5 Undervalued Stocks to Rent, Not Buy

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**SPEAKER_2** (0:27)
Please stay tuned for important disclosure information at the conclusion of this episode.

**Susan Dziubinski** (0:50)
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. 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%.
So walk through what happened.

**Dave Sekera** (1:19)
Good morning, Susan. You know, 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 there was a Wall Street Journal article that was published really regarding off balance sheet obligations for all the big AI hyperscalers. So 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. And at this point, they're not accounted for on the balance sheet. So I think that was a big eye opener for a lot of people out there. Now that sent stocks down on Tuesday, so 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 markets already had regarding the duration and the depth of the AI build out boom.
I did break down the market performance into the individual sector performance. Now just note here the industrials, which as we've talked about, has been one of the more overvalued sectors recently. It was actually the worst performer last week. It was down 4.2 percent. And as you would suspect, a lot of the AI stocks or AI related industrial stocks were the ones that got hit the hardest. Stocks like GE, Vernova, Vertiv and Bloom Energy were down the most. Those were the biggest contributors to the downside there.
Second was the utility sector. That was down 3.5 percent. I think that's a combination of a couple of things. One, just rising interest rates in general are bad for utility stocks. But I think it's also just the realization that maybe there isn't going to be as much electricity demand in the future that people are currently pricing in into those utility stocks. Then, of course, tech was down 3.1 percent. As you suspect, Nvidia, Broadcom, AMD, Intel, those were the ones that were the biggest contributors to the downside.
As people were rushing for defensive sectors, healthcare did the best. It was up 4.2 percent. This morning, it looks like futures are a little red before market open. We're seeing oil a little bit better. That's a couple of dollars lower, $85 a barrel. Bonds a little bit better this morning, 10-year at 4.72 percent, but still on the upper bound of where I'd like to see the 10-year.

**Susan Dziubinski** (3:35)
Now, 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?

**Dave Sekera** (3:47)
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. 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. It's 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, and so 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. Now, if those rising interest rates are indicative of the market pricing in, 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, maybe 20 to 25