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5 Stocks to Buy for 3Q 2024

Plus our new stock market outlook.

5 Stocks to Buy for 3Q 2024
Securities In This Article
Constellation Brands Inc Class A
Chipotle Mexican Grill Inc
Exxon Mobil Corp
Microsoft Corp
Alphabet Inc Class A

Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I sit down with Morningstar Research Services Chief US Markets Strategist Dave Sekera to discuss what’s on his radar this week, some new Morningstar research, and a few stock picks or pans for the week ahead. I’d like to start out by wishing viewers a Happy 4th of July holiday this week.

Dave, so it looks like a quiet holiday week ahead. Anything you’re watching on the earnings front?

David Sekera: Good morning, Susan. Yeah, actually I’ve got to start off and say that’s an awesome scarf you have going on this morning. I really like that one. As far as companies reporting this week, taking a look at the calendar, the only one really of note, I think it’s going to be Constellation Brands. Now, it’s an interesting company.

Over the past 25 years, I’ve watched Constellations Brands really transform itself. It used to be a relatively small wine distributor. It’s now one of the largest alcoholic beverage companies in the US. For those that don’t know it, it has the rights to Corona and Modelo here in the US, which are really some of the faster-growing brands that we have right now.

Plus, they’ve been using those brands to extend into the alcoholic seltzer space. So right now it is a 3-star-rated stock. It’s a company we rate with a wide economic moat. Has a medium uncertainty. It’s trading at an 8% discount. So that’s near that 4-star territory. So this is one I keep on a watchlist if there’s any kind of pull back here.

Dziubinski: Now what about on the economic front this week? Any reports coming out worth watching?

Sekera: Beginning of the week, there’s a couple of miscellaneous reports like some PMI numbers. We actually have Federal Reserve Chair Powell tomorrow at the ECB conference. But I don’t expect him to say anything of any interest or anything any different. So the real action this week is going to be on Friday. That’s when we get the nonfarm payrolls number, the unemployment number, the average hourly warning earnings, and so forth.

And of course being the day after holiday, you’re going to have a lot of junior traders manning the desks. So I would say that there’s a good possibility we could see some interesting movements after those numbers come out. Personally, watching the payroll numbers, I think those are going to be the most interesting.

So consensus right now is for a decline to 187,000 from 272,000 last month. But I also want to watch and see what’s going on with that difference between the payroll numbers that are reported by the establishment versus those reported by the household survey. There’s just been a big difference between those two numbers. I’m really trying to understand what’s going on there, whether or not we still see that big differential or if that differential’s starting to narrow.

Then the other part that’s really going to be really interesting and to keep a close eye on is your average hourly earnings. So the consensus there is for 3/10 of a percent increase versus last month at 4/10 of a percent. And really what we want to see is whether or not average hourly earnings are keeping up or even surpassing inflation so that we can get some real wage growth. Or are consumers still kind of either staying in line or potentially even still falling further behind inflation? So if we’re following further behind inflation on a real wage growth basis, of course, that would place even more pressure than what we’ve seen on the consumer.

Dziubinski: Let’s turn to some new research from Morningstar. The PCE number last week came out as expected. Given the number, is it safe to assume that Morningstar still expects a fed rate cut in September?

Sekera: Yeah. That’s correct. So our U.S. economics team is still looking for that first cut to the federal-funds rate at the September meeting. We do have a meeting scheduled here at the end of July on the 30th and 31st. But right now, the market’s only pricing in a 10% probability of a cut at that point in time.

But as far as the September meeting, that probability in the market does increase all the way up to about 65%.

Dziubinski: So let’s talk about a few companies that reported earnings last week that you’ve talked about before. First, we have Carnival Cruise Lines. Looks like earnings there were solid, and the stock rallied. So what Morningstar think of the report, and is the stock still attractive after that rally?

Sekera: Yeah this is actually a stock pick on our July 10 show last year. And on that show I think we spoke pretty much in length as far as the strength that we saw upcoming in the travel sector, and that has largely played out. So what we’ve seen is that even in the face of relatively high inflation, again, moderating, but still higher than what we would prefer to see, travel has still been holding up even the past a quarter or two.

At Carnival, I think when they reported last quarter, they noted that net yields were up 12%, while costs at the same point in time for them were flat. So that led to a pretty big increase in their adjusted EBITDA. And then they also noted that segments in North America, as well as Australia and Europe, were booking at higher prices than what they had the prior year.

So while consumers have definitely been pulling back in a number of different areas, cruising is not yet one of them. And our equity analyst team sees that demand momentum continuing maybe for the next two quarters and possibly into 2025. So that stock was up 14% by the end of the week following earnings. It’s a 4-star-rated stock at a 33% discount.

It’s a company we rate with a narrow economic moat and a High Uncertainty Rating.

Dziubinski: Now, General Mills reported sales and volume declines for the quarter, and the stock pulled back after earnings. So any changes to Morningstar’s outlook on the company or to our fair value estimate on the stock?

Sekera: Yeah, this is actually kind of disappointing to see. The stock was down, I think about 6% after earnings by the end of the week. They noted here that fourth-quarter organic sales were down 6%. But to us even more concerning from a long-term perspective: Management guided that organic sales growth down, I think, is maybe down 1% or flat for fiscal 2025 and for operating profit to be down 2% to flat.

So our analyst noted in his write-up that he does expect we’ll probably reduce our fair value estimate somewhere in that mid-single-digit percentage. Now after that fair value reduction, it looks like the stock is still going to be in the 4-star territory—not fair value but slightly undervalued.

And Kris Inton, who’s the equity analyst here, he noted that to justify that current market price, we would need to forecast no sales growth and flat adjusted operating margin over the next five years, which he thinks is actually probably pretty unlikely. So the stock does look undervalued to us, but I think we might need to see a bit of a turnaround here starting to emerge before the stock starts to make a meaningful recovery. However, you have a pretty healthy dividend yield here that you’d earn in the meantime of 3.8%.

Dziubinski: Now, speaking of disappointing, Nike stock plummeted after earnings, and Morningstar’s analyst noted that we’ll be bringing down the fair value estimate on the stock by a low single-digit percentage. What happened?

Sekera: Yeah, Nike’s stock really got hit hard after earnings—was down, I think, about 20%, which for a company this large that’s just a huge move. So this past quarter or actually the quarter before, management had already lowered their guidance to a low single-digit percentage sales decline for the first half of 2025. I’d note here that for Nike, their fiscal year-end is not the calendar year-end.

It’s actually in May. So this quarter, the guidance became even worse than that prior-quarter guidance. So they guided to a mid-single-digit percentage sales decline for the full year of 2025. Our analytical team had previously projected a 1% sales increase for the full year. So once we incorporate this new guidance into our model, your analyst noted in his write-up, he does think that we’ll be lowering our fair value estimate by somewhere in that low single-digit percentage.

Now overall, we still think Nike is a strong company, has a wide economic moat, a Medium Uncertainty Rating. Overall, we don’t think this is necessarily indicative of brand erosion. But you know in my opinion I think the stock might need to see at least several quarters of wage growth in the US outpacing inflation really and just until we get to the point where consumers are going to start feeling good about their own personal position before we start to see them ramp up spending in branded items such as Nike.

Dziubinski: Now, speaking of the consumer, you’ve talked in prior shows about your concerns about the state of the consumer today. Did Nike’s revised forecast change your stance at all on what’s going on with the consumer today?

Sekera: No, this, I think, really just provides further anecdotal evidence that middle-income consumers are really just starting to feel that compound impact of inflation now for the past two years. So specifically, when we take a look at Nike here, their sales in North America, which is 42% of the company revenue, was down 1%. And unfortunately it’s not just limited to the US at this point.

Sales in their European division were down 2%. And in China, sales were only up 3%, whereas we had actually been projecting sales in China to be up 7%. So I think that shows the economy in China is actually still pretty lackluster there as well. So if you remember, spending had remained pretty elevated as we came out of the pandemic the past couple of years.

But at this point, it just appears that excess savings at middle-income consumers had has just been used up at this point. The savings rate has been brought down over the past couple quarters. It’s actually now below prepandemic levels. And if you look at credit card balances those have rebounded, and they’re all the way back up to prepandemic trend lines.

Dziubinski: Well let’s pivot over to some non-earnings-related research. Morningstar recently raised its fair value estimate on Taiwan Semiconductor by 45%. Now that’s a huge boost. So why the change, and is the stock attractive after that fair value hike?

Sekera: Yeah that was a big increase, I mean what a difference just one year can make. So I took a look here. We actually recommended the stock almost one year ago on our July 31 show last year. Stock is up 75% since then. Now even following this fair value increase, it’s still a 4-star-rated stock and trades at about an 18% discount from that new fair value estimate.

It’s a company we rate with a wide economic moat. Has a medium uncertainty. So taking a look through our write-up here, the fair value increase was based on a number of different things. So first, higher pricing expectations. And because of the higher pricing, especially for AI, all of that drops almost pretty much right to the bottom line here, because a company is not going to have to add a meaningful amount of new additional capex spending, so that’ll be very good for their operating margins here in the short term. We see stronger artificial intelligence demand for their products. And we also put in a higher probability that management will probably revise their full-year guidance down even higher. And then lastly, a little bit more technical here, but what we did is, we lowered our weighted average cost of capital, the WACC, on the company down to 8.2% from 9.3%.

A number of different aspects here, but the one that analysts called out the most as far as lowering that WACC, is that the company is closer to opening up a number of different overseas plants, and that would then help mitigate some of the geopolitical risks that we see in East Asia.

Dziubinski: Now, we also saw Chipotle’s stock split last week. It’s one of the largest splits ever. It was a 50 to 1 split. So what’s Morningstar think the stock is worth after the split, and is the stock a buy today?

Sekera: Yeah. And of course you always have to remember with the stock split it doesn’t change the economic value of the company at all. It only changes the proportion amount of ownership that each individual share represents. So when a split occurs, we’ll adjust our fair value estimate in proportion with the number of shares that the company is split into.

So after that share split, our now split-adjusted fair value is $40 a share. But that stock I think is still trading a little bit over $62 a share. So puts it well into that 1-star range. It’s a 57% premium to our fair value. In fact, it’s one of the most expensive stocks under our coverage.

We don’t have anything against the company. It’s got a wide economic moat, has only a medium uncertainty, but we think the market’s just pricing in way too much growth for way too long. I just note here for viewers that are interested in the story, I’d recommend taking a look at our May 6 show. In that show, we did review our sell recommendation and some of our assumptions behind it.

Dziubinski: Now, we’ve talked a lot about Illumina on the show, and last week it did, in fact, spin out its Grail business. So what do we think of Illumina after that divestiture? Do we like the company without Grail? And is the stock undervalued?

Sekera: Yeah. So following the spinoff, we did reduce our fair value estimate here. So we’re now looking at $188 per share. That’s a decrease of, coming down from $228 per share, and the differential being the value of Grail now that it has been spun off. So at this point following the spinoff, it’s still a 5-star-rated stock trades at a 44% discount to that new adjusted fair value estimate.

It’s a company that we rate with a narrow economic moat, so we do think they have some long-term durable, competitive advantages. Although I’d note because of what’s going on here with this situation, it is a stock that we rate with a high uncertainty. Now when we look at that fair value and break it down a little bit further, $180 of that value is just based on the core sequencing business of Illumina.

And then the other $8 of value is going to be based on its remaining 14.5% stake that it still owns in Grail. Now, I think what’s going to be interesting over the next couple of quarters is to see what activist investor Carl Icahn does. Now, he had bought a stake in this company last year. He’s been a big proponent of trying to unlock shareholder value by spinning off Grail.

So we’ll see what happens and what he might have to say next. But looking forward, I think probably the next potential catalyst for the stock is going to be in mid-August. I believe that’s when they’re going to host their annual analyst Day. So looking to see what they have to say and what their plans are going to be now that Grail has been spun off.

Dziubinski: Now what about Grail? Does Morningstar have an opinion yet on Grail as a stand-alone business?

Sekera: Not yet. So currently we haven’t launched coverage on Grail, but if we do pick up coverage, I will definitely review that one and our fair value estimate on The Morning Filter.

Dziubinski: Now, in other new research, you just published your Third-Quarter Stock and Bond Market Outlook, which viewers can access via a link beneath this video. So let’s start with a quick recap of second-quarter stock market performance.

Sekera: So the US market index, as measured by the Morningstar US Market Index, which is our broadest proxy of the US market, was up about 3.2%. Now it’s most interesting here is just how concentrated that return was. So I ran a quick attribution analysis using Morningstar Direct. And what I noted here is that if you were to actually remove the gains from just five stocks, those five stocks being Nvidia, Apple, Microsoft, Alphabet, and Broadcom, the broad market index actually would have fallen last quarter.

Now when we break those returns down, value stocks were down 7/10 of a percent. Looks like you know the retreat in value is pretty widespread. There was no particular sector or particular stocks that were necessarily responsible. Taking a look at the core part of the index, that was up 2.3%. That was really on the back of Alphabet and Broadcom.

Without those two stocks, the core sector would have been down as well. And then looking at growth, that was up 1.2%. That was on the back of Nvidia, Apple, and Microsoft. But again without those three stocks, that category would have been down for the quarter as well. And then when we look at it by market capitalization, it was just all about the large-cap category. That was up 5.5%, whereas mid-caps were down 2.6% and small caps down about 3.9%.

Dziubinski: So then given that, given the concentration of the return in the market in the second quarter, how do stocks look heading into the third quarter? Are they overvalued?

Sekera: So from a broad market perspective, I’d say we’re not yet in overvalued territory, but especially some of those stocks are starting to feel a bit frothy here. So the market right now is at a 3% premium to a composite of our fair value estimates—that may not necessarily sound like all that much, but if you go back through 2010, only 10% of the time has the market traded at that much of a premium or more.

And I also think this is a good time just to remind viewers how our fair value estimate differs from what you’re going to hear from a lot of other Wall Street strategists. So we take a bit of a opposite view from what you’re going to hear elsewhere. So we actually calculate a bottom-up composite of what we think the market would be trading at based on the fair values of over 700 stocks that we cover on an analytical basis, based on our fundamentals, and then we compare that to where the market is trading. So really that bottom-up fundamental analysis, whereas a lot of other strategists do the opposite. They start with more of a top-down approach. They have some sort of model, some sort of algorithm, I don’t know.

But they somehow come up with their forward earnings estimate for the year. And then they’ll apply to that some sort of forward multiple. I always find that it seems like it’s a little bit more of a goal-seeking exercise that they do. It always seems like that things always are like, “oh, things are your 8 to 10% undervalued one year from now.”

So again, I really like our approach. And I think you can look in our outlook and see how that approach has panned out over time. We do have a chart in there that shows where the market is currently trading over the past 14 years versus where our price/fair value multiple has bottomed out during market bottoms.

And then peaked in other instances where the market had also peaked.

Dziubinski: Now let’s talk about the market through the lens of growth versus value specifically. How do valuations look?

Sekera: Well, growth stocks still appear overvalued in our mind. They’re trading at a 6% premium to fair value. Value stocks still undervalued at a 9% discount. Really the biggest change this quarter from last quarter is going to be in the core stock category. It’s now trading at a 7% premium versus only a 3% premium last quarter. And that runup really again was from Apple, Alphabet, and Broadcom.

Dziubinski: Now what about valuations by market capitalization?

Sekera: So large-cap stocks, and of course, that’s where the preponderance of the AI stocks that are really run up are going to be captured, that’s a 6% premium. Whereas mid-cap stocks trading at a bit of a discount at 6%. But it’s that small-cap category that’s still in our mind is trading at very low valuations. Has a 21% discount to a composite of those stocks that we cover.

Dziubinski: So then given valuations, Dave, how should investors be thinking about the stock portion of their portfolios today?

Sekera: So overall whatever your equity allocation is, based on your own personal risk tolerance, what your investment goals are, I think you should still be right at that allocation. I wouldn’t be overweight the market, but I also wouldn’t be underweight the market at this point as well. And then within that overall equity allocation, I’d advocate to be overweight the value stocks as that’s where we just see the best value today.

And then still would be underweight growth stocks. But the change this quarter is following that outperformance in that core category, I think now is probably a good time to take some profits there and move to an underweight from a market weight that we had last quarter. And by capitalization, I would overweight those small-cap stocks, probably have a small overweight in that mid-cap space.

And then in order to be able to pay for those two overweights, I think you need to underweight the large-cap space.

Dziubinski: Now let’s talk briefly about bonds. How did bonds perform during the second quarter?

Sekera: The Morningstar Core Bond Index was up, I think, just under 1% for the quarter. I really that’s just reflective of the yield carry that you would have captured over the past three months. Looking at the index and looking at the charts here, long-term interest rates were largely unchanged over the course of the beginning to the end of the quarter. Taking a look at some of the other categories, the Morningstar Corporate Bond Index, that underperformed the core index slightly.

The high-yield index was largely in line with the core index. The reason being is that we did see corporate credit spreads widen out slightly over the course of the quarter. Last quarter, if you remember, we’d actually moved to an underweight in corporate bonds and we recommended sticking with US Treasuries instead.

And at this point, I’d still maintain that recommendation. I still think corporate credit spreads are probably still too tight as compared to potential downgrade and default risk.

Dziubinski: So then how should investors be thinking about the bond allocation, the bond portion of their portfolio today?

Sekera: So in our third quarter 2023 outlook, we had recommended to investors to start lengthening duration. the 10-year US Treasury and interest rates generally were rising at that point in time. And we thought as a good time then to start locking in those higher rates. So at this point, I’d still continue to recommend that longer duration for your fixed income exposure.

I would just note that our US economic team is projecting a multiyear period of declining long-term interest rates. So right now they’re projecting that the 10-year will average this year 4.25%. So a little bit below where we’re trading right now. But they’re looking for that 10-year to average 3.75% next year. And then falling all the way to 3% in 2026.

Dziubinski: All right. Well it’s time to move on to the stock picks portion of our program. Now Morningstar’s analysts, it’s the beginning of a new quarter, so they’ve pulled together their top investment ideas for the third quarter. And today, you’re going to share with viewers five of your favorite newcomers to that list. So we’ll start with oil giant ExxonMobil.

Why is this one of your top ideas for the third quarter?

Sekera: Well, first of all, in my opinion, I think Exxon is really just a core type holding. And this is one where I think you can add to that position, overweight it, when the stock is trading in undervalued territory and then move back to a market weight and take profit when the stock then heads back up.

And I think that’s kind of what we’ve seen with that stock really over the past couple of years. I note it started off this year as a top pick in 2024 Outlook at the beginning of the year. It fell off the top pick list in the second-quarter outlook after the stock had moved up in the 3-star range.

Now it’s back into that you know top pick category again as the stock has retreated. It’s a 4-star-rated stock, trades at a 17% discount. We rate them with a narrow moat. Now I’d note this does have a High Uncertainty Rating, but as a company that’s as reliant on commodity type of items, it’s really not necessarily surprising.

So I’m pretty comfortable with that. 3.3% dividend yield. And just overall Exxon is our preferred integrated oil company stock. Given its earnings growth potential and a combination of earnings potential increases from its high-quality assets and from cost savings, I think this one looks pretty good for your portfolio.

Dziubinski: Now your next pick is a stock we’ve talked about before, but it’s new to the official analyst picks list this quarter. And the stock’s Fortinet. Remind viewers about this one, Dave.

Sekera: I think anyone that’s watched The Morning Filter for any length of time is not going to be surprised by this one. I mean, you and I have talked about the cybersecurity space and why we’ve been a proponent of investing in that space for quite a while now. So right now, Fortinet’s the only cybersecurity stock that’s still rated 4 stars, trades at a 22% discount.

It’s a company with a wide economic moat. Now again this one does have a high uncertainty, but in the tech industry, I think you’re pretty comfortable with a high uncertainty type of rating. And you’re taking a look at the tech space, overall, this is probably one of the few tech stocks that’s really essentially unchanged in price year to date. Fortinet, in and of itself, we think it’s a leader in the cybersecurity space. They have a broad range of solutions and kind of ranges anywhere from network security firewalls to security operations. Longer term, we think that this company will benefit from those long-term structural tailwinds as well as this very strong industry fundamentals.

Dziubinski: Now, International Flavors and Fragrances is your third pick. The stock’s up about 18% this year, but it still looks pretty undervalued. So what’s going on with this one?

Sekera: This one’s been a recommendation of ours for a while before it made the top picks list here this past quarter. I went back and look through … So we first recommended this stock on our Sept. 18 show. Stocks up 41% since then. But as you noted, it’s still undervalued. So it’s kind of a bit of a long story here.

But over the past few years, the company suffered from what we consider to be a number of different self-inflicted wounds, as well as some industry volatility stemming from the pandemic. Now, from the perspective of what we call our self-inflicted issues, company made a number of acquisitions. They just haven’t turned out as planned. It’s led to a pretty good amount of management turnover.

So they’re now in the process of divesting a number of different business lines. They’re really trying to go back to business looking at and focusing on their core competencies. And I think they’re going to use the proceeds there to repay some debt in order to help fix their balance sheet.

Now, from an industry perspective, the pandemic led to volatility and customer ordering patterns. So what happened was consumer food packaging companies overordered in 2021 and 2022. That was due to excess demand from the pandemic and in response to shipping and supply chain bottlenecks that we saw back then, and consumer product companies saw a larger reduction in demand then in 2023.

So then there were using up all of that that they had overordered. So looking forward, we do think that that destocking is coming to an end this year. We’re looking for more normalized growth patterns in 2025. So as earnings guidance came out both in line kind of within our own expectations, we see this to be an attractive situation based on that overall story. 4-star-rated stock, 27% discount. I’d note it may not necessarily be attractive for dividend investors, only a 1.7% dividend yield. They are working to fix that balance sheet. So we don’t think they’re going to be in a position to raise that dividend until 2026. But following that, we would look for them to start going back to their historical dividend practices.

Dziubinski: Now your next pick is a name I don’t think we’ve talked about on the show before. Baxter International. Now Baxter’s stock price chart looks pretty awful for the past three years. And the stock’s trading at only half of what we think it’s worth. So tell us the story on this one.

Sekera: Well let me apologize in advance. This also is going to be somewhat of a lengthy story. So the company has a wide range of medical instruments and supplies that it sells, anywhere from acute and chronic kidney failure to injectable therapies, IV pumps, a lot of other hospital-focused offerings. So here’s the story.

So first supply chain issues, which we saw globally, hit the company pretty hard in 2022. Some of these supply chain issues are still being worked through, but we think they’re getting close to the end of that. But also in 2022, at the same time, your inflation ended up hitting their margins pretty hard.

They’re unable to pass through a lot of these higher costs as they had contracted agreements in place that they just had to work through until those contracts came up. Now looking forward, supply chains are normalizing. We do think the company’s getting back on track from that perspective. But overall, this company burned a lot of investors over the past couple of years.

I think there’s a lot of negative sentiment among investors in this name. Just looking at the chart this year, it started to recover earlier this year, but then they reported earnings in early May. Stock got hit. It sold off again. So again a lot going on here. One of their subsidiaries, specifically their Hill Ramp subsidiary, reported a 9% decline.

Now that subsidiary makes more what we consider to be higher-cost, more capital-intensive products than their other business lines. So what happened then is that we did see that sales decline, but we think it was due to an outage in February through April of the change healthcare reimbursement system that’s owned by United Health Care. So what happened was healthcare providers were under a lot of liquidity pressure because they weren’t able to get reimbursed by their insurance providers while that system was down. In the meantime, healthcare providers were then delaying those types of purchases because they were those higher-cost items. So now that that system has been fixed, we expect that over the next couple quarters, those specific sales are going to start picking back up again.

But again it’s just a big story that investors aren’t willing to give management the benefit of the doubt. All right. Now, after all that negative part of the story, let’s get to the upside. So we do think the underlying fundamentals here looking forward are positive. Some of the broader things we see is an increase in medical utilization, slowing inflation should help to drive margins, management did increase their 2024 guidance by $0.03. Not a huge increase, but at least going in the right direction. So they’re looking at $2.88 to $2.98 per share. And then also looking forward, and I think this is probably the bigger part of the story in my mind, is a number of or actually a pretty substantial amount of their three-year contracts are starting to come up for renewal.

So as they renew and renegotiate those contracts, we think they’re getting better cost pass-throughs than what they had before. So I think over the next couple of years, as that plays out, we’ll see much better earnings performance and much better operating margins. So having said all that, it’s a 5-star-rated stock, trades at a 50% discount, so half of our fair value, provides a 3.5% dividend yield. And just as an indication of how undervalued we think the stock is, its estimated PE ratio right now is 12 times, that in and of itself, I think appears pretty cheap. But that’s what we consider to be depressed earnings. That forward PE in 2025 based on our earnings estimates for that year drops all the way down to 10 times.

So overall a big story, one I think you really need to go to Do your due diligence. Read through the write-ups here. But again, if it sounds like an interesting story, it’s one that maybe you have to wait a couple of quarters. But I think it’s very, very undervalued.

Dziubinski: Yeah. Cheap long-term pick there. And then your last pick this week is a REIT that we haven’t talked about much on the show before. And that’s Ventas. Looks like shares of this healthcare REIT have picked up a little steam over the past few months.

Sekera: Yeah I’m actually kind of surprised that this one hasn’t been one of our picks on The Morning Filter. Real estate has been one of the more undervalued sectors over the past one and a half years. And we’ve talked about real estate ad nauseum over the past couple of quarters. And I think we’ve even recommended a number of other REITs.

I think like with the reopening plays, we had a recommended lot of the mall REITs. So overall, real estate, I’d still shy away from urban office space. I still think that there’s a higher risk of downside valuations than the upside in the short term. But I do like real estate that has more defensive characteristics.

Ventas owns a diversified portfolio of healthcare properties, I think they have over 1,300 properties in their portfolio, consists of things anywhere from senior housing properties to medical offices, hospitals, life sciences, skilled nursing, postacute care. So a very wide range within that healthcare space. And of course healthcare has just long-term secular tailwinds behind it.

We have the aging population of the baby boomers. We see regulatory changes that we think expands the pool of participants in the healthcare system over time. So this one is a 4-star-rated stock, pretty wide discount here at 26%, healthy dividend yield at 3.5%. Now I’ll note it has no economic moat; however, that’s you know pretty common in the real estate industry.

But it is a company that also has a Medium Uncertainty Rating. So again from the real estate perspective that has defensive characteristics I think this is an interesting one for your portfolio.

Dziubinski: Thanks for your time this morning, Dave. And happy 4th of July. Viewers interested in researching any of the stocks that Dave talked about today can visit for more analysis. We hope you’ll join us for The Morning Filter again next Monday at 9 a.m. eastern, 8 a.m. central. In the meantime, please like this video and subscribe to Morningstar’s channel.

Have a great holiday!

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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David Sekera, CFA

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Dave Sekera, CFA, is chief US market strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Before assuming his current role in August 2020, he was a managing director for DBRS Morningstar. Additionally, he regularly published commentary to provide investors with relevant insights into the corporate-bond markets.

Prior to joining Morningstar in 2010, Sekera worked in the alternative asset-management field and has held positions as both a buy-side and sell-side analyst. He has over 30 years of analytical experience covering the securities markets.

Sekera holds a bachelor's degree in finance and decision sciences from Miami University. He also holds the Chartered Financial Analyst® designation. Please note, Dave does not use either WhatsApp or Telegram. Anyone claiming to be Dave on these apps is an impersonator. He will not contact anyone on these apps and will not provide any content or advice on either app.

Susan Dziubinski

Investment Specialist
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Susan Dziubinski is an investment specialist with more than 30 years of experience at Morningstar covering stocks, funds, and portfolios. She previously managed the company's newsletter and books businesses and led the team that created content for Morningstar's Investing Classroom. She has also edited Morningstar FundInvestor and managed the launch of the Morningstar Rating for stocks. Since 2013, Dziubinski has been delivering Morningstar's long-term perspective and research to investors on

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