3 Overvalued Stocks to Take Profits In and 3 Undervalued Stocks to Buy Instead

Key Takeaways

• The one theme driving economic growth today
• How to position your stock portfolio for the new month
• Which earnings reports to watch for in the week ahead
• Top insights from Big Tech earnings
• Stocks on which to lock in gains and promising stocks to buy instead

In this episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski cover the latest in the war and the market, the gross domestic product print, and the Fed meeting. They update the stock barbell strategy heading into May. Key earnings releases this week include Advanced Micro Devices AMD and Fortinet FTNT; tune in to find out why.

They reveal which of the Big Tech stocks—Alphabet GOOGL, Microsoft MSFT, Meta Platforms META, Amazon.com AMZN, and Apple AAPL—look like stocks to buy after earnings. The episode wraps with three overvalued stocks to take profits in and three undervalued stocks to buy instead.

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

Transcript

Susan Dziubinski: Hello. Welcome to The Morning Filter podcast. I’m Susan Dziubinski with Morningstar. Every Monday before market open, I sit down with Morningstar Chief US Market Strategist Dave Sekera, to talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. All right. Well, good morning, Dave, and I want to apologize in advance for how nasally I sound, my sniffles, and any sneezing, to you and the audience. I am nursing a head cold. So, I hope you’re well.

David Sekera: Well, I am sorry to hear that. All good on my side, but hopefully we can get some vitamin C in you and maybe some vitamin coffee to start off with. And maybe some vitamin C and get you healthy again.

Dziubinski: What is your mug this week? Is that Iron Man?

Sekera: It is.

The War & The Market

Dziubinski: Iron Man mug. All right. Well, so Dave, let’s start this week with a recap of where we are as of this morning with the war and its impact on the markets. Start talking about oil.

Sekera: Sure. I mean, at this point, we’re now, what, two months, actually over two months from when the conflict first started. And unfortunately, it just appears like we’re not anywhere closer to any kind of long-term resolution at this point. Yes, there are some ships here and there getting through the Strait of Hormuz, but effectively it still seems like it’s mostly closed, and the amount or the supply of oil and natural gas coming through is still a lot lower than what it was preconflict. Now taking a look at oil prices this morning, they are still steadily climbing back up. Last I saw before coming on the show, it’s 105 for the front-month contract this morning. So not necessarily to the peak where it was toward the beginning of the conflict, but unfortunately it looks like it’s still moving back up there. Now, in my mind with everything going on, I think oil and the higher cost of oil is being overlooked by the market for now.

At some point, I think it will end up coming back in focus. At that point in time, it will drive negative sentiment in the marketplace, but for now, traders are just hyperfocused on the AI buildout boom and the implications for that. So until we people kind of really start thinking about oil prices, it’s all about AI for now.

Unpacking GDP

Dziubinski: All right. Well, let’s talk about a couple of economic matters. We had GDP numbers come out last week. What stood out to you?

Sekera: So the GDP number or real GDP came in at a 2% annualized growth rate. So that was a little bit higher than what the Atlanta Fed GDP now was looking for, but it was lower than what our own economic team was forecasting. However, in my opinion, I think the biggest takeaway is not necessarily the level of GDP, but just how much the AI buildout boom is bolstering economic growth for now. Taking a look at the numbers underneath, looks like eight tenths of that GDP growth came from the increase in information processing equipment, and then software added another half a percent points to that growth number. So between those two, it looks like about two thirds of all GDP growth was really just from artificial intelligence. I mean, if you were to strip that out, economic growth would’ve been much lower than the actual print.

Fed Meeting Takeaways

Dziubinski: All right. Now, also last week, the Fed left interest rates unchanged, which is what was expected. What were your key takeaways from the meeting and anything from FedChair Powell’s comments?

Sekera: I heard a lot of blah, blah, blah, blah, blah, blah, blah. It sounded like the teacher from the Peanuts cartoons. I think a lot of words were spoken, but I don’t think anything was actually said. I’m not reading anything into this meeting. I think it was all noise. There’s no signal here really to gauge what might be happening in the future. In my mind, I still think there’s just no rate cuts coming anytime over the course of the foreseeable future. And that’s also now what the market’s coming around to that point of view as well. If you look at the market pricing, the probabilities are effectively no change through year-end. If you look all the way through the December meeting, at this point, it’s interesting. There’s now an equal chance being priced in of a hike as well as a cut. So both are about a 12% probability of either a cut or a hike.

Going into January 2027, the probability there, it starts to slowly move more toward a hike than a cut at that point in time, but that’s still a long way away. There’s still a lot that’s going to happen between now and then. So personally, I wouldn’t read too much into those probabilities when you start getting that far out.

May Portfolio Positioning

Dziubinski: All right. It’s time to check in on your barbell stock portfolio strategy for 2026. Now heading into April, you had suggested that investors take profits in energy and value stocks and put the proceeds into growth and tech and AI stocks. So how’s that recommendation been doing, and what are you suggesting as we kick off the month of May?

Sekera: Overall, I’d say that barbell has been working the way that we expected it to work thus far this year. So for those of you that don’t remember or weren’t around in our 2026 outlook, at the beginning of the year, we just reviewed a whole number of reasons why we expected more volatility this year than what we’ve seen last year or even the past couple of years. And as such, that’s why we recommended a barbell-shaped portfolio strategy, essentially putting half of your equities into very high-quality value stocks, those with wide or narrow economic moats. We pointed out the energy coming into the year, oil and gas names, those stocks were especially undervalued, recommended those as well. But then the other half of the portfolio, we noted that growth stocks were very undervalued coming into the year, especially tech and AI. So we were looking essentially for half your portfolio in those high-quality value stocks, the other half in those tech and AI growth stocks.

And then that way, as the market moved around, as the volatility would either take stocks down or take them back up, you could then reallocate those allocations to take advantage of that volatility. Now, as you noted on the March 30 episode of The Morning Filter, that’s when we recommended to start taking profits in value stocks. Specifically, we called out the energy sector as a good area to take those profits. Energy at that point in time, I think was up like 35%, and then take those proceeds and reinvest those into the growth stocks, specifically the tech and the AI stocks that really had been beaten down over the first couple months of the year. So that recommendation has done very well. Here in April, growth as a category was up 12%, value stocks only up 3%, but within that growth category, tech stocks have done especially well.

They’re up 17%, whereas a lot of those value-oriented sectors have really lagged. Most of them are flat to only up maybe 2%, and energy has fallen a little bit. I think it’s down about 3% this past month. So of course that brings us to, the question is, well, where does that leave us today? So looking at our current market valuations at the end of March, the market overall is trading at a 5% discount to fair value, so a lot lower discount than what we were at the end of last month. Value and growth stocks are both at 7% discounts, and core stocks are only at a 2% discount. By sector, some of the most undervalued sectors include technology at an 11% discount, healthcare at a 7% discount, and then financials and real estate, both at 5% discounts each. Some of the more overvalued sectors are going to include consumer defensive.

That’s the most overvalued, at a 19% premium. But as we’ve talked about before with consumer defensive, that is skewed much higher because of Walmart WMT and Costco COST: two stocks that we think are significantly overvalued. If you strip those out of the rest of the sector, that sector looks pretty attractive, especially the food names. Basic materials sector at a 12% premium. And then lastly, industrials at a 7% premium.

Earnings Watch: AMD

Dziubinski: All right. Well, we have another full slate of earnings reports coming out this week, so let’s get to them. Now, AMD has been a prior pick of yours, and it’s up nearly 70% this year, trading well above Morningstar’s $300 fair value estimate. So what are you going to be listening for here?

Sekera: Well, as you noted, AMD has been a pick a couple of times over the past year or two. Really, the investment thesis here on AMD has been that we’ve expected that AMD will be ultimately the number-two player behind Nvidia for AI chips. Now, as far as earnings this quarter, I don’t see any reason why they shouldn’t look very good. I expect that they’ll benefit from the high demand for CPUs to support the AI buildout boom, similar to what we saw with Intel. But really what I want to hear more about from AMD is just going to be whatever information they can provide to help support our investment thesis here, hear more about what they’re doing to design and develop new AI-oriented products.

Earnings Watch: ARM

Dziubinski: Now, we don’t talk much about ARM ARM on The Morning Filter, and that’s because it’s perennially overvalued. Morningstar assigns the stock a $135 fair value, and of course it trades well above that. So there’s a lot of price risk on this stock heading into earnings, right, Dave?

Sekera: Yeah, there’s a huge amount of price risk being priced into the market on this one. So I looked up the options contracts last Friday at the end of the day. And if you take a look at the one-month option contract, the closest to the 50 delta, based on the implied volatility that the market’s pricing in, in those option contracts, the market’s pricing in plus or minus 27% move in that stock price before those contracts expire over the course of the next month. Now, again, here’s another one. I don’t see any reason why they shouldn’t be posting a very strong quarter. I just think that what the market really needs here is just more reasons why that growth will be so high for so long to be able to justify that valuation. According to Morningstar.com, if you look up on the stock page there, the stock is trading at 117 times a normalized P/E ratio.

So again, you have to see huge amounts of growth on this one over the next couple years to bring that P/E ratio down anywhere near more normalized historical type of averages.

Earnings Watch: FTNT

Dziubinski: Now, Fortinet reports this week. Stock had a pretty good April, but it’s still down quite a bit over the past year. Trades well below Morningstar’s $108 fair value estimate. What are you going to want to hear about from Fortinet?

Sekera: Well, really for all the cybersecurity stocks, it’s just trying to understand exactly what that impact of artificial intelligence is going to be on the cybersecurity space. If you remember, we did have a bonus episode. I interviewed Ahmed Khan. He’s our equity analyst that covers the cybersecurity space for us. I think that was on March 19. And we really reviewed all the different reasons why we think AI actually makes cybersecurity ever more important going forward, why we don’t think that this software or these type of companies are going to be displaced by AI. I’ve actually got a pretty interesting anecdote. So last week I was talking to a networking contact of mine out in the industry and talking about Anthropic, and I don’t know how you pronounce it, their platform. It’s called like Mythos or Mythos. But again, this is an AI software that Anthropic has that they were running to see how that could potentially hack into or find cybersecurity holes across a lot of different platforms.

And supposedly they found thousands of different ways to be able to get into a lot of different types of platforms across the financial industry and a lot of other areas. So essentially what they did is before they were going to release this out into the wild, they put together a whole group of people, a lot of people in the cybersecurity industry. I think Fortinet might have been one of those players. Palo Alto was another player, but they also pulled together a lot of companies that could potentially have cybersecurity issues if they weren’t able to patch them. So the person that I talked to is relatively high up in cybersecurity for one of the largest corporations in the United States. And I was really just asking them, how real is this? A lot of times things like this, you might think it’s maybe just like marketing coming from the company to try and gin up a lot of excitement about their AI platform here.

But in this case, he noted that, no, this is actually very real. In fact, he just noted that, from their perspective, they’re essentially kind of throwing out what all their plans were for how they were going to work on and improve their cybersecurity over the year, just because, for now, they’re spending all their time working on different patches to be able to shore up their different systems. He was just saying that using artificial intelligence, what it was able to do was find even just one small, tiny little cybersecurity hole or issue, but then use that to find another one and then another one. And essentially was able to patch a path of 20 different issues that, in and of themselves, wouldn’t have necessarily been all that concerning, but being able to patch them all together really was something that could have caused a lot of problems for these companies.

Earnings Watch: KHC

Dziubinski: All right. Well, that’s a little scary, but let’s talk about something that’s less scary. That’s Kraft Heinz KHC. Kraft Heinz has been a pick of yours in the past. Stock’s in the red this year and deeply undervalued relative to Morningstar’s $42 fair value. So what should we be listening for on the earnings call?

Sekera: Well, and it’s not just Kraft. I mean, it’s all of these food names. We’re trying to find out: Are we finally getting to the point where the impact from the GLP-1 drugs … are we at the point where those are going to start having a less negative impact on results? But the problem with the food names now is that’s not necessarily the only issue. We have rising oil prices, rising commodity prices, so you’re going to see higher packaging costs that these companies are going to have to push through. They’re going to suffer from higher transportation costs. We’ve talked on the show a couple of times over the past month or so. We’re just seeing wheat, corn, soybean prices. All of those are going up. So a lot of their input costs are going to be going up as well. So unfortunately for the food names, these are now just new headwinds that they have to contend with that we weren’t anticipating even just a few months ago in our forecasts.

Big Tech Earnings: Takeaways

Dziubinski: All right. Well, let’s move on to some new research from Morningstar about all the Big Tech earnings that came out last week. Before we get to the specifics, Dave, any broad takeaways?

Sekera: The broadest takeaway here looking at the results is that the AI buildout boom is still just full speed ahead. No slowing at all. In fact, they’re pushing the pedal to the metal and going even faster than what they were at the beginning of the year. In my mind, this is just a modern day gold rush to build out capacity faster than their competitors. Everyone wants to try and capture that first-mover advantage. I think the big concern here is everyone thinks that any laggards are going to just end up being on the scrap heap of history if they’re not at the forefront of this. As far as the individual results go, it looks like everyone pretty much beat on both the top line and the bottom line, and in many cases, they beat by a lot. Everyone to some degree boosted guidance one way or the other.

So it really just came down to, for the individual stocks, what the idiosyncratic issues were that the market was looking for for the individual companies. And that led to whether or not you saw that stock trade up or down after earnings. But even for those that traded down immediately after earnings, by Friday, it looks like a lot of those were even starting to recapture those losses.

Alphabet’s Blowout Quarter

Dziubinski: All right. Well, let’s go through some of the companies one by one, starting with Alphabet. Now, here was an example of pretty blowout results, right?

Sekera: Yeah. I mean, these were just crazy-strong numbers for a company that’s already this large. Revenue was up 22%, operating margin expanded by 220 basis points. Our team noted that we’re estimating their Gemini API sales of $15 billion on an annualized revenue run rate. That’s up from just $9 billion last quarter. Now, capex spending, interestingly, here was kind of only in line with what expectations were, yet they raised their fiscal 2026 capex spending by $5 billion now to a range of 180 to 190 billion. That was only 175 to 185 last quarter. So what that tells me is that we’ve got now accelerated spending for the remainder of the year.

Dziubinski: Now, Morningstar raised its fair value estimate on Alphabet’s stock to $433 after earnings. Stock’s been a pick of yours several times in the past. What do you think of it after that fair value increase?

Sekera: It still looks attractive to us. As you noted, it’s been a stock pick of ours in the past. And I actually looked up … This is actually one of the more recommended stocks that we’ve had on The Morning Filter going all the way back to when we started the podcast in 2023. This is a stock that was pretty much left for dead in the AI arms race about two years ago. Everybody thought that AI was going to end up decimating search. That’s not what we’ve seen. And again, our investment thesis was we thought that AI was going to actually improve search over time and to be able to improve this company in a number of different areas. At this point, that stock has now risen enough. It’s only at a 11% discount to fair value. So still enough to put it in 4-star territory, but unfortunately, not nearly that margin of safety as what we’ve seen over the past couple years when we were recommending it.

Is Microsoft Still a Buy?

Dziubinski: Now, Microsoft is another one of those stocks that you’ve recommended several times over the past few years. It also reported last week, so walk through results.

Sekera: So again, it looked pretty good. Third-quarter revenue up 15%. I mean, they beat across all of their different segments, so there wasn’t any holes in their portfolio. As far as AI goes, their Azure revenue was up 39%, a little bit faster than what consensus was expecting at 38%. Their operating margin expanded a little bit, expanded 20 basis points to 46.3%. As far as guidance goes, fourth-quarter guidance for revenue, margins, earnings were all generally in line with our model. I’d say the real key takeaway here was their updated guidance to now spend $190 billion in capex over the next three quarters.

Dziubinski: All right. Now Microsoft stock was down after earnings. Morningstar reaffirmed its fair value estimate of $600. Why do you think the stock sold off after earnings, and why do you think market sentiment continues to still be kind of sour on Microsoft?

Sekera: Yes. Generally, I don’t really know why the stock sold off. As you noted, we held our fair value steady. I heard some rumors out there that maybe they were a little light on their Azure growth compared to what some of the whisper expectations were. But overall, in our view, we still think this stock is very undervalued, trades at a 31% discount to our fair value. It’s a 5-star-rated stock. So this might be one that kind of works out like what we saw with Alphabet, whereas one where we had a differentiated view from the marketplace. However, sometimes it just takes a while for the market to look at a story the same way that we’re looking at a story. This one’s still being pulled down with all of the software stocks. So this might be one where you have to have some patience. Maybe it takes another year or two for the valuation story here really to unfold as we see how AI impacts or maybe in this case doesn’t impact the company’s results.

Meta’s Big Pullback

Dziubinski: All right. Meta’s results appeared to be strong on the surface. So take us through those.

Sekera: In this case, Meta’s revenue was up 33% to 56 billion. Now on the flip side of the coin here, the operating margin did contract by 90 basis points. Not a huge amount, but you never like to see it going the wrong way. And essentially that’s because of just the higher amount of AI expenses that they’re spending. So full steam ahead here with their AI buildout boom, but they are talking about a number of different ways that they are able to actually capture that AI spend in order to help them bolster their revenue and over time lead to operating margins expanding again. Specifically, they called out AI-optimized ad and content recommendations leading to increased time being spent on Meta’s several different platforms. Specifically, the amount of time spent on Instagram was up 10% for Reels. For Facebook, they said people were spending 8% more time watching videos.

So maybe not necessarily good for society as a whole, but definitely good for the company’s margins. In this case, they noted that the volume of ads was up 19%, and ad prices were up 12%. So definitely leading to very strong top line. And while maybe you see some margin contraction here in the short term as they’re spending more money on AI, in this case, it looks like AI is certainly helping improve the results here in the short term.

Dziubinski: Now, Meta’s stock was down I think about 9% after earnings. Why do you think the stock got punished? Was it because of the decline in margins? And do you think that pullback was overdone?

Sekera: In this case, yeah, I think the market’s a little bit concerned about the operating margin here in the short term. The market is definitely concerned about the amount of capex that they’re spending. So they increased the range of capex spending this year now to a range of 125 to 145 billion. That’s up from their prior guidance of 115 to 135 billion. Now, just to put those numbers in perspective, in 2025, their capex spending was only about half of that at about 70 billion. In 2024, their capex spending was a little under 40 billion. In 2023, their capex spending was a little under 30 billion. So again, you just have to think about how much money they’re pouring into artificial intelligence and just how much economic value they’re going to have to generate over time to not only just be able to pay for that capex spending, but to be able to generate earnings on top of that.

Overall, we held our fair value steady at 850 a share. So I think really the big concern in the marketplace here is that capex spending. Meta, of course, does have a pretty checkered history on making these big bets with capex spending. If you remember, back when they changed their name from Facebook to the Metaverse, huge amount of money that they paid into the Metaverse, which didn’t pan out. Essentially, they’re closing down a lot of the operations that they poured into there and writing that off. So to some degree from the market point of view, I think it’s a bit of a show me story on the amount of additional capex that they’re spending on artificial intelligence.

Amazon: Buy After Earnings?

Dziubinski: All right. Well, Amazon’s earnings report was pretty positive across the board. So run through the headlines on it for us, Dave.

Sekera: So with Amazon, revenue is up 15% year over year. As you noted, the revenue is stronger pretty much across all of their divisions. So no problems here. Taking a look at their AWS platform, that’s their web hosting platform for artificial intelligence, revenue there was up 28% versus 25.7% for the consensus number. Some discussion out there, maybe that was a little bit slower than what the whisper number was, but still, 28%, very strong growth in that division. Operating margin overall improved by 130 basis points, going up to 13.1%. That’s up from 11.8% a year ago. And just margins across the board better than expected. And taking a look at their guidance here, they’re looking for second-quarter revenue of 194 to 199 billion. So an increase from prior consensus of only 189 billion.

Dziubinski: Now, Amazon stock was down a little bit after earnings, but Morningstar ticked up its fair value estimate by $20 to $280. So Amazon’s been a pick of yours in the past. What do you think of the stock today?

Sekera: So after we increased our fair value, it’s not only still trading at a 4% discount, puts it pretty much on top of fair value. So it’s a 3-star-rated stock. This one’s been a pick a number of times in the past. I would just say that with Amazon, it never really stays 4 star for very long. I do think that this is a core holding type of stock for a lot of portfolios. So I wouldn’t argue if someone wants to buy a position to start in Amazon today. Again, I would keep it at a relatively small position just so you do have dry powder. So if it does go back down into that 4-star territory, you have the ability to be able to buy more and dollar-cost average into the downside. But for the most part, if you’re buying Amazon stock here, I’d say for long-term investors, we’d look for that stock to grow in line with our cost of equity estimates.

Apple Earnings Recap

Dziubinski: All right. Last earnings report we’re going to talk about, Dave. You’re doing a great job. Apple reported last week. So what’d you think of the results and how does the stock look from a valuation perspective?

Sekera: Revenue up 17% year over year, led by iPhone growth, specifically in China was particularly strong. Gross margin coming in at 49.3%. I guess that’s now a new all- time record for the company. So very good numbers coming in and good numbers yet to come. Management guided to strong growth in the June quarter. I think maybe a little bit of margin compression just because some of their spending might be going up here in the short term. Overall, we raised our fair value by 4% to 270 per share. Stock right now is trading a little bit over there, so it’s 3-star-rated stock. So another one in line with pretty much what we expected overall. So really no surprises here. Stock is still 3-star, so not necessarily something I’d be buying a new position in here today, but another one that, if you like the stock and this is a buy and hold for you, certainly no reason to be taking any money off the table.

What’s Wrong With Southern?

Dziubinski: All right. Well, let’s move on to our question of the week. Now, as a reminder, if you’d like to ask Dave a question, the best way to reach us is via our email at themorningfilter@morningstar.com. Now, this week’s question is a follow-up from the April 20 episode of the podcast where we talked about “forever stocks.” Now, James wants to know why one of your picks that week was Duke DUK instead of Southern SO. James says that Southern is the only stock he’s bought and held, picking up shares at just $10 per share and reinvesting forever. So Dave, what’s wrong with Southern?

Sekera: Absolutely nothing wrong with Southern, Susan. So I think, and the reason I like this question is it kind of gets back to what we talked about originally with that question is I don’t think that there’s anything that you would consider a buy and hold. I think you need to buy and then manage those positions such that if there’s changes in the investment thesis or changes in the outlook, and then depending on what’s going on with the stock price in the market, there’s always good times to take some profit off the table and there’s always good times to buy more and dollar-cost-average down. Now, specifically with Southern and Duke, there’s really two reasons why we picked Duke over Southern when we were looking for a utility stock pick. So the first is these are very different growth stories. Southern is much more focused on data center growth.

It’s much more of a data center and AI play than Duke. And the valuation incorporates a much higher amount of growth coming from those data centers. And so it requires more capex spending here over the next couple of years to be able to build out the capacity for those data centers. So overall, this is one where we think the earnings probably grow faster, but I think the higher capex spending is also going to limit the dividend growth over the next couple years. Duke, we look at being a much more diversified growth story. It’s just really based on population growth within the geographic areas that they operate in. We’re seeing some replacement of coal plants with gas over time. So we’ll see rate improvements coming from that. We think they’re in very good regulatory rate environments, looking for improved operations over time. So it’s a different story than what we’re seeing with Southern.

Now, secondly, when I look at both of these stocks, Duke was much more attractively valued when we picked Duke. So Duke was only a 3-star stock, but it was trading at a slight discount, and it had a slightly higher yield at 3.4% for the dividend, where Southern was trading at a 19% premium. That put that in 2-star territory. So in this case, what we’re seeing is that Southern is trading at a much higher PE ratio in the marketplace because the market is pricing in already that higher growth rate. So in this case, I don’t think there’s anything wrong with it as a buy-and-hold strategy, but this might be another one where it’s a good opportunity that you can buy and manage that position. So depending on what you’re looking for in your portfolio, if you want to hold Southern and you’re willing to go through maybe some ups and downs in the stock price over the time, that’s fine.

Or maybe this is one where you could lock in some profits on Southern and use those proceeds then to reinvest into Duke. So this could be one where maybe you can manage your position a bit here over the next couple of quarters.

Take Profits: CIEN

Dziubinski: All right. Well, it’s time for Dave’s stock picks of the week. This week, Dave’s brought us three stocks to take profits in and three stocks to buy instead. So we’re going to start with the profit taking. The first one is Ciena CIEN. What’s the story with the stock, Dave?

Sekera: The story is, according to our valuation, Ciena is probably one of the more overvalued stocks in the marketplace today. Last I saw, the stock was trading well over $500 a share. Our current fair value is only 125. So I spoke with our analyst last Friday, Mark Giarelli, and really tried to understand what the story is going on with this one. Essentially, it’s just the amount of demand for fiber optic interconnects right now is just off the charts, all being driven by the AI buildout boom, being driven by the huge increase in data centers. And so Mark cautioned me on this one to say, take a look what happened with the stock and what happened with their products in the early 2010s. Essentially what happened is after the 2008, 2009 financial crisis, telecom carriers restarted a lot of their deferred capex programs, and it was really driven by expectation for growth in mobile data and their expectation for rapid expansion in cloud and internet traffic.

And of course, all of that certainly happened, but what happened was capacity was added at a much faster pace than the amount that that traffic grew over really the next decade. So in our model here, we are looking for very strong growth. If you look at revenue, company posted $4 billion of revenue in 2024. We’re expecting that to go all the way up to $6 billion in revenue this year. So essentially a 50% increase in two years. We’re looking for it to get all the way up to 9.4 billion by 2030, looking for exceptionally fast compound annual growth rate for earnings. Again, their earnings in 2024 was only 58 cents a share. We’re looking for that to skyrocket up to $3.10 here in 2026 and grow even faster, going all the way up to over at $7 in 2030. So we are modeling in a huge amount of growth still yet to come over the next four to five years.

It’s just that right now the stock is trading at 173 times our 2026 earnings estimate. And in fact, if you go all the way out to our earnings estimate in 2030, it’s still trading at 74 times those earnings. So again, if this is one you’re involved in, you really got to believe in the amount of growth coming in multiples faster than what we’re already modeling into our financial forecasts.

Take Profits: SNDK

Dziubinski: All right. Well, another name you’re suggesting taking profits in is SanDisk SNDK, which is another really pricey one.

Sekera: Exactly. So this is really the same story. So the AI buildout boom has led to a huge shortage of memory semiconductors. Now, when I think about semiconductors and look at memory specifically, I look at these as really much more of a commodity-oriented type of technology hardware. So what’s happened is you just had the supply demand, the amount of demand just off the charts. So of course, these companies can charge whatever they want. People are paying for it. I mean, if you think about it, if you’re someone that’s building out a data center today for hundreds of millions of dollars or billion dollars, you’re not going to not open your AI data center on time because you can’t get enough commodities memory storage. So you’re going to pay whatever you have to pay to be able to get those in. However, like anything else, supply and demand will eventually normalize over the next couple years.

The companies that make these chips are revamping their production lines, trying to figure out how to be able to manufacture as many of these chips here in the short term as they can. Some of them have already talked about building out new production facilities that probably come online over the next 12 to 18 months. So this is one where I’m just concerned that as that supply demand normalizes, and again, it may not even be for a couple of years, the market’s already pricing in huge amounts of growth. I mean, this stock is up 400% year to date. I think the stock is up 3,000% over the past year. So again, taking a look at our model, we’re pricing in exceptionally fast growth over the next couple of years. Over the past three years for this company, revenue averaged $6.7 billion. We’re forecasting $19.7 billion in 2026, $46 billion in revenue in 2027.

For this company, earnings were actually negative in 2023 and 2024 from a gap basis. We’re looking for … Or I’m sorry, then they had $3 in earnings in 2025. We’re looking for $72 in earnings in 2026, peaking at 203 in 2027, but we forecast that the memory cycle will peak in 2028, and then revenue and earnings will start to fall thereafter. Yet even then, we’re still looking for revenue to be 4 times higher in 2030 than that past three-year average. So we are still looking for a step change in the amount of memory demand over the long term compared to what we’ve seen over the past three years. But I just think that this is one that, as those prices stop skyrocketing, and in fact, when those prices start coming down, this is one that I would be highly concerned that this stock really could just gap down.

This would be one that could fall off a cliff once people start to sell it.

Take Profits: IREN

Dziubinski: All right. Well, and then the final stock you suggest investors take some profits in is Iren IREN, which is the stock I don’t think we’ve ever talked about before. So tell us about it.

Sekera: Yeah. I mean, this is one that I don’t think I’ve ever even really looked at before. It wasn’t a name that I’ve really done any work on in the past. I think we might have just picked up coverage on this one relatively recently, but the company’s engaged in the data center business, looking to really power bitcoin, AI, and those kind of things, utilizing renewable energy. So really almost kind of like the trifecta on investing in everything that’s hot right now. But at this point, that stock trades at a 76% premium, more than enough to put it in 2-star territory. We rate the company with no economic moat and a very high uncertainty. So this is another one that whenever it falls out of favor, whenever the momentum runs out on this stock, another one that I’m very concerned you could see big gaps to the downside.

Stock to Buy: GOOGL

Dziubinski: All right. Let’s pivot over to the positive and talk about stocks to buy. Your first pick this week is Alphabet. So give us the key metrics.

Sekera: It’s a 4-star-rated stock, trades at 11% discount to fair value. We rate the company with a medium uncertainty, and we also rate the company with a wide economic moat. In fact, it probably has one of the widest economic moats of the companies that we cover. We think that they have four out of the five moat sources, that being cost advantage, network effect, switching costs, and intangible assets.

Dziubinski: Now we’ve already talked quite a bit about Alphabet this morning. So what else would you add to the pitch for the stock?

Sekera: This is one where I just think it’s just another one of these companies that’s going to benefit from the growth in artificial intelligence in multiple different ways. We’ve already talked about how in-house they’re benefiting from the growth in Gemini. We’re seeing how AI is improving engagement for their search business. We’re seeing increased advertising volume and pricing in YouTube. So I think internally they benefit a lot from it, but externally, they’re still building out their AI cloud capacity as well. Still, that’s undersupplied—more demand than they can handle there. They’re going to be able to host a lot of other AI platforms. And then lastly, looking at TPUs, that’s their AI chips, it appears to be gaining ground as well. So I think that’s just another avenue that they’re going to be able to monetize their expertise in artificial intelligence.

Stock to Buy: DOW

Dziubinski: All right. Your next stock to buy this week is Dow DOW. Give us the highlights.

Sekera: Dow currently trades at a 16% discount to fair value. It’s a 4-star-rated stock. Nice healthy dividend yield at 3.5%. We rate the company with a high uncertainty, being subject to a lot of economic uncertainty and costs going into the business, but unlike a lot of the other basic material and chemical companies, we do rate it with a narrow economic moat based on its cost advantages.

Dziubinski: Now, Dow’s stock is already up more than 70% this year. So talk about why that might be and also why you think the stock has more room to run.

Sekera: Yeah. I mean, specifically, I was looking for a stock to recommend that we still think has more upside and that should benefit from the supply disruptions for oil and natural gas in the Strait of Hormuz. Now, in this case, the company is a US chemical company, and we think that they will benefit over time because we’re seeing a lot of Asia-based chemical companies either reduce or just halt a lot of the manufacturing of petroleum-derived commodity chemicals just because they’re not able to get enough oil in to be able to manufacture that into the derivative products here. In this case, the US-based chemical companies aren’t experiencing those same types of shortages. We do have enough oil that we’re able to pump out of the ground here to be able to supply our own demand. So in this case, we think that US chemical companies such as Dow will be able to fill that supply gap by running their own plants at higher capacity rates, higher utilization rates, which will not only drive revenue higher but also should be able to benefit their margins.

Stock to Buy: LMT

Dziubinski: All right. And then your final stock to buy is Lockheed Martin LMT. Give us the bird’s-eye view.

Sekera: Lockheed Martin stock is a 4-star-rated stock at a 20% discount, 2.6% dividend yield. We rate the company with a medium uncertainty and a wide economic moat, that wide economic moat being based on switching costs and intangible assets.

Dziubinski: Now, Lockheed stock is down from its highs earlier this year, and it now looks undervalued again. So what’s driven down shares lately, and why do you like the stock today?

Sekera: Yeah, it could be just a matter of the stock probably rose too far, too fast at the beginning of the conflict with Iran. And I think now it’s probably just giving back some of that. I mean, maybe there’s a little bit of disappointment with some of the results during the first quarter. Revenue came in only at a flat year-over-year level. They did see a small contraction in the operating margin. But from my point of view and talking to our analysts, we weren’t surprised. My understanding is that the first quarter is typically the slowest quarter of the year. Overall, we still think that the long-term tailwinds in the defense industry are still in place. From our point of view, there’s no change in our long-term outlook for defense spending in the US. We still see an increased spending as a percentage of their budgets across the EU, and we’re still looking for increased spending in defense across both the Middle East and Asia as well.

So still think that there’s more yet to come with this company. I think this is just one where maybe the market got a little bit over its skis too much in the short term. It’s giving that back, and that’s now giving investors the opportunity to be able to buy this one at a pretty decent margin of safety from our intrinsic valuation.

Dziubinski: All right. Well, thank you for your time, Dave. Viewers and listeners who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. We hope you’ll join us next Monday for The Morning Filter podcast at 9 a.m. Eastern 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.