4 Stocks to Buy for the Long-Term While They’re Still Undervalued

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Dave Sekera (0:14)

Sorry, quick break for legal. To learn more, visit vanguard.com/audio. All investing is subject to risk. Investments in bonds are subject to interest rate, credit and inflation risk. Vanguard Marketing Corporation distributor.

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Dave Sekera (0:26)

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Please stay tuned for important disclosure information at the conclusion of this episode.

Sarah Hansen (0:53)

Hello, and welcome to The Morning Filter Podcast. I'm Sarah Hansen for Morningstar, sitting in for Susan Dziubinski, who's on sabbatical for a few more weeks.

I'm here on Monday mornings to talk with Morningstar Chief US. Market Strategist, Dave Sekera, about key takeaways for investors in today's market. What to keep on radar this week, some new Morningstar research, and a few stock ideas, as always. Before we get started, we have one programming note. We dropped a bonus episode of the podcast last week, where Dave and Morningstar Chief Economist, Preston Caldwell shared their forecasts for the fourth quarter. They covered a lot of ground, so if you haven't tuned in yet, be sure to check it out wherever you get your podcasts.

Okay, great to see you, Dave.

Dave Sekera (1:40)

Good morning, Sarah. How are you doing?

Sarah Hansen (1:42)

Doing great. It's a beautiful sunny fall day here in New York.

Let's wrap up the action in the market from last week. We had some hot inflation data, some volatility in chip stocks, some motion in the treasury market. So talk us through what was most important.

Dave Sekera (1:59)

Well, I think the inflation metrics were pretty important last week. So first of all, CPI came out hotter than what consensus expected. And when that print came out, the yield on the 10-year initially spiked. It got as high as 5.32 percent. But then the thing was as that yield was going up, the equity markets were falling. And as the equity markets were falling, that then drove a flight to safety bid and the 10-year did come down after that. Now, the day after CPI, we get PPI and that also came in much hotter than expected. The real concern there is PPI is often considered to be a leading indicator of CPI, meaning it's showing that we still have the hotter CPI yet to come as well.

Now, it's interesting that following these inflation metrics, the probability that the Fed hikes in October is still pretty low. It's only 15 percent. But we did see that probability increased now up to 76 percent for a hike at the December meeting.

Now, the other thing is that even after that hotter than expected PPI came out, the yield on the 10-year came down even further. So I think the market's currently pricing in two things. First, that tighter monetary policy will end up slowing the economy down, and that will then contain future inflation past what we're seeing right now.

Secondly, there's just a lot going on in the equity market. A lot of these commodity-oriented tech hardware names have really been getting crushed. We saw big rotation in the value names. But I think we're also probably seeing some rotation out of equity and into fixed income while the yields are still above 5% on the 10-year. Now as far as what the Fed does, whether they hike in October or December, I don't think really means that much in and of itself. Our economist is still only looking for one more hike by the Fed, and then he thinks they'll be done tightening monetary policy after that point.

Sarah Hansen (3:50)

Okay, so the other big piece of news aside from inflation we had last week was about Anthropic.

Now they had their private investor day last week ahead of a very hotly anticipated IPO, which will be sometime this fall. Now this was a closed door meeting, but what did we hear and what do you make of it?

Dave Sekera (4:08)

So what I'm hearing is there's a lot of arguments out there whether their revenue is growing as fast as what a lot of people had expected or not. I think the takeaway is whether or not they're meeting it down to the last billion-dollar annual revenue run rate, they're still growing extremely fast at this point. But I think just as important as the top line is that reportedly, they're free cash flow positive and profitable at the gross margin line. Now as far as the operating margin goes, there's a number of different adjustments that they make. Once they make those adjustments, they're also reporting to be profitable at the operating margin level as well.