3 Stocks to Sell and 3 Stocks to Buy for October I October 5, 2026

Thank you. Hello and welcome to the Morning Filter podcast. I'm Susan Jabinsky with Morning Star. Every Monday before market open, I sit down with Morning Star chief US market strategist Dave Sakara to recap what's been going on in the market, cover what investors should have on their radars for the week, and share some new Morning Star research and a few stock ideas. Now, programming note, Dave and I are taping this episode on Friday, October 2nd before market open, so our comments don't reflect any developments in the market after that time. Also, I wanted to let viewers know that you'll be seeing a fresh face on the podcast starting next week. Our colleague Sarah Hansen will be sitting in for me for the next six weeks while I'm out on sobatical. Sarah has been a senior markets reporter at Morning Star for a few years. She's also written for Money Magazine and for Forbes. So, please welcome her warmly and then I'll be back on the podcast in mid- November. All right. Well, good morning, Dave. Now it's October, so let's take a quick look back at September. And I remember you saying >> early in September that this September is historically the worst month for stocks. So how how did that month end? >> You know, honestly, Susan, considering just how negative all the macro dynamics in the market have been, September held up much better than I otherwise, you know, would have necessarily expected. Now, as you mentioned, September on average is usually the worst month of the year. Just have to note though, October has a history of some of the worst individual sell-offs over time. So, I would say not necessarily out of the woods just yet. In fact, I kind of went through some of the history here in the market. So, October accounts for eight of 20 largest single day declines. So, we'll see. We have got third quarter earning season ramping up. So we'll see if we get some of that volatility this month or not. Now as far as how did September do? So if you look at the broad market, so I use the Morning Star US market index, it was down only 6/10en of a percent. When I break that down into the morning style box, I would note that the value category was down the worst. It was down 4.9%. Core stocks down 3% and growth almost break even, only down onetenth of a percent. By capitalization, large stack large cap stocks were up 7/10en of a percent. Midcaps down 4.7% and small caps down 1.8%. And then looking by sector, only two sectors were in the green this month. That was tech and communications. Those were up a little bit over 4.1% each. And the worst performing sectors were the basic materials and financials. You know, those were down over 7% in September. You know, looking down the rest of the list, consumer cyclicals and real estate both down over 6% and utilities, of course, being a proxy for fixed income was down 5.7%. >> All right. Well, speaking of fixed income, you know, you and I talked quite quite a bit in September about, you know, Treasury bond yields um on the podcast. So, how did the bond market end up looking for the month of September? Well, and I guess the real question here to me, and maybe it's a little too early for the Halloween reference, but you know, are equity investors whistling past the bond boneyard at this point? And I think that they may be. So, we'll see how October shapes up. So, if you look at the core bond index, so that's our broadest proxy of the fixed income market that was down 2.6% in September. And of course, it's all about how much interest rates rose across the entire curve. Looking at the yield curve here, the 2-year Treasury was up 54 basis points. It hit 4.88%. The 5-year was up 60 basis points, hitting 5.09%. And the 10-year closed at 5 point uh 5.29%. So, that was a 54 basis point increase just this past month. So, I really think as an investor, you need to keep a close eye on the 10-year. You know, for now, it seems like the equity market kind of just doesn't care about interest rates. So, I think you just want to watch and see if the 10-year can hold that 5 and a/4%. If it doesn't and it continues to keep widening, I think the next stop just is naturally going to be 5 1/2%. And after 5 1/2%, then I think the market starts gearing on a six handle. So again, if we can keep here at that 5 and a/4 or maybe even get a bit of a rebound back down to five, the market will probably be okay with that. But at some point, I think the market's going to start caring about interest rates. We just for whatever reason don't happen to be there yet. >> Okay. Well, let's take a step back from the numbers and and just pan out. You know, what are some of your key takeaways from last month's market activity as we're, you know, we're heading into October? I think we're in an environment which is really kind of one of the most tricky environments for investors really to determine how they want to position their portfolio. So overall the US equity market is undervalued. Trades at about a 10% discount to a composite of our fair values. But as you and I have talked about before, it's a really concentrated area that we see that undervaluation. There's seven meggaap stocks that account for pretty much that entire discount. If you were to pull those out from our calculations, the rest of the market is pretty fairly valued. And of course, those seven mega caps are in some way each, you know, tied to the AI theme. You know, macrodnamics, I think, continue to keep getting worse. We of course have tightening monetary policy that at some point should start slowing economic growth. We have rising interest rates. So, at some point, we will see some investors reallocate into fixed income out of equities. And of course, the higher interest rates go, that decreases the present value of any future free cash flow, whether that's, you know, fixed income or the equity markets. We still have rising inflation. You know, that's continuing to pressure consumers and at some point that will compress operating margins more and more as well. And the economy is still in my mind very reliant on the continued growth in the AI buildout boom. So in this environment, I think kind of the traditional investing, you know, growth versus value. Do I want to be overweight growth? Do I want to overweight value? Or the traditional, you know, how much do I want to have in large, mid, small caps? You know, maybe trying to trade the market around, you know, by sector waitings. I don't think that that's the way you're going to really get the outperformance going forward. I don't think that's the right way to think about it. I think in this environment, if you want to outperform the market, you really need to have a focus on specific stocks and specifically those stocks are going to have attributes that will perform in a market where capital becomes more and more expensive and to some degree more scarce. >> All right. Well, then Dave, let's get against that backdrop, get a little specific. You know, what types of stocks then do you think investors perhaps should be focusing on in October? Well, first I do have to note as far as the AI buildout boom goes, you know, our tech team has not changed, you know, their investment thesis for artificial intelligence and just how much capital spending is going to be behind that over the next couple of years. And when you look at where the undervaluation in the market is today, I think you still want to have exposure, you know, to AI, but specifically that exposure needs to be focused on those companies that are the leaders in AI, whether that's leaders in building new technology or the leaders in those who are actually utilizing AI to build more economic value. So again, those at the forefront of building and utilization is where you want to be. I think you still want to steer clear of, you know, any of those companies that are tied towards, you know, commodity oriented technology items. Those that are really the followers, you know, of the AI buildout boom. I think you want to look for companies that of course have, you know, an economic moat and an inflationary environment. those specifically where the moat provides greater pricing power whether that's you know switching costs you know products that can't be substituted the network effect you know where the more and more usage of their product creates more and more economic value and if you're looking at the economic mo impact of intangible assets specifically I'd be looking for the ones where the intangible assets are going to be based on patents I think you want to be in more defensive oriented sectors those are going to be less economically sensitive and I think You also want to be in shorter duration stocks. So those stocks where the valuation is going to be based more on the amount of free cash flow a company generates here in the short term as opposed to some of those, you know, growth stocks where you're really betting on that company producing a lot of free cash flow far out into the future. I'd look for companies that have very little amounts of floating rate debt. Often times small cap companies have a lot of floating rate debt. So, as interest rates are going up, you know, their costs are going up as well. I like companies that not only have, you know, good, high, solid dividend yields, but those companies that have the ability to continue increasing those dividends at least at the rate of inflation, you know, going forward. And then lastly, I think you want to look for companies that could actually benefit from inflation. So, think about companies that can maybe charge fees to their clients in according to transaction size. So that way, you know, their revenue actually increases at least at that rate of inflation. >> All right. So then let's look at the flip side. Dave, what do you think investors should, you know, maybe be steering clear of in October? >> And sometimes it's more important, especially in a market selloff, what you don't own as opposed to, you know, what you do own. So I think you want to underweight, you know, those economically cyclical sectors that I think would be at a lot of, you know, downside risk. You want to be underweight anything that's a long duration growth stock that's not tied to those economic lead or those AI leaders, you know, that we've talked about. Steer clear of anyone that has, you know, very high amounts of floating rate debt, i.e. the private credit market that we've also talked about in the past and why I have a lot of concerns there. And also steer clear of anything that has negative free cash flow, anything that needs to be financed. So biotech startups cuz I think the capital is going to become more and more scarce you know going forward and of course there are always exceptions you know to those rules the technological leaders in AI that's where we see the value that's who's driving new economic value going forward so whether it's in the hardware space in Nvidia or a broadcom or those that are best utilizing it Microsoft Alphabet Amazon but steer clear of those AI followers those commodity oriented tech hardware companies because I Once you get, you know, the market starting to price in, supply catching up with demand, I think a lot of those stocks have a long way to fall. >> All right. Well, let's turn to earnings. We have a couple of companies reporting this week to talk about. And we'll start with Constellation Brands. That one's been a pick of yours in the past. Stocks having another tough year. So, Dave, do you think anything could come out of earnings that might give a little pop to the stock? Yeah, I mean anything that could just show the stabilization in beer consumption trends is really going to help this one out. I mean beer consumption for whatever reason has been on a multi-year downward trend. In fact, all alcohol consumption in general has also been on a downward trend and you unfortunately we hadn't anticipated that you know in our models which is why these stocks you know have been falling and to some degree we've also reduced our fair values on a number of them you know over the past year as well. You know, as far as Constellation specifically, it is a four-star rated stock at a 35% discount. Good, healthy dividend yield at 3.7%. So, I think the real question for investors, you know, to us is, you know, hey Dave, how do you guys get to your valuation? What's in your model? So, just a quick synopsis here, you know, we're looking for a 1% decline in revenue here in fiscal 2027, and that's on top of an 11% decline thereafter. we're only looking for flat revenue in fiscal 2028 and then from there on out we're only looking for a 2% average revenue growth thereafter. So essentially just inflation and depending on where inflation is maybe even slightly less than inflation growth. Now as far as the operating margins go we are looking for those to improve and normalize you after you had the big hit in revenue last year be looking for them to be able to better balance their fixed versus variable costs. We're looking for $11.76 in earnings for fiscal 2027. So that puts the stock at really only a 9.6 times, you know, forward PE at this point. So considering we're only modeling, you know, a 3.7% average growth from 2030 uh 2028 to 2031, I think that just shows you how little growth you need at this point for the stock to look, you know, attractive. So yeah, obviously you know the market is pricing in further deterioration greater than what we're expecting you know. So any kind of you know showing that alcohol consumption in general and beer consumption in particular is bottoming out and in fact when it starts coming back I think there's a lot of upside here when that happens. >> Now Morning Star's current fair value estimate on Constellation Brands is $173 per share. Um and as you pointed out you know the stocks trading well below that. So, you know, the question I have to ask Dave is, do you think there's an opportunity here ahead of earnings or would you suggest that, you know, investors hold off because it's at a deep enough discount? >> I think you can wait until after earnings and decide, you know, what you want to do on this one. I don't know of any specific catalyst, any hard catalyst that, you know, potentially could come up this quarter that's really going to make that stock, you know, pop that much that, you know, you could miss, you know, the upside here. I think there's enough of a discount that if we do see those signs that, you know, beer consumption is stabilizing and maybe even starting to increase and yes, the stock probably gets a good run after that. But I think that the market sentiment being as negative as it is that you still have time to participate in the upside on this one. I think it's going to probably take several quarters in a row for the market really to give them kind of the full credit for what we see in our model. So, I think it's going to be a while before you really get, you know, all the way up to our fair value estimate. >> All right. Well, Delta's stock is having a great year and shares are trading well above our $50 fair value estimate. Delta, of course, will be reporting this week. So, what are you going to be listening for? >> First of all, with the airline industry, I think you just have to realize that the past couple years, everything that can go right for the airline industry has been going right for the airline industry. you had all the pent-up demand from the pandemic and during that time period you had a pretty slow return of supply that had been taken off during the pandemic. So there was a slow return in the number of routes, slow expansion in the number of planes. So I think that was all a huge benefit to you know the airline industry. Now at the same point in time we also have had this consumer spending shift to experiences away from stuff like running shoes. We'll get to that later. And you know at the other point in time I think you see consumers are willing to spend a lot more on things like you know the premium seating not morning star by the way as far as our travel budget goes. Now you know the other part too that the industry has been making a lot more money on that I don't think people had conceptualized before is that you know they are charging for the checked bags the seat selection the priority boarding the online Wi-Fi food and beverage. So, they've been making a lot more money than what people would have estimated, you know, beforehand. And then, you know, prior to the Iran conflict, we also generally had a long-term decline, you know, in energy prices and jet fuel prices. So, all of this really shaped up well for the airlines to be hitting, you know, just phenomenal margins. Unfortunately, the question is, you how long can all of that last? You know, as you mentioned, Delta stock has had a great rally. It's up 20% year to date. It's up 42% since the end of 2024. But I spoke to Nick Owens, you know, about this one in length. And Nick is our equity analyst that covers, you know, this sector. He thinks revenue has probably peaked at this point. And he also think that margins from here on out probably start to decline towards more normalized levels as we get, you know, more supply coming on and that we'll be able to meet the demand that's out there. I think we also suspect that the additional growth that we've seen from all those ancillary, you know, things that they've been charging for has probably peaked as well. So, when you look at where this stock is trading, it's trading at 16 times our 2026 earnings estimate, which on the face of it probably seems pretty reasonable, but on our mind, you know, we think that's probably too high for an industry and a company that, you know, from here on out is probably stagnant at best. if not necessarily we're looking for declining earnings you over the next five years. >> All right. Well, let's turn to some new research from Morning Star about stocks that have been in the news. And we'll start with Micron Technology. Now, the stock pulled back a bit after the company reported, you know, another blowout quarter. But this was really interesting to me. Morning Star reduced its fair value estimate on the stock by quite a bit. um down from $850 to $700, which is pretty pretty good hack right there. So, talk talk about that cut in the fair value, Dave. You know, what drove that? >> Well, I mean, first of all, for a stock that's risen 555% over the past 52 weeks, I'm honestly shocked at how little this stock moved one direction or the other, you know, after the earnings announcement. In my mind, there's no way that the market has perfectly forecast how much more of this rapid growth we're going to see, you know, for the rest of this year and into next year. There's no way the market is perfectly forecast, you know, when the downturn, you know, starts to starts when it rolls over and starts to decline and how fast, you know, the pace of decline is going to be thereafter. So, this is one I think you really need to keep your eyes on and really understand the potential volatility you can see in this one going forward. You know, as you mentioned, Will Cerwin uh did cut his fair value pretty substantially. You know, in this case, it's a twostar rated stock now trading at over a 50% premium to that lowered fair value. So, just kind of walking through what's going on here. So company's just been experiencing phenomenal growth. Of course, and we've talked about the huge shortage that there is, you know, in memory semiconductors. This company can charge whatever they want to charge. People are going to pay for it. You know, the amount of, you know, margin expansion has just been, you know, phenomenal here. You know, it's just an indication of this. I mean, their revenue was up 380% year-over-year, you know, this past quarter. But the thing that Will is really looking into that I think is really driving a lot of his view is that the quarter overquarter pricing increasing is now increasing at a decreasing rate. And I specifically pulled this quote out of his write up which I think is really the big indication here that he said quote we're in the final stretch of this unprecedented cyclical upswing. So right now we're modeling in that we think the peak amount of growth will occur here in 2028. And in fact we're projecting you know earnings of $250 a share in 2028 which means the stock's actually trading at about four times our 2028 earnings estimate which would be really low other than we think that at that point earnings are going to start to come down and come down pretty quickly. The reason being is that we think memory supply doubles by 2028. We just see the amount that producers are revamping their existing production lines. They're starting new production lines. They're building out new manufacturing facilities that are coming online. So, we're looking for a pretty steep downturn starting in 2029. We're looking for earnings in 2029 of $200, you know, per share. So even in the face of like that higher ongoing memory demand from AI, you're just going to have lower pricing and lower margins really start to hit, you know, the income statement at that point in time. And in fact, by 2030 is when he expects memory will actually be overs supplied at that point. Earnings at that point drop to 125 per share. And by 2031, earnings drop all the way down to $70 per share. So to put that all in context, even in 2031, you know, what are we expecting? We're looking for revenue of 180 billion. Back in 2025, which seems like ages ago, I mean, their their revenue then was still 37 billion. So you were still looking for multiple times higher revenue at that point in time. And earnings at $70 per share in 2031. Still, you know, what is that? nine times greater than what they posted in 2025 when it was under $8 a share. And before 2025, I think they also had negative earnings maybe in like 2023 or 2024. So again, it's not like we're modeling in, you know, the company to go back towards, you know, the type of revenue they had pre the huge AI buildout boom, but I think it's just a matter of at some point in a cyclical highly commoditized industry, you will get that normalization. And that's what our fair value is pricing in today. >> Right. Well, you might have to have Will back on a bonus episode of the morning filter to talk about all of that. You know, you talked with him about Broadcom and that was great. So, uh, we'll have to put Will back on the short list. All right. Uh, McCormack stock pulled back a bit after the company reported what looked like improving results. Morning Star held its fair value estimate on this one at $65. And our analyst remarked in her stock analyst note that the shares looked like a bargain. All right, Dave. So what are your takeaways on McCormick after earnings? >> Yeah, to me it doesn't seem like kind of the slump in the stock price here is due to the fundamentals. I think it's much more due to the situation and as we talked about the situation here being, you know, the agreed to, you know, merging with the unilver food business which we expect to close in 2027. You know, as far as their own results went, I mean, I think they were just fine. Organic sales up almost 2%. you got some good margin expansion, his cost savings, you know, more than offset the amount of inflation that they had. So, I think it's just a matter of the market being very unsure of how to model in this company, you know, going forward. I mean, if you look at the stock price, you know, the chart here shows that they actually held up much better than almost all the other food stocks over time. It's just that once you had that announcement with the merger of the Unilver food business is really when the stock, you know, started to fall. I mean, historically, the spices business has held up much better than what we've seen in the food space in general. So, I think the market is worried that this combination will end up pulling down the results of the combined company, you know, after that occurs. Now, as a reminder of what happens is the combined company will be actually more of a food company than it was just the prior spices business. You know, McCormack shareholders today are going to only own 35% of the combined company. Unilver shareholders will own 55% of the combined company and the other 10% is going to be kept by unilver. Now when I look at our fair value forecast here, you know, Aaron has modeled in the combined company, you know, beginning in 2027 and after she incorporates her estimates for the merger, she's looking for earnings per share in fiscal 2027 of, you know, $367 per share. So, it's only trading at a 12 times forward earnings, you know, based on the combination of the company. She thinks the deal makes strategic sense. She thinks that the mix shift in the synergy will actually allow the company to be able to expand margins. I think it's just that the market doesn't like that it's harder to assess what that combined company will look like because of course now you've got to model you know both individual McCormick by itself and model in you know the McCormick food business which is only part of I'm sorry the unilver food business which you have to break out from the unilver results you know overall. So in this case I think it's probably pretty good that you're getting as high a dividend as you are. I think this might be one you're you're going to have to sit on this stock for a while before the market really starts to see those synergies come to fruition after the merger occurs, which is probably by mid 2027. And then even then, you might need a couple of quarters for the market to get comfortable enough to give the combined company, you know, the full credit to get towards that long-term intrinsic valuation. >> All right. Well, you referred earlier in the podcast to no one buying uh gym shoes. So, let's talk about Nike. of the stocks falling this morning in pre-market trading after reporting earnings and Morning Star put the stock under review and Morning Star doesn't put stocks under review very often. So Dave, what's your initial take here on Nike and then tell us a little bit about what leads Morning Star to do that to put a stock under review? you know, I mean, as we talked about last week and I think, you know, even over the past few quarters and where we've talked about Nike, you know, we really needed to see indications of the turnaround and, you know, as we talked about, you know, until then, you I really just didn't want to get caught in the downdraft, you know, of this long-term, you know, fall, you know, in the in the stock price. And so, when we take a look at the results here, not only is there no sign of a turnaround, it's still in the stage where things are actually getting worse. So I think revenue was down 4%. Companies guiding to being down high singledigit percentages for the full year. So that means you know the next three quarters to average in to get to that high singledigit you know percentage down means that things are still getting worse from here. Taking a look at management's you know earnings guidance uh their guidance here is for $1.15 to $135 you know per share. That's well below our analyst you know pre-earnings forecast of $169 per share. So, as you mentioned, we did put this, you know, under review, and I think it's just a matter of this point, we really need to go back to the drawing board. We really need to re-evaluate what our long-term investment thesis was on this company, re-evaluate what all of our financial projections were. And in fact, personally, I would start with a blank model on this one and rebuild it back, you know, from the bottom up in order to get to, you know, what the fair value or what the long-term intrinsic value of this company is, you know, based on its new performance levels. Now, Carnival was up double digits after reporting all-time high revenue numbers for the latest quarter, and Morning Star held its fair value estimate on the stock at $35 per share. So, what' the market get so excited about? Well, I mean, they beat earnings guidance and then they increased guidance, you know, even further. So, they increased their yield growth expectations to up 3.8% from being up 3.2%. You know, they're looking for cost growth being lower than what they had expected before. So, that's only up 3.5. It was higher at 3.7. And we're looking for, you know, a slight increase, you know, in earnings as well. So, I think they bumped that up a couple of pennies. and the stock's only trading at like 11 times earnings. Now, personally, I have to admit, I've actually never been on a cruise, but people that cruise really like to cruise and this is just an indication that demand res remains extremely strong. You know, even despite the weak consumer sentiment out there, you know, even though we have all the inflationary pressures, volatile geopolitical environment, you know, I mean, they're still seeing great growth in new bookings, you know, coming online. In fact, you know, we noted in our note that they've already booked, you know, 50% of their 2027 capacity at just record pricing levels. And they even talked about experiencing a very solid start into 2028 already with higher occupancy and prices than they would have been, you know, on a kind of equivalent basis for 2027, you know, last year. So, everything is still looking, you know, really good for the cruising industry overall. And I think we've made a couple of recommendations on the cruising stocks, you know, in the past. So, as far as consumer sentiment goes, yeah, consumer sentiment might be really negative, but I think this is a great indication of you have to watch what consumers actually do versus what they say. >> And even after the, you know, the runup in the stock price, Carnival stock still looks really undervalued. So, so you think there's still an opportunity here? >> I do. So, I mean, even after that pop, it's still at a 30% discount to fair value. puts in fourstar territory, almost a 2% dividend yield. Now, this isn't as undervalued as when you and I have recommended Carnival, you know, multiple times, you know, in the past. And to some degree, I think as an investor, it's also going to depend on your outlook for oil and the economy. And not just the economy, but really employment levels and making sure that people have, you know, jobs. So, of course, you know, from where we are, if oil prices slide in 2027, yeah, I think that's going to be a good ongoing tailwind. And if the economy holds up and jobs in particular holds up, that's also a good tailwind. Of course, if either of those are not true, then you know, maybe the stock, you know, takes a bit of a dip from here and you could buy it cheaper in the future. Overall, looking at their coverage here of the cruise lines, uh, you know, I recently recommended Nor is it Norwegian. Um, that one's at a 40% discount. What I like about that is their demographics, you know, of their client base skew higher to income households. So, I think those would hold up better in any kind of downturn. Plus, I think with the stock trading at lower levels compared to our intrinsic valuation, it just naturally has better upside potential. All right. Well, time for our question of the week. Now, as a reminder, if you'd like to ask a question to Dave, you can send it to us via our email, which is the morning filter at morningstar.com. Now, a couple of questions have come up lately about one of your former stock picks, Dave, and that's Clorox. So, you know, there's not one question in particular here. Just, you know, in general, people are looking for some insight into some of the stocks ups and downs this year. Probably more downs than ups and uh whether you still like it as an investment today. >> Well, that was a very polite way, Susan, of telling me just how much people are calling me out on the carpet with this stock pick. So, it is a five-star rated stock. It trades at almost, you know, half of our fair value, so a very large discount. But I think this is one of those situations where it just shows that even though you think something might be cheap, cheap can still always get cheaper. And I think this is also a good example of, you know, personally why I recommend if you're investing in individual stocks, starting with that, you know, partial position and keeping that dry powder. So that way if a stock does sell off, you can then dollar cost average in, you know, to the downside if your long-term investment thesis, you know, is still in place. So in this case, you know, the company last quarter, you know, provided fiscal 2027 guidance. They're looking for organic sales growth 3.5 to 4.5%, which I think in this environment is pretty good. They're looking for earnings, you know, per share to be in a range of 570 to $6, you know, per share. Means the stock's only trading at 14 times that forward earnings guidance. You know, our expectation, our projection for earnings for 2028 is $6.56. So again, only 12 times fiscal 2028 earnings estimates. So what that tells me is that the market is obviously pricing in, you know, further declines as opposed to what we're expecting here, which is for stabilization and, you know, return to growth. So really what's happened with Clorox, they've had a rough number of years. I mean, actually going all the way back to, you know, the beginning of the pandemic has really messed up kind of their operating performance. And I think a lot of investors have just thrown in the towel and just gotten discouraged with this situation. So when you think about it, you know, over the past six years, you had the huge surge in sales early on during the pandemic, but then of course you had the detocking that occurred thereafter. We had the negative impact on their earnings from skyrocketing inflation in 2021 and early 2022. Then unfortunately the company got hit by a very costly cyber attack in 2023 that really hampered their operations took some time to recover from and then most recently they changed to a new ERP system. So then that led a lot of customers to pre- buying inventory prior to them instituting that change. So then we also had kind of that pull forward in sales and then detocking which we're now finally you know getting past that. But of course, now we've got higher oil prices leading to higher resin prices, higher transportation costs, which is hitting them right now. So what Clorox really needs is just a good, boring, uneventful operating environment for performance to normalize and just get back to what I would consider to be that preandemic, you know, operating conditions. Spoke to Aaron at length on this one. you know, she doesn't think that the brand or their portfolio brands, you know, have been tarnished. Really doesn't see anything different in the operating environment as far as kind of the normal trade-off between, you know, branded items versus private label items. I mean, that is always been occurring and it doesn't look any different to her now than it has in the past. So, in our model, we are forecasting an operating margin for fiscal 2027 to bounce up to 15.1% is 14.4% 4% last year, but that's still well below what I would consider to be that 8-year average prepandemic of 18%. So, we are looking for ongoing gradual operating margin expansion from fiscal 2027 all the way out to 2031. And that would be the point we finally get back to the prepandemic average. So, by putting that into our model, we're looking for a 5-year compound annual growth rate for earnings of 12.5%. And when you look at that growth rate versus the current multiples, we think the market is just discounting that way too heavily today. >> All right. Well, great background, Dave, but at the end of the day, would you say Clorox is still a buy? Would you still call it a pick of yours? >> It is. And when I look at it and I look at it a a couple different perspectives. So, we talked about the multiples. We talked our intrinsic valuation based on their discounted cash flow. But you know, one of the things I also look at that we don't talk about very often is I look at an enterprise value to Ebada multiple. So essentially enterprise value is just the total value of the company. It's the value of the debt plus equity less cash. And I compare that to IBADA which is a proxy for the amount of free cash flow. And the reason I look at that multiple is it's often kind of a a quick way to look at, you know, how attractive could this company be to, you know, private equity or even strategic buyers as a buyout target. So if that multiple starts to get too much lower from here, I do think it could be a target. So this could be one of those situations where, you know, you start off with that partial position and then you need to set levels where you're going to buy more stock, you know, to the downside. In the case, the way I'm looking at it is I would set that next buy level being for each multiple of enterprise value to IBIDA being lower. So every multiple lower would be about $11 down, you know, in your stock price. So in this case, your next purchase price would be, you know, about $70 a share, which means that you'd be buying that next round of stock at 9.5 enterprise valued EBA, which is also a 12 times forward, you know, PE multiple. So the thought process here is that as that multiple declines, it becomes a more and more attractive, you know, for being a buyout target. So if someone does end up identifying this company and taking a run at it, you know, you've been able to buy, you know, more stock, you know, to the downside and collect that premium once it occurs. Now, in the meantime, you're collecting a 6.1%, you know, dividend yield. I spoke to Aaron about the dividend yield specifically. She's confident in their ability to be able to maintain that dividend. In fact, they still have enough free cash flow left over after that dividend payment to be able to do some small share buybacks, which of course, you know, if you're buying back stock at a 50% discount to its intrinsic valuation, that's just very accreative to the economic value of the company overall over time. >> All right. And Dave's referred to Aaron a couple times. Aaron Lash is the analyst who covers Clorox and you can read her full report on it on morningstar.com. All right. Time for our stock picks portion of the program. And because it's a new month, Dave has brought us three stocks to sell and three stocks to buy in October. So, we'll start with Dave sells this week. And the first stock to sell is SpaceX. Now, Morning Star awards SpaceX a narrow economic moat rating and pegs it with a $62 fair value estimate. So, Dave, is is the sell call on this based strictly on valuation or is there more to it? It is based on valuation, but there is more to it, you know, as well. And I'm already prepared for the amount of hate mail I'm going to get in, you know, for talking about SpaceX being a sell. But when I think about the investing environment today that we talked about at the beginning of the podcast, this one in my mind is kind of emblematic of everything that you really want to be in avoiding, you know, in today's, you know, environment. Now, I talked about you want to steer clear of those stocks that are going to be economically sensitive. Now, I will admit this one is not economically sensitive per se, but when you look at the valuation and especially what the market is incorporating in where it's trading today, you know, the market's incorporating, you know, the value of a lot of businesses that aren't actually even up and running yet. Some of those businesses which we just don't think using today's technology are anywhere near being, you know, economically viable. So if any of those, you know, don't end up coming to fruition, you know, that's a big hit in where that stock is, you know, compared to where it's trading today, you know, very long duration stock. I mean, the value of the stock is based on free cash flow that's going to be far far out into the future, you know, past, you know, even our fiveyear, you know, forward forecasts. That valuation is just based on huge growth expectations for pretty much every part, you know, of their business. You know, as far as free cash flow goes, I mean, according to our estimates, we think they're going to be free cash flow negative through at least 2029, if maybe not even through, you know, 2030. So, that tells me they're going to have to raise, you know, a lot of debt in order to be able to build the business the way they want to build the business. May even have to raise, you know, new equity at the same point in time. So, their cost of capital, it's just going to be increasingly more and more difficult to be able to raise that capital. And the capital they raise is just going to be increasingly more expensive as well. Plus, you still have that huge technical overhang of equity from the IPO that's currently locked up. You know, we have different lockup periods that are expiring over the next couple months. There's just going to be a lot more equity supply coming on the market. Then lastly, you know, one thing I don't think people talk enough about with SpaceX and, you know, Tesla as well, you do still have a huge amount of keyman risk here. So, you know, god forbid anything were to happen to Elon Musk, I think that would be a huge hit to the stock or if he just decides there's something else out there he wants to spend his time on, other businesses he wants to start, other industries he wants to try and disrupt and he's not paying as much attention here. I think that keyman risk is probably not necessarily correctly valued in this situation as well. >> All right, Dave, your second stock to sell is Robin Hood. Now, Morning Star assigns it a $57 fair value estimate and a narrow economic moat rating. So, why is this one a stock to sell in October? >> Well, first of all, the valuation. So, one star stock trades at double our fair value. I mean, you do mention that we assign a narrow economic moat. I think there's a lot of debate about, you know, the economic moat in this one and how strong it is. It's a midcap growth stock. I mean, to some degree, the midcap growth category, I think, has probably gotten overextended. And of course being a growth stock means that it's naturally also a very long duration stock which if people start pricing in higher interest rates is subject to a lot of downside risk there and you're not even getting paid you know a dividend on this one. Now taking a look at our model we are looking for pretty strong growth. I mean we're looking for a 5-year compound annual growth rate for revenue of 18%. Little bit of margin expansion gets you to a 21% compound annual growth rate for earnings. But you know half of the valuation of this company is in what we consider our stage three part of our discounted cash flow model. So that's the perpetuity value you know of the company when you get out there. So again when you think about duration what is duration? It's the rate of change in price based on a rate of change in interest rates. So in my mind this one is very subject to downward revisions if interest rates you know still go up from here. When I look at the underlying business, you know, well over half of the business, half the revenue is coming from, you know, individual investor stock trading. So if we saw any kind of, you know, sell off, you know, in the market, you know, the individual investors, their clients, you know, start losing money in the market, then I could see, you know, fewer and fewer investors, you know, trading. And then lastly, I think the big question with this company is can they really grow enough, diversify away enough to be able to compete with more established brokerage companies and asset managers. And in order to do that, they need to get further and further away from kind of that baseline, you know, individual investor trading, which to some degree, the way they have it on their platform is in my mind more gaming than it is, you know, necessarily long-term investing. But I think in order to assume the company's worth anywhere near what it's trading in the marketplace, you have to have huge growth estimates in the amount of brokerage assets that they bring on board. Bringing on board, you know, a lot more retirement deposits. Company has to do a lot more securities lending. And you also have to make some very large assumptions in the amount of revenues that they drive from crypto trading as well. So, I think we actually have some pretty strong revenue and earnings growth estimates in our model, but yet the market is still double what our fair value is. >> All right. And the last stock on your list of sells is Garmin. Now, Garmin earns a narrow economic mo rating, and we think shares are worth $231. So, why is this one a stock to sell? >> Well, I mean, just from a valuation point of view, trades at about a 24% premium, more than enough to put it in two star territory. Now, personally, I remember I had a Garmin GPS, you know, from my car, but that was over 15 years ago. And to be honest, when I was doing my searches here, I didn't even know this company was still, you know, up and running. Now, it is in the large growth category, long duration stock. In my mind, I think that based on their current business lineup, I think they are going to be a very economically sensitive company going forward. So, what do they still do today? They make GPS enabled hardware and technology in five different types of product lineups. Those lineups being fitness, outdoors, automotive, aviation, and marine. So, for example, like in that fitness division, a lot of their earnings are made from smartwatches, fitness trackers. You know, they make money with their communications equipment, specifically the marine and aviation navigation equipment. But I'll also note there even there that's really much more for the recreational market than as opposed to the commercial which makes me think that it's very sensitive to you know consumer spending. Now I pulled up the model and I'll have to admit I was very surprised at just how strong earnings growth they've had over the past 3 years. I mean it averaged you know over 21% which I would not have suspect but when I look at our model and look at our analyst write up we just don't forecast that to last. whereas I think the market is looking for that type of earnings growth going forward. Our 5-year compound annual growth rate for revenue and earnings just a little bit over 8%. So I mean that is you know inflation plus you know some product expansion from here. But yet the stock is trading at 29 times earnings. So this would be one I think it would be very subject to a significant multiple contraction if that growth doesn't meet those investor expectations over the next few years. >> All right. Well, let's move on to your stocks to buy in October. And the first one up is S&P Global. Give us the highlights. >> So S&P is a four-star rated stock, 27% discount, about a 1% dividend yield. We rate the company with a medium uncertainty and a wide economic moat. That wide economic moat being based on the network effect, switching costs, and intangible assets. >> Now S&P stock is down quite a bit this year, though, you know, it does look like it's up off its lows. So, why do you like the stock given today's market environment? >> Well, first of all, when you talk about like the stock being down as much as it is this year, I think to some degree it just got pulled into that software category. And we've talked about why software stocks have sold off as much as they had this year. A lot of concerns about AI disrupting or displacing, you know, software and some of these type of businesses, which we just really didn't see in our long-term investment thesis. Markets starting to come around to that view. So these stocks have to some degree bottomed out and been recovering over the past month or so. Now as far as like S&P Global specifically, when I look at the rating agencies, I think the rating agencies have some of the widest and deepest moes, you know, in the finance business in and of themselves. When I look at this company, you know, they have over 30% net income margins. I mean, that puts it well into the top quartortile of the S&P 500. But the thing that that also does is because so much of the value of the company is at such large margins, it also means it's going to be a very low duration stock. I think S&P as a rating agency is going to be a lot less economically sensitive than you're going to see for, you know, the other average, you know, companies out there. And then I also like the way that the business is structured on the rating agency side. So rating agency fees are charged as a percent of the amount of debt issued. So when you think about, you know, how much money, how much debt, you know, the hyperscalers, you know, need to raise end of this year and even in 2027, I think there's a lot of upside potential and rating agency fees there. I know there's estimates of, you know, up to a half a trillion of new debt by the hyperscalers expected to be issued in 2027. So I think you could see a pretty good earnings boost from that here in the near term. I mean the index providers. So you have the S&P 500 index but all their other indices as well. They also charge a percentage fee of assets under management. And then lastly S&P has a lot of proprietary data which in a world of you know increasingly more and more general AI. That proprietary data becomes increasingly more valuable. S&P is one of the longest, you know, dividend growth track records in the S&P 500. So, I'd like that you'll at least be able to keep up with inflation, you know, with those dividend increases. And then lastly, when I take a look at the model to get to our discounted cash flow, I think you've got, you know, pretty reasonable assumptions in the model. We're only looking for like 5% topline growth over the next 5 years. Little bit of operating margin expansion only gets us to 10% earnings growth. So in our model, you really don't have to model in like really kind of any strong or unreasonable growth assumptions to be able to get to a stock that trades at a pretty deep discount. >> All right, Intercontinental Exchange is your next stock to buy in October. So run through some of the key metrics on this one. >> So it trades at a 17% discount to fair value. It's enough to put in four-star territory, 1.4% dividend yield. We rate the company with a low uncertainty rating and a wide economic moat. their wide economic mode being based on cost advantages, network effect, and intangible assets. >> Right now, the stock's down for the year, but it has enjoyed a nice rally during the past couple of months after announcing that it was going to be acquiring market access. So, Dave, why do you like the stock today? >> Well, I mean, overall, when you think about their business, they own some of the world's largest and most profitable, you know, futures and derivative trading exchanges. You know, they also have very high net income margins over 30%. So again, that's going to make this a much more, you know, lower duration stock. And I like the lineup they have. When you look at the network effect, the cost advantages, the intangible assets, all leads me to thinking this company has very good pricing power. I also suspect that this company would be a lot less economically sensitive than the average company. You know, trading activity for institutional investors often increases during periods of higher volatility. I think they'd be a beneficiary from higher inflation. If you have much higher inflation, then you have, you know, an increase in the number or an increase in the volume of derivative contracts that trade in order to be a higher dollar, you know, volume or a higher dollar value. You know, it's a good dividend grower. I mean, they have exchange, you know, specific clearing and collaterization requirements, which really creates, you know, barriers to entry from AI. And like S&P Global, they also have a lot of proprietary pricing data which becomes increasingly more valuable in, you know, an area where AI's trade on public data. Modest assumptions, you know, in our model, but yet still very undervalued. >> All right, Dave, your final stock to buy for October is Alliant Energy. So, give us the bird's eye view on it. >> So, Alliance stock is a four-star rated stock at a 17% discount to fair value, 3.4% dividend yield. We rate the company with a low uncertainty and a narrow economic moat and pretty much like every utility that narrow economic moat is based on efficient scale. >> All right. So you know it's a pretty attractive discount. So bes besides valuation why is all a stock to buy in today's market? >> Really two aspects to it. So the first aspect is I wanted to have a utility stock as a buy because the utility industry or the utility sector has gotten hit very hard with the increase in interest rates. In fact, if I look at the returns for the Morning Star utility index, it's actually down a lot more than what the fixed income index is. But yet, to me, it has a lot of benefits of potentially, you know, floating interest rates upwards because dividend payments typically will move up at least with the rate of inflation, you know, over time. Whereas with fixed income, you know, you get stuck with a a set coupon. So, you don't have kind of that inflation, you know, protection, you know, to the upside. Now, as far as Alliance, you know, in particular, it's the parent of two different regulated utilities, Interstate Power and Light, Wisconsin Power and Light, and to some degree, you know, every utility is a play on AI, but we think this one is particularly well positioned. Our analyst team thinks that, you know, the amount of earnings growth here is probably higher than what management is currently guiding to. In fact, we're looking for accelerating earnings growth after 2027. So, I think that's going to play well here. So I think it's just a matter of they have a lot of good growth dynamics based on the number of data centers in construction in their market area. Now a couple more data centers that are already signed for and will be built over the next couple years as well as some you know attractive you know areas that we see even more data centers you know being built. So again a lot of additional growth you know even beyond 2028. And in this case, you know, when I look at the regulatory environments that they're in, we also think that those regulatory environments are very constructive for the equity perspective. >> All right. Well, thanks for your time this morning, 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. Be sure to tune in next Monday for the Morning Filter podcast at 9:00 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.