5 Undervalued Stocks to Buy to Play a Little Defense | April 29, 2024

[Music] hello and welcome to the morning filter I'm Susan javinsky with morning every Monday morning I sit down with Morning Star Research Services Chief US market strategist Dave Sakara to discuss what's on his radar this week some new Morning Star research and a few stock picks or pans for the week ahead so good morning Dave the first thing on radar this week is of course the FED meeting now given the sticky inflation numbers we're seeing the market isn't expecting the FED to begin cutting interest rates anytime soon what will you be listening for hey good morning Susan you know as far as fed meetings go I think this one's going to just be largely a nothing Burger as you mentioned inflation just isn't moderating you as we expected and I just don't think the fed's going to be in any position to be able to start lowering monetary policy anytime soon so I think during the press conference I think chair Paul will acknowledge that inflation you has stayed you know higher for longer and I think he just is going to have to admit the committee still just is not going to have enough confidence that inflation is on a downward path towards their 2% Target but I think he's also going to have to acknowledge that the economy is slowing faster than most expected after we saw that first quarter GDP print and while our own economics team does still expect inflation to moderate we also pushed back our expectation as to when we think the fed's going to start lowering the federal funds rate so at this point you know based on our assumption that inflation will moderate but that we also expect economic growth to continue to slow in the second and third quarter you know under a 1% rate we're now looking for that first cut to begin uh in September now having said that I'm going to play Economist here and I'm going to say on this hand uh first I do think that if chair Paulo makes any negative remarks regarding the outlook for the economy I mean very negative remarks that could indicate that maybe the FED is very concerned about just how much and how fast the economy is slowing so that could indicate that maybe the FED would want to start lowering rates faster to keep the economy from slipping into a recession so in that case it would be a case of you know bad news is good news but you know secondly on the other side of the coin if chair Powell even just utters the word during the Q&A session you I think the algo trading programs that all pick up on that and I do think we could then see a market sell off so let's take a little bit of a diversion here Dave and talk about the market it's been quite a month economic numbers have surprised and stocks have fallen so recap it all for viewers and then tell us how the stock and bond markets look today yeah I really think you know the economic numbers that we saw last week really were just you know the worst of Both Worlds you know it's showing that the economy is slowing you know faster than expected and inflation is still running higher than expected so through last Friday you know stocks have fallen 3% here in April but I'd say to us you know this pullback was not necessarily unexpected you know in our second quarter Outlook we did note that stocks were trading at a 3% premium to fair value so at that point it wasn't necessarily an overvalued territory just yet but we did note that stocks were feeling pretty stretched you know at the end of March in fact when you look at it you know the market has only ever traded at a 3% premium more you know only 14% of the time since 2010 so at this point following the the stock selloff you know the market is trading pretty close to our fair value right now we are starting to see you know some better valuations you know here and there but this is certainly not a backup the truck you know kind of Market you know just yet and also the bond market got hit and yields you know have risen across the entire curve you know here in April the two years up 40 basis points to almost 5% you know the 10-year treasury up 46 basis points to about 4.67% as of last Friday so you know year to date the morning star core Bond index which is our proxy for the broad fixed income Market you know that's also falling you know just over 3% now personally I'm keeping a very close eye on that 10-year you know if that 10e starts getting closer to 5% yeah we could start seeing some institutional investors reallocate out of stocks and in the fixed income and of course you know that change could push stocks down in the short term well let's get back to talking about the week ahead and we have some notable companies reporting earnings that you're going to be watching this week on Tuesday we have two companies reporting that have been outsized contributors to the Market's returns this year and that's Amazon and Eli Lily so what do Morning Star think of each stock heading in earnings yeah so Amazon right now is a three star rated stock trades you know just a couple percent below our fair value you know and following the strong results that we saw out of both alphab but and Microsoft last week I think Amazon really has its work you know cut out for this week I think the Market's going to be expecting you similarly strong numbers uh really I think there's two areas that I think the Market's going to be especially focused on you know so first is going to be its Cloud business they just want to make sure that you know Amazon is keeping up we saw very strong growth out of both you know Microsoft and alphabet so I think investors just want to make sure Amazon's not losing you any market share to those two and then second is going to be you any additional information you know regarding their e efforts in artificial intelligence and specific their capex spending programs then also with Amazon we're now starting to get a lot of questions you know will Amazon youall start paying a dividend as well we saw both alphabet and meta you know announc new dividends so I spoke with Dan Romanov he's the equity analyst that covers Amazon for us you know he just said in his view you know he doesn't think Amazon's in a position yet to start paying that dividend you Amazon just doesn't produce you know the same kind of free cash flows like the others you know if anything maybe we see like a stock buyback program you know announced here here so let's move on to Lily uh Lily is really actually one of the most overvalued stocks you know under our coverage we think Market is just paying way too high of a valuation you know for their weight loss drug now this one I've spoken to Damen Conover he's the director of our healthc care team you know a couple of times on this stock and what I think is really interesting here is you know he noted that we actually model in a higher number of prescriptions in our forecast than the market does you know for their weight loss drugs yet the stock is still way overvalued in our view it's a two star rated stock trading at a 49% premium to fair value so in my opinion I think this is a situation where not only does Lily have to post you know really strong earnings growth but I think it also needs to provide you know very strong guidance and I think if they were to disappoint on either front you know this is a stock that has a big risk of gapping downwards now also on Tuesday we have two consumer brands that morning star likes that are reporting Starbucks and Clorox both stocks look undervalued according to morning Serv metrics tell us about them yeah so Starbucks is currently rated four stars trades at a 16% discount to our fair value and pays a 2.6% dividend yield it's a company we rate with a wide Moe we assign a medium uncertainty now personally I'm not a fan of Starbucks coffee myself I'm really much more of a Dunkin Donuts kind of guy but you know the key aspect for Starbucks is it's just huge loyalty program and there's a couple of different benefits you know of having that strong digital program you know first of all they're able to tailor you know discounting the specific consumers and types of consumers as opposed to having have you know really broad National ad campaigns and it also just drives a lot of traffic I mean consumers really value that ability to order online or order on their cell phone just walk in you know and pick up their coffee and lastly the good thing about uh you know call it an addictive product if you will it is to me but you know Starbucks has shown ability to raise their prices you know even faster than inflation and also given how large Starbucks are is you know it's still able to grow very quickly I mean between new store growth pricing mix you know we forecast average annual growth of 8% on the top line and earnings growth of 16% through 2033 now Clorox is a different type of story so it is a fourstar rated stock trades at a 14% discount has a 3.3% dividend yield you know it's a wide moat with a medium uncertainty but here's a name and we saw a lot of these names it just overshot to the upside you know during the early days of the pandemic I mean if you remember back then I mean Clorox wipes I mean they were worth their weight in gold I mean they're just impossible to get but a lot of the investors that bought back then you know really got burned now in 2022 and 2023 as the underlying business started a normalized like a lot of other consumer product companies their margins really started getting squeezed you know essentially they've just had a tough time you know raising their prices as fast as their own costs have been going up but unfortunately with Clorox you know their problems were really aspirated by cyber security breach you know last fall and one of the aspects of our investment thesis here is that looking forward you know we do think that once inflation really does start to moderate and starts coming back down you know companies like this you know will be able to catch up increase their pricing and get back towards more normalized type of margins now Wednesday we'll be hearing from two companies that we've talked about before on the morning filter Estee Lauder and Cognizant Technology Solutions what's morning star's current take on both companies and their stocks yeah Este Lauder is actually one of our top picks it's a five-star rated stock trades at a 29% discount to fair value pays a 1.8% dividend yield company we rate with a wide Mo and a sign a medium uncertainty again a stock that overshot in 2021 and 2022 in fact I think it even hit you know one star territory at one point but in our view it's not overcorrected to the downside you over the past few years you know the company's really been under pressure from really two main aspects so first you know Estee does remain Overexposed you know to the department stor sector which of course you know department stores are still you know kind of struggling you know and second the sales in Asia you know especially China have been under a lot of pressure you know the Chinese economy never really re accelerated you know after the pandemic now having said that you know looking forward when I look at our model we do model out a 7% compound annual growth rate on revenue and we do expect the earnings will be bolstered by operating margins you know following some cost cutting programs that they've put in place and I think really the long-term play here is really expecting you know the growth in the merging Market middle class you know over the long term for the Emerging Markets then moving on to Cognizant that's a fourstar rated stock at a 28% discount 1.8% yield company with a narrow economic moat in medium uncertainty and we've talked about this when you unnum different times on the show so just a quick synopsis the investment thesis here is that we do look at this company as being a second derivative play on artificial intelligence when we think about it you know a lot of small and midcap companies you know they just are not going to have the expertise or the financial wherewithal to build train and roll out their own artificial intelligence models so I do think they're going to need to hire outside expertise to do that for them and then on Thursday of course Apple reports Apple was hit with an antitrust lawsuit from the US Department of Justice several weeks ago and the stock isn't having a great year what's Morning Star think of Apple heading into earnings yeah I mean year to dat Apple is actually down 12% % so it's actually now fallen enough it's dropped back down into three star territory from being four stars at the beginning I'm sorry it's now dropped back into three star territory after being in two stars you know earlier this year so our fair value is $160 per share uh we do rate the company with a wide moat and a medium uncertainty and looking at this quarter you know we expect to see relatively weak iPhone you know demand and a couple of just you know reasons why you know the replacement cycle for cell phones generally has been slow especially in China where we do see the government pressuring consumers you away from the Apple products and in fact you know their competitor there Huawei actually just recently launched a very competitive phone to the iPhone and then also with the stock I think investors are just concerned about the lack of you know announcements guarding you know their AI strategy so I think we want to hear more about you know what apple is thinking as far as artificial intelligence now having said that you know some of this will be offsite by some Rising margins we do expect to see a higher percentage of iPhone sales in more of the premium models and we also expect to see a higher percent of the revenue coming from services so both you know higher margin products or Pro both of them being higher margin uh for them uh so really the only other thing as you mentioned you know we do have you know the doj lawsuit we'll be listening for any commentary there you I don't think we're going to hear you any new updates at this point but our base case there is that we do think the lawsuit at the end of the day will result in apple you having to open up different portions of its ecosystem system okay on to some new research from Morning Star about companies that reported earnings last week let's first talk about meta platforms the stock is up quite a bit in 2024 and looked overpriced heading into earnings then earnings came out okay but the stock tanked so recap what happened whether morning stars made any changes to its Fair Value Estimate on the stock and tell us how the stock looks today is it attractive after that pullback yeah I think actually I think meta really just killed it on both revenue and earnings you know substantially beating estimates you know on both of those but you know the meta stock I mean it really just dropped like a rock and I think the big reason is because they are raising their capex spending program in order to spend more money on artificial intelligence so if you remember with meta I mean they spent a huge amount of money building out the metaverse and of course that never produced you know any tangible benefits never really produced you know any money or any margin for them that's really a big reason why the stock dropped as much as it did you know in 2022 in fact I don't think that stock really bottomed out until they started to pull back on spending on AI so I think that's the big concern here now of course the stock did Skyrocket higher in 2023 and early 2024 and that's because the margins were expanding so much as they were pulling back on that capex spending on the metaverse now as much as we thought that stock was undervalued coming into 2023 so it was a five-star rated stock coming into the year last year that pendulum swung just way too much to the upside in our view it was rated you know two stars in early 2024 and even after the selloff you know it's still trading at 20% premium which puts it in that two star territory so let's move on to Tesla now unlike meta Tesla stock is having an awful year uh the stock jumped after earnings though and Morning Star nudged up its Fair Value Estimate by a few dollars what's the takeaway and is the stock a buy yeah I mean Tesla I mean it's almost a mere image you know of meta uh so Tesla missed on both the top line and the bottom line yet as you noted the stock surged I think 11% you know after the earnings announcement in my opinion I think it's really just largely due to the announcement that they're pulling forward as far as when they're going to be able to start uh selling their lowcost cars so you know they're now saying that they should be able to start selling them at the beginning of 2025 maybe even as early as the end of this year at the end of 2024 uh before you know they were projecting not being able to start selling those cars until the end of 2025 now prior to this earnings announcement the stock had fallen you know 40% this year you know that was enough to put it in that fourstar territory after being a two star as recently as you know last July I also talked to Seth Goldstein you know following earnings and there's a couple of other key takeaways you know that he noted here so first we are seeing stronger adoption of the full self-driving subscriptions uh he slightly raised you know his 2024 delivery forecast due to Tesla's recent price cuts and he also raised his energy storage volume forecast as well now however that will be offset by some slightly reduced you know near-term margins especially in the automotive you know gross margins but net net at the end of the day we did bump up our fair value by $5 to $200 a share so it does put it currently at a 16% discount which puts it in that three star territory now alphabet stunned the market both with its results and with the news that it's going to begin paying dividends now the stock surged on the news and Morning Star raised its Fair Value Estimate by $8 to $179 what's Morning Star take on the results the dividend and the stocks valuation today yeah alphabet also I mean they beat and they beat big both on Top Line and the bottom line company's still just hitting on all cylinders as far as you know we're concerned you know across all of its three major business segments you know search advertising YouTube and its Cloud business now they also announced that they were increasing their capex budget you know for artificial intelligence but they did note that they're offsetting some of that spend by cutting uh some of their expenses elsewhere so I think the market was comforted you know by that uh they did announce a 70 billion stock buyback program and that they are now paying a dividend so the real benefit of that dividend is that now that those you know dividend funds that before you know couldn't own that stock can actually now start to buy it so that is going to widen out their investor base uh we bumped up our fair value by 5% to $179 a share it wasn't the dividend that did that the dividend in itself you know doesn't change our valuation but it's really just due to an increase in some slight you know changes to our underlying business assumptions so the thing with alphabet it was actually kind of the last of the big Tech names that we thought was still selling at much of a discount to fair value so following the stock Rising it's a three star rated stock trades only you know 4% discount to fair value and if you take that 20 cent dividend payment and annualize that that gives you about a half of a percent dividend yield now Microsoft also reported strong results last week and Morning Star bumped up its Fair Value Estimate by $15 on the stock to $435 so what impressed Morning Star the AI related news maybe or yeah so as you know you know Microsoft they did beat both on the top line and the bottom line I spoke to Dan Romanov you know following earnings he's the equity analyst that covers Microsoft for us and he said that he just thought that you know they were just doing you very impressive business really from kind of all the different business angles that he looks at now specifically he called out Azure that's its Cloud business is doing exceptionally well you know that's an area where we just think that you know in the cloud business overall there's still just a long pathway of growth for all of these companies but AI did contribute a large amount of that growth for them this past quarter uh he also noted that they started giving a preview of their fiscal year 2025 guidance you know looking for double digigit Revenue growth but being slimly offset by a margin contraction of 1% both of those are consistent with our financial model so Microsoft wide economic Moe media uncertainty in my opinion it is a core holding you know type of stock trading at about a 3% discount three stars 34% yield and last one on the tech theme IBM stock fell after earnings the company also announced it's acquiring hashy Corp any changes to our Fair Value Estimate on this one and is the stock still looked overpriced yeah so IBM actually missed on the top line although they were able to you know squeak out a bottom line beat that stock did drop 8% so so our fair value of $139 is unchanged still puts it a 20% premium to fair value so it's a two star rated stock you know no change to the valuation but our long-term thesis here still is the same you know we do think that IBM will probably have you know some individual strong Port products within its broader portfolio but overall when we look at the secular Trends within the it business itself we're just expecting you know lower consumer spending you know with IBM over time now do think this stock end of last year beginning of this year probably got caught up with you know the wave where everyone is looking for anything you know AI related but at the end of the day IBM just really is an a is not an AI play you know in our view and I think the market is now starting to also come to that same realization now both Verizon and AT&T looked attractive heading into earnings and Morning Star didn't make any changes to its fair value estimates on these stocks after earnings so what do you think here today do you still like these two names yeah I think longtime viewers might be getting tired of us talking about B of Verizon and AT&T but you know you know these two stocks are up 25% from those August lows they're both rated four stars trading at about a 26 and 27% discount you know respectively both paying yet well into 6% you know dividend yields we rate both company with a narrow economic moat and a medium uncertainty you know for both quarters I think is a similar story you know the wireless Revenue growth was pretty good churn is still relatively low low margins are improving you know the only hit here would be you know free cash flow was relatively weak but as Mike Hodel noted you know first quarter is typically a seasonally soft period for free cash flow anyway so no change to our long-term investment thesis here you know we still think the wireless industry over time is going to become more like an oligopoly they'll compete Less on price and that's going to allow margins to expand over time and then lastly Dave bogin reported last week the stock popped after earnings and we held Our Fair Value Estimate $33 how did earnings look and what do you think of the stock yeah I think we talked about Biogen last week and you know we noted that Biogen stock has been under pressure for a while you know one of their main drugs is losing its patent protection and is you know facing competition but we think Biogen in and of itself is in the midst of expanding its portfolio in neurology you know beyond multiple sclerosis into neuromuscular diseases and Alzheimer's so we think the story here is that the market just generally has underappreciated bio pipeline so this past quarter I think we're starting to see some benefits from some new product launches and some cust coding programs you know both of which should offset those headwinds you know from a declining portfolio of older drugs you know in multiple sclerosis now Karen Anderson who's you know our Healthcare analyst that covers the stock you know encouragingly you know she noted that you know three different new product launches do appear to be gaining some acceleration and she thinks that points to a pretty solid growth profile Beyond 2024 so the stock popped it's up I think about 7 and a half% on the week four star rated stock at a 31% discount I will note it does not pay a dividend so if it if you're a dividend investor this might be one you want to shy away from but it's a company with a wide economic moat although it does have a high uncertainty which you know for a biotech I think you should expect a high uncertainty stock Al righty we've arrived at the picks portion of our program and given sticky inflation and slowing economic growth you say that now may be the time to play a little defense so today you've brought viewers five defensive stocks to consider most of the companies you're going to talk about have economic Moes reliable cash flows and pay dividends then their stocks are undervalued your first pick is a consumer defensive stock it's brown foran tell us about it yeah so Brown Foreman I think you kind of have to look at the long-term trading pattern here you know the stock Rose you know way too high in 2020 it got well into that two star category and the Stock's been just a long-term downward Trend you know ever since and in fact at this point I think it's now trading below pre-pandemic levels so I think this is an opportunity to be able to buy a high quality name that you know rarely has traded you know much below our Fair Value Estimate now personally I'm not a Jack Daniels guy myself but Jack Daniels is the bestselling American whiskey brand in the world as you mentioned this is a company we rate with an economic moat we believe it's a wide economic moat in this case we assigned a medium uncertainty this company and when I think about their underlying you know fundamental business here we've noted you know they've successfully expanded you know into both you know the premium and the super premium segments within their their brands plus they've been able to take their brands and extend those you know into the ready to drink category which is one of the more you know faster growing areas within this business and I pulled up our model over the weekend and I looked at our assumptions and actually I think they look relatively conservative to me you know we're looking at compound annual growth for Revenue over the next 5 years of only 4% we're looking for earnings growth of 8% so at the end of the day it's a fourstar rated stock at a 18% discount and pays a 1.8% dividend yield now your second pick this week is from another sector associated with defensive investing and that's healthc care and the stock is one we recently talked about too it's Johnson and Johnson why is this stock a defensive pick for you today well in fact I mean Johnson and Johnson in my opinion I think is just a core holding type of stock it's current rated four stars trades at a 10% discount 3.4% dividend yield you're a company that we assign you a low uncertainty rating and it is one with a wide economic Moe you know in fact you know according to Damen con Conover who's the head of our Healthcare Equity analy team he thinks it's actually one of the widest Moes in the health care sector so I think the reason why the stock is trading at where it is right now is that they will start to face some competition from a bio simular product beginning this Summer that will be a drag you know on growth over the short term but I would note you know our Equity analyst team has already got that factored into their model and we do forecast that some other new product growth you know should offset that over the next couple years again another one where I think our assumptions look pretty conservative here so looking at the Top Line we're only looking at a 2.3% compound annual growth rate over the next 5 years looking for only 4% you know average annual earnings growth but yet the stock is trading at you know under 14 times our 2024 estimated EPs and only about you know 13 times 2025 earnings now your next pick is also from the healthc care sector it's medronic yeah and we've talked about this one a number of times you know I think over the past year so metronic is the largest Pure Play medical device maker it is one of the ones that we think is best position in Medtech for being able to benefit from the continued aging of the baby boomer generation for those of you that don't know the company they make medical devices for chronic dis diseases when I look at their portfolio includes things like you know pacemakers defibrillators heart valves stun and Insulin pumps uh we rate the company with a narrow economic moat and a medium uncertainty so when I looked this one up I think we last talked about it on our October 30th show you know it's up 14% uh and plus whatever dividends you got you know since then but it is still undervalued it's a fourar stock at a 28% discount and a 32% dividend yield and when I look at our underlying fundamentals we're looking for you know Revenue growth for the next 5 years on an annual basis of about 42% earnings growth of 11.3% it trades at about 15 times or 2024 estimated earnings now your last two picks this week aren't from sectors that investors would associate with being defensive in nature but you argue that both our defensive plays in today's market the first is numont explain yourself Dave well they're defensive in my opinion you know just from uh two different aspects so first of all mining companies yeah are typically assed with being a very secular business however in an environment of you know still higher for longer inflation you know gold actually feels you know a bit bit defensive to me but the real reason that I'm looking at you know numont mining is you know when I look at our model we do assume that gold prices are going to end up declining over time so we're forecasting gold at $2,320 you know per ounce uh from 2024 through 2026 but then we actually model the price of gold will decline towards our midcycle forecast of $1,780 by 2028 so the story here to me is that if gold were actually to stay here or even move higher I think there's a huge amount of upside leverage you know in the stock however if gold price you know does fall towards our long-term Target of 1,780 over the next four years you're still buying this stock at a very large margin of safety you know numont did report earnings last Thursday they significantly beat on both the Topline and earnings you know the stock is up 12% but it's still a fourstar rated stock at a 16% discount and a 2.3% dividend yield and then your last pick this we week is a name we've already talked about on the show today it's AT&T how does this fit into your definition of being a defensive pick today yeah so AT&T you know does fall into that Communications sector and the communications sector is considered to be economically sensitive meaning that it has some attributes of you know defensive names but also some cyclicality to it as well and I would just say that you know while there is you know churn in the wireless industry overall you know and that's essentially when people move you know from one carrier to another when I think about the wireless business and cell phones you know not too many people are going to give up their cell phones you know even in a recession so AT&T is rated four stars it's a 27% discount at a 6.6% dividend yield you know company that we rate with a narrow economic Mo and assign a medium uncertainty you know when I look specifically at you know the first quarter earnings you know we thought the wireless Revenue growth was pretty good turn was low you know we're seeing Improvement in margins here you know the free cash flow was relatively weak but you know typically the first quarter is seasonally soft so that's not a concern and at the end of the day no change to a long-term investment thesis you know the wireless industry is generally becoming more like an oligopoly over time we expect that the main competitors there will compete Less on price that's going to allow margins to expand so I think the only real question here is you know why pick AT&T you know over Verizon so I did reach out to Mike Hodel he's the equity analyst that covers these names for us and his answer here for AT&T is that he does like their fiber strategy he thinks AT&T over time will succeed in bringing together both the wireless business and the fixed line business in a unique way that he thinks that over the next decade you know will provide you know additional benefits you know to the company and be able to generate you know some additional earnings and of course you know as always you know if you're interested in any of these stocks or you know any of the others we discussed you know in the show you can find you a lot more analysis on morningstar.com or whichever Morning Star platform you use thanks for your time this morning Dave viewers 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 Stars Channel and have a great [Music] week for

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Keywords: morningstar, investing, stocks, funds, etfs

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Length: 31min 39sec (1899 seconds)

Published: Mon Apr 29 2024