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. And before we get started, Dave and I would like to wish our viewers a happy Thanksgiving.

All right. Good morning, Dave. We have a shortened week ahead due to that holiday. So what’s on your radar on the economic front?

David Sekera: Hey, good morning, Susan. You know, what a heck of a couple weeks it’s been, probably over the past month or so, but we’ve made it through third quarter earnings season. Overall, fourth quarter guidance seemed to be pretty solid. We’ve all somehow survived the elections, and now we’ve finally gotten past Nvidia’s results last week without really any major market moves.

I don’t know about you, but definitely looking forward to a holiday-shortened week. In fact, I’ve got a couple of turkeys in the refrigerator down in the basement I need to prep to smoke for Thursday, but until then, it’s all going to be about PCE this week. That, of course, being the Fed’s preferred measure of inflation. I spoke with our US economics team.

I know they currently expect core PCE to come in at about 0.2% on a month-over-month basis. So that would only be slightly higher than the rate they considered to be consistent with about a 2% average annual rate of inflation at that core reading. Now, CPI overall did come in higher than what we expected earlier this month.

But they told me they’re just not necessarily overly concerned. They noted two different areas: Housing and US auto prices were the areas that came in higher than what they were expecting. Those are both areas that have lower weightings in the PCE reading. Plus they still expect that housing inflation is due for a correction and should be coming down probably over the next couple of months or so.

So our outlook for inflation, they still expect that inflation will moderate over the course of 2025. In fact, they’re still looking for inflation to fall below the Fed’s 2% target next year.

Dziubinski: Now we have the Fed meeting again in December. So in addition to this PCE number, what other key metrics will be coming out before that meeting?

Sekera: We’ll get our payrolls report coming out. We’ll check and see how the job market is doing and where unemployment is. And then I think we have another CPI and PPI report beforehand. So unless there’s any real major deviation from our expectations there, our base case is still looking for the Fed to cut another 25 basis points at the December meeting, and looking forward, we still think a combination of the slowing rate of economic growth and moderating inflation really provides the backdrop that the Fed needs to continue lowering that federal-funds rate over the course of 2025.

In fact, our economics team is looking for that rate to get down to a 3%-3.25% range by the end of next year.

Dziubinski: All right. Let’s talk holiday shopping season, which I haven’t even started doing! But let’s talk about holiday shopping season because, you know, Black Friday seems to run the entire month of November now. Anyway, what’s Morningstar’s outlook for fourth quarter retail sales, and how does that compare to years past?

Sekera: Sure. So as far as holiday retail sales go, I look at a number that we call total modified retail sales that is actually calculated by our analyst that covers the REITS space. And what he’s looking for is a proxy for goods that could either be sold in stores or online. And he excludes things like sales at supermarkets and gas stations, services, and so forth, really to try and get at those type of items that are sold more for holiday gift giving.

So his current forecast for the fourth quarter total modified retail sales growth is only 3.7%. Not exactly a grinchy outlook, but that really compares to 6.5% last year. So well lower than what we’ve seen. And when I look at it over the past five years, it’s actually averaged even higher than that at 8.1%.

So that would actually be the slowest rate of increase since we saw 3.4% print back in 2018.

Dziubinski: So then what are Morningstar’s expectations in terms of those brick-and-mortar sales versus online sales?

Sekera: The forecast for sales at brick-and-mortar, or more in-person, is 2.4%. Now that compares to 5.1% last year and a 6% average over the past five years. Still looking for better sales growth for e-commerce, at 6.9%. But again, that was 10% last year, and that compares to a 15.6% average over the past five years.

Again, looking for a much slower sales season this year for holiday sales than in years past.

Dziubinski: And as you alluded to earlier in the show, we have earnings season winding down. You only have one company reporting this week that you’re keeping an eye on, and that’s CrowdStrike. Why is this one that you’re watching?

Sekera: First of all, you know, I just really like the dynamics of the cybersecurity space. I know we’ve talked about it a number of different times over the past couple of years, why I really like cybersecurity stocks overall. So when I look at what’s going on here, I just note that Palo Alto just reported and the stock pulled back a little bit, but that one’s still up 35% year to date.

Fortinet, that one’s up 60% year to date. CrowdStrike was a 3-star rated stock. It just moved up 10% over the past week. It’s also up 40% year to date, it’s now in that 2-star range. But again, yeah, I definitely think that cybersecurity is something that you should keep on your buy list.

Anytime you see these stocks trading at fair value or below fair value, in my mind, it’s a definitely a good time to look to get involved.

Dziubinski: All right. Let’s pivot over to some new research from Morningstar starting with our take on Nvidia’s earnings report from last week. What was the biggest surprise to come out of that, Dave?

Sekera: To be perfectly honest, my biggest surprise wasn’t just how much the revenue surged, or how much earnings beat expectations, or even what their guidance for the fourth quarter was. My biggest surprise was just how little the stock moved afterward. I mean, it was only within a very tight couple percent range up and down afterward.

And when I think about the dynamics here, we’re talking about a company whose revenue has essentially doubled; their earnings have more than doubled on a year-over-year basis. The stock price has gone from $50 at the beginning of the year to almost $150. So to me, it was just very surprising. I was really expecting some sort of breakout either to the upside or to the downside. Whisper numbers before earnings from both the sell side and the buy side really, in my mind, were just all over the place.

There was a huge range of expectations. And when you look at a stock like this, so much of the value here is going to be based on what your growth forecasts are. And so even small changes in that long-term growth forecast can have extremely large impacts on what today’s valuations should be. I think probably the biggest takeaway for me here, looking at the price action, tells me traders overall, I think with how much were up thus far this year, they just want to coast into year-end, they want to lock in the profits that they’ve already made.

Call it a year and wait till next year before they start taking any real positions one way or the other.

Dziubinski: Now, Morningstar raised its fair value estimate on Nvidia stock by 24% after earnings. So walk us through the rationale on that.

Sekera: I read through the rationale. To me, it seems like there’s really two main reasons why we increased the fair value. First, Nvidia is successfully ramping up supply much faster than what we had expected. That led us to increase our growth forecast for the next two years. Before now, the company really had been very supply constrained as compared to just the amount of voracious demand that there’s been for its AI GPUs.

So that’s probably the biggest reason is seeing them being able to satisfy more and more of that demand. And then second was commentary from the company itself surrounding the profitability of their new products of the Blackwell line. And I know that provided our analysts with much higher confidence that gross margins can remain in that mid-70% range over the long term.

So overall, when I look at our model here, we still forecast revenue in fiscal 2025 of $130 billion, which of course is already double last year, and that’s going to double again to $280 billion by fiscal year 2029. Over that same time period, our projections for earnings are also to more than double, increasing to $6.07 in 2029 from $2.96 in fiscal 2025.

Dziubinski: All right, Dave. So then the big question is, is Nvidia a buy after that fair value increase?

Sekera: You know, I’m just going to say the stock is not cheap. Our fair value is $130 a share. Puts it in that 3-star range, which means we think that it’s pretty close to fair value. So I just want to try and put things in perspective here a little bit, trying to help people gauge the relative value here.

Based on our forecast, that stock is trading at 50 times 2025 earnings. However, based on our growth forecast, that does come down to a much more reasonable 24 times earnings in year 2029. In the short term, we expect growth is just going to continue to keep growing at a torrid rate over the next 12 months. But as we get further and further into the future, of course, it’s getting harder and harder to gauge just how much that growth rate will slow when you start thinking about years, you know, three, four, or five years from now.

Now, of course, Nvidia does have that first-mover advantage in the AI GPUs. But competitors aren’t sitting still, they’re all trying to catch up. And even their own clients—Microsoft, Alphabet, Amazon—they’re all working on designing their own AI GPUs, which are going to be then designed for their own specific purposes.

So it’s getting harder and harder in my mind, really, to try and dial into what we think that growth outlook is going to look like. So, of course, that’s why we have a very high uncertainty rating here. To a large degree, the stock is fairly valued, but here in the shorter term, it seems like it’s really much more of a momentum player for the foreseeable future.

Dziubinski: All right. Well, let’s turn to some other companies that were in the news last week, starting with Wal-Mart. The company reported solid third quarter results, and the stock hit an all-time high. So what did Morningstar think?

Sekera: Yeah, I mean, Walmart is doing very well here in the short term. They are, and we’ve talked about this a couple of times over the past few quarters, picking up a lot of new customers, a lot of people still under pressure from the inflation we’ve had for the past couple of years.

And we’re seeing more people trade down from the traditional supermarkets down to Walmart. So Walmart’s comp-store sales were up 5% again, that’s on top of a 5% gain last year. So in my mind, pretty strong growth from a comparable same-store sales basis. But a lot of that is coming from top-line growth, from staples as opposed to discretionary goods.

But even so, considering those are typically lower-margin items, Walmart was still able to increase their operating margins. So they’re doing a very good job with cost control. But I would exercise caution. The stock itself is trading at over 36 times the high end of its 2025 guidance. So in my mind, I think the stock will probably do pretty well or at least do fine here over the short term.

But once that rate of growth starts to slow, this is one where I just wouldn’t be surprised to see that stock gapped down at some point in time in the future, looking at our model over the next five years, our compound annual growth rate we’re forecasting for revenue is only 4%.

So I think about that. That’s inflation plus organic growth. So call it 2% inflation, 2% organic growth. So not a huge growth rate on the top line. Now we are looking for earnings per share to do much better. The five-year compound annual growth rate there is 12%. But in order to get there, when you think about the top line only expanding at 4%, that means you have to assume margins expand pretty rapidly here over the five years.

So we’re modeling in a five-year expansion of 100 basis points, getting up to 5.4% from 4.3% this year. And even with all of those assumptions baked in, it’s still a 1-star rated stock that trades at a 56% premium to our fair value.

Dziubinski: Yeah, so no bargain there. Let’s talk about the other end of the spectrum. Last week, Target also reported, and those were some disappointing results and they reduced guidance. The stock cratered afterward. So what did Morningstar think of those results?

Sekera: Yeah, the stock was down 21% after earnings, and then it only bounced a couple percent since. So it’s not like we’re getting a huge rebound here. And again, taking a look, the earnings were even well below our projections. Granted, comp-store sales were positive, but they’re only up about 0.3%.

Now, that’s on top of having fallen 5% last year. So to my mind, I think that’s really kind of a disappointing result, especially when you compare that to Walmart, who is up 5%. Taking a look at Target’s revenue, it was bolstered by an increase in sales and staples, but those are low-margin items as compared to what they sell in the discretionary category.

Now, when you break target sales down, half of their sales are tied to either apparel, hard lines, or home furnishings. And that is where Target makes a higher margin. So, again, overall, pretty disappointing results. Management also cut its full-year guidance for earnings to a range of $8.30-$8.90 a share. That’s down from $9.00-$9.70 per share.

Overall, pretty disappointing results, not necessarily a big surprise to see that stock having sold off like that.

Dziubinski: Given the selloff, Dave, is Target stock a buy?

Sekera: In my mind, no, I don’t think it’s necessarily a buy at this point. When I look at some of the dynamics here we rate Target with no economic moat. We just don’t think that they have that same value proposition as what you would see at a Walmart or a Costco.

Nor does it have the cost advantage or anything like that. So this is just one of those stocks that, before I ever got involved, I’d want to see just a very large margin of safety before I’d be willing to invest.

Dziubinski: Now, we’ve talked a lot in the past on the Morning Filter about Medtronic, and that company reported earnings last week. Looks like the company beat on earnings and revenue, yet the stock pulled back a little bit. So what did Morningstar think of the report?

Sekera: This is one of those reports where there was a bit of good news, but also a little bit of bad news as well. And I think the market focused probably too much on the bad news here in the short term. So on the good news side, 5% organic top-line growth, we are pretty happy with that.

But unfortunately, the gross margin did constrict by 50 basis points, but a lot of that was really due to new product launches and the expenses that came from that. Overall, our analysts noted that she thinks that Medtronic is really getting close to an inflection point where the investment and research and development that they’ve spent over the past couple of years is starting to pay off.

We’re starting to see more products reach commercialization. We think that supports our forecast for mid-single-digit growth over the next couple of years, and the big takeaway here is that while gross margin was under pressure here this past quarter, going forward over the next few years, that should start to improve as costs from those new product launches subside.

Dziubinski: So were there any changes to our fair value estimate on Medtronic? And how’s the stock look today? Is there opportunity here?

Sekera: We think there is opportunity. Now, there is no change to our fair value. It’s still on track to meet our forecast for this year. It’s rated 4-stars, trades at a 23% discount, pays a pretty good dividend yield at 3.25%. It is a company we rate with a narrow economic moat. The main moat source here is going to be the intangible assets based on its IP and its patents.

We also note that it does have a secondary moat source from switching costs. Overall, a company with a medium uncertainty that trades at I think just under 16 times earnings. So it looks pretty good to us.

Dziubinski: In some nonearnings news last week, Comcast announced that it plans to spin off most of its cable networks. So what’s Morningstar think of the plan?

Sekera: So specifically, they plan to spin off most of the cable networks including USA, CNBC, MSNBC, and E! to shareholders. However, they’re keeping the Bravo Channel, the NBC network, and Peacock along with their production studios and their theme parks. Now, interestingly, looking at the note here written, it just doesn’t make intuitive sense to us.

Overall, we think scale does matter in the media business. So maybe this is really setting up that spinoff to be a takeover target by another media business—or, who knows, maybe Elon Musk.

Dziubinski: Any changes to Morningstar’s fair value estimate on Comcast on that news? And is the stock attractive today?

Sekera: No change to our fair value overall. You know, that spinoff will go to the existing shareholders. Stock’s currently a 4-star stock at a 19% discount.

Dziubinski: All right, viewers, it’s time for the main course, the picks portion of our program this week. Dave has brought us some undervalued stocks that tie in to the holiday season. Your first pick this week is Hasbro HAS. Run through the data on it.

Sekera: So Hasbro is rated 4-stars, trades at a 25% discount, has a 4.5% dividend yield, does have a narrow economic moat. The moat is mostly being from intangible assets like their brands and their distribution network. We think that that moat source is evidenced by its market share and its pricing power, but most importantly, its ability to win licensing contracts, which is getting to be increasingly more important in the toy business. However, it is a company that we do rate with a high uncertainty.

Dziubinski: Now, Hasbro stock is having a pretty solid year, though it did pull back a bit after the company reported earnings. So why does Morningstar think the stock has more room to run?

Sekera: I think this was actually a pretty hard quarter for many to understand. You know, sales here fell by 15%, so a big pullback. But that 15% drop is mostly in the consumer products division, and a large portion of that sales decrease looks like that was in brands that they were purposefully exiting and for closeouts as well.

Now, on the good news side, the operating margin did expand by 400 basis points to 15% in that segment. Overall, the operating margin’s at 25.7%, kind of one of its higher readings for operating margin on a quarterly basis. But looking forward, the fourth quarter guidance was weaker than what the market was looking for.

They’re looking for revenue to possibly drop another 20% in that fourth quarter. But I think it’s really mostly due to a shift in timing for certain releases as well as just clearing out some more of those underperforming lines. So a lot of things going on here from a product line basis. However, when I looked at Jamie [Katz]’s note, she still sees a pretty steady state of brands heading into 2025, looking for much more stabilized demand next year, and going forward she’s looking for the company to return back toward more organic top-line growth of 5% next year.

And for an operating margin of what was 20% this year beginning to expand as they get out of some of those underperforming lines, looking for 20.8% next year and then further expansion thereafter. The other thing that she noted here, is that over time digital games become a larger percentage of their business. And those, of course, have higher margins as well.

So over our forecast period we are looking for a compound annual growth rate for earnings of over 20% coming off of their lows. But the stock’s only trading at 16 times this year’s earnings.

Dziubinski: Your second holiday-themed pick this week is Constellation Brands STZ. I guess you’re assuming that consumption of the company’s beer brands will increase over the holidays. Give us the highlights on this one.

Sekera: Well, it’s a 4-star rated stock, trades at 18% discount. Its dividend yield is only at 1.7%, but I think that’s really just because the company focuses more on stock repurchases than cash dividends. But we do rate the company with a wide economic moat, that moat source coming from intangible assets. As you mentioned, beer is 80% of their revenue.

They have the well-known Corona and Modelo brands here in the US that they distribute. But the other 20% of the revenue comes from several well-known wine brands and some alcoholic spirits brands. And it’s a company we rate with a medium uncertainty.

Dziubinski: Constellation Brands stock is having kind of tough year. What’s Morningstar think the market is missing?

Sekera: Overall, I think the stock is pretty close to unchanged on the year. But we’ve had some relatively weak performance in the wine and the alcoholic spirits business. That’s offset the solid performance that we’ve seen in the beer business. But longer term, we do think that it’s still just a very solid outlook.

In our model, we’re looking for a compound annual growth rate over the next five years for revenue of 6.5%, and adding some margin expansion on there, looking for earnings to grow on a compound annual growth rate over the next five years at 10.6%.

Dziubinski: All right. Shopping mall REIT Macerich MAC is your next pick. Walk through the data on this one.

Sekera: Sure. It’s a 4-star rated stock, trades at an 18% discount, has a 3.5% dividend yield. Now, as with most real estate plays, we rate it with no economic moat and it has a high uncertainty rating.

Dziubinski: Now Macerich’s units are performing pretty well this year. Has the death of the shopping mall been greatly exaggerated, Dave?

Sekera: This is actually a theme we’ve talked about over a couple of years now, that the shopping mall is still going to be around. It’s just how the shopping malls are evolving over time. So in fact, this is a stock I think we first highlighted on our March 6, 2023, show. Since then, it’s up 63% plus the dividends you would have earned.

We reiterated our call earlier this year on April 22. Stock’s up 29% plus the dividends since then. And for those of you that missed those shows, you know what Macerich is? It’s a small cap REIT, but it really invests in class A shopping malls. So our original thesis here is that even going back over the past couple of years, we have a pretty positive view on shopping malls that are those highest high-end ones, the class A, the ones that we think have got the best foot traffic and the best ability to pull people into their malls.

We’ve also noted how malls are changing. They’re becoming much more experiential over time. They’re less reliant on retail sales. So they’re doing two things. One, they’re repositioning their portfolios on the retail side in order to put together a better portfolio that’s more cohesive of the type of retailers that they have in there.

But they’re also seeing more things that can’t be replicated online. More restaurants, gyms, doctor’s offices, movie theaters, other ways of pulling foot traffic into those malls. So to some degree, our investment thesis still remains the same. Yes, e-commerce is still taking share from retailers at a faster rate. But I think that class A malls overall still have a reason to exist.

A lot of shoppers still like that in-store experience for some items. The malls have revamped that portfolio to become more symbiotic and to drive foot traffic. And lastly, with malls becoming more experiential and less reliant on just retail sales, we think people are going to continue to keep going back.

Dziubinski: Now, home goods retailer Wayfair W is your next pick. Fill us in on it.

Sekera: This is a stock maybe a lot of people don’t know. For those of you that haven’t heard of Wayfair, it is an e-commerce platform. They sell furniture, home decor, housewares, and other home goods online mainly in the US. I think 87% of their sales last year were here just domestically. But it’s a 4-star rated stock, trades at a 37% discount to our long-term intrinsic valuation.

Doesn’t pay a dividend. And I have to caution you, this one has no economic moat and a very high uncertainty rating.

Dziubinski: Yeah, this Wayfair stock looks way undervalued. I think it’s the most undervalued of the stocks you brought to us today. So what’s weighing on shares and what’s Morningstar’s long-term thesis on this one?

Sekera: This is definitely not one of the typical stocks that we usually highlight on the show that we’ve talked about over the past couple of years. And I think this is also a stock that’s really going to be much better geared for those investors that can withstand a higher degree of risk in their portfolio.

But as you mentioned, at a 37% discount, that is a very significant margin of safety from our long-term intrinsic valuation. But again, one of those stocks, I think you’re going to have to live with a lot of volatility over the shorter term. It’s one of those companies that when you look at what’s happened over the past five years, the results have just been significantly impacted by the pandemic.

In 2020, their sales skyrocketed by 55%. People wanted to go buy things online. They weren’t going to buy things in person. But their sales really have only slid ever since. And of course, then we had all the shipping bottlenecks, the supply chain distortions. And now, we’re dealing with what I consider to be somewhat of a stalled housing market.

But our analyst has noted that just now we’re starting to see more signs that she thinks is showing a stabilization and starting to see that top-line revenue starting to normalize. So she thinks the top line should begin to grow again next year. And even then, we’re still only looking for a 2% compound annual growth rate over the next five years.

So we’re not looking for any huge rebound or anything like that. But the big story on this stock is going to be that as that top line begins to grow again, the free cash flow and operating margins should also begin to rebound. So we’re looking for free cash flow to be positive this year for the operating margin to then turn positive in 2027.

But again, as always, before you invest, I think this is one you definitely need to do your own research, develop your own opinion on this one. This is a situation where you really have to believe in that longer-term outlook for the rebound and margins. And of course, you’ll make sure, if you do get involved in a stock like this, you make sure you properly size it within the constraints of your own portfolio and your own risk tolerance.

Dziubinski: And then your last pick this week, Dave, is Amazon.com AMZN. Take us through the data.

Sekera: Sure. So Amazon’s currently rated 3-stars. It only trades a couple dollars below our $200 fair value and of course does not pay a dividend at this point. But it is a company we rate with a wide economic moat. In fact, our moat is based on four of the five moat sources, including network effects, cost advantages, intangibles, as well as switching costs, and the company with only a medium uncertainty rating.

Dziubinski: Now, as you mentioned, Amazon is trading about in line with our fair value estimate. So it’s not really undervalued, according to Morningstar. Given that, why is it a pick this week?

Sekera: To some degree, just taking a look at the market overall, in a market that’s generally getting to be overvalued, I’m finding it harder and harder to find undervalued stock picks that I really can get behind. A lot of what I see out there right now that’s undervalued are either story stocks or contrarian plays. You know, often these are getting to be much higher-risk investments, other investments that probably are going to take a while for them to play out.

Whereas fundamentally, Amazon still just has everything going for it right now. Its AWS, which is its cloud platform that hosts artificial intelligence, we’re seeing accelerating growth going into that business. The ad business is still doing especially well. That’s a very high-margin business growing very quickly, and its retail side, the business there is still the online leader.

So overall, yes, maybe it is a 3-star rated stock. But what that just means for you as a long-term investor is that you should expect to earn that company’s cost of equity over time, which in this case we use a 9% assumption. So 9%, to be honest, is not that bad, especially in a market that’s getting to be pretty fully to overvalued. And also compared to a lot of other stocks out there that unfortunately are just trading at substantial premiums to our long-term intrinsic valuations.

Dziubinski: Yeah, a reasonably priced, high-quality company.

Sekera: Exactly.

Dziubinski: Well, thanks for your time this morning, Dave. Viewers who’d like more information about any of the stocks that 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 video and subscribe to Morningstar’s channel. Have a great holiday.

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