投资者的每周市场展望：CPI和PPI数据解析

• This week focuses on CPI and PPI readings and their implications.
• Earnings from major companies like Adobe, Broadcom, Costco, and Salesforce are highlighted.
• Discussion on the importance of metrics beyond PE ratios for stock valuations.
• Insights into the impact of tariffs on company performance and overall market dynamics.
• Recommendations on stocks to sell or buy based on current market conditions.

Hello and welcome to the morning filter! I'm Susan Jinsky with Morningstar. Every Monday morning, I talk with Morningstar Research Services Chief US Market Strategist Dave about what investors should have on their radars: some new Morningstar research and a few stock picks or pans for the week ahead.

So good morning, Dave! Happy Monday! This week you'll be watching for the CPI and PPI numbers. What are the expectations given the inline PCE reading that we saw in late November?

Hey, good morning, Susan! You know, I just can't believe it's December 9th already, but you know, happy holidays to you and to everyone else out there that's viewing this program. Yeah, so let's get into it.

CPI looks like that gets released Wednesday morning before market open. The consensus estimate for headline CPI on a month-over-month basis is 2.1%, and 0.3% on a core basis, which puts us pretty much in line with the Cleveland Fed Nowcast of 2.7%. Looking at it here on a year-over-year basis, the headline consensus estimate is 2.7%, and then core on a year-over-year basis is 3.3%. So it looks like inflation is still relatively sticky here in the short term.

Then on Thursday before market open, we have PPI. Looks like both on a month-over-month basis for headline and core, the consensus is 0.3%. I did talk to Preston Caldwell at the end of last week; he's the head of our US economics team here at Morningstar. From his viewpoint, you know, assuming inflation comes in expectations are even slightly better, you know, he'd still hold to his base case looking for a 25 basis point cut at the Fed meeting here in December. But he thinks that after that, the Fed may then move to like an every other meeting pace, where probably skip in January, cut in March, and so forth over the course of next year.

All right, turning over to earnings, we have a few companies reporting this week that we've talked about on the show before. The first being Adobe, which has been a pick of yours a couple of times this year. How's the stock looking heading into earnings, and what will you be listening for?

The stock still looks pretty good to us. It's a four-star-rated stock, trading at a 133% discount to fair value. Now, it did look like it had a pretty good week last week; it traded up pretty significantly after DOY sign, you'll hear, released their earnings. It's a company with a wide economic moat, although high uncertainty. But of course, in that tech sector, pretty much everything's at least of high uncertainty. But I would note this is probably one of the few companies where we can point to already offering AI services in their product offerings.

So I think on the conference call, people are going to be listening for, you know, just any color or commentary that management may give on engagement with that AI offering or if they have any other additional AI offerings in the works. You know, all that will be very closely scrutinized. And just taking a quick look at our financial model here this morning, you know, for our compound annual growth rate for the next 5 years for the top line, you're only looking for 11%. So I think anything that they talk about that could, you know, cause our analytical team to revise their estimates upward on the top line would be definitely a positive or tailwind for the stock in my point of view.

Now we also have Broadcom reporting this week. Again, big semiconductor name, AI beneficiary. Looks about fairly valued. What's Morningstar think about the company, and what will you want to hear about on this call?

Yeah, I mean it's really been a huge AI beneficiary. I actually looked at the charts here, and you know, going back to the beginning of 2023, we've increased our fair value estimate by 150%. You know, since then, even still, you know that stock is trading at a 16% premium to fair value, which puts that into the bottom of the two-star, you know, territory. You know, 1.2% dividend yield, but I note the stock actually traded up 11% last week. I took a quick look through; I didn't see any news really that prompted that.

So again, starting to get to be a little overvalued in our point of view. But, you know, still a strong company, wide economic moat, medium uncertainty. You, as you noted, it's been riding high on its artificial intelligence business, so any commentary that they provide there, you know, won't be important only for its own valuation but for, you know, all the AI leverage stocks.

Looking at the rest of their business lines, you know, VMware, that's also been growing well, so we're looking for continued, you know, solid to strong guidance there. But I did talk to our analyst at the end of last week on this one, and he noted that I think a lot of people, including himself, are going to be listening for any commentary on their non-AI chip business. You know, that's really a more cyclical part of the market that's been beaten down, you know, pretty hard. So if we get any glimmer of hope for a turnaround, you know, I think that could send, you know, this stock as well as any other, you know, non-AI semi stocks higher.

They've really just been, you know, languishing as the global economy has had a relatively more on, you know, economic outlook. And he noted here, like one good example of, you know, other legacy networking stocks that could do well if we do start seeing that turnaround would be Cisco.

All right, now we also have Costco reporting this week. And in the past, you've noted that Costco is more overpriced than Nvidia. So is that still true heading into earnings?

Still true, and you know, in my point of view, I just don't get it. Like Costco, great company! I personally enjoy shopping there myself. Company with a wide economic moat and a medium uncertainty. But you know, the stock trades at 49 times next year's projected earnings. You compare that to Nvidia, which only trades at 33 times, you know, next year earnings. When I take a look at the valuation of the stock, it puts it well into one-star territory, trading at an 84% premium to our fair value.

You know, thinking about this corridor, is there any reason why Costco won't do well this quarter? Not that I know of. But once the market loses faith, you know, in the growth rate of this stock, I think this is one where there could be potentially a lot of downside at some point in time in the future.

All right, let's pivot over to a question from one of our viewers. Before we do though, I'd like to thank everyone who tuned in for our viewer mailbag episode last week, and I'd encourage viewers to send their questions our way because you never know when we might answer your question on the air. Email us at [email protected].

As a reminder, Dave cannot provide personalized investment advice. All right, on to a question from Eric. Eric notes that you talk about a stock's PE ratio on occasion, but you also say that Morningstar doesn't take PE ratios into account when valuing stocks. So why not, and what are the most important metrics Morningstar uses to value stocks instead?

Yeah, that's exactly correct! You know, we do not use the PE ratio in and of itself as a basis for determining valuations. You know, in our view, when we think about, you know, what a stock should be worth, the intrinsic value of a stock is technically just the present value of all the free cash flow that would occur to shareholders over its lifetime. So we use a standardized discounted cash flow model in order to calculate that.

So essentially that model just calculates the present value of that future free cash flow stream, which is then discounted to the weighted average cost of capital. So PE, in my opinion, and the way I try and talk about it, it's just a shorthand way to try and estimate intrinsic valuation or really kind of reflect that.

Now, a lot of people will use that forward PE; they apply it to, you know, the one-year forward earnings multiple. And of course, when you think about PE ratios, the higher the PE, the higher the assumed growth rate. But you know, my view, I think there's a lot of problems with trying to use PE as a valuation tool in and of itself as opposed to just using it as a tool to try and, you know, convey, you know, what the valuation of a stock, you know, might be.

So for example, when I think about a PE ratio, it doesn't account for differential in growth prospects over different periods of time; it kind of just assumes an average growth rate, you know, over the future.

So when you think about it, you know, some stocks may have, you know, very rapid growth in the short term that might fade very quickly, or maybe you have, you know, faster growth in the future if earnings growth is slow for whatever reason for the next couple of years.

Yeah, I don't think the PE ratio also accounts for the differentials, you know, between, you know, free cash flow versus GAAP earnings. And then lastly, I just think you have to be careful using a PE ratio. You know, sometimes they can tell you the wrong thing at the wrong time.

So for example, a company that's very cyclical may actually have a very low PE ratio and look cheap, but that might also be the same point in time that the economy is running hot, and the market knows that its earnings will end up falling over the next couple of years. Or conversely, you know, that PE might be really high after the stock has already fallen, and the market expects earnings then to ramp up as the economy recovers.

So again, it's a way I try and use it, you know, to try and convey, you know, relative, you know, fair value, but it's not how we actually calculate the fair value of a stock. So then, Dave, given all that, why do you talk about PE at all for some stocks? You did just mention it for Costco.

Yeah, so in a format like this, you know, it's just very hard to try and, you know, quickly communicate to investors how to do a DCF evaluation. You know, essentially you kind of need to walk through all of the inputs, you know, all the assumptions, you know, the entire, you know, kind of projected time frame that we model out.

And you know, I don't think I've ever actually tried to argue you a stock should trade at like 18 times or versus, you know, 20 times, but use it as a way to try and highlight those situations, especially where we think valuations have just really gotten significantly, you know, out of whack.

So it's one of those things I think, you know, PE is best used as a relative value measure more among companies you know, in a similar sector, with similar business lines, you know, similar outlooks — more for a relative value perspective than it is necessarily for an absolute value perspective.

At the end of the day, you know, I still recommend going to morningstar.com, reading the research that's published by the equity analysts, you know, take a look through the company's SEC filings, you know, read through the Management Discussion and Analysis section, listen to a couple of earnings calls, you know, make sure you fully understand the investment thesis of a stock before investing in any particular company.

Well, thanks to Eric for that very thoughtful question, and of course to you, Dave, for your thoughtful response.

Okay, so let's turn to some new research from Morningstar, starting with Okta and Zscaler, two cybersecurity companies that reported earnings last week. Regular viewers of the Morning Filter know that you love the cybersecurity sector, Dave.

Oh, I do! I really like the fundamentals and how the cybersecurity is set up. You know, from my point of view, taking a look at the companies that reported last week, we had Okta, you know, nice pop in the stock after earnings there. In fact, that was enough to put that stock into the bottom of the three-star range, you know, coming up from four stars. But, you know, it's still about 15% undervalued.

When I look at our cybersecurity names, I think it's still the most undervalued here. Looking at the quarter, you know, sales grew 14% year-over-year, margins expanded, you know, 600 basis points to 21%. And then our analyst also noted that management raised its sales and adjusted margin outlook for 2025. So everything's looking, you know, pretty good here.

However, you know, the increased guidance was in line with our expectations already, so our $100 fair value estimate is unchanged following the news. The other stock that reported was Zscaler. Now that is a three-star stock; we left our $213 fair value unchanged.

Now, interestingly, the stock slumped after earnings. I think the market was disappointed by some slower billings growth; I think we've had some turnover on the sales team. But, you know, looking forward, we still forecast sales growth will rebound over the next couple of quarters as the new sales team, you know, gets up to speed and ramps up.

Taking a look at our model, you know, we're still projecting over 20% compound annual growth rate for revenue and earnings over the course of the next 5 years. And it looks like the market pretty quickly, you know, kind of came back around to our view. Looks like that stock recovered at the end of the week and is actually now higher than it was pre-earnings.

So then, neither stock is a buy today, but maybe keep them on a watch list?

Well, definitely keep them on a watch list. Although, yeah, I wouldn't argue if you wanted to start to scale into a position, you know, Okta here. I would just say, if you do that, you know, keep some dry powder. That way you can dollar-cost average in if we were to see any kind of retreat with a broad market sell-off over the next couple of months or next couple of quarters.

All right, Salesforce also put up some great results last week, and the stock was up after earnings. Looks like Morningstar raised its fair value estimate on the stock a bit too. So why the fair value boost, and is there an opportunity here today?

Yeah, overall, as you noted, pretty strong results for earnings. But more importantly, our analyst noted here that he expects revenue acceleration in the coming quarters. I think that's what really lifted our fair value up to $315 a share from $290.

Now it's a three-star rated stock, but I would note it's at pretty much the top end of that three-star range. You know, any moves higher here will take it into that two-star territory. He also noted there's just a lot of excitement about Agent Force, which, you know, in his view, he thinks it actually represents probably one of the better long-term opportunities out there to transition from what he considers to be a mostly human agent labor force to a mostly virtual agent pool.

Now we had both Dollar Tree and Dollar General report last week. Now results were pretty grim for these two retailers the quarter prior, so was the news any better for the most recent quarter?

That's a yes and a no kind of answer. So at Dollar Tree, there was no change to our fair value estimate; results were essentially in line. You know, same-store sales were up 1.8%, you know, not necessarily going to cover off the ball, but at least, you know, in the right direction. But we did see operating margins on an adjusted basis expand 40 basis points, getting up to 45%.

So again, things going in the right direction there. However, at Dollar General, we lowered our fair value by 10%. You know, really as a combination of both incorporating the impact from some store remodeling, you know, increases in labor costs at the same time that spending in lower-income households remain under pressure.

So same-store sales were up 1.3%, kind of, you know, moving in the right direction, just barely positive. But unfortunately, profitability was lower than our forecast. So overall, you know, the story in the sector is still somewhat the same as what we've been talking about really since the beginning of the year.

Still seeing that ongoing shift in purchasing patterns. You know, the rate of inflation may be slowing, but the compound impact of, you know, inflation over the past two years with wage growth lagging really still, you can see how much it's taking its toll on lower-income households, and to some degree, even middle-income households.

So that spending, you know, shifting towards, you know, low-margin consumables and less on the high-margin discretionary goods. So the long-term investment thesis here, and maybe it takes a little while for it to play out, but once wage inflation, you know, starts to catch up to inflation overall, you know, spending patterns will end up normalizing.

We'll see that spending, you know, shift back to discretionary items, which of course then will end up leading to an increase in operating margins over time. Now there's clearly a lot of short-term uncertainty here, but does either stock—either Dollar Tree or Dollar General—look attractive for a long-term investor?

Well, it's interesting. So I actually looked, you know, over the history of these stocks, and you know, both of these stocks started the year, you know, in well into overvalued territory. Both were rated two stars at the beginning year, but you know, they've been hit, you know, especially hard. You know, Dollar General is down over 40%, Dollar Tree down to 50%.

So at this point for long-term investors, we do think the market has sold off, you know, too much. Both are undervalued; both trade at somewhat similar discounts to fair value. However, you know, the Dollar Tree rating is four stars, and that's because we rate it with a high uncertainty.

That high uncertainty requires a greater margin of safety to get to the five-star territory, whereas Dollar General is a five-star-rated stock because our uncertainty rating there is medium. You know, I would just note that, you know, here in the short term, it kind of looks to me like the Dollar General fundamentals might be the weaker of the two.

But either way, I do think this is probably a situation that, from an investor point of view, it will require some patience, you know, waiting for wage growth, you know, in lower-income households to catch up over time to the broad inflationary pressure we've seen over the past two years.

Now we've also talked about Brown-Excuse me, Brown-Forman on the show before, and the stock soared last week after posting better-than-expected results. So was Morningstar as enthusiastic as the market with the results, and are there any changes to the fair value estimate on the stock?

Well, I mean, our fair value is unchanged, remained at $55 a share. I think the takeaway here is that results were, you know, in line with our own estimates. But as you noted, you know, the stock was up as the results came in better than the market expectations. But you know, even more importantly, I think the management comments that sales trends, you know, kind of look on track to rebound in the second quarter of fiscal 2025, you know, after we've seen an extended period or slump really over the past year.

I think that going forward is really what's going to help, you know, support this stock in the near term. It is a four-star-rated stock that trades at a 19% discount to fair value. Now, what about tariffs in Brown-Forman, Dave?

Is that an issue for the company?

Yeah, we shall see! I mean, it's really very cloudy to figure out at this point in time, you know, what tariffs may or may not be implemented. You know, specifically here, our analyst noted that 7% of the company's sales are from tequila, so that of course could be negatively impacted by a tariff on imports from Mexico.

But really, I think the bigger concern would be, you know, if tariffs are put in place on the EU and if we saw retaliatory tariffs, you know, put in place on US imports. You know, that would take its toll here on the top line. You know, whiskey sales to Europe make up about 15% of the company's total sales.

Now, Dave, you published your final stock market outlook of 2024 last week, and viewers can access a link to your outlook beneath this video. So what are you expecting in terms of market behavior for, you know, the rest of the year?

Yeah, I know, of course it's always going to, you know, be barring some exogenous shock, you know, that hits the markets. I think US markets just want to coast into year-end. I think there's probably pretty limited upside here. You know, we're already up, I think like 29% year to date.

But with those kinds of returns, I think portfolio managers and traders generally just want to lock it in. They just want to close out the year with those gains. You know, over the next two weeks before the holiday, we will probably see some tax-loss selling here and there, some window dressing. But generally, I don't think a lot of people are going to want to take, you know, any large directional bats or just really take any large positions one way or the other.

So do stocks still look overvalued?

They do! In fact, you know, it just appears with the market continuing to keep, you know, drifting upward, we are getting you further and further into, you know, overvalued territory. Above a composite of our valuations, you know, right now it looks like stocks really priced to perfection, trading at about a 5% to 6% premium, you know, over a composite of our fair values, which, you know, a lot of people may say, “Yeah, 5% to 6% isn't that much.” But yeah, when I look at our price-to-fair value metric going all the way back to the 2010 timeframe, you know, less than 10% of the time have we been at this much of a premium or more.

So do you think investors should be worried about today's market valuation, or do you think maybe the market rally still has some legs?

You know, valuations are, of course, a major concern in my mind. But I still think at this point, you know, most investors should probably remain market weight. I just think this is one of those times valuations can probably remain high for a period of time until earnings growth, you know, kind of catches up.

When I look at the macro dynamics of the market, I still think the tailwinds that we have right now overwhelm the headwinds. So looking into 2025 here, you know, looking at the estimates coming from our US economics team, they're still projecting inflation to moderate over the course of 2025, in fact, getting down to below the Fed's 2% target.

They're still looking for the Fed to ease over the course of next year, getting the Fed funds rate down to 3% to 3.25% by the end of 2025. Of course, globally, we've still got the European Central Bank easing as well. A whole host of monetary and fiscal stimulus coming out of China.

You know, on the long-term interest rate perspective, you know, they're looking for the 10-year treasury yield to get down to 3.6% by the end of next year as well. And of course, we still think we're in this soft landing environment, you know, for a slowing rate of economic growth, but no recession.

Then lastly, of course, now we've got all the expectations of, you know, what President Trump may or may not do. I think everyone's looking for an extension of the 2017 Tax Cuts and Jobs Act. I think people are high-pricing in a higher and higher probability of cuts to the corporate business tax and potentially personal tax rates, you know, looser regulatory burdens.

So we're also looking for a big ramp-up in mergers and acquisitions next year, especially in the tech space. Now, you also say in your new outlook that you think there's one wild card that could upset things. Tell viewers what that is and why.

Yeah, I mean, at this point, I think probably the biggest threat to the US markets, you know, in the short term next year would be the potential imposition of tariffs. And so at this point now we're just kind of in this wait-and-see mode, you know, how much of this is campaign rhetoric, you know, how much of this are they really going to end up implementing?

At the end of the day, and of course, you know President Trump, always a bit of a wild card. You know, is he going to come out swinging on day one and implement, you know, huge tariffs across the board, trying to force other countries, you know, to the table to negotiate and get concessions? Or is this, you know, the art of the deal? Is this really just more of a negotiation tactic?

Maybe he starts off with a couple small limited tariffs, you know, here and there and uses that as kind of the hammer to try and get people to come to the table, you know, using the threat of additional tariffs in order to get concessions. And of course, you know, it's going to be a matter of, you know, how much and how fast it's implemented, what geographic regions are we going to be including, and what products are included.

And just as importantly, you know, as far as, you know, what's included, you know, what's going to be excluded? Are there different areas or different countries that maybe we exclude, you know, different allies that we don't have tariffs on? Are there specific products that might be excluded?

So huge wide range of outcomes on individual stocks. I mean, from anywhere being, you know, the most negatively impacted would be those companies that have a high percentage of, you know, their products are internationally sourced.

Looking at the note on Best Buy from Shawn Dunlop, you know, he noted here that 60% of, you know, Best Buy products come from China, another 20% from Mexico. So again, that would be very negative for that company; you know, companies that can't pass through those costs, you know, and see their operating margins can contract, that'd be negative there.

But there also could be beneficiaries, you know, those companies that have a lot of domestic sourcing, especially if they're sourcing domestically, you know, comes at the expense of other competitors whose sourcing maybe comes internationally. You know, those companies that have strong pricing power, you know, could benefit and see earnings growth there as well.

And then lastly, just from an economic, you know, point of view, you know, Preston believes that tariffs would be a drag on GDP forecast, you know, over the short term. But he noted here too that the ultimate impact on inflation and interest rates would also depend on, you know, what kind of response we see both from a fiscal as well as a monetary point of view.

So again, a huge wild card for next year, one that we will track, you know, very closely. And yeah, as we know more, we will price it into our valuations. But at this point, I think it's too early to tell exactly what's going to happen.

So as 2024 is winding down, Dave, how should investors be thinking about their equity portfolio positioning in terms of market capitalization and investment style?

Yeah, positioning with kind of the valuation that we have out there is increasingly important. So we still look for an overweight in that small-cap category, trading at an 8% discount.

Probably about time to move mid-cap to an underweight position as well. That's now creeped up to being a 5% premium, which is also the same as the large-cap category that's also at a 5% premium. You know, we've been recommending to be underweight large caps for a little while now, and in fact, when I look at large-cap valuations, you know, the last time we were at this much of a premium or more was back in 2018.

And of course, if you remember, you know, that was right before the market corrected, you know, late that year. And you know, historically, small caps tend to do well when the Fed is easing monetary policy and interest rates are coming down, and that's still the environment that we think that we're in.

Taking a look at our valuations by category, you know, value stocks are at fair value; probably the most attractive part of the market by there. So again, overweight your market-weight core stocks; those are trading at only a 2% premium, and looking for an underweight in growth stocks or at least a good area to take some profits—growth stocks trading at a 177% premium.

Rarely have they ever traded at this much of a premium. You know, the last time they were up this high was in 2020 and early 2021 during the disruptive technology bubble. So I think as we see, you know, this—the economy lose steam over the next couple quarters, you probably have a slowdown in growth rates for earnings for growth stocks. So I'd look for a rotation, you know, into value, away from growth.

All righty! Well, it's time for the picks portion of our program this week. You've brought viewers some tax swaps to make, specifically three tax loss candidates and three stocks to replace them. So now, given how well the market's done, Dave, do investors really have that many tax loss candidates? Like, where might they find them?

Yeah, I mean, to be honest, it's actually not a lot of them out there. I mean, with the markets at all-time highs, you know, even what I consider to be, you know, a lot of low-quality stocks have also been bid up, you know, over the course of the year. So as you mentioned, very tough to find losses in most portfolios on a year-to-day basis.

So at this point, you need to look back, you know, over multiple years in order to find stocks where you might have some embedded losses. So I did a quick screen. I looked for stocks that had losses, you know, year-to-date over the past two or three years as well, and then also looked for those that were rated one or two stars, you know, those stocks that we think are overvalued.

And most of what I found were really only contained within that small-cap category, so I expanded that search, and I also looked for stocks that are currently rated three stars, then picked out a few that just… and again, this is my own personal opinion, but I think they probably have a pretty low probability of really taking off here in the short term.

All right, well, let's get to it. Your first stock to sell is DocuSign. Now this stock is up 80% this year. So how is this one a tax-loss selling candidate?

So DocuSign peaked at around, I think, $300 a share in early 2021. Of course, it was bid up during that disruptive technology bubble. The stock just got crushed; it dropped into four-star territory and remained there for much of 2022 and 2023. As you noted, you know, it's rallying this year; it's bounced well off of its lows, but at this point, we think it's probably rallied too much.

So this is one that if you happened to buy, you know, during that disruptive tech bubble, now might be a good time to exit. I think at this point you can realize, you know, those tax losses if you have them, plus you then are able to sell this stock as it's well above its intrinsic valuation. Now, I note they did report pretty solid earnings at the end of last week. In fact, we bumped up our fair value to $80 a share, but stock closed at $107 last Friday.

It's, you know, a company with no economic moat, high uncertainty. So at this point, it's a two-star stock trading at a 34% premium.

So, Dave, the stock you suggest in its place is Adobe, and you must really like Adobe because it's the second time we're talking about it today.

Well, and I'm also going to note here, I am taking a bit of a risk recommending this one. They do have their earnings coming out after market close on Wednesday this week. So if for whatever reason, you know, they were to miss earnings and that stock sells off, I might look stupid here.

But having said that, Adobe is one of the very few large-cap tech stocks that we think is undervalued. It's rated four stars, trades at a 133% discount to fair value. And so while large-cap tech stocks, you know, overall as a category are overvalued, I still think that investors, you know, do need to have some exposure in a diversified portfolio in that category.

So in this case, I think Adobe meets, you know, the bill. It's a company with a wide economic moat, which is supported by switching costs. Our analytical team has noted that in the software space, you know, the more critical function it is, the more touchpoints you have in an organization, you know, the higher the switching cost for a software vendor, and that's what we see here.

I'd also note too that the company has what we consider to be an exemplary capital allocation. Now I don't talk about capital allocation, you know, very much, but in this case, you know, I'd note only 20% of our equity research coverage has an exemplary capital allocation rating, so just kind of another factor in its favor here.

But long term, when we think about our investment thesis, Adobe is the dominant player in content creation across print, digital, and video. Our analytical team had noted that they did introduce Firefly in 2023. They think that's an important AI solution that will attract, you know, new users over the next couple years. Looking at our financial model, you know, top-line growth, you know, compound annual growth rate over the next 5 years of 11%. Add in a little operating margin expansion that we forecast, you come up with a 13.2% compound annual growth rate for earnings over the next 5 years. Now the stock does trade at 27 times earnings, so certainly not cheap, but relative to a lot of other, you know, situations we see in tech, seems pretty reasonable to us.

Now your next sell candidate is Intel, and Intel stock has been really a train wreck this year. The company's CEO retired just last week, so fill in viewers.

Yeah, so Intel is a three-star-rated stock, but it trades really almost right on top of our $21, you know, fair value. I'd also note that, you know, not only has the stock been under a lot of pressure, but the company did halt its dividend. So no dividend payment on this one, at least for the foreseeable future.

We rate the company with no economic moat, and actually, I have to note here, we actually stripped Intel of its narrow economic moat back in August of 2023. And in fact, this was a company we had a wide economic moat rating on, you know, back in August of 2022. So since we started taking that moat rating away, that stock is down about, I think slightly over 40% since August of 2022.

And we also have a very high uncertainty rating here. Essentially, the short story is, unfortunately for Intel, they fell behind in the semiconductor upgrade cycle, and now they just have to spend a boatload of capital expenditures just to try and catch back up.

Now we still think they will be the leader in traditional semis used in PCs and servers for at least, you know, several more years. But I think our analytical team is very concerned that Intel's best days may be behind it. In fact, you know, this might be one of those ones that's transitioning from what we consider to be, you know, traditional technology into now legacy technology. They just have to catch up on a manufacturing basis with Taiwan Semi, and that's just to be able to pull even, you know, much less try and become a leader again.

So while this one is at fair value as far as where the stock is trading, you know, in my opinion, I just don't think you're going to miss much on this one, you know, in the short term. You know, this stock is at its lowest price since 2013, so I think in this case, there are a lot of losses, you know, to harvest. And I think at this point, you reinvest that money in a better story.

All right, and you think that better story is Microsoft. Why is that, Dave?

Yeah, so Microsoft really not much of a discount. Only a 9% discount to fair value, but enough to still kind of keep it into that four-star range. You know, maybe it's kind of creeping into the bottom of three stars. But it's a company that still has that wide economic moat, only a medium uncertainty rating.

And really, I mean, the company still just hitting on all cylinders. You know, last quarter our team noted that their product activity in business process was up 133%. Their PC business expanded 177%. Their intelligent Cloud business up 21%. And of course, that's where the real attraction lies for Microsoft. They've done, you know, just a really great job capitalizing on the rapid increase in demand for AI computing power.

You know, we're still seeing demand increase for, you know, the hybrid environments in general and specifically in this case for their Cloud platform, the Azure business. Now we think that the Azure business has been capacity constrained over the past couple quarters, you know, so we expect that with as much capex as they've been spending there, we're looking for capacity expansion to accelerate growth over the next couple quarters.

So even with that additional capex spending, you know, they've been able to hold their margins. So again, just a much better story, you know, in this case.

So then your final stock to sell this week is Franklin Resources. Now here's a company and a stock that are having a terrible, horrible, no good, very bad year. The asset manager has been experiencing outflows stemming in large part from controversy at its bond shop, which is Western Asset Management.

Nice, Susan! I'd like the children's book reference there! For those of you that don't know, that's Alexander and the Terrible, Horrible, No Good, Very Bad Day, an excellent book if you have young children to read to. But, uh, getting back to the story, you know, in this case, it's not just that; it's the terrible, no good, very bad decade.

You know, this stock is down, you know, 60% over the past 10 years. And you highlighted it as experiencing outflows stemming from controversy at its bond shop, Western Asset Management. Looks like what was going on here is a portfolio manager was steering winning trades to their high-fee funds and then steering the losing trades to their low-fee funds.

But it looks like to me, you know, I think issues appear to be running even deeper and longer than that.

Yeah, we currently rate the company with no economic moat; we stripped them of the narrow economic moat in September of 2024. And in fact, we had lowered them too narrow from wide back in September 2018.

Yeah, the stock is down 26% since September 18, currently it is rated three stars, trades almost on top of our fair value. Granted, it does have a very high dividend yield of about 5.8%, but from a principal perspective, in my opinion, I just don't think you're going to miss out much on this one in the short term.

So the stock to buy in its place, sort of this asset manager swap, would be BlackRock. Now BlackRock looks fairly valued according to Morningstar, but why do you like it as a replacement idea anyway?

Yeah, essentially this is just a swap idea. You know, you pull out a couple percent of fair valuation pickup. But as you noted, BlackRock is a three-star stock, only trades a few percent below our fair value, and it only pays a 2% dividend yield.

So not necessarily that attractive on a swap basis that way, but it is a wide economic moat. You know, you're picking up switching costs; you're picking up intangible assets. And our analytical team noted that, you know, the barriers to entry in the asset management business really aren't all that significant, but the barriers to success are extremely high.

You know, it takes a very long time period, a lot of skill to not only put together a long enough track record of investment performance, you know, to really start gathering assets, but to then have enough assets under management to build the scale necessary to be able to compete. You know, here you have, you know all of that.

So I think you can, you know, capture the tax losses, you know, and pick up BlackRock, swap out of a slightly overvalued stock for a slightly undervalued stock, and you pick up the wide economic moat in that swap.

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 9:00 a.m. Eastern, 8:00 a.m. Central. In the meantime, please like this video and subscribe to Morningstar's channel. Have a great week!