7 Stocks to Buy That Can Move the Market

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

Susan Dziubinski (0:52)

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 what's been going on in the markets, what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas. All right. Well, good morning, Dave. You and I haven't talked in a couple of weeks, so let's start by talking a little bit about what's standing out to you when it comes to recent market activity in September. What are some of your key takeaways?

Dave Sekera (1:23)

Hey, good morning, Susan. Well, first of all, I just have to point out in our September market outlook which was published on morningstar.com at the beginning of the month, we warned investors that the macro dynamics out there were starting to turn pretty ugly and as such, to expect a volatile month this month.

Unfortunately, that's what we're seeing playing out over the past couple of weeks. If you look at oil prices, unfortunately, they're continuing to keep heading higher. Last I checked this morning, they were about 103 per barrel. So fill up your gas tank. Those prices, unfortunately, are going to keep crawling higher over the next couple of weeks. If you look at inflation, unfortunately, I think that's still getting worse as well. If you look at the CPI and the PPI prints, I think both of those are indicating that inflation certainly isn't getting any better. When you look at some of the underlying data, I think that's actually still getting worse. Taking a look at long-term interest rates, if you look at the 10-year US Treasury, that's really still trying to hit that 5% handle, the question there will be, when it hits that 5 handle, is there going to be enough buyers coming in, in order to push that yield back down? Or once it hits 5, is it going to stay above there? And I think that's going to have a lot of impact on how things trade thereafter. We've got tightening monetary policy coming pretty quickly again. Then looking at the individual stock action with a lot of the different AI sectors, we're seeing some on-again, off-again action, a number of those, like the tech hardware, having been selling off really over the past couple of months, and some of the other leaders trying to gain, but not necessarily really getting any footing yet.

Susan Dziubinski (3:00)

Now, for our audience, Dave mentioned his September stock market outlook, and we do have a link to that research in the show notes. And Dave, in your outlook, you also had some very interesting commentary about market valuations, maybe how they're a little bit misleading today. So talk about that.

Dave Sekera (3:18)

So I wouldn't necessarily use the word misleading, but I think you need to understand what the market valuations are telling us today. So based on where the market is right now, we're at about like a nine to 10 percent discount to fair value. Now, as a reminder, I think we look at fair value for the market differently than what you hear from a lot of other market strategists. Always seems to be most other market strategists start with this top-down approach. They have some way that they calculate what they think S&P 500 earnings are going to be for the year, they apply some sort of forward multiple to it. It seems like they're always telling you the market's nine to 10 percent under value compared to their target price. But really to me, that's always been an exercise, really more for goal-seeking than it was necessarily true valuation. Of course, here in the US, we cover over 700 stocks that trade on US exchanges. I mean, predominantly all the biggest of the large cap and even a high percentage of the mid cap stocks out there.

What we do is we put together this bottom-up analysis. We put together a composite of the total market capitalization of all of those companies and we divide into that the intrinsic valuation as determined by our equity analyst team on those same stocks. That gets to that price-to-fair value metric. Now, at a 10% discount, that's usually the area that I would start thinking about, and this might be a good time to start overweighting US equities. But in this case, I really have to point out how the undervaluation is especially concentrated and why I'm not necessarily willing at this point to go to that overweight recommendation. So if we look at all of the big mega cap stocks, there's seven of those right now that account for essentially the entire discount for the marketplace today. If you look at where those are trading versus our intrinsic valuation, those seven stocks being Nvidia, Alphabet, Microsoft, Amazon, Broadcom, Meta and Tesla. And of course, each of those to some way, shape or form is going to be a play on artificial intelligence, maybe slightly different ways that they're play on AI, but still an AI play at the end of the day.