 4.2% dividend yield. So, slightly higher, but it does trade at less of a discount, only 12% versus the 20% of Exxon.
Dziubinski: Let’s dig into some new research from Morningstar. Now, we didn’t have a new episode of The Morning Filter last week, so we need to get caught up on earnings from the big banks. Dave, what were your key takeaways there? And are there any notable fair value changes to talk about among those big banks?
Sekera: Right now with the big banks, everything that can go right is going right. In fact, we expect that we’ll see at least a couple of very strong quarters of earnings growth over the next couple of quarters. In 2025, we expect net interest income will continue to increase, loan growth should increase probably in the second half of the year, and fee income is still increasing as well.
We’re also looking for good numbers out of their investment banking groups that should increase this year. We’re looking for a big ramp-up in mergers and acquisitions as well. From the cost side, costs still appear to be pretty under control at the large banks. When we look at charge-offs, that should remain relatively low or at least at normalized levels. We are projecting a soft economic landing.
At this point when I look at the valuations, I think it’s just a matter of the market over extrapolating just how long this growth is going to continue. We expect that over the medium term, earnings growth would partly start returning more toward historical normalized levels. And at this point, I’d also note, with valuations where there are, I don’t think the market is pricing in any probability of any kind of negative event with the large banks. So, generally I’d say that they’re fully valued with some of them getting to be further and further overvalued.
Dziubinski: Now US Bancorp USB has been Morningstar’s pick in the bank industry, and the stock fell a bit after kind of a so-so earnings report. What was Morningstar’s take?
Sekera: I mean The stock did pull back that day after earnings, but then if you look at the charts, it looks like it recouped a lot of that, almost back to unchanged from where the stock was trading prior to the earnings report.
Generally, when we look at the results versus a lot of the other banks, our analyst noted that their net interest income and fee income were what he considered to be relatively lackluster. And then as far as the company’s guidance, they only guided to modest loan and deposit growth over the course of the year. So again, I think this one is still a bit of a show-me story before the market gives them the credit that they’re giving to some of the other banks.
So, I’d say looking at this company going forward in the next couple of quarters, we’re really going to be listening to what’s going on as far as their expenses, whether or not they can really have that discipline to keep expenses low and bring them down. That’s actually part of our investment thesis for the company.
The market’s in a bit of a wait-and-see mood on this stock after the bank delivered what we consider to be relatively disappointing, negative operating leverage for the past couple of years. But we do think that that should improve as they get those costs more and more under control over the course of the year.
Dziubinski: Dave, do you still like US Bank’s stock after earnings?
Sekera: The stock by itself is really not all that interesting, but it is relative to the other bank stocks, it’s one of the more attractive ones out there. In fact, if I look at our bank coverage, this bank and KeyBank KEY are really the only undervalued banks or at least the undervalued stocks for the banks out there today. And of course, I mean that’s quite a change from what we saw back in the spring and summer of 2023 after the Silicon Valley Bank failure when all of the banks were significantly undervalued.
Right now, US Bank: 3 stars, 7% discount to fair value, 4.1% dividend yield. But again, when I compare that to Bank of America BAC, Citi C, and Wells Fargo WFC, all of those stocks are rated 2 stars, and JPMorgan JPM is well into the 1-star territory.
Dziubinski: All right. Well, another pick of yours, Dave, Verizon VZ reported better-than-expected numbers last week. What did Morningstar think of the results? And is Verizon’s stock still attractive?
Sekera: Reading between the lines here, I think earnings generally appeared solid but not necessarily anything to write home about. They had modest top-line growth, some improvement in wireless subscribers, and strong ongoing free cash flow, but it does look like they’re more interested in driving growth from increasing pricing as opposed to trying to gain new subscribers. I do think that they had recently increased their pricing not that long ago.
When we look at their guidance, management expects wireless growth service revenues to increase 2.0% to 2.8% in 2025. It’s a little bit of a slowdown from 3.1% in 2024, but overall the stock still looks pretty undervalued to us. It trades at a 25% discount, puts that in the 4-star territory, very high dividend yield at just under 7%. The stock we rate with a Medium Uncertainty for a company with a narrow economic moat rating. When I look at our value stocks under coverage, this is still one of the more attractive stocks out there.
Dziubinski: Netflix NFLX reported blowout results last week, and the stock rallied, and Morningstar raised its fair value estimate on Netflix stock by 27%. Walk us through the report and that boost in fair value.
Sekera: Even with that fair value boost, it’s still definitely lagging the stock to the upside. Our investment thesis here had been that we expected to see a much bigger slowdown in growth. We thought that the firm really had passed the largest opportunity for new member growth after it did the big crackdown on password sharing. So, at that point in time, we did see a lot of growth, but we thought that new subs would still grow but much slower than what we had seen.
Now, new subs this past quarter did come in faster than we expected. They also had much higher margins than what we expected. So our analysts did incorporate that into our fair value. So he increased our sales projections over the next couple of years and then also boosted the margin expansion to some greater numbers. And I would say our fair value still includes some forecasts that sub growth will slow, that we still think that probably the highest growth rates for subscriber growth is probably behind us.
Dziubinski: Is Netflix stock attractive after that fair value increase or no?
Sekera: No, it’s not. So even after that fair value increase, the stock’s still at a 40% premium to our fair value, puts it in 2-star territory. And when I look at our earnings note here, our analysts noted that Netflix is trading at about 40 times our 2025 earnings, but when you look at his forecasts and his growth rates, our fair value is implying a 2025 multiple closer to 30.
Dziubinski: All right. Well, it’s time for a viewer question. Adam asked if you think Johnson & Johnson JNJ is still a good core holding. And of course, J&J reported earnings last week, too. Tell us, Dave, what does Morningstar think of Johnson & Johnson today?
Sekera: We maintained our $164 fair value per share following earnings. Now this is one where stock initially did take a little bit of a hit after earnings came out. The market is concerned about some expected slowing of growth in 2025 as Stelara faces biosimilar competition.
We assume in our model over a $3 billion decline in global Stelara sales in 2025. But I’d note the stock did rally after that initial selloff, and I think it’s actually pretty close to being back to unchanged compared to where it was trading prior to the earnings. In my mind, I think that hopefully that’s a good sign that maybe the stock is in this bottoming-out process.
But to some degree, the story here kind of needs to undergo a reset in the market sentiment. So, Johnson & Johnson’s 2025 results, we think will be kind of that launching point. The company is guiding toward 5% to 7% revenue growth from 2025 to 2030, and that’s actually much higher than our assumed growth rate of 2.5% for average annual growth over that same time period.
I know our analysts are watching several different things, specifically several products across their portfolio, and we just want to assess whether or not the long-term guidance is achievable based on how those products perform, which if they perform better than what we’re currently modeling in, does actually provide some upside to our fair value estimates.
Dziubinski: So then, Dave, is J&J still a good core holding and is it a buy today?
Sekera: The answer there is yes and yes. It’s a 4-star-rated stock, 10% discount at fair value, 3.4% dividend yield, a company we rate with a wide economic moat, the stock has a Low Uncertainty Rating. Just generally when I look at the company right now, that stock is trading I think just under 16 times its 2025 earnings forecast.
Dziubinski: All right, so one more question before we get to the picks. We need to quickly circle back on Edison International EIX, which we talked about a couple of weeks ago. The California wildfires have occurred in this utility’s territory. So give viewers an update on Morningstar’s take on the company.
Sekera: I mean the stock here I think is just going to likely remain under pressure while we still have fires burning out in California. And in fact, I don’t think the stock really is going to be in a position to make a full recovery until there’s more definitive information out there as far as what exactly started some of these fires. More recently there have been several lawsuits that have been filed against the company just alleging that their equipment was involved in starting the Eaton fire.
Now in our view, reading Travis’ [Miller, Morningstar strategist] recent note here, he thinks that Edison shareholders probably face pretty minimal exposure. I would encourage readers or viewers to go and read his full note here on Morningstar.com. Travis does walk through his reasoning as to why, but he did reaffirm his $80 fair value estimate once again, and he noted that Edison trades near an 11 times PE multiple, which is about a 40% discount to the sector PE.
Dziubinski: All right. Well, we’ve made it to the picks portion of this week’s episode. Finally. As we move deeper into earnings season, you’ve brought viewers three stocks to buy before they report earnings. The first stock on your list is Advanced Micro Devices AMD. Run through the metrics on it.
Sekera: Yeah, so AMD is a 4-star-rated stock and trades at about a 23% discount to our fair value. Now, it doesn’t look like it pays a dividend. So, for dividend investors, maybe this isn’t one you might have much interest in. Taking a look at the stock, it does have a High Uncertainty Rating, but that’s going to be very similar to pretty much all of our technology coverage. But we do rate the company with a narrow economic moat, that narrow economic moat is based on its intangible assets around just a variety of chip designs that it has, but specifically its expertise in GPUs, which is becoming increasingly valuable for AI applications.
Dziubinski: We talked about AMD a few weeks ago. Morningstar thinks the company will be the number-two player in AI semiconductors. The stock’s down about 40% from its 2023 highs. What’s the market missing here, Dave?
Sekera: I think this is one where sometimes you can see what goes on in the markets is that in the short term or even over the medium term, they can act like a pendulum, sometimes swinging too far in one direction and then overcorrecting too far in the other direction.
So, when I look at the stock chart here over the past couple of years, I’d note that it peaked in early 2024 on optimism for its artificial intelligence. But the stock at that point in time we thought ran up way too much.
Now I don’t think it ever hit 1 star at that point in time, but it was certainly deep into the 2-star territory. But since then, the stock has really just generally been on a downward trend ever since then. At this point, we think the pendulum has now fallen too far to the downside. We think this is one that once the semiconductor sector starts to turn back up, has some good positive leverage to the upside.
As you noted, we think this company will eventually be the number-two player in AI semis and GPUs behind Nvidia. Taking a look at the stock, it trades at about 21 times our 2025 earnings estimate, but we’re looking for average growth in earnings of about 26% between 2026 and 2028. And this is one where it reports earnings on Feb. 4. So, we’ll keep a close eye on this one when it comes out.
Dziubinski: All right. Your second pick this week is Nutrien NTR. Hit some of the highlights on this one.
Sekera: This is one we’ve talked about a couple of times. I think we first had this as a pick on our July 8 show. The stock’s up about 7.5% since then. And then we reiterated that recommendation on our Oct. 21 show after the stock had retreated a little bit over the course of the summer, but the stock’s up 11% since then. But even still, it’s a 4-star-rated stock, 25% discount to fair value, and provides a 4.1% dividend yield.
The stock does have a High Uncertainty, but that’s going to be pretty similar to most of our sector coverage in the basic-materials area. But it is a company we rate with a narrow economic moat, which you don’t see that often in the basic-materials group. That narrow economic moat is going to be based on its cost advantage in potash and nitrogen.
Dziubinski: The stock’s had a tough couple of years, but it’s up about 17% already this year. What’s going on and has the tide turned?
Sekera: Well, for those that have an interest, I’d say I’ll probably go back and maybe watch the Oct. 21 show. We provide a lot more background in-depth there, but just the synopsis, we’ve seen a lot of volatility in corn, soybean, and wheat prices early during the pandemic. Then this company also was impacted by the supply chain bottlenecks that we saw thereafter. Both of those really just caused a lot of disruptions in the company’s business for those three or four years. We think a lot of those disruptions are now normalizing, and I think the market is just starting to catch up to our outlook.
Generally, I’d say our investment thesis here is that we project 2024 will be the cyclical low for volumes and price. We expect both to rebound up toward historically normalized levels over the past couple of years. But the reason I’m highlighting this one again right now is that Seth Goldstein, he’s our analyst who covers the stock, published a note last week, and he was highlighting news of a production cut by major potash producer, Belaruskali.
Now that’s one of the four largest potash producers globally, and he thinks that’s going to help move the potash market from being oversupplied to being more balanced. Plus that supply cut should then boost potash prices, which were at multiyear lows as the market was oversupplied. Specifically, he expects prices will rise closer to his long-term forecast of $325 per metric ton, which is up from $280 per ton in 2024.
Dziubinski: All right. Your last pick this week, Dave, is Barrick Gold ABX. Run us through the numbers on this one.
Sekera: Barrick is the world’s second-largest gold miner by production. It’s a 5-star-rated stock that trades at a 30% discount to fair value, 2.5% dividend yield. The stock is rated with a Medium Uncertainty. I would caution that we assign this no economic moat, but when I look at all of our gold miners, none of them have an economic moat.
Dziubinski: Gold prices were up quite a bit in 2024, but Barrick Gold finished the year in the red. What happened there?
Sekera: They got hit by a couple of different company-specific issues here, specifically lower production, increased capex at some of the mines that it runs and some of its joint ventures. Now, long term, our analyst team expects that these issues will be resolved. They think that will result in increased production, which in turn then will lower unit costs and help improve margins over the next couple of years. And they also specifically called out what’s going out going on in Mali. They’re trying to force Barrick to pay higher taxes there. That dispute right now is in arbitration. The company had suspended mining there until that issue is resolved. They think there is a potential there that Barrick’s economic interest in that mine also could decrease as part of the negotiations for settling that. But that mine in and of itself only makes up 12% of the volumes over our five-year forecast period. So, they think the overall impact of that will be pretty manageable.
Dziubinski: Why do you like Barrick Gold specifically today?
Sekera: I mean we first recommended the gold miners in January 2024, and part of the thesis here is one of the reasons I kind of like these gold miners is we have a pretty bearish view on gold prices in and of themselves. Our midcycle projection for gold is only $1,820 per ounce. Gold today is trading at somewhere around $2,800 per ounce. So, in my opinion, there’s a lot of upside leverage if gold prices were to stay here or move higher.
As far as the gold miners, why we like Barrick, this one is trading at the greatest discount to fair value, and we think its current production issues and dispute in Mali are both more than priced into the stock. So, it seems like the market is overly penalizing the company here in the short term for issues that we think will get resolved to the upside over the long term.
Dziubinski: All right. Well, thanks for your time this morning, Dave. Viewers who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. We hope you’ll join us for The Morning Filter next Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a super week.
Got a question for Dave? Send it to themorningfilter@morningstar.com.
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