5 Stocks to Buy if You're Concerned About U.S. Market Valuations I October 21, 2024

Summary

Highlights

• The economy is performing better than initially expected with the GDP now running at 3.4%. 📊
• Tesla's stock is currently down by over 10% this year, and it's rated three stars by Morningstar analysts. 🚗
• ServiceNow's integration of AI is noteworthy, even as its valuation approaches the two-star range. 🤖
• Verizon is a four-star stock, traded at a 17% discount to its fair value with a healthy dividend yield. 📶
• Nutrien, a Canadian crop nutrient company, is trading at a 32% discount, signaling a potential buying opportunity. 🌾

Key Takeaways

• Experts suggest waiting for the right moment to buy Tesla stocks given their volatility, despite its current three-star rating. 🚗
• ServiceNow is acknowledged for its strides in AI integration but is close to becoming overvalued. 🖥️
• Verizon is favored among telecom stocks for its attractive dividend yield and undervalued status. 📶
• Nutrien stands out for its cost advantages and cyclical low expectations for 2024. 🌱
• ASML is regarded as undervalued but should be approached with a strategy of building a position over time. 📈

Overview

5 Stocks to Buy if You're Concerned About U.S. Market Valuations I October 21, 2024 Transcription

• 00:00 - 00:30 [Music] hello and welcome to the morning filter I'm Susan chabinsky with Morning Star every Monday morning I talk with Morning Star Research Services Chief US market strategist Dave Sara about what
• 00:30 - 01:00 investors should have on their Radars some new Morning Star research and a few stock picks or pans for the week ahead so good morning Dave anything on radar this week on the economic front hey good morning Susan you know really not much as far as like what I consider to be Market moving economic indicators yeah I'll keep an eye on new home sales and like durable good orders especially the durable good order in light of the you know better than expected retail sales number last week but you know it's
• 01:00 - 01:30 interesting I still think the economy is running at a much hotter rate than what we originally anticipated earlier this year in fact I just checked again this morning the Atlanta fed GDP now is running at 3.4% so again a lot hotter and a lot higher than I think pretty much anyone would have expected but you know really it's all about earnings this week well then let's turn to earnings Dave talking about some companies reporting starting with Tesla so what are you going to be listening for here well first of all Tesla already announced earlier this month you know their third quarter deliveries 463,000
• 01:30 - 02:00 Vehicles which is a 6% year-over-year increase so I talked to Seth on this one he's the analist that covers this stock and I know he's going to be watching to see if that higher growth rate you know is able to then boost their Auto segment profit margins he's also going to listen for any updates on the new lower price vehicle that's set to enter production next year now to me I think that's probably like the next main potential Catalyst you know for this stock and then also of note uh we did leave our Fair Value Estimate unchanged following
• 02:00 - 02:30 the robot taxi event earlier this year now you know 2024 has really been a year of sort of fits and starts for Tesla's stock it's down more than 10% so far this year so is the stock attractive today you know I wouldn't consider attractive it is rated three stars you know our Fair Value Estimate is $200 a share so one of those stocks you know especially in light of just how volatile this stock can be I think if you want to get involved in this one you probably want to wait to see if it trades down where you can buy it at a larger margin of safety from its long-term intrinsic
• 02:30 - 03:00 valuation now we also have chipmaker Texas Instruments reporting this week so what do you want to hear about here I think people are going to really be listening to their guidance you know very carefully you know my own opinion I think there's probably greater risk to the downside here now the reason being the asml guidance last week indicated that semiconductor capex spending you know was slowing at Samsung and Intel so the question to me is you is that really idiosyncratic to just those semi chip manufact facturers or is it really going
• 03:00 - 03:30 to be you know more broad than that you are we really seeing a cap back spending slow at all the traditional commodity and uh the semiconductors you know across the board or really just those two now how does Texas Instruments look from a valuation perspective heading into earnings yeah we think it's actually overvalued at this point it trades at a 133% premium to fair value so that's enough just to put it into that two star territory now we also have service now reporting earnings this week and the stock looks about fairly valued heading
• 03:30 - 04:00 into earnings so why is service now on your radar well I talked to Dan Romanov he's our Equity analyst uh last Friday just to get a read from him of what he's thinking here and you know he just highlighted service now in his opinion is really one of the best enterprise software companies who's currently really implementing AI you know in their existing business model you know he also noted they just have very good operational momentum he thinks that they're really running ahead of the pack there you in his view he just saw really no reason to expect the company won't at
• 04:00 - 04:30 least meet if not beat you know their expectations for earnings he also expects an in line to better than expected guidance now it is a three star rated stock but I have to caution it's getting to the top of the range of the three star it's really nearing that two star range so my opinion is you know I probably wouldn't look to buy here but then again I also wouldn't be selling stock at this point I think this is probably one of those ones where you can let it run for a while above the fair value you know before you look to maybe sell any to try and lock in gains
• 04:30 - 05:00 now we also have several key Telecom players reporting this week in Verizon T-Mobile and AT&T so Broadley what do you expect to hear about from this group generally I think we're just still looking for ongoing Improvement in the operating margins you know looking for that to support our thesis that the US Wireless industry is transforming more into an oligopoly where going forward we still expect they're going to compete Less on price but I also want to hear if they're going to give you know any indications of you know how demand has been for the iPhone 6
• 05:00 - 05:30 now these stocks have all rallied tremendously during the past 12 months so do any of them look attractive ahead of earnings yeah I mean this has been you know really a sector that's run up a lot more than I think people would have expected you know T-Mobile's up the most it's up about 55% over the trailing 52 weeks now that's run up to the point where it's trading at a 17% premium above our fair value so that's a two star rated stock AT&T is up the second most that one's up 51% that's enough now to put it into that three star territory
• 05:30 - 06:00 it's only trading at a 5% discount but still an attractive yield at 5% and then Verizon has actually lag to the upside that's at a that's up 43% compared to the other two so at that point it's still a four-star rated stock trades at a 17% discount to fair value and has over a 6% dividend yield so that would be the one that we would still look to advocate for today now we also have a trio of big names in defense reporting this week in RTX Lockheed Martin and
• 06:00 - 06:30 North Grumman so what are your expectations here well unfortunately with you know all the ongoing geopolitical conflict I'm expecting earnings probably should be pretty good should expect to see the backlog you know continuing to build so probably good expectations you know coming out of all three of these stocks and how about the valuations on these stocks heading into earnings are there any opportunities here you know at this point I would say most of them are pretty fully valued you know if not getting to be overvalued you know year to dat lock is up 35% it's enough to put
• 06:30 - 07:00 that in two star territory trades at a 22% premium to our fair value you RTX we actually recommended that stock uh the first time we recommended was uh July of our 2023 show you know that's up 50% year to date that's also now almost a two star rated stock trades at a 6% premium uh Norm that's up 133% year to date so it's still slightly undervalued but again at a 6% discount you know a three star rated stock you know personally I hope the markets over extrapolating the short-term growth here
• 07:00 - 07:30 you know too far into the future uh if you are looking for a defense play you know I would just highlight Huntington Engles you know that stock is essentially flat year to date it's a fourstar rated stock at a 19% discount but yeah I would caution expectations here you know based on you know the production of what the company makes you know they make large Naval vessels you know those are going to be subject to you know long-term Contracting so they're not going to benefit you know in the short term from the ongoing conflict but for a long-term investor that's the one that we think has you know the best
• 07:30 - 08:00 intrinsic value today okay so moving on to some new research from Morning Star a US bankor saw a nice bump in its stock price after earnings last week so why Dave what did management have to say that impressed the market yeah I think it's really just a combination that you know the stock is undervalued and they reported you know pretty solid third quarter results you know they're seeing that interest income growth they're seeing an expansion of their net interest margin you know management also solidified their guidance for 2024 for net interest
• 08:00 - 08:30 income to come in at the high end of their previous guidance you know plus when you take a look at that guidance for 2024 you know we're expecting to see you know more than a 100 basis points of operating leverage in the fourth quarter now we've talked a lot on the morning filter about US Bank because it's been morning star's favorite stock among the US Banks so did we make any changes to the Stock's Fair Value Estimate after earnings and is it still a buy from morning Stars perspective you know at this point there no change to our fair
• 08:30 - 09:00 value you know came in line with our expectations in fact it just moved into that three star territory from four stars trades at a 7% discount but it still has a pretty healthy yield at 4% it's probably the last of the US regionals I think that's still trading at much of a discount to our fair value all right so let's talk next about two Tech names that released earnings last week and that performed very differently after their reports that's asml and Taiwan semiconductor now you already talked a little bit about about asml so
• 09:00 - 09:30 let's start with that one the stock finished the week down 14% after it accidentally reported earnings early so what the heck happened here and how do you accidentally release your earnings early well I mean as far as it goes for accidentally releasing your earnings you know early I haven't heard any actual explanation of you know why it happened yeah know in my guess it's probably was just human error they probably just programmed you know the wrong date into their system when they uploaded you know the press release for when it was supposed to get released you
• 09:30 - 10:00 know as far as what happened here you know revenue and earnings were just fine but asml provided much weaker than expected guidance for next year now as you noted that you know there was sort of this big and unexpected shift in terms of Revenue guidance and margin guidance at asml so what was the explanation for that so they lowered the revenue guidance to be between you know 30 to 35 billion Euro you know it was 30 to 40 billion Euro beforehand so they brought that top end of the range down but they also cut their gross margin guidance for 2025 to a range of 51 to
• 10:00 - 10:30 53% the previous Target was 54 to 56% and then also of note you know their third quarter earnings were pretty weak they only came in at 2.6 billion Euro versus expectations of 5 billion Euro so we'll get better clarity as earning season progresses you know our best bet at this point is that in in orders from Intel probably pulled back you know pretty significantly you know Intel recently postponed the opening of one of its Fabs also we just have to note there's a lot of customer concentration
• 10:30 - 11:00 you in chip equipment manufacturing here there's only a handful of big buyers and so when you see things like you know memory chips you know having a down cycle that can you know really disproportionately you know impact the uh the equipment manufacturers now Morning Star trimmed its Fair Value Estimate on asml a bit and it looks like the stock is undervalued according to morning Stars metrics but what say you Dave is asml an opportunity today so it is a 25 % discount to our fair value which places
• 11:00 - 11:30 it in the fourstar category only has a 1% dividend yield it is a company we rate with a wide economic mode although a high uncertainty you know being in the technology sector so our Equity analyst has called it out as being you know undervalued and I think this is just a good example of some of the things we've talked about you know in the past as far as you know building into a position this is probably a pretty good example that if you want to start building a position yeah probably start with a partial position you know that way if we do see the stock trade down any further
• 11:30 - 12:00 you know you could dollar cost average into it you know and be able to buy more stock you know at lower prices well let's focus on some brighter news and that was Taiwan semiconductors earnings report last week the stock really rallied after earnings and interestingly Taiwan semi is asml largest customer so comment on that Yeah we actually estimate that uh Taiwan semi accounts for about a third of the sales you know for asml and then you know Samsung and Intel each account for about
• 12:00 - 12:30 10% of each so considering just how well Taiwan semi is doing I think that really just shows you know how much pressure both Intel and Samsung are under right now so let's get down to what Taiwan semi had to say that drove that stock rally what did management say that the market got so excited about well I mean third quarter results were much better than we anticipated you know Revenue was up 133% sequentially from last quarter and both gross and operating margins improved about 5% percentage Points each
• 12:30 - 13:00 from the prior quarter coming in at 57.8% and 47.5% respectively and then taking a look at guidance you know fourth quarter Revenue guidance is to grow 11.6% sequentially gross margin guidance was coming in you know marginally higher sequentially at 58% and that operating margin you know still holding up at 47.5% so having said all that though you know our change we actually didn't make any changes I'm sorry to our long-term assumptions so our fair value is unchanged following those results so you
• 13:00 - 13:30 know given that we didn't change the fair value after earnings do shares look undervalued after the rally so year to date when I look at the stock it's up 93% so at this point it's only trading at a 7% discount to fair value puts it in three star territory you know typically I would just like to see a greater margin of safety from its intrinsic value before it really Garners much more interest from us now Netflix also reported last week and sales growth was strong margins expanded and subscriber growth slowed but that was
• 13:30 - 14:00 expected Morning Star raised its Fair Value Estimate on the stock by 10% so is Netflix a buy after earnings Dave you know not according to our analyst team now following the results we did bump up our fair value to $550 from 500s per share but you know even after that it's still a two star rated stock trading at a really a big premium to our fair value we still think the market is probably extrapolating this short-term growth too far into the future the analytical team noted that they think some of Netflix's
• 14:00 - 14:30 markets are probably pretty close to approaching out saturation and we expect much more moderate you know margin expansion going forward you know in fact when I take a look at our financial model you know over the next 5 years you we're only projecting 11% compound annual growth rate for the Top Line you know 22% compound annual earnings growth rate but yet the stock trades at about 39 times 2024 earnings all right well it's time to move on to the Pix portion of our program program and this week our picks
• 14:30 - 15:00 were inspired by comments that two viewers made after the September 30th episode of the morning filter as a refresher the picks in that particular episode were the adrs of undervalued high-quality Chinese companies and viewers asked for some undervalued ADR of Canadian and European companies that's just what Dave has brought us today so his first pick this week is nutrien so give us some key stats on this one Dave sure so nutrient is a Canadian company and it's the world's
• 15:00 - 15:30 largest crop nutrient Company by capacity and within those crop nutrients you know it is the world's largest pottish producer by capacity one of the largest nitrogen fertilizer producers globally and uh you know it's rated you know four stars trades at a 32% discount has a 4 and a half% yield company we rate with a Naro economic moat and that's really going to be based on the cost advantages that they have in their underlying businesses however it is a company that we rate with a high uncertainty now nutrient stock is having a pretty
• 15:30 - 16:00 tough year so give us a little bit more flavor on morning star's thesis for the company so first of all just I wanted to give a little bit of background as far as you know kind of what's happened here with the fundamentals so when you take a look at the charts you know I just note that corn soybean and wheat prices you know they all skyrocketed in 2021 and into 2022 and that was really just because we had a increase in global demand you know following the pandemic we had droughts in many areas of the world and of course also all of those supply chain
• 16:00 - 16:30 disruptions so to take advantage of those high prices you know Farmers significantly increased the amount of usage of fertilizers in order to be able to maximize their yields at that point in time now since then prices have you know plunged all the way back down to pre-pandemic levels in some cases you know even lower so of course you know the farmers have pulled back on their fertilizer usage you know as well so looking forward we're actually projecting 2024 to be the cyclical low for both volumes and for prices to start rebounding he going forward more towards
• 16:30 - 17:00 you know those historically normalized you know kind of levels so moving back to nutrient you know it's poish business accounts for 44% of ebda and I would note here that we think production costs are in the lower half of the curve you know for that part of the business so you know even when prices are at cyclical lows you know they're still actually generating profits you know in that part of their business now the other part of their business like the nitrogen business that I believe that's 39% of their ebda production costs there are in the middle to the lower end of
• 17:00 - 17:30 their cost curve and you know the low crop prices Weighing on fertilizer prices you know are at cyclical lows so we expect growth is going to rebound uh we're looking for you know a increase in 6% in the Top Line next year and probably to increase by inflation or maybe a little bit more than inflation thereafter and we forecast 2024 will be the low for their earnings at $3.63 a share we're looking for the company's earnings to be 391 next year and up to 413 in 2026 so when I look at that stock right now it's you know we're
• 17:30 - 18:00 trading at pretty modest multiples it only trades at like 13 times our 2024 earnings estimates and only 12 times next year's now your second pick this week is another Canadian company Toronto Dominion Bank so first rund down some of the key data points on this one so Toronto Dominion is one of the the two largest banks in Canada by assets I believe it's got like number one or number two market share in most of its retail operations and the number two market share you know in its business banking in Canada currently
• 18:00 - 18:30 rate the stock with four stars trades at a 12% discount has a pretty healthy yield at about 5 and a quar per. we rate the company with a wide economic moat based on its cost advantages you know they have a lowc cost deposit base we think you know excellent operating efficiency and pretty conservative underwriting and it's a company we rate with a low uncertainty now there's been a cloud around Toronto Dominion Bank stock this month as the bank announced that it will be paying around $3 billion in penalties
• 18:30 - 19:00 for its failure to have proper anti-money laundering practices in place in its us operations and as part of that settlement Regulators are also expected to place an asset cap on the firm's us business so given that news how is this a pick well I would just have to note you know following that news there was no change you know to our fair value you the amount of the fine was close to what our analysts had already included you know in their projections and I'd know at this point the bank has set aside enough to cover the size of that fine
• 19:00 - 19:30 you know taking a look at the balance sheet you know it's well capitalized their common Equity Tier 1 ratio is 12.8% and last quarter you know just looking at our notes here they reported you know relatively strong loan growth and increasing that interest margin so fundamentally you know looks like it's still on the right path now Rogers Communications is the largest wireless service provider in Canada it's also your third pick this week uh so Rogers is a five-star rated stock uh trades at a 31% discount to
• 19:30 - 20:00 fair value and a 3.8% uh yield company we rate with a narrow economic moat based on its efficient scale and cost advantages and have a low uncertainty rating on this company now what's warning star's take on Rogers Communications business so it is Canada's you know largest Wireless services provider but in addition it also has a fixline network that covers you know two-thirds of Canada now the other two main Canada competitors are BCE and telis and unlike the us where we expect oligopoly like
• 20:00 - 20:30 conditions we actually see more competition in Canada so a company called quore is now going to be competing on a national level going forward so our investment thesis here is that quore will generally keep price levels you know lower throughout Canada but we don't think that they're going to be able to price at enough of a discount to really take a significant share you know from those big three incumbents you know it's just going to Clore itself is just going to have to continue to invest enough in its Network to keep up with the big three so looking at our financial model here
• 20:30 - 21:00 again relatively you know conservative you know Topline growth assumptions of only you know 3% on average you know over the next 5 years but we are looking for pretty good margin expansion to drive a 133% you know earnings growth stock trades at only 11 and a half times earnings uh versus Our Fair Value which You Know Places the stock at you know 17 and a half times earnings okay well we'll go across the pond for your final two picks this week uh British American Tobacco is your first pick there and boy that's an attractive yield on this
• 21:00 - 21:30 stock yeah I mean generally when you talk tobacco companies you know they do generally have you know pretty high dividend yields the reason being that at this point they're typically run to maximize those cash returns you know in this case you know the dividend payout ratio is 75% you know right now it's a four-star rated stock trades at a 31% discount to fair value has 8.6% dividend yield and it is a company we rate with a wide economic mode now British American Tobacco is the second largest Tobacco
• 21:30 - 22:00 Company by volume but given the decline in tobacco consumption worldwide what's the case for the business today so you know cigarettes do account for 80% of its Revenue yet you know cigarettes are in a long-term you know secular decline you know we expect you know volumes will probably decrease anywhere from you know 3 to 5% on average you know per year generally tobacco companies are try to increase their prices enough every year to offset you know those volume declines so what they're doing right now is they are using you know that other part of their
• 22:00 - 22:30 cash that they don't pay out as dividends you know to try and you know generate you know more revenue from what they consider to be next Generation products and those Next Generation products are what they call you know nicotine Delivery Systems and they include things like nicotine pouches you know heated tobacco and Vapes when I take a look at our financial model here you we're forecasting you know no Topline growth over the next five years a little bit of you know operating margin expansion to be able to drive you know 5% earnings growth and our fair value you know is really only 11 and a
• 22:30 - 23:00 half times you know 2024 earnings and then your last pick this week is pharmaceutical giant GSK rund down the metrics for us uh so GSK is a four-star rated stock trades at a 28% discount has a 4% yield company we rate with a wide economic moat based on its patents economies of scale and distribution Network and a company that we rate with a medium uncertainty now GSK earlier this month that it had agreed to pay as much as 2.2
• 23:00 - 23:30 billion to settle the majority of lawsuits in US courts involving claims that Zantac which GSK manufactures causes cancer so have concerns about these settlements been weighing on the stock so you know GSK stock did get hit you know pretty hard in mid 2022 you know due to that product liability from Zant however at that point in time we thought the market was just greatly overestimating the potential liability now the settlement when it came in it was a little bit higher than we thought
• 23:30 - 24:00 but pretty much still within the range of our expectations so you know taking a look at our note in our right up here there was just no change to our fair value and in fact we actually think this is a positive for the stock you know it should remove the overhang you know that had been over that stock for the past you know two years now and I think that's going to allow investors really to go back to focusing on the fundamentals really reviewing not only their product you know portfolio but taking a look at their pipeline that we think investors today under appre appreciate yeah talk a little bit more
• 24:00 - 24:30 about um the business at GSK Dave well as a UK company it is you know still one of the largest global pharmaceutical companies you know out there globally they have a portfolio of drugs you across a couple of different therapeutic uh sorry I'm I need a little bit more coffee here today just to keep myself going so taking a look at their product portfolio it spans you know several different therapeutic classes you know including respiratory cancer and antiviral a couple of different vaccines
• 24:30 - 25:00 although I would note they were not involved in the MRNA vaccines uh from you know the pandemic for covid looks like they're also in the midst of launching a traditional RSV vaccine that we think has you know a multi-billion dollar potential but you know really you know GSK faces probably you know some of the lowest you amount of you know near-term patent losses across the pharmaceutical sector we think that sets the company up you know just for pretty steady growth over the next 3 years and we think the stock is just very
• 25:00 - 25:30 attractive here as it trades at only about 10 times 2024 earnings 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 again next Monday at 9:00 a.m. eastern 8: a.m. Central in the meantime please like this video And subscribe to morning star's Channel have a great week [Music]
• 25:30 - 26:00 [Music] e