Plus, what to watch in Nvidia’s earnings report.
Key Takeaways
- The yield on the 30-year Treasury bond hit 19-year highs last week. Here’s what that may mean for investors.
- Next week’s PCE numbers and the Federal Reserve’s next move
- Things to watch for in Nvidia’s NVDA earnings report this week
- Will Marvell Technology MRVL continue to soar after earnings?
- Which stock is the better buy after reporting: Home Depot HD or Lowe’s LOW?
- Whether we raised our fair value estimate on Target TGT or Walmart WMT.
- Stocks to rent versus stocks to buy: What’s the difference?
- Stock picks: Cheap stocks to rent.
In this new episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss last week’s market activity and what to make of the surging yield on the 30-year Treasury bond. They cover what to watch for in the earnings reports from Nvidia, Marvell Technology, and Salesforce CRM. Tune in to find out whether Home Depot, Lowe’s, Target or Walmart look like stocks to buy after earnings.
They explain why it’s better to rent some stocks rather than buy them for the long term and discuss what qualities to-rent stocks often share. They close the show with a handful of undervalued stock picks that make good rentals today.
Got a question for Dave? Send it to [email protected].
Transcript
Susan Dziubinski: Hello and 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 recent market activity, what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.
Last Week’s Market Takeaways
Well, good morning, Dave. Let’s kick off this morning talking about last week’s market activity. Stocks struggled and finished the week down more than 1%. Walk through what happened.
David Sekera: Good morning, Susan. It’s always impossible to know really what the market does in the short term and why it’s going to do that in the short term. But I think the biggest news, at least to me last week, was that there was a Wall Street Journal article that was published regarding off-balance-sheet obligations for all the big artificial intelligence hyperscalers. Essentially, in this article, what they did is they compiled the total amount of future lease payments and the total amount of future purchase obligations that all these companies are currently on the hook for. At this point, they’re not accounted for on the balance sheet. I think that was a big eye-opener for a lot of people out there. Now, that sent stocks down on Tuesday. I would say this is definitely an article that would be worthwhile reading if you haven’t read it already. Essentially, what it did is it just added to a lot of the ongoing questioning the market’s already had regarding the duration and the depth of the AI buildout boom.
I did break down the market performance into the individual
Dziubinski: The market seemed to also get spooked last week as the yield on the 30-year Treasury bond hit that 19-year high. What drove that movement in the long end of the curve, and why did stocks react the way that they did?
Sekera: Sure. If you remember, in our 2026 outlook, we did highlight rising interest rates as being one of the bigger potential risks to the market thus far this year. And of course, that risk is really going to depend on not only the amount of change, but also that rate of change. I think that’s what concerned the market the most is just how much those long bonds have been weakening.
Now, I think you also have to realize, too, that rising interest rates, depending on why they’re rising, may or may not be as much of a risk to the market as you would suspect. If those rising interest rates are really indicative of rising real growth expectations, people are expecting the economy to grow. Therefore, you’re getting credit growth because companies are borrowing more in order to support that growth; you’ve got more demand for borrowing, then that’s really not that much of a risk to the stock market because you’d expect earnings growth will also expand and that would offset a lot of the risk of those rising interest rates.
If those rising interest rates are indicative of the market pricing in your higher inflation expectations or even fiscal concerns, and that then leads to a lack of demand for those bonds, that to me is really the big risk to the stock market. If the stock market starts really discounting future free cash flows at higher rates of return without offsetting earnings growth, that’s when you’re going to see the market take some pretty big hits.
Now, I’m going to get a lot of pushback on this. Nothing is ever all else being equal, but the equity market probably has a duration of over 20.0, maybe 20.0 to 25.0. Essentially, what would happen is if you had an immediate hundred-to-basis-point shift in discount rates or the risk-free rate, I mean, that would actually call for an almost 20% drop in the value of stocks. Certainly not calling for that, not looking for that. But if we really saw interest rates get out of hand, those are the kind of numbers that you could potentially see if the US Treasury market really starts to crater.
Dziubinski: It sounds like investors should be watching the bond market for signals, but where should they really be focusing their energy then, Dave?
Sekera: Personally, I watch the 10-year much more closely than I watch the 30-year. I think the 10-year is much more meaningful to the markets for a couple of reasons. First, there’s just a lot more outstanding bonds in that duration bucket. If you look at maybe that seven- to 10-year bucket of outstanding bonds, I think there’s like $3 trillion worth of US Treasuries out there. Of course, as those move, those have a much bigger impact on the markets just from their prices alone. I think there’s less than $1 trillion of those really long bonds out there.
I’d also note, too, I think that a lot of people, ourselves included, use the 10-year as the basis for the risk-free rate in their discounted cash flow models. I’d just say if the 10-year were to hit 5% and have that five handle, I think you’d start to see a lot of investors potentially reallocate out of stocks into fixed income, especially those investors like insurance companies and pension funds that do a lot of asset duration and liability matching.
But the concern would also be if investors start increasing the risk-free rate in their discounted cash flow models. I think, if that happens, that’s when you start to see a lot of those growth stocks, the ones that are really going to be based on growth expectations far into the future, get hit the most as people increase interest rates, and the long duration would hit those stocks.
Now, last week we did see a short rally in those really long bonds. The reason being that the US Treasury put out an announcement that is going to be doubling the amount of what they call their liquidity support buyback operations for the next couple of months, and that they’ll then revisit the amount of long-duration bonds when they do their refunding announcement over the next couple of months. We did see a pretty good rally immediately after that.
The concern was they gave back a lot of those gains the next day. I think we do need to keep a careful look, especially on the 10-year, but probably the 30-year as well. If that 30-year starts to widen out meaningfully, it’s going to pull the 10-year out with it.
On Radar: PCE
Dziubinski: All right, so we will be watching bonds. Now, coming up this week, we have some fresh inflation numbers coming out as the PCE comes out. What’s the market expecting, and what could these numbers mean for the Fed’s next move?
Sekera: I think it’s going to be really hard to tell what that might mean for the Fed’s next move. Of course, we get one more PCE number coming out before that September meeting. I don’t think there’s going to be a real strong, meaningful takeaway from the numbers. Of course, if they come out really far from consensus, that would be subject to change. But based on expectations, I just don’t think there’s going to be enough of a change to sway the Fed any differently here in the short term. We’ll see what the next numbers come out and whether there’s any real trend emerging from last month’s numbers, this month’s numbers, and then next month’s numbers.
As far as what the consensus is, so, for headline PCE, on a month-over-month basis, the forecast is looking for a 0.2% increase. That would be an increase from the decrease that we saw last month of 0.1%. On a year-over-year basis, the forecast is looking for a slight slowdown to 3.6% from 3.7%. Once you pull out the energy and some of those other really volatile parts of inflation and get to core PCE, the month-over-month forecast is looking for a 0.2% increase. That would be up from one-tenth of a percent last month. And on a year-over-year basis, we’re looking for it to be flat at 3.3%.
In this case, I’d say some of that short-term data that month over month might be slightly worse, but the year-over-year data looks to be in line or maybe even slightly better. I just don’t think that what these numbers will be this month will be enough really to change anyone’s mind.
NVDA Earnings Preview
Dziubinski: All right. Well, let’s talk about some companies to watch this week that are going to be reporting earnings. We’ll start with Nvidia. What are you going to want to hear about here, Dave?
Sekera: I mean, the expectations will be that they should easily be able to beat the prior guidance that they’ve given, just looking at what’s going on with the hyperscaler and all the other AI names out there. The question, of course, then is, can they beat whatever the street whisper numbers are? Now, our own expectations are they’ll probably raise existing guidance even further based on all of the spending that we’re seeing and the increase in spending coming out from the hyperscalers.
I know our analyst team is listening for a couple of different things. One, just the ongoing pace of Nvidia’s current expansion, and then any hints that they might give toward their future road map. For example, Rubin Ultra, that’s due out in late 2027. That’s expected to be on time, but we’re starting to hear some reports out there that they may not necessarily be able to meet all of their technological targets for that rollout. If not, I think that could potentially be a negative.
I think there’s just going to be a lot of discussion out there regarding the financing that they have for certain partners that have been announced, as well as this big financing pool that they recently announced. It’s a $500 billion mobilization where they’re working with a number of different large financial asset managers out there. I think a lot of people really want to hear them lay out their case, why they’re arranging these partnerships and the financing from these large financial asset managers, and how it really kind of plays into the depth and the duration of the AI buildout boom.
Dziubinski: Now, Morningstar’s fair value estimate on Nvidia is $280, and the stock’s trading well below that. The stock has been a pick of yours in the past. Do you think there’s any reason to buy the stock ahead of earnings?
Sekera: Yeah, it’s currently a 4-star-rated stock at a 23% discount. Now, as far as trying to buy it before earnings, I mean, that’s always, to somewhat of a degree, a little bit of a gamble. From a trading perspective, I mean, there’s just really no way to know whether they’re going to beat or miss those whisper numbers and how that might impact the stock in the short term. But with it being a 4-star-rated stock at that much of a discount, I’d say if you’re a long-term investor, you don’t have, or maybe don’t have enough, AI exposure at this point in your portfolio, go ahead. You can start a small position here. But as always, I would leave enough dry powder so that if it does trade off and if there’s no change to the investment thesis, you then have the ability to dollar-cost average then to the downside.
MRVL Earnings: What to Watch
Dziubinski: Let’s talk about another former pick of yours, Marvell Technology MRVL, also reporting this week. The stock is up triple digits this year. Morningstar’s fair value estimate on the stock is $270. What are you going to want to hear about here, Dave? Do you think the stock’s momentum can continue?
Sekera: I think the biggest news people are really going to want to focus on is this new deal that they recently announced with a partnership with Alphabet GOOGL and with Google. Specifically, this partnership is regarding custom chips, specifically its AI inference accelerators. In our view, we think it expands Marvell’s long-term growth in its AI. I mean, they already have deals with AWS and with Microsoft, but in this case, we’re now pricing in even more business with this new business from Google.
The other thing to note too with a lot of these deals, we see once again, Google’s going to get warrants for up to 7% of the company. Those only vest if Google ends up spending, I think, $120 billion cumulatively with Marvell through 2033. We did raise our fair value as we included that new deal. We hadn’t had that in our model before. I think that’s a good indication for growth here.
Other than that on the call, I mean, just more detail regarding their medium-term growth trajectory, maybe some discussion about the upcoming CFO transition. After our fair value increase, the stock is trading at a 14% discount. A nice discount, but not necessarily enough to put it in 4-star territory. It’d be right at the bottom of the 3-star, almost into the 4-star territory. Any kind of selloff here after earnings might be an opportunity.
CRM Earnings: What Matters
Dziubinski: All right, so keep it on the watchlist. Lastly, you’re going to keep an eye on another pick of yours that’s reporting this week, and that’s Salesforce CRM. The stock was, of course, knocked down with all the other software stocks earlier this year, but it staged a bit of a comeback during the past several weeks. Still looks pretty undervalued heading into earnings relative to Morningstar’s $280 fair value. Same question here, Dave. What are you going to want to hear about? And would you recommend investors pick up shares ahead of earnings or hold off?
Sekera: Fundamentally, we don’t know of any reason why we’re not going to see the same thing they’ve been doing for however many quarters on end here. They should be able to beat consensus. We expect they’ll continue to modestly increase their own guidance. Really all I want to hear here from them is just business, ongoing business, just kind of business as usual. They’re continuing to incorporate AI into their products. Those new AI products are selling well. As long as we hear just kind of normal business as usual, I think the stock is pretty undervalued here. Now, if there were any kind of hint whatsoever that their business is being disrupted by AI, then I think that would really cause a lot of questions regarding the investment thesis. You could see that stock sell off even further.
The thing I’d note with this stock and really all of the software stocks in general, what we’ve seen is kind of this inverse correlation with the AI commodity tech hardware stocks. Whenever those stocks sell off, and that calls into question the length and depth of the AI buildout boom, then we see all of these software stocks trade up. I would suspect that that inverse correlation’s probably going to last for a while here.
The stock is very undervalued, 25% discount, more than enough to put it well into 4-star territory. I just note here that I think the chart looks pretty supportive. What we’ve been seeing are higher lows. It broke through its prior resistance levels. All of that, I think, portends well for the future performance of the stock. As always, I would start with that partial position, have that dry powder. So, if it does trade down, you can dollar-cost average into that weakness.
Better Stock to Buy: HD or LOW?
Dziubinski: All right. Pivoting over to some new research from Morningstar on companies that reported last week. We’ll start with two leading retailers in home improvement with Home Depot HD and Lowe’s LOW. Start with Home Depot. The company’s results were pretty good despite a tough housing market. Morningstar maintained its $325 fair value estimate on the stock. What’d you think of the results?
Sekera: Yeah, like they said, they were probably pretty good overall, but I think this is one where you differentiate between performance and valuation. From a top-line perspective, second quarter revenue up 5.7%. Pretty good growth. Of that, 1.7% came from same-store sales growth. The rest of it really came from some new acquisitions that they’re tucking into their overall business.
Now, the operating margin at 14.7% was down 10 basis points. Unfortunately, the benefit from tariff refunds wasn’t enough to more than offset some higher costs that they’re experiencing. The question here with the company is that it held its 2026 operating margin guidance flat. I think the real question with this company is what’s going to happen in 2027, whether those higher costs continue to pressure that operating margin or if they’re able to find ways to offset that and keep the operating margin flat or start to grow from here.
Taking a look at our own assumptions over the longer term, really nothing this quarter was enough to change our fair value estimate. From our perspective, nothing really to do here. But I did have kind of one note here as I read through the analyst write-up, which I thought was pretty interesting. Overall, she notes that the housing market remains pretty stalled at this point. But what she pointed out, and I didn’t realize this, over the past five years, the average monthly mortgage payment for the median US home has risen by a thousand dollars. I didn’t realize it was actually that high. Half of that is coming from higher financing costs. When you think about how much that’s risen, yeah, that’s really pressured home improvement spending.
Dziubinski: All right. Now, meanwhile, the results from Lowe’s appeared to be a little bit more mixed than Home Depot’s results, at least on the surface. Walk through Morningstar’s take on Lowe’s results.
Sekera: Exactly. If you look at their second-quarter revenue, that came in a lot higher than what we saw at Home Depot. That’s up 8%. But of that 8%, only 0.2% came from same-store sales. I would really like to see better same-store sales growth as a mix of that overall revenue growth. Really, that just means that it’s a strength in a lot of their pro sales divisions, some of these new areas that they bought, some other acquisitions that they made that generated all of that growth.
Again, good to see growth. Personally, I’d like to see that growth a little bit more balanced. In this case, their operating margin contracted by 62 basis points, higher fuel costs, transportation costs, and so forth; a greater contraction than what we saw at Home Depot. They ended up lowering their guidance to the low end of their prior guidance range.
Now, we didn’t make any changes to our fair value at this point in time. Based on that and looking at what the market is pricing in, it seems like the market’s looking for 2% same-store sales growth on average over the longer term. Operating margins in an 11% to 12% area. We’re looking for better performance over the longer term. We’re forecasting 3% same-store sales growth, which, in my mind, when you think about just some volume increases and just inflation, I don’t think 3% same-store sales growth is really all that unreasonable. We’re looking for an operating margin of 13.7% over the longer term. Again, our forecasts here are a bit higher than what the market’s currently pricing into that stock.
Dziubinski: All right. Morningstar’s fair value estimate on Lowe’s is $255. Given that, given the valuation on Home Depot, which would you say is the better stock to buy today, Dave? Home Depot or Lowe’s?
Sekera: When I take a look at these stock charts, I mean, both of them have generally been on a pretty downward trend over the past year, but I think it’s really for a couple of different reasons. Home Depot was one that we thought swung too far to the upside, had gotten over its skis just too much. We’re not necessarily surprised to see that one having traded down as much as it has. In fact, it’s still above our long-term fair value estimate, but at the top of that 3-star range. Lowe’s, on the other hand, is lower than where it was a year ago, but that one we think looks much more attractive. It’s at a 15% discount, which puts it right at that border between a 3- and 4-star-rated stock, currently a 4-star-rated stock. Not necessarily hugely cheap, but in our view, a much better buy than what Home Depot is today.
Earnings Review: TGT, WMT
Dziubinski: All right. Let’s talk about another pair of retailers that reported last week, and that would be Target TGT and Walmart WMT. Start with Target. The stock finished last week up 7%. The company seems to be showing some signs of a turnaround. What did Morningstar make of the results? Were there any changes to the fair value estimate on Target stock?
Sekera: Yeah. I mean, personally, I’m not a big fan of Target, but I have to admit this was a pretty good quarter that they posted here. Second quarter, same-store sales up 3.8%. But I would note that of that 3.8%, 3.6% of it came from higher foot traffic. They’re seeing higher trip frequency. The problem is that they’re not necessarily turning that higher margin or that higher revenue into greater margin. Again, we’re still seeing the people that are coming in buying the lower-margin products as opposed to the higher-margin home and apparel and those other areas where they make the bulk of their money.
In this case, we saw tariff refunds offsetting a lot of the costs here. Really, I just would note here that the analysts said that the fair value would increase by the high single-digit percentage as we incorporate these better-than-expected results. Longer term, it’s still a no-moat retailer. It’s one that we don’t think has a competitive advantage. They don’t have lower prices than Walmart or some of their other competitors out there. They don’t have better brand offerings. I think overall, while they were able to post some pretty good numbers this past quarter, overall, that just limits the longer-term operating margin expansion potential that you can see from here.
Dziubinski: Now, Walmart’s stock fell about 9% after reporting a sales slowdown. Morningstar maintained its $81 fair value estimate on the stock. How does Morningstar’s take on Walmart maybe differ from the market’s, Dave?
Sekera: Similar story like with Home Depot and Lowe’s, you really have to separate the performance of the quarter from what the market has been baking into the valuation. We’ve talked quite a bit about why we thought Walmart has been very overvalued for quite a while at this point in time. As you noted, the stock sold off. But I would say when you look at the quarterly results, they really weren’t all that bad. They posted 2.6% same-store sales growth, a nice balance between foot traffic being up 1.5% and the average checkout being up 1.1%.
The problem was that it was a deceleration from the prior quarters, which we’ve been expecting for a while, but the market hadn’t. I think the stock selloff is more an indication that the market had overextrapolated too much top-line growth for too long. I think the biggest differential between us and the market is that the market still assumes the company will be able to increase margins over time to above the 6% ceiling that we’ve seen in the past as far as those historical margins. We think that getting that much above 6% is probably pretty unrealistic.
When you just think about the mix and the shift from some of the higher-margin into more of that lower-margin being a higher percentage of their overall sales, just industry competition overall. We just don’t see the company getting that much above those long-term historical operating margins. That’s why this is still a stock we think is pretty expensive.
Dziubinski: Now, of course you just said Walmart is expensive. How about Target? Is Target still overvalued after earnings?
Sekera: It is. Even after our analysts go through and increase their fair value, it’s still going to be 35% to 40% overvalued depending on where it’s trading in the marketplace. Whereas with Walmart, even after that selloff, it’s still 28% overvalued. I mean, it’s down 23% from the peak when it was a 1-star-rated stock, but it’s still trading at 35 times forward earnings. It’s just one where, while the company’s performance fundamentally is still doing fine, if that multiple starts to contract as the market starts to price in slower growth, I really think there’s a lot more additional downside in that one.
Stocks to Rent vs. Stocks to Own
Dziubinski: All right. Well, it is time for our question of the week. As a reminder, if you have a question for Dave, you can send it to us via our email address, which is [email protected].
Now this week’s question comes from Philip, who has been tuning into The Morning Filter for a while. Thank you for your loyalty, Philip. Philip asks, “On the Aug. 10 episode, Dave mentioned the concept of renting stocks. Could you explore the concept further and explain where you draw the line between renting versus buy-and-hold forever stocks? What criteria do you apply? Is it the industry the company is in, the general economic cycle, or perhaps something else entirely?”
But there’s a lot in there, Philip. Dave, let’s unpack this sort of one piece by one piece at a time. First, explain what you mean when you say some stocks are better rented than owned for the long term.
Sekera: When I think about renting a stock versus owning a stock, stocks that you want to own are those that are going to just be able to compound returns for decades yet to come. Whereas when you rent a stock, those are typically for companies where I think that the valuation and the investment thesis is temporary. Something where it’s a very cyclical industry, maybe it’s dependent on a specific catalyst. Again, something where the valuation is low now, and the market is pricing it at a discount, but this isn’t a business that you think is going to compound value for decades yet to come.
I have to admit, this is one where, as a long-term investor, renting a stock is a little bit of a gray area between trading and long-term investing. It’s not necessarily trading where you’re just looking for short-term small gains based on momentum. Again, it’s not like one of those stocks where you’re just going to buy it and put it away, and buy-and-manage for years to come.
Dziubinski: Are there certain sectors or industries where investors would most likely rent stocks rather than own them for the long term?
Sekera: Yeah. When I think about sectors that you would prefer to rent stocks versus own, first of all, it would be any of those sectors where you see what we consider just to be a long-term structural decline. I mean, if you think about traditional media, certain types of retail, those would be areas where you might have temporary valuations get too low, but the sector overall is going to be on that long-term downward trend, which you don’t want to be involved in if you’re really going to try and buy-and-manage that stock for the long-term. In those cases, you can get bounces in stocks where the valuations fall too low, the market becomes overly negative in the short term. In that case, any kind of glimmer of a turnaround is going to send those stocks higher.
I’d also steer clear of those sectors that don’t lend themselves to developing an economic moat. Those are the type of sectors where you have mean-reverting margins over time, sectors like homebuilders, a lot of the different industrial companies. In that case, there’s going to be periods in time where a company generates excess returns, but then you don’t expect them to be able to maintain those excess returns over time. Of course, that’s when you want to buy those stocks where return on invested capital is currently low. Investors are then extrapolating those low returns into the future too far. Once you see that bottom out and then start to recover, that’s when those stocks start to rally; then, as the markets revert back to more of those longer-term types of historical returns.
Lastly, just got to be careful of any of those sectors that have a High or Very High
Dziubinski: Dave, talk a little bit at the individual stock level then. What are some of the qualities that these stocks that you’d rent rather than own for the long term, maybe what they have in common?
Sekera: When I’m doing my screening, the first thing I’m going to look for is stocks that we rate with no economic moat within those sectors, which are also no-moat sectors. When I look at the uncertainty, I’m going to screen for those companies that we have a High, Very High, or even Extreme
I’ll look for companies that have what I consider to be lower credit quality, those with the low corporate credit ratings, maybe junk credit ratings, companies that have very high debt leverage, because in that case, the interest expense is going to be high; that’s going to compress margins. If it gets to be too low of a credit rating, investors might be concerned about bankruptcy risk during a recession. But then once you start to see the economy and the results turn around, that’s actually going to magnify the earnings to the upside. High debt leverage is going to magnify equity earnings to the upside as well as magnify to the downside. You’ll see much bigger swings in the performance.
And then this one, I don’t know how you necessarily really screen for. You can use some shorter-term technical indicators, but I really want to see those ones where you have just that extreme negative market sentiment where the market is looking at the stock and just saying, “Hey, this company’s just never going to make money again,” and people are just puking that stock out of their portfolios.
Lastly, take a look at the stock chart, try and identify if it looks like that stock is starting to put in a bottom. You really want to see the prior investor base washed out. Look for lots of volume, lots of turnover to the downside. Once that volume starts to even out and the stock starts bottoming out and maybe even starts having some higher lows, that’s usually a pretty good indication that that investor base has been washed out to more of a value investor base as opposed to maybe a growth investor base.
Stock Pick: LEN
Dziubinski: All right. Well, this week your picks, Dave, tie into this theme. You brought us five stocks to rent today. Your first pick is homebuilder Lennar LEN. Run through some of the key metrics on it.
Sekera: Sure. Lennar stock is currently a 4-star-rated stock, trades at a 27% discount, dividend yield of 2.3%. It’s a High Uncertainty Rating and a company we rate with no economic moat.
Dziubinski: Now, you did mention homebuilders earlier in your comments. Why is Lennar a stock to rent today? Fits the homebuilder theme, right?
Sekera: Exactly. If you think about the homebuilding sector overall, it’s a sector where we just don’t think you can build an economic moat. It’s very economically sensitive. It’s very sensitive to changes in interest rates. When you think about what’s been going on with homebuilders really over the past five years, since the beginning of the pandemic, in 2021 and 2022, I mean, revenue for this company was up over 20% per year. A lot of people were trying to move out of the cities, moving into the suburbs. Remember mortgage rates back then; they were ridiculously low. I think mortgages had a three-handle back then. Of course, the stock just raged higher, and it moved all the way up into the beginning of 2024.
And then we saw revenue turnaround and decline in 2025. We’re actually looking for a revenue decline even further here in 2026. That stock is now down 50% from its highs. When I look at the stock chart, I think it’s in the bottoming-up process. It’s really been a bit of a trading range since March.
Taking a look at earnings here, maybe I’m getting a little bit involved in this one too far in advance of that turnaround that we’re looking for, but we’re forecasting earnings this year of $5.36, puts it at 16 times earnings this year. Not necessarily on a PE basis; all that attractive at this point, but we are looking for a rebound then in 2027 once you get back to more of a normalized housing turnover rate. It’d be looking for 5% revenue growth. We’d look for the margin to rebound to 6.8% from 6.0%, which I’d note that 6.8% is still kind of half of what you saw prepandemic, as far as operating margins go.
It’s not like we’re pricing in some big, huge new historically high margin or anything like that. When you put those all together, we’re looking at 7 times earnings for 2027. At this point, that stock’s trading at only 12 times our 2027 earnings estimate.
Stock Pick: RH
Dziubinski: All right. Your next stock to rent is RH RH, which some investors may remember was called Restoration Hardware. Give us the highlights.
Sekera: The stock’s currently a 4-star-rated stock, trades at a 43% discount, which, at that big of a discount, because it’s a Very High Uncertainty, only puts it in that 4-star range, but a very large margin of safety from our long-term fair value estimate. Again, another company we rate with no economic moat, based on being in the retail sector and not having any long-term durable competitive advantages.
Dziubinski: Dave, why do you think RH is a stock to rent today rather than buy for the long term?
Sekera: A lot of it has to do with just what their basic business is. For people that aren’t familiar with RH, I consider it to be a luxury furniture—not just a furniture—retailer. They’re really trying to sell a lifestyle. But we think when you look at the discretionary products that they sell, that their sales are going to be very cyclical, really tied to the housing market overall. The business doesn’t have the ability to generate really those economic moats that we’re looking for.
I’d also note, too, that they are trying to become what they consider to be a lifestyle brand. They have 26 restaurant locations. They’re trying to use that for customer acquisition, and it’s a brand-building tool, trying to really put that image together as being a luxury lifestyle. I’ve looked at their menus here in the Chicago area personally. I’ll just tell you what, I think the prices are a little too high for my taste. My wife, my daughter, and my in-laws, I think, have gone there once, and from their perspective, it wasn’t necessarily worth going back to.
Now, fundamentally, what’s going on here? You had huge sales growth in 2021 during the beginning of the pandemic. It was a combination of a couple of things. One, a lot of housing turnover. Again, a lot of people looking to redecorate their houses or redecorate the houses that they were buying, a lot of demand for new furniture. Plus, you had all of the shut-ins early during the pandemic. That drove just a huge wave of buying to online from being in person, and that stock just soared. It went from a pandemic low of $100 a share to over $700. Like anything else, and especially with these types of stocks that you want to rent, this is one where it just overextrapolated way too much growth for way too long. The stock has really been in a long-term downward trend ever since.
Now, as far as our model, taking a look at what we’re expecting, we’re looking for 5% growth this year. We’re looking for an average 8% to 9% growth over the longer term. We expect that the stability in the business now that they’ve gotten past all of that pull forward from the early pandemic years, looking for a margin expansion. The 2026 operating margin we’re forecasting is 9.2%. That’s below the 11% to 13% historical range that they’ve had. We’re looking for that to slowly expand over the next couple of years. We’re looking for it to get to 10.3% in 2027. We think earnings will bottom out this year at $5.82 per share.
Now, that makes the stock look expensive based on 2026 earnings. That makes it 26 times this year’s earnings. But once people start focusing on how much we think this company can make in 2027, we’re looking at earnings of $11 per share next year. Then, the stock’s only trading at under 14 times 2027 earnings. Once we start moving later this year and into the beginning of next year, when people start pricing stocks on two-year forward, the 2027 earnings estimate, I think this one really starts to look undervalued here.
Stock Pick: F
Dziubinski: Now, your next pick this week is a stock I’m not sure we’ve ever talked about on the show. It’s Ford F. Break down some of the key metrics on it.
Sekera: Yeah. The auto industry overall, certainly not one I ever would think about a buy-and-hold or buy-and-manage kind of stock. Right now, Ford’s a 4-star-rated stock, trades at a 24% discount. Pretty healthy dividend yield, 4.2%. But again, it’s a High Uncertainty industry, with no economic moat.
Dziubinski: Now, you mentioned the automakers in general are pretty much stocks to rent, but why is Ford specifically your pick of the bunch?
Sekera: Yeah. When I think about the auto industry, it’s just a highly competitive, no-moat sector. Low-margin business, high fixed-cost base, requires a lot of continual reinvestment into the business. New auto sales are going to be economically cyclical over time.
That begs the question, why Ford and why now? To some degree, you should never let your emotions get tied up with a company or stock, but I’m going to let them get me tied up in this stock here. Emotionally, my first car was a 1973 Buick station wagon. My next car after that was a ’76 Buick Regal. Then, I had a 1978 CJ5. But I have to admit, when I grew up, my dad had a 1966 Mustang convertible. Loved driving that car. Again, this is one where I’m just a Ford guy at the end of the day. I’ve had some GM GM cars in the past. I’ve had a Jeep in the past, but nothing beats the old Ford Mustangs.
As far as what’s really going on here fundamentally, we think earnings bottomed out in 2025, and that’s also when it appears like the stock has bottomed out. We’ve had generally upward momentum ever since. I like seeing that in the charts. Fundamentals improving. In the second quarter, they raised their EBIT and their free cash flow guidance. Of course, they’re only going to do that if they’ve got very high confidence that they can continue to keep meeting those increased expectations. Generally, if I take a look at our model and look at our assumptions here, we’re still looking for an increase in the F series for Ford pickup sales. I know the consumer perception for Ford, looking at a lot of the different market sentiments out there for new auto sales, is that their quality has been improving over the past couple of years.
Taking a look at where the stock is trading, it’s trading at only 7.5 times the 2026 and 2027 earnings estimates. And then we’re looking for some pretty good earnings growth in 2028 and thereafter. And I’ll just leave you with this. Dave Whiston is the equity analyst who covers this stock. His takeaway here is, “We have not felt this optimistic about Ford’s progress in years.”
Dziubinski: Dave, I have a very important follow-up question here. You said your first car was a wagon?
Sekera: Station wagon. 1973 brown Buick station wagon.
Dziubinski: Did you have that brown wood paneling on the side?
Sekera: This one didn’t have the wood paneling, but I’ve got to admit both sides were dented in from being in accidents, crack along the windshield. When I first got it, I had to change the spark plugs and the points. I mean, it required a lot of work, but you know what? I was 16. It had four wheels, and it moved. Big V-8 engine.
Stock Pick: MBUU
Dziubinski: Independence at 16. Must have felt pretty good.
Anyway, all right. Back to your picks. Malibu Boats MBUU is another stock you say is one to rent today. What are some of the important stats on it?
Sekera: The stock’s currently at a 30% discount, more than enough to put it in 4-star territory. Unfortunately, a 0% dividend yield. I’d like to see a dividend on this one. I’m hoping a dividend comes back as the numbers start to improve over time, but I can’t rely on that at this point. It’s a High Uncertainty and a company we rate with no economic moat.
Dziubinski: Dave, why do you like Malibu Boats today as a stock to rent rather than own?
Sekera: I mean, from the renting perspective, when you think about buying boats, I mean, it’s going to be highly discretionary, very economically sensitive. I would note that I think that their higher fixed-cost base relative to a lot of other industrials is something that is not going to position them well as far as how their numbers are going to look over an economic cycle. Just a no-moat business. Overall, we just don’t see any economic moats among any of the boat manufacturers.
I think this is one where it’s going to be especially difficult really trying to model out future earnings. I mean, the stock has really been all over the place. It’s really down a lot. It peaked in early 2021. It’s down 65%. Since then, it’s just down 18% even from just a year ago. But it’s the same thing that we’ve seen with a lot of these other companies where you saw huge swings in activity because of the pandemic.
I mean, if you remember at the beginning of the pandemic, all of the shut-ins, people trying to social distance led to a huge increase in demand for outdoor activities. You saw a huge amount of pull-forward effect in those early years during the pandemic. But what’s happened now is because of that pull forward, you’ve had a couple of years in a row where that pull forward has hampered sales for the past couple of years. When you look at the impact that’s had on the stock, I mean, the stock round-tripped all the way back to its pandemic lows in early 2020.
This is a similar story that I’ve talked about with a couple of these stocks where they don’t necessarily look that attractive based on our 2026 earnings estimates, but start looking a lot more attractive once the market is going to start focusing on 2027 and thereafter.
It currently trades at 23 times our 2026 earnings forecast of $1.30 per share, but we expect 2026 to be kind of the trough in that business cycle when we get past that pull-forward effect from the early 2020s. When you look at 2027, our forecast is for $3.13 per share. It’s trading at under 10 times that 2027 earnings estimate. To put that $3.13 in context, I’d note that in 2019, prepandemic, the company did $3.76 per share. I don’t think that 3.13 is any kind of historic looking for any kind of real fast rebound. We’re looking for 2028 and thereafter even to grow further.
Stock Pick: CE
Dziubinski: All right. Your last stock to rent is a chemical stock, Celanese CE. Break it down first, Dave.
Sekera: Sure. Currently trades at over a 40% discount to fair value, more than enough to put it in 4-star territory. Not much of a dividend. They’re just kind of clinging to a 0.26% dividend yield right now. Being a chemical business, it’s going to have that Very High Uncertainty. In this case, unlike the other ones we talked about, they do have a narrow economic moat. We think that narrow economic moat is based on a cost advantage they have in the acetyl chain business. Plus, they also have some intangible assets and switching costs regarding their engineered materials business.
Dziubinski: Now, you mentioned earlier in your comments that chemical companies are cyclical, which makes them stocks to rent, but why Celanese specifically? Is it that moat?
Sekera: Partially. I mean, chemical companies are going to be very economically cyclical. Even within the chemicals business, I would think Celanese in particular is going to be very economically cyclical. Now, having said that, it is one of the world’s largest producers of acetic acid and its derivative chemicals. Those are used in various end markets, coatings, adhesives. They also have one of the largest producers of specialty polymers used in very economically sensitive sectors like automotive, electronics, some more defensive like medical, and a number of other different end markets as well.
We hadn’t talked about the corporate credit ratings much on some of the other businesses, but I would note this one is a junk-rated or below-investment-grade corporate credit rating, currently rated about BB. Like a lot of the other chemical businesses, very high fixed-cost business.
Taking a look at the stock charts here, I mean, this one got hit really hard in 2024. In fact, the stock is now down 74% from its March 2024 peak. I think it’s at its lowest level over the past 10 years. There was a little rally earlier this year, which failed. It looks to me that after that failed rally, it’s now finding support at what was like the prior resistance level. That might be an indicator of some support here.
I would note performance is still kind of struggling here in the short term. Our equity analyst team did lower our fair value after the last earnings report. The biggest reason is that management lowered their guidance. I mean, they had pretty strong numbers in the second quarter, so that lower guidance means that they’re looking for lower sequential profits in the second half of this year. I think what’s happened is that we’re finally getting to the point where hopefully that lowered guidance is washing out the weak hands here. I think that puts the company in a position to hopefully underpromise and overdeliver over the next couple of quarters going forward.
The stock trades at less than 10 times our 2027 earnings forecast, and we’re looking for an earnings recovery in 2028 and thereafter. Very undervalued stock from that multiple perspective, very undervalued based on our discounted cash flow model. Again, I think once the market starts turning toward the future earnings expectations as opposed to the depressed levels we’re at right now, any kind of glimmer of hope, I think this stock has some pretty good upside ahead.
Dziubinski: 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.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.