4 Long-Term Stocks to Buy on the Dip

Susan Dziubinski: Hello, and welcome to The Morning Filter. I’m Susan Dziubinski with Morningstar. Every Monday morning, I talk with Morningstar Research Services’ chief US market strategist Dave Sekera about what investors should have on their radars, some new Morningstar research, and a few stock picks or pans for the week ahead.

Well, good morning, Dave. There’s nothing on your radar this week on the economic front that’s all that’s meaningful in light of everything else that’s going on with tariffs this week, so let’s get straight to earnings. We have a few companies reporting this week that are on your radar, starting with Tesla TSLA. What are you going to want to hear about here?

Dave Sekera: Good morning, Susan. When you take a look at Tesla’s stock price, no pun intended, but that company’s stock has just been on a crazy ride. It’s gone from, I think, $220 a share last October before election season, rallied all the way up to almost, I think, $500 a share toward the beginning of this year, and now it’s all the way back to $240. With this stock, I’m really hoping this is just a matter of getting back to the actual fundamentals of the company, and its performance, and its outlook in and of itself. Of course, like anything else, we’re just going to want to hear from the company about the impact of the tariffs, the firm’s strategy to try and allay some of those issues.

We also want to hear about the status of the robotaxi service in Austin. I think that’s supposed to be maybe launched here in June. And then lastly, just any updates that they might be able to provide on the timeline for ramping up their production of Model Y’s affordable vehicle. And again, that is a big portion of why we expected vehicle sales to get reinvigorated in the second half of this year. If that were to get pushed back, that certainly could be a risk in our mind.

Dziubinski: You alluded to, of course, Tesla’s stock price volatility during the past six to eight months. How’s the stock look from a valuation perspective heading into earnings?

Sekera: Our fair value’s still $250 a share, and I believe our fair value was unchanged throughout all of that. If you were involved in that stock and followed our ratings, hopefully you took a little bit off the table when it was up to well into that $400 range. But at a $250 share fair value, that puts the stock really close to the middle of the 3-star category today.

Dziubinski: OK, so it’s fairly valued. We have AT&T T, Verizon VZ, and T-Mobile TMUS, all three reporting this week. Do you expect to hear much about tariffs from these three companies during their calls?

Sekera: We do. And I think there are really two reasons why we’re going to want to listen to what they’re doing about tariffs. First, of course, just being the impact of the costs on the individual cellphones. So they usually will give some sort of discount for cellphones to new customers when you sign up. We’ll see how they’re going to be able to mitigate some of that impact.

But then also you have to remember, the tariffs are just going to increase the cost of the networking equipment that they use to construct their wireless and their fixed-line networks. Both of those, I think, are things that people are going to want to hear about and whether or not they’re really going to be able to pass those tariff costs through here in the short term or if that’s something that could impact the margins and tariffs are negotiated away or whatever ends up happening to them at the end of the day.

Dziubinski: How do these three stocks look heading into earnings? Any of them look attractive?

Sekera: It’s really interesting when you look at the three. If you look at T-Mobile to start off with, that’s a 2-star-rated stock, trades at a 25% premium above our fair value. AT&T is a stock, which, of course, if you remember a couple of years ago, was our pick within the sector. That’s moved up enough now that it’s a 3-star-rated stock. I think it was a 5-star stock back in the day when we were talking about it. I think it trades at $27 a share, so a little bit above our $26 fair value estimate. But then Verizon, we still like. That’s a 4-star-rated stock at a 17% discount. Pays a nice, healthy 6.2% dividend yield. So of the three, Verizon’s still our choice today.

Dziubinski: All right. We have some defense companies reporting this week, with RTX RTX, Lockheed Martin LMT, and Northrop Grumman NOC. The Trump administration has talked about bolstering defense, and, of course, there’s tariff uncertainty with defense manufacturers, too. Can you give us some perspective on Morningstar’s take on these three defense stocks in light of those issues?

Sekera: I read through Nick’s [Owens, Morningstar analyst] note here. And really what he’s highlighting is that defense firms are among the US’ most domestically based manufacturers, and that their exports are to countries with new tariffs that are going to be at the lower end of the ranges. In our view, actually, the tariffs probably don’t have that big of an impact on our stocks, and I believe our fair values are unchanged on all of them.

Dziubinski: Both RTX and Lockheed Martin have been picks of yours in the past. How do they look today from a valuation perspective? Either of them attractive?

Sekera: RTX, I think, was our first pick when we first started talking about the defense manufacturers a while ago, but it’s moved up enough now. It’s a 3-star-rated stock. In fact, I think it trades a few dollars above our fair value. So again, fairly valued today. But of the two, LMT looks more attractive to us. That is a 4-star-rated stock at a 12% discount and has a relatively healthy dividend yield at 2.8%.

Dziubinski: ServiceNow NOW, which is another former pick of yours, also reports this week. The stock looks undervalued headed into earnings. So what’s your take, and what are you going to want to hear about from the company?

Sekera: Yeah, you’re right. It does look undervalued. It trades at a 22% discount to our fair value, puts it into that 4-star territory. Although this is not one for people looking for a dividend. The company does not pay a dividend at this point in time.

I think what’s going on here, last quarter revenue guidance was a little bit below what we had in our model, so hopefully that will make it easy to beat this quarter. But last quarter, profitability was actually slightly better than anticipated, so offsetting the lower revenue that we saw there. So I’m hoping that that’s an indication that margins will continue to be on the strong side. But overall, I would like to see guidance come in at least within expectations. But really, I want to see it better than expected this quarter. Because really, I would prefer not to see two quarters in a row where the guidance comes in below expectations.

Dziubinski: All right. Let’s move on to some new research from Morningstar. Now, one of your favorite core holdings, Johnson & Johnson JNJ, reported earnings last week. What did Morningstar think of the results?

Sekera: It was exactly what I wanted to see, personally. It was a lot of nothing. It’s a 4-star-rated stock. Now, having said that, it moved up, I think 6% last week. So, at this point, it’s only trading at a 4% discount to our fair value, has a nice, healthy 3.3% dividend yield. But overall, results in line with our expectations. Really, no big changes to our fair value. It’s still $164 a share just because, again, it came in pretty much what we wanted to see. At this point, I still continue to see it as a core holding, although it’s no longer as undervalued as what we had preferred to see last week or when we’ve talked about it before.

Dziubinski: Another of your picks, U.S. Bank USB also reported last week. What did Morningstar think of the results here? And, in general, has anything stood out to you in bank earnings overall?

Sekera: I would say with U.S. Bank specifically, nothing of any real interest. They maintain their 2025 guidance and their medium-term targets. The company continues to execute on having pretty solid expense control, which is a big portion of our investment thesis in our model. We maintain our $53 fair value estimate. So, it’s still a 4-star-rated stock trading at a 28% discount. It does have a wide economic moat. So, of the U.S. banks … and again, it’s the largest of the regional banks, but it’s probably still our pick for banks overall.

I do think it was interesting in the bank earnings overall, I think JPMorgan JPM probably had some of the more dour outlooks for the banks. I know they increased their loan-loss provisions, just expecting consumer spending and the economy to be weaker in the second half of the year. But it seems with the banks that came out last week, they didn’t have maybe as negative an outlook as what we saw from JPMorgan and Jamie Dimon specifically.

Dziubinski: Let’s pivot over to technology. Now, Nvidia NVDA and AMD AMD stocks each fell, I think, about 7% on increased China restrictions last week. First, walk us through Nvidia’s announcement and the changes that Morningstar made to the stock’s fair value estimate.

Sekera: We cut a little bit. I mean, this isn’t a huge cut. We reduced it to $125 a share from $130. And as you said, it was due to the new restrictions on its exports to China. China, I think, had already shrunk to being about 10% of Nvidia’s revenue. It was 20% not that long ago. And at this point, we’re now changing our model so that we expect it to go pretty close to zero at this point in time. And a big chunk of what happened here was that they do expect to incur $5.5 billion of write-offs on its H20 AI GPU. That GPU was actually specifically made for the Chinese market in order to be able to get around the prior tariff, prior export restrictions. Now, taking that out of the model was enough to be able to cut that fair value by $5 a share.

Dziubinski: AMD stock also fell last week, and Morningstar also reduced that fair value estimate, but this cut was more sizable in percentage terms than Nvidia’s was, right? And why was that?

Sekera: Similar to Nvidia, they’re also not going to have to take write-offs in order to write off the products that they had made to be able to export to China for its AI products. So, that’s an $800 million write-off. But at the same point in time, we did reduce our global expectations for PC revenue. And of course, AMD has a much higher percentage of its business in more traditional semiconductors used for individual computers as opposed to AI. So, it’s really a combination of the two writing off the products that they had for AI for China. But I think the bigger change here was reducing our PC revenue expectations.

Dziubinski: Got it. So, it was more involved on that one. Given these fair value changes, given the pullback in the stock prices, does either stock look attractive?

Sekera: It depends on what you’re looking for. Nvidia is still a 3-star-rated stock, but it trades now at a 19% discount. So, that puts it right there on that border with being 4 stars. Any more of a pullback from here is certainly going to look much more attractive to us. But AMD has fallen enough. It trades at a 27% discount, so that puts it solidly in the 4-star category.

Dziubinski: All right. I’m staying with tech. We had Taiwan Semiconductor TSM release earnings last week. Stock was up, I think, a bit afterward, yet Morningstar trimmed its fair value estimate on the stock. Unpack that one for us, Dave.

Sekera: I wouldn’t worry too much about the decrease in our fair value estimate on this one. Overall, the results were in line. Sales guidance was pretty strong for 12% sequential growth. We do think that indicates consumers or their customers are trying to bring in as many chips as possible while we have the tariff pause. So again, a lot of pull forward. But what’s going to end up happening is that the effect of tariffs are going to be felt more in the future when the current inventories are depleted. So, we do expect tariffs to hit revenue by 4% in our 2026 model at this point in time. And specifically, it’s going to hit their non-AI segments even more. So I think that was really what’s caused that little bit of a cut that we had in our fair value estimate.

Dziubinski: Does Morningstar think that the stock of Taiwan Semi is a buy today?

Sekera: We do. So again, I’m not that worried about a slight pullback in our fair value. It trades at a 42% discount, so more than enough margin of safety to put that into that 5-star territory, which, of course, is the rating that we use to indicate stocks that we think are most undervalued as compared to our fair value.

Dziubinski: Let’s move on to our viewer question this week. During last week’s broadcast on YouTube, Steve asked in the chat, “How can you say the market is undervalued while the S&P 500’s PE is near an all-time high?”

Sekera: This also gets to a big difference in how we look at the market and look at individual stocks, as I think what you hear from a lot of other strategists. So, again, we’re not a PE shop. We will look at price to earnings and multiples, but really more as like a sanity check to take a look at what our valuations are. When we value stocks, we do use a discounted cash flow model. Depending on the company, we model out anywhere from five to 10 years explicitly, the entire income statement, the amount of free cash flow. Then we have a stage two, which is our fade period, and then stage three, which is the perpetuity part of our model.

And using all of that, the present value is how we look at the value of a stock. Again, the value of a stock truly is the present value of all of the long-term free cash flow that we expect that company’s going to be able to generate over time. We never use PE as really a shorthand way of trying to come up with what a stock might be worth today.

Now, at the market level, we take a composite of the intrinsic valuation as determined by our analyst team. We add all that up together, and then we compare that to what the market value of all of those stocks is. So that is our price/fair value metric. So again, we’re looking at those intrinsic valuations compared to the market valuation. While at the beginning of the year the market was trading at a pretty rare premium over what the composite of our intrinsic values were, it has now fallen enough to the point where we are now starting to see the market trade at a pretty attractive discount to those intrinsic valuations.

While the market may swing too far in one direction or the other because they’re using shorthand metrics like PE, our valuations tend to change less over time. Which is why when you see the market act like a pendulum, being overvalued at the beginning of the year to now being undervalued today—why we talked about a couple of weeks ago that we thought the market had fallen enough where it looked like it was time to take a strategic short-term tactical overweight. Now, of course, the market had started swinging back up, so I think you’ve been able to lock in some profits after that. But I still think the market looks pretty undervalued here from a long-term perspective. Having said that, I think there’s still a lot of volatility in the months to come just as we undergo all of these tariff negotiations and all the headline risk that’s going to surround those.

Dziubinski: Well, I just wanted to take a minute to remind our audience to please continue to send us your questions. You can reach us at [email protected]. And Dave and I hope to meet some of our viewers and listeners in person at the Morningstar Investment Conference in Chicago on June 24 and 25. Dave and I are going to be taping a special episode of The Morning Filter at the podcast stage, and we’ll be there on Wednesday of those two days at 10:50 a.m. And you can find out more about the conference in the show notes. Hope to see some of you there.

We’re going to move on to this week’s picks. Since the tariff uncertainty began in earnest, Dave, you’ve been advocating that investors favor undervalued wide-moat stocks, sort of in that Medium to Low Uncertainty range, with the idea being that these companies will have the wherewithal to withstand an economic slowdown and pass along those additional tariff-related costs to consumers. You’ve brought us four stocks this week. Your first pick is Amazon AMZN. Run through the numbers.

Sekera: I think the market selloff is also just a really good opportunity to take a look at what you own in your portfolio and be able to uptier the quality of the companies that you invest in.

In this case, taking a look at Amazon, it is a company we rate with a wide economic moat. The stock is rated with a Medium Uncertainty. It’s currently a 4-star-rated stock trading at a 28% discount to our fair value. Doesn’t pay a dividend yield, so if you’re looking for that high dividend in your portfolio, this may not necessarily be the right pick for you. But for investors looking for that high-quality company trading at that wide margin of safety, this is definitely one in my mind.

Dziubinski: You said that Amazon stock is 28% undervalued relative to our fair value. How does Morningstar’s take on Amazon differ, what seems like kind of dramatically, from that of the market?

Sekera: We actually had raised our fair value to $240 a share from $200 following the first quarter earnings. And as a combination, their outlook for the year was better than what we had expected in our model, so we raised our profitability, but we also noted that their working capital assumptions were getting much better as well. When we put the combination of those two in our models, that’s how we got that fair value increase.

Fundamentally, Amazon still just has everything going right for it. When you take a look at AWS, that’s its cloud platform that hosts artificial intelligence, we’re still seeing accelerating growth there, looking for more growth there in the future. The ad business, an especially high-margin business, that’s growing very rapidly still. And as far as being a retailer, they’re still the online leader, and I just don’t see anyone necessarily competing with them anytime soon.

The big question here is going to be the tariffs. And again, that is very difficult to really try and get your arms around how that may flow through. But over the longer term, we still think that generally Amazon is going to be able to negotiate better terms with their own suppliers, probably better than just about any of the other retailers out there, and that they’re also in a position where they’re going to be able to pass through their costs probably better than most of the other retailers out there as well. This is one where you look at that wide moat, really thinking about that they’re going to have good powers of being able to keep their own costs down better than what you’d see competitively, as well as probably be able to put those prices through better than what you’d see for a lot of other competitors.

Dziubinski: All right. Your second pick this week is Brown-Forman BF.B. Give us the highlights.

Sekera: This one is very undervalued at a 35% discount. Puts it in that 5-star territory. Pays a nice dividend yield at 2.7%. Again, wide economic moat, Medium Uncertainty.

Dziubinski: Dave, talk to the tariff risks here and why you like the stock today.

Sekera: Yeah, so our analyst did note that if tariffs were to remain outstanding for the long-term and if they were subject to high retaliatory tariffs, then that would be an issue for the company out in the shorter term, but we just don’t think that that is going to end up being the case. Now, this is one where I think you also have to look at the long-term stock-trading pattern for this company. Early in the pandemic, this stock rose. It rose just way too high in 2020. It was a 2-star-rated stock. And it’s been on a long-term downward trend ever since just because it hadn’t been able to keep up with the expectations that the market had priced in. So, I think you still have a lot of negative sentiment, a lot of investors that just prefer steering clear of this one, which I think also then provides the opportunity today.

What’s going on here is, I think, the market is just overly incorporating changes in what we’re seeing in preferences for alcoholic consumption. I think when you look at the company here, they are successfully expanding into both the premium and the super premium segments, so that will benefit them over time. Plus, we’re seeing good brand extension, using their brands in order to get into new categories, like the ready-to-drink category, which will help bolster their sales over time. If you take a look at our financial model, I still think it looks relatively conservative to us.

Dziubinski: Your next pick this week is Zimmer Biomet ZBH. Walk through the key points.

Sekera: Thirty-five percent discount, 1% dividend yield. It’s a 5-star-rated stock. Again, a good way to uptier the credit or the quality of your portfolio to a wide economic moat and a stock we rate with a Medium Uncertainty.

Dziubinski: Now, medical-device makers like Zimmer, they won’t be immune to tariffs. How great is the risk to Zimmer specifically? And then, given how undervalued the stock is, is the market sort of overcompensating for that tariff risk?

Sekera: So this, I think, was a little bit of a surprise to us. The inclusion of medical devices in the tariffs is certainly in contrast to the historical pattern of exempting lifesaving and life-sustaining devices from tariffs. So, I think with this one, Zimmer and some of the other larger device makers, they are large enough that they will over time be able to shift manufacturing around and minimize the impact of the tariffs if these tariffs were to stay in place over the longer term.

Now, in the near term, we do expect that there will be some margin pressure here. But fundamentally, there’s no change to our outlook for the company’s economic moat. When you think about these devices and the surgeons that use these devices, there’s a very steep learning curve in order to learn different instrumentation. So, you’re going to see orthopedic surgeons still continue to use their devices over time. There’s not going to be any change to the intellectual property on their patents, so that still supports their economic moat over time.

So, overall, the company is a leader in providing devices for joint reconstruction. Over time, we expect favorable demographics, especially the aging baby boomers provide that steady, long-term revenue growth for the company. While we may have some short-term issues with the margins if those tariffs were to remain outstanding—which, personally, I don’t think that they probably will—I think this is one where the market is being overly pessimistic to the downside, and I think there is a lot of upside potential in this one once the tariff negotiations occur.

Dziubinski: Then your final pick this week is Thermo Fisher Scientific TMO. Give us the headline on this one.

Sekera: Rated 5 stars, trades at a 32% discount. It has a dividend, but it’s very, very low, so probably not necessarily one for dividend investors. Wide economic moat with a Medium Uncertainty. And I’d also highlight it has an Exemplary Capital Allocation Rating.

Dziubinski: Why do you like Thermo Fisher? Why do you think it could be somewhat resilient?

Sekera: For those of you who don’t know the company, it sells scientific instruments and lab equipment, diagnostics, consumables, and other types of life science reagents. Again, I find it to be just a very defensive company in as far as what it does and what it sells.

This is one where it also had been impacted by the pandemic. In the early years of the pandemic, they had abnormally high revenue growth that led to very large expansion in operating margins. But over time, once those revenue growth rates normalized and those margins came back to more historically normalized margins as well, it really didn’t keep up with what the market expectations were back when the stock price had moved up too high at that point in time. I think this is one where as things have normalized, investors have been disappointed as it hasn’t lived up to their expectations, which were probably just too high at that point in time. And so now the market has just swung too much to the downside and is being overly pessimistic as compared to our long-term valuation assumptions.

Dziubinski: Well, thank you for your time this morning, Dave. Those 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 week for The Morning Filter on Monday at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. And have a super week.

Got a question for Dave? Send it to [email protected].