4 Cheap Stocks to Buy Before They Turn Around

On this week’s episode of The Morning Filter, Dave Sekera and Susan Dziubinski discuss what to watch in the market after the US struck three nuclear sites in Iran over the weekend. They also review last week’s Fed decision and dot-plot update, discuss which economic and earnings reports to watch this week, and share what they learned about the consumer after digesting last week’s earnings reports from Lennar LEN, Darden DRI, and Kroger KR.

Plus, they cover whether Meta Platforms META, Marvell Technology MVRL, or Advanced Micro Devices AMD are stocks to buy today after popping last week. And one of Dave’s stock picks this week is a Warren Buffett favorite.

Episode highlights:

Fed Reaction & InflationStocks in the NewsShould You Stick to a Market Weighting in Stocks?Undervalued Stocks to Buy Before They Rebound

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

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Transcript

Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday before market open, Morningstar Chief US Market Strategist Dave Sekera and I talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.

All right, well, good morning, Dave. Now, over the weekend, we had some big news. The United States attacked three Iranian nuclear sites. So how’s the futures market responding this morning to that, and why do you think it’s responding the way it is?

David Sekera: Hey, good morning, Susan. Yeah, actually, before we get into that, just want to show off my new Miami University mug I’ve got going this morning. Got that from my oldest daughter the other week, so.

Dziubinski: OK, not to brag, but I also have a Miami child.

Sekera: Yeah, all right.

Dziubinski: So I’m coincidentally using my Miami University mug this morning, so there we go.

Sekera: Nice, I like to see it. All right, so let’s get back to what’s going on in the world here. So taking a look at equity futures this morning, a little bit in the red, but I would say effectively based on that news, I would say that’s really just unchanged. Bond markets essentially unchanged as well. Gold looks like it’s up a little bit, but in my mind, not enough to be really meaningful. Last I checked, oil’s up is less than a dollar a barrel. It’s now trading at under $75 a barrel.

Just to put that in context, I looked at the oil chart for the past three years. Really, we’re still kind of right in the middle of the range. So really, no change in the oil markets as well. At this point, it just looks like the market is just pricing in essentially no escalation. I know Iran threatened to close the Strait of Hormuz, but at this point, the markets just are not believing that they have any ability to do that.

Really, the larger takeaway here, the market’s just pricing in. They don’t expect that Iran will be able to conduct any kind of meaningful retaliation. Let’s keep our fingers crossed and really, from our point of view anyway, hope it stays that way.

Dziubinski: So Dave, how would you suggest that investors effectively monitor what’s really going on in the conflict?

Sekera: Yeah, I mean, in the fog of war, it’s always difficult at best to try and separate what’s real versus what’s propaganda, especially in an era of social media where anybody can upload anything, especially in an area where we’ve got all kinds of AI and deepfakes out there as well.

I just watch the oil markets. I think the oil markets are going to reflect really the best insight as to what’s really going on on the ground. I’ll watch the spot prices for both WTI and for Brent. I’ll look at the forward futures curve for the next two years. Really just watch for the amount of change and the velocity of change. So, of course, rising oil prices would just indicate the situation is getting worse. How fast they rise, how far they rise will give you an indication of that. Then when we have falling oil prices, really just an indication that the situation is moderating.

Now, why do I think this? Well, when I look at like the global energy giants—the BPs BP, the Exxons XOM of the world—they have very large global oil and natural gas trading desks. They’re going to have the best real-time information; in fact, I would say they probably have better information than a lot of governments are even going to have.

They have global contacts on the ground in all these different regions, whether it’s people that actually work for their company or different consultants or people that they pay for information, so they’re going to know exactly what’s going on in each of the different major oilfields out there—the infrastructure, the pipelines. They know exactly what’s going on with all the shipping facilities out there as far as what may or may not be damaged and even when there is damage in different oilfields or facilities, they’re going to have pretty good estimates as far as how much that damage is and maybe even estimates as far as like when they think those will end up going back online.

And of course all the global macro hedge funds—they have lots of money that they can pay for information as well, so I really think it’s those oil markets that’s really going to show exactly what’s going on on the ground before we see it in any of the other markets out there.

Dziubinski: As expected last week, the Federal Reserve left interest rates unchanged. The Fed also left its interest rate forecast for 2025 unchanged and is still penciling in two cuts this year. So, what do you make of that, Dave?

Sekera: Oh, yawn. No, it was just another nonevent in my point of view. From what I can tell, just kind of all the standard same talking points. The Federal Reserve is going to remain data-dependent. We’re going to balance our dual mandate between inflation and full employment. Yes, we still expect tariffs will increase inflation at some point. We just don’t know if it’s going to be a one-time adjustment or if it might increase inflation expectations. We will act as necessary when the data blah, blah, blah, blah. So nothing.

Dziubinski: Well, as you mentioned, you know, the Fed did inch up its inflation forecast for the year and Fed Chair Jerome Powell said during the press conference that the committee is beginning to see some impacts of tariffs on inflation. So, what do you make of that specifically and anything else Powell had to say?

Sekera: You know what, Susan, you caught me. I got to admit, I didn’t expect anything of any significance to come up at this meeting. I had better things to do. So actually, I skipped watching Chair Powell’s Q&A session this time around. Considering just how minimal there were in any changes in the federal-funds rate probabilities over the next couple of months, stocks, bonds, nothing really moved all that much. So it doesn’t appear I really missed anything this time around.

Dziubinski: So then looking ahead to this week, we have the PCE numbers coming out, and the PCE is the Fed’s favorite inflation gauge. Given that we saw cooler than expected CPI and PPI readings earlier this month, what are you expecting to see with PCE this week?

Sekera: So just taking a look at the consensus here, it’s calling for pretty moderate inflation from PCE. Headline on a year-over-year basis up 2.2%. Headline on a month-over-month basis up one tenth of a percent. And then same thing, core PCE on a month-over-month basis, consensus looking for one tenth of a percent as well.

So unless the readings are really different than consensus, I don’t think this is going to be meaningful as well. Just thinking about the pull-forward effect of purchases prior to the tariffs, now companies are using that excess inventory up. In my opinion, I think trying to use any of these economic metrics to really try and gauge what’s going on with the economy and/or inflation is a bit of a fool’s errand for this month and maybe even the next couple months until things kind of even out over time.

So in my mind, I think that’s why second-quarter earnings and the management conference calls are going to be even more important as far as trying to understand what’s really going on out there and even more important than earnings conference call and guidance typically are.

Dziubinski: So then, given that, Dave, are there any economic reports you’re watching this week?

Sekera: Here’s a couple. I’m going to take a watch of durable goods orders. Now, looking at consensus, I don’t know, it kind of looks like it’s all over the place. I don’t think even the economists out there have a great sense as far as how that’s going to turn out. Now, it was down 6.3% in April, but of course, it’s up 7.6% in March when everyone was buying before the “Liberation Day” tariffs were supposed to go into effect. With all that pull forward, it decreased then in April. So we’ll see where it comes in here.

We’ve also got several PMI reports, purchasing manager indexes. Now, remember, those are diffusion indexes. So if they’re below 50, you know, that means that the economy is contracting. If they’re greater than 50, expansion. But really, same thing. I’ll watch those, look for anything that really looks odd here. But for the most part, I’m not going to read too much into those right now either.

Dziubinski: How about from company earnings perspective? Any of those you’ll be watching for this week?

Sekera: Well, in this case, I’m going to be watching and listening to what FedEx FDX has to say. That’s probably going to be the best real-time indicator of economic activity right now. It’s going to give you insight both as far as what’s going on at retail demand levels, what’s going on with online purchases. They do a lot of business-to-business shipping as well. So again, really, that’s probably the best economic indicator right now.

Having said that, it might still be hard to separate, even at FedEx’s business, how much of that activity is from tariff pull forward, how much of it is actually true economic expansion or contraction.

I did take a quick look at our note on FedEx from last quarter. It looked like they did lower guidance last quarter. Now, personally, I doubt that they would probably do so again. Their fiscal year adjusted EPS guidance right now is $18 to $18.60 per share. So that puts the company at about 12.3 times in the midpoint for forward price to forward earnings guidance, which when I look at our model, is pretty much in line with where we are. It’s a 3-star-rated stock, so probably nothing to do at this point as far as buying or selling it. But again, I will be listening to what they have to say about the economy.

Dziubinski: All right, well, let’s pivot over to some new research from Morningstar on some stocks that have been in the news. So on last week’s episode of The Morning Filter, you said that you’d be watching earnings from Lennar LEN, Darden DRI, and Kroger KR. So let’s start with Lennar. First, what did the company have to say about the housing market?

Sekera: Similarly, I actually went and reread the note from last earnings season on Lennar as well. They had reported a pretty slow start to the spring selling season. This quarter, I talked to our equity analysts and essentially said the bad news is home sales, new-home sales, still pretty sluggish at this point. The good news, at least it doesn’t seem to be getting any worse.

He noted that he thinks there’s still an above-average supply of new homes that are unsold out there, a lot of spec homes, so we might need to see the 30-year mortgage really start to move down in order to help bolster demand in the new home market at this point. But overall we think that it supports our forecast for housing starts to decline about 3.5% this year, another decline of 1% in 2026 before it starts moving up, so I don’t know, at this point based on our economic outlook, I would say probably new house construction is neither a contributor nor a detractor from economic growth.

Dziubinski: So what do you think of Lennar as an investment after earnings? Is it a buy?

Sekera: I would say that’s a definite maybe. I think that if you’re going to buy this stock, this is one where you probably have to have either an outlook for 30-year mortgage rates coming down here in the near term, or it’s a stock you’re just going to have to be pretty patient for a while. It is a company we rate with no economic moat, pays an under 2% dividend yield. Having said that, trades at a 33% discount to fair value, puts it in 4-star territory. But as far as this stock really starting to work anytime soon, I think you’re really going to see an upward trend in new home construction and new-home sales before the stock really starts to work.

Dziubinski: So let’s talk about Darden and Kroger. What did their results and forecasts reveal about the state of the consumer today?

Sekera: Looking at Darden, I think they actually did surprisingly well. Their same-store sales were up 4.6%. Olive Garden, which is 42% of their sales, that was up 6.9%. Longhorn Steakhouse, that’s 26% of their sales, that was up 6.7%. So, again, that was much better than I think I would have expected coming into this quarter.

Now, we have noted that inflation for food away from home has now outpaced food at home for 27 consecutive months. At some point, that’s got to be a headwind for the restaurant industry. But, for now, consumers still obviously like to go out to eat. As an old consumer analyst, the one thing I’ve learned is never underestimate the US consumer’s willingness to spend.

So I don’t know, is this an indication that maybe the economy is not slowing as much as thought? Is this maybe an indication that maybe wage inflation is actually doing well enough to bolster consumer spending? To be honest, I just really don’t know at this point. It’s very, very difficult to tell.

Taking a look at Kroger, they did pretty well as well. Their same-store sales, up 3.2%. They raised their full-year outlook by 25 basis points to 2.25% to 3.25% for same-store sales. Now, having said that, their operating margin was flat at 2.9%. They held their 2025 forecast unchanged, so essentially what’s going on here is they are making better revenue, better profits on those higher same-store sales, but they’re reinvesting that cash back into their business in order to lower pricing. So they need that lower pricing to keep that foot traffic up, to keep consumers coming back into that store. So not necessarily a margin story at this point in time.

Dziubinski: So is either Darden stock or Kroger stock attractive today?

Sekera: From our point of view, I’d say no and no. Darden, 1-star-rated stock. We think the market’s just pricing in too much growth for too long. I haven’t spoken to our analysts. We’re still pretty comfortable with our valuation, long-term annual sales growth in the low single-digit area. You know, I don’t know. You just really have to have much higher assumptions than that to get to anywhere near the current stock price. I think management’s earnings guidance is 10.50 to 10.70 per share. That puts the stock at 21 times earnings. For a restaurant company, I don’t know, that seems a little on the pricey side for me.

And then as far as Kroger goes, 2-star-rated stock, no economic moat. Personally, I’m just not a fan of investing in the supermarket industry. It’s just a very low margin, very highly competitive industry. I’d just rather put my money elsewhere for a long-term investment.

Dziubinski: And we saw Meta META stock pop last week on news that the company would begin placing ads on WhatsApp. Now, what did Morningstar make of that news? And was there any change to our fair value estimate on Meta stock?

Sekera: Yeah, I read through our write-up and I would say that overall it was not surprising to our equity analyst team. Facebook, Instagram already saturated with ads, so they really needed to extend those ads onto their other platforms in order to drive any other additional revenue growth. We maintained our fair value, $770 per share, and that WhatsApp monetization was already incorporated into our growth forecast. So overall, no change.

Dziubinski: So then is Meta stock a buy today?

Sekera: I think that’s going to depend on what you’re looking for. The stock is at a little bit of a discount, kind of 10% to 11% from our fair value, but that still puts it in that 3-star range. So not enough margin of safety to be a 4-star-rated stock. Having said that, if you are looking to try and invest in exposure for AI, specifically how AI can drive revenue over the long term for social media platforms, this might be one to take a look at, but if you’re really looking more for what I consider to be more of a tech-oriented stock, something that is trading at a margin of safety, I’d say probably not. I think within tech, there’s a lot of more undervalued opportunities elsewhere.

Dziubinski: Well, let’s talk about what has been an undervalued opportunity in tech, and that’s Marvell Technology MRVL. That stock was a pick of yours on the May 12 episode of The Morning Filter. The stock was up last week after the company announced during an event that it was raising its growth expectations. So what did Morningstar make of that news, and were there any changes to the fair value estimate on the stock?

Sekera: Yeah, it’s nice to see one that’s working out as our equity analyst team has called on this one. So for those of you that didn’t watch that episode, just as a reminder, Marvell is a chip designer. It’s focused on wired networking. Of course, it’s been a huge beneficiary from the buildout of data centers to support AI.

Now, earlier this year, all of those AI stocks were falling. This one fell along with all of the artificial intelligence stocks, but yet it never really recovered off the bottom. And to some degree, we had heard that there were rumors out there that Marvell was losing share for its custom chip portfolio of AI accelerators. Our equity analyst team didn’t think that that was true. The company did host a webinar last week focusing on its custom AI accelerators, and it looks like they gave the market enough comfort to really indicate that they are maintaining that technological lead and their market share. So the stock did take a pretty nice pop, 10% after that webinar.

Dziubinski: Now, Marvell still looks undervalued despite that uptick last week. So is the stock still a pick of yours today?

Sekera: Yeah, it would still be a pick today, still at an 18% discount, still in that 4-star range. In fact, when I look at our AI-related names with how fast and how much all of them have come back, this is really one of the few AI names that’s still trading at a discount. So hopefully that webinar will be the catalyst that results in the market reevaluating their view on the stock, reevaluating the growth trajectory and the valuation. So hopefully this one can continue its climb up and to the right.

Dziubinski: Now, Advanced Micro Devices AMD also held an event last week where it showcased some new products, and the stock popped after that event. What did Morningstar think of the showcase?

Sekera: Well, overall, when I think about our synopsis of our investment thesis for AMD, we do think that ultimately AMD will be the number-two player in AI behind Nvidia NVDA. But at this point, Nvidia still has a long lead ahead of AMD. So at the event, they did highlight several new products and semiconductors, software, services. Our equity analyst was encouraged by the advancements that they’ve been making in AI, but there was nothing there that would lead him to revising his longer-term forecast. So, as such, he left our fair value unchanged.

Dziubinski: So then from a valuation perspective, Dave, is AMD attractive today?

Sekera: I mean, unless you’re seeing something that we’re not, I would say probably not. I mean, it is a 3-star-rated stock, but it is trading at a 7% premium to fair value. So again, nothing necessarily that we’re seeing that would necessarily make it a buy here in the short term.

Dziubinski: Now, International Flavors and Fragrances IFF was a pick on the April 7 episode of The Morning Filter. But last week, Morningstar’s analyst on the company downgraded its economic moat rating to narrow from wide and lowered his fair value estimate by about 14%. So, Dave, unpack those changes for our audience.

Sekera: And I think this is also just a good opportunity to reiterate, what is an economic moat? How does it impact the long-term intrinsic valuation of a company?

So an economic moat is our analysis of whether or not a company will be able to generate returns over invested capital over the long term. So a company that’s rated no moat, even if they have high excess returns today, we expect that’s going to be competed away within the next five years. A company that has a narrow moat that we think it does have kind of some long-term durable competitive advantages, they’ll be able to generate those excess returns for the next 10 years before they get competed away. And a wide-moat stock is one where they have enough excess returns over the next 20 years that we would rate it that highly.

So in this case, when we reduced our moat rating, that does reduce the future earnings stream of excess returns over the weighted average cost of capital to a time period that’s only going to be for really the next 10 years as opposed to the next 20 years. Now, in this case specifically, that wide economic moat was based on the company’s attractive specialty ingredients businesses, that includes taste, scent and health and biosciences.

However, the company had provided some new information recently, which we took into consideration. This information being regarding its capex spending plans. Based on these plans, we then revised our assumptions. Overall, we now expect that the company will be spending more capex on its no-moat food ingredients business than what we had previously assumed, so that means that it erodes those excess returns more quickly, so it’s really that mixed shift in capex spending over the long term that led to us downgrading that moat to narrow.

Dziubinski: So after that moat downgrade and the fair value trim, is International Flavors and Fragrances still attractive?

Sekera: It is, and it’s also a good example of why we recommend for investors to look for those stocks that are trading at pretty significant margins of safety from that long-term intrinsic valuation. In this case, even after moving it to a narrow economic moat and bringing our fair value down a bit, it’s still a 4-star-rated stock at a 21% discount at a 2.1% dividend yield.

Dziubinski: Well, it’s time for our question of the week. JD emailed us last week asking why you’re suggesting that investors maintain their market weightings in stocks even though the S&P 500 looks overvalued according to its P/E ratio and Berkshire Hathaway BRK.A BRK.B is hoarding cash. What say you, Dave?

Sekera: Well, again, this is a good example of how we can talk about how we value markets and how that’s different than what you’re going to hear from a lot of other strategists, a lot of other companies. Now, our equity analyst team here in the US covers over 700 stocks that trade on the US exchanges. I mean, that’s almost all of the S&P 500, all of the large mega-cap stocks. So on a percentage basis, we cover a very large percentage of the US stock market.

Now, we’ll take an aggregate of a composite of the market capitalization of all of those stocks that we cover, and we’re going to compare that to a composite of the intrinsic valuation, which is assigned by all of those equity analysts on those companies. So we’re really doing what I would consider to be a bottom-up basis based on that intrinsic valuation. Of course, that’s going to be based on our economic moat analysis and based on our discounted cash flow model using our methodology.

Now, a lot of other strategists do much more of a top-down approach. They have some sort of model, some sort of algorithm. I don’t know how they do it. They’ll come up with what they think the S&P 500 is going to earn over the course of a year. They play some sort of forward P/E ratio to it. Always looks like they’re coming up with some sort of price target that’s like 8% to 10% higher than wherever it is today. To me, that always seems like it’s really more an exercise in goal-seeking than it is necessarily really evaluation.

So, of course, we don’t use P/E ratios in our valuation at all. In fact, when I look at P/E ratios and some of these other broad market metrics, they’re really just a shorthand way that other people try and estimate valuation without really having to go through the work of building out a full DCF model on all of the companies that really make up the market.

And I think you need to be very cautious when you’re using things like historical PEs or these other metrics. So for example, I looked at back in 2010, eight of the top 10 largest market-cap stocks out there were stocks like Exxon, Walmart WMT, GE GE, Chevron CVX, Bank America BAC, AT&T T, JP Morgan JPM, ConocoPhillips COP. None of those stocks are top-10 market-cap stocks today. Top 10 didn’t even include companies like Nvidia, Amazon AMZN, Alphabet GOOGL, Meta, and Broadcom AVGO.

So I would just say that when I look at the market today and those really the big mega-cap stocks that skew the overall valuations, they would have very different long-term growth dynamics, very different operating margin structures very different free cash flow profiles than what the market had. And the further you go back, the greater the difference is going to be in what companies skew the overall market valuations.

So long explanation as far as, so why do we view the market as a market-weight today? So when we do our price/fair value analysis, the market’s only trading at about a 2% discount. Historically, going back to 2010, about half the time the market was trading at a higher valuation. Half the time the market was trading below that valuation.

So while I am concerned that we could see some downward volatility here in the shorter term, maybe some kind of correction with all the trade and tariff negotiations going on, second-quarter earnings coming up in mid-July, the view of our US economics team that we are expecting the rate of the economy to slow over the next couple of quarters, the Fed to be on pause until the fall, still what’s going on in the Middle East at this point in time.

So at this point, if there is a pullback, at a market weight, that gives you the opportunity to then move to an overweight, just similar to like what we did at the beginning of April when the market fell too far too fast. And then if I’m wrong and the market continues to just be as bulletproof as it has and just continue to keep chugging along, worst-case scenario at that market weight, you’re making at least the market rate of return.

Dziubinski: All right, well, viewers and listeners, keep sending us your questions. You can reach us at TheMorningFilter at Morningstar.com. And as a reminder, Dave and I will be taping an episode of The Morning Filter at the Morningstar Investment Conference in Chicago this week on Wednesday. There’s more information about the conference in the notes section of the podcast, and we hope to see some of you there.

All right, it is time for everyone’s favorite part of the show, Dave. It’s your picks of the week. This week, you’ve brought us four stocks that have underperformed the market this year and that have become increasingly undervalued because Morningstar’s analysts have either increased or held firm on their fair value estimates on these stocks.

So your first pick this week is Salesforce CRM. Give us the highlights.

Sekera: So Salesforce is rated 4 stars, trades it at 20% discount to our fair value, not necessarily for dividend investors. The dividend is pretty minimal here, but it is a company we rate with a wide economic moat, that moat rating being primarily on switching costs with network effect being kind of that secondary moat source.

Dziubinski: Now, Morningstar slightly raised its fair value estimate on Salesforce in late May, but the stock is down even more since then. So what’s Morningstar see here that the market’s missing?

Sekera: Yeah, to be honest, I don’t really know why the market is negative on this stock. First-quarter results were better than the top end of guidance. Based on the results and that guidance, we did bump up our own near-term estimates while holding our long-term estimates unchanged at this point. So it just doesn’t necessarily look a very expensive stock from even a P/E point of view. Yes, we don’t use P/Es, but I still like to kind of get a guess as far as like what the market is thinking.

It only trades at 24 times this year’s earnings, 21 times next year earnings, and I think this is a good stock that’s a play on our theme that 2025 will be the year that investors really start shifting their focus away from AI hardware companies to those companies that will be able to use AI to drive top line growth and/or improve their efficiency, generate higher operating margins.

And this one, you have a company where one of their subsidiaries or one of their products is called Agentforce, that’s their AI-powered platform, showing a lot of strength. It’s only been available for two quarters, but it already has $100 million in revenue run rate at this point.

So I don’t know. I think this is probably a pretty good buying opportunity within the technology sector. Our analyst team thinks that the stock is or this company is kind of one of the best out there as far as a combination of top line growth potential, margin expansion potential, has a strong balance sheet, the stock is down, I think, about 22% year to date. So I don’t know. I think this one looks pretty good to us.

Dziubinski: All right. Well, your second pick this week is Clorox CLX. Run through the numbers.

Sekera: So Clorox is rated 4 stars, trades at a 32% discount, has a 4% dividend yield, wide economic moat based on intangible assets, essentially its brands, as well as entrenched positions with a lot of leading retailers out there.

Dziubinski: Now, it looks like Clorox stock is off about 50% from its highs during the pandemic. So is there a catalyst here that can turn things around?

Sekera: I think you have to be really cautious when you look at probably the five- to six-year stock chart on this stock. So, of course, when the pandemic emerged, Clorox wipes, I mean, they were like gold. That stock skyrocketed higher, well into the 1-star territory. We thought it was significantly overvalued back then. And of course, then the company was just never able to match anywhere near the kind of growth expectations that those valuations would have required for that stock to be worth anywhere near as high as it got.

Now, the stock sold off over multiple years. It looks like it tried to bottom out, and then in the fall of 2023, the company unfortunately got hit by a costly cyberattack that hampered their operations. It really took them some time to recover from, took them a lot of expenses really to be able to get things back online. Just as a side note, it’s a perfect example of why I really like a lot of these cybersecurity stock plays.

In this case, thinking about Clorox, it’s kind of just a normalization play at this point in time. When I look at our model, we’re only pricing in 3.3% top line growth. It’s a combination of a little bit of pricing, a little bit of volume. I think that’s probably going to be pretty conservative. And we’re forecasting that operating margin to gradually return toward prepandemic averages over the next couple of years. So when I think about this stock, just a combination of moderate top line growth, slow and steady operating margin normalization, really just gets Clorox and its stock back on track for long-term investors.

Dziubinski: Now, your third pick this week is Thermo Fisher Scientific TMO. Give us the quick hit.

Sekera: Yeah, this one’s fallen off. It’s now a 5-star-rated stock at a 37% discount. Again, one of these stocks doesn’t provide very much as far as dividend yield. I think it’s only four tenths of a percent, but we also do rate the company with a wide economic moat based on intangible assets and switching costs.

Dziubinski: Now Thermo Fisher is down about 40% from its highs. So walk us through how this company went from trading at what was something like a 20-something percent premium to our fair value estimate a few years ago to a near 40% discount today.

Sekera: Yeah, and in my mind, this is actually a situation that was very similar to Clorox. Again, this will be much more of a normalization play going forward. For those of you that don’t know the company, they sell scientific instruments, lab equipment, the diagnostic consumables, life science reagents, things like that.

So, of course, during the pandemic and the early years, just abnormally high revenue growth rate that, of course, also led to large expansion in their operating margins at that point in time. But since then, things have started to normalize. Revenue actually contracted 4% in 2023. Of course, as the top line was contracting, that also brought your margins down as well. And then here in 2024, the revenue and the operating margins kind of essentially flat.

So looking forward, thinking about the top line, we’re expecting long-term growth of 5.5%. Looking for operating margins to rebound over that same five-year forecast period, but we still expect that they don’t get back toward that peak in 2020 and 2021. So long term, we’re still looking for a company that can have essentially on average 10% earnings growth. Stocks only trading at 16 times this year’s earnings, 15 times next year’s earnings. So again, just a good long-term play for that normalization after what we saw over the past five to six years and really how that’s played out in the company’s fundamentals and its stock price.

Dziubinski: And your final pick today is Occidental Petroleum OXY. Share the highlights on this one.

Sekera: Oxy is a 4-star-rated stock at a 23% discount, 2.1% dividend yield, but unfortunately no economic moat.

Dziubniski: Now, shares of Oxy have been a little bit volatile since the Israel-Iran conflict began. So do you kind of like Oxy as a hedge?

Sekera: I do. It’s one of the largest independent oil and exploration production companies here in the US. It looks like the company has a pretty dominant position in the Permian Basin, which is, according to our numbers, one of the cheapest sources of production here in the US. And I do like owning energy in a portfolio. I think it’s that good natural hedge for geopolitical risk, for inflation if inflation were to come back.

Now, this, as well as a lot of the energy stocks, initially popped on the news of the attack. But since then, they’ve given back much of that pop just as oil prices have stabilized. But I do think it does show the value of having some oil reserves, especially onshore, having benefit for investors. And overall, I like this one. It’s just a rare opportunity to be able to coinvest with Warren Buffett. It looks like Berkshire Hathaway owns about 27% of this company. Who knows if it’s cheap enough? Maybe he’ll just buy the whole thing.

Dziubinski: Well, Buffett has said in the past that Oxy is a wonderful business that he plans to hold for the long term, but he has said that he has no intention of buying it outright.

Sekera: Yeah, well, like anything else, everything’s got a price. In fact, one of the guys I used to work for a number of years ago, Jimmy, old Solomon Brothers trader, he’s like, “hey, Dave, just remember, everything’s always got a price.” So, yeah, while Warren might say he’s not interested in buying it now, if the stock were to sink any further or if oil prices go up and this thing doesn’t go up along with it, they’ve got a lot of cash there to put to work. Warren is retiring. Maybe once he’s no longer pulling the levers on Berkshire, maybe the other people taking over might have an interest in it. So never say never, Susan.

Sekera: That is true, Dave. Well, we’ll see what happens. Thanks for your time this morning. Those 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 next Monday for The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week. Thanks for watching!