5 Stocks to Buy That Are Sheltered From AI Disruption

Key Takeaways

• What impact the Iran war may have on the consumer, the economy, and Fed policy this year.
• Why to watch Micron Technology’s MU earnings this week.
• 3 big companies that’ll be disrupted by artificial intelligence—and why Microsoft MSFT isn’t one of them.
• Takeaways from earnings season.
• Stock picks: 5 AI-resilient companies whose stocks look undervalued.

In this episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss what the oil futures chain is telling investors today and the impact an extended conflict could have on the consumer, the economy, and Fed policy. They also cover what to watch for from this week’s Fed meeting and why to watch Micron Technology’s earnings. They unpack new research from Morningstar about AI disruption and economic moats and walk through economic moat downgrades on Adobe ADBE, Salesforce CRM, and ServiceNow NOW. Tune in to find out why Microsoft’s economic moat looks AI-resilient and which two companies’ competitive advantages should be strengthened by AI.

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They discuss Oracle’s ORCL pop after earnings, some things that stood out from earnings season, and whether Campbell’s CPB is a buy after reporting. This week’s stock picks are all companies whose wide moat ratings look solid in the face of AI disruption and whose stocks are undervalued.

**Got a question for Dave? Send it to themorningfilter@morningstar.com. **

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Dave’s Complete Archive

Latest Stock Market Outlook

What AI Means for Software Companies’ Moats

Transcript

Susan Dziubinski: 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 what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.

The War & the Market

Well, good morning, Dave. Let’s talk about the Iran war and the markets, starting with oil. So, where are oil prices, as we’re taping this Monday before market open, and what’s the oil futures change showing in terms of how long the war is expected to last?

David Sekera: Hey, good morning, Susan. Now, actually, before I get into what oil prices have done over the course of the weekend, I just want to make sure people understand crude oil future contracts to some degree. So, what I want to read here on screen exactly when the last trade date is. Crude oil futures contracts expire on the third business day prior to the 25th calendar day of the month preceding delivery month. So, what does that mean? Well, if you look at the April 2026 oil futures contract, the last trade date for that contract is March 19. And then next month, the last trade date for the May 2026 contract is then April 21. So if you take a look at the April 2026 oil futures contract, it’s about $97 this morning. That’s a dollar lower than where they were last Friday, but it’s up still $2 from where they were Monday last week.

Now, as we’ve discussed, it is also important to take a look at the future’s strip. So what I’ve seen over the past week is the price for the May contract has increased more than the April contract. So the spread between those two months has now declined to about a dollar from well over $3 last week. So what that actually means is that the market is pricing in a higher probability hostilities are going to last longer into April than what was priced in the prior week. Now there’s still a pretty big drop between the May and the June contract that’s over $4 spread between those two. So the market is still pricing in a relatively high probability that the hostilities will have moderated by the June contract last trade date, which then is May 19.

So taking a look at the future prices here, I mean, they do decline every month through the full year, so if you look at the December contract, it’s significantly lower than the near term, but what I’d say is, if you look at that contract compared to where it was pre-Iran war beginning, the December contract is still 11 and a half dollars higher than preconflict. Now personally, I doubt the market is pricing in hostilities. They’ll still be ongoing when it expires in November, but I think what the market is pricing in is still a much higher probability that there could be damage to oil-producing facilities, maybe infrastructure damage that hasn’t been repaired by then, or at least some other types of disruptions that’s going to keep all of that oil production offline through the end of the year.

**Dziubinski: **All right. So then given what the oil market is suggesting in terms of duration here, what do you think the impact of the war can have on the consumer and the economy? At what point would you expect the impact to be significant?

Sekera: Well, and to some degree, I mean, there already is an impact even today. The higher oil prices are flowing through to the pump. If you look at gasoline prices, the national average is up over 60 cents per gallon just over the past two weeks. And with oil where it is, I expect gasoline prices for the next couple weeks will still continue to keep going up even if oil prices are steady here, because again, it takes time between pumping the oil out of the ground, sending it to the refiners to crack it into gasoline, and to actually get to the gas stations. I think that’s going to boost headline inflation for at least the next couple of months. Now, as far as when that impact is going to really hit the consumer, I spoke with Erin Lash at the end of last week.

Erin, of course, is our sector director for the equity research team for consumer. Now, her opinion is, at this point, she just isn’t that concerned just yet that higher prices are changing consumer habits. Now, of course, the caveat here is a concern really will start to be elevated if gas prices remain elevated after Memorial Day. Of course, that’s when you have driving season really starting to begin, and if gasoline prices are still elevated at that point in time, it will then flow into lower discretionary spending on activities such as like eating out or summer vacations, and that’s when you’ll see the main impact to the economy.

**Dziubinski: **Now, I know there was some other news that came out last week that you think could cause some volatility ahead, and that news was tariff-related, right?

**Sekera: **Exactly. So if you remember back at the beginning of the year in our 2026 Outlook, we noted a number of different key reasons why we thought 2026 would be much more volatile than what we saw in 2025. One of those key reasons would be the resumption of all the trade and tariff negotiations. Now last week, the administration did announce new investigations being initiated under Section 301 of the Trade Act, and investigations will then be used to kind of reinstate some of the tariffs to be able to replace those that were ruled against by the US Supreme Court. Now, in my opinion, I think this news was overlooked by the market just because of all the headlines surrounding Iran. And I think as those investigations come to fruition later this year, we’ll start to see that cause more market volatility potentially as early as this summer, but more likely this fall.

Fed Meeting Expectations

**Dziubinski: **And now we also have the Fed meeting coming up this week. Now, of course, no one’s expecting an interest rate cut at this week’s meeting, but what’s the market currently pricing in as far as rate cuts go for the rest of 2026, especially surrounding the uncertainty around the war now?

**Sekera: **Yeah. So right now the market’s essentially pricing in a zero probability in either the March or the April meeting. We’re looking at a 25% probability at the June meeting and a 33% probability at the July meeting. Now, as we’ve talked about before, I didn’t expect that there would be any change until the new Fed chair took over. So in my mind, this really isn’t any different than what we’ve already expected. To me, what’s actually much more interesting is how the probability of no change at year-end has actually changed over the past couple of weeks. So right now, there’s almost a 40% probability of no Fed fund rate cut at the December 2026 meeting, whereas a month ago, that was only a 3% probability of a cut. So the market, much more concerned that there may be no cuts to the fed-funds rate through the end of this year.

**Dziubinski: **All right. So what would you expect Fed Chair Powell to say during his commentary regarding what impact the war could have on Fed policy and interest rate decisions this year?

**Sekera: **Oh, personally, I think he’s going to try and say as little as he can get away with during the press conference afterwards. Now, all kidding side, I think he’s going to be asked a lot of questions about the impact of oil on both the inflation and the economy. And like I said, I think he’s going to try and get away saying as little as he can. So I think he’s just going to fall back on kind of the standard template language that you’ll often hear from him. A lot of phrases such as that they’re “monitoring the situation,” “they’re watching long-term inflation expectations.” They’ll admit that if oil prices remain higher for longer, it could have a negative economic impact, but it’s unclear exactly how much that will be at this point in time. Ultimately, it’s all going to come down to that the Fed will state that they will act accordingly if needed to support their dual mandate.

Of course, that dual mandate is to target inflation at 2% and be able to put together an economic environment that maximizes sustainable job employment.

Earnings: Micron Technology

**Dziubinski: **All right. Well, we have earnings season winding down, but there is one company reporting this week that you’re watching, and that’s Micron Technology MU. Why is this one on your radar, Dave?

**Sekera: **Well, interestingly, our equity analyst just increased his fair value last week to account for just the insatiable near-term demand that he’s seeing for memory. But even after that fair value increase, that stock’s still trading at a 50% premium to our fair value, puts that well into 2-star territory. And really the increase in his fair value was that we’re now kind of lengthening out the demand cycle for memory. Specifically, we’re looking for this high demand cycle to last at least the next two years now during the AI buildout boom. I think the real question for investors will be, how long will this demand exceed supply and how high are prices going to get before that new supply comes online? So we’re forecasting demand in margins to peak now in 2028, but we are expecting that in 2027 and 2028, new capacity will come online.

So in our model, we are forecasting a downcycle beginning in 2029. At the end of the day, memory in and of itself is just a commodity-oriented product. Yes, there is a shortage today. We’re seeing customers paying whatever they have to pay just to be able to get that product. However, it will come to an end as that new supply comes online. And once the market gets that visibility as to when margins and prices will start to fall, I think that this stock will get hit especially hard. So I think this is one of those situations that, until that happens, I think we might be wrong for a while before we’re right.

AI’s Impact on Economic Moats

**Dziubinski: **All right. Well, let’s pivot over to some new research from Morningstar. Now, Morningstar recently reexamined the economic moat ratings of about 130 companies that our analysts thought could be at risk of disruption from AI. So Dave, what was the impact of this review, and why did Morningstar do it now?

Sekera: Well, before we get into the impact, I just kind of want to remind people what exactly is an economic moat rating. And in my mind, it’s a very Warren Buffett type of analysis. Does a company have long-term durable competitive advantages such that they will be able to generate excess returns on invested capital over the weighted average cost of capital? And if so, how long will they generate those excess returns before they get competed away? So if we rate a company with no economic moat, that means that even if they’re generating excess returns today, we think those excess returns will get competed away pretty quickly, at least within the next five years. If we look at a company that has a rating of a narrow economic moat, that means we expect that they’ll be able to generate those excess returns for 10 years before they get competed away.

And a company with a wide economic moat, we expect to be able to generate those excess returns for at least the next 20 years, if not more. So then the question is, well, why is this that important? So I’d just say, generally, the longer you expect a company to be able to generate those excess returns, the more that company is worth today, i.e. higher stock price, or if those returns are getting competed away more quickly, then the company’s probably going to be worth less today. Now, the economic moat analysis is just a continually reiterative process. And I’ll just say that, to some degree, it’s just with the pace of change, especially because of AI, increasing, it is getting increasingly harder to determine just how long some of these long-term durable competitive advantages will last before they get competed away. So we reviewed the moat ratings of all of those companies that we thought could potentially be impacted by artificial intelligence, and specifically not only looking at their economic moats in general but really specifically looking at the moat sources in particular.

As a reminder, the five moat sources we look toward are cost advantages, efficient scale, intangible assets, network effect, and switching costs. Overall, the total impact across our global coverage was that we did lower our economic moat rating on 40 different companies, but we also increased our moat rating on two different companies. Now, to put all this in perspective, we do cover over 1,652 companies globally. So in the grand scheme of things, not that many companies that we changed our moat on, but there was definitely a concentration in where we lowered our economic moat, specifically in the enterprise software sector, IT services, and payroll sectors. And then the two upgrades we had were in the cybersecurity industry. So really, what’s the overall takeaway here? I think it’s just admitting that it’s getting increasingly harder to forecast long-term earnings over longer time periods. I suspect that there will be a lot wider dispersion of earnings and returns over time, but at the end of the day, a lot of these stocks are those of the same firms where the prices have fallen to the point where they’re trading at very, very low valuations compared to where they’ve traded in the past, significantly below our valuation of what the long-term intrinsic value of the company are.

And at this point, they’re trading a very wide margin of safety from that long-term intrinsic valuation, even after reducing some of the fair values in light of the lower economic moats.

3 Downgrades Due to AI

**Dziubinski: **All right. Now, those in our audience who want more specific details about the impact of AI on economic moats can tune into our sister podcast, which is Investing Insights, this coming Friday, March 20. Our colleague, Ivanna Hampton, will be sitting down with Morningstar’s director of tech stocks to unpack it all.

All right. Now, Dave, let’s talk about some of your prior picks that have seen their economic moats downgraded from wide to narrow due to the threat of AI. And those picks are Adobe ADBE, Salesforce CRM, and ServiceNow NOW. So talk about them.

**Sekera: **Yeah. So all three of these stocks are still rated 4 stars. Just going down the list here, Adobe was the most negatively impacted of the three. We lowered our moat rating to narrow from wide. That led to a pretty substantial decrease in our fair value estimate by 32%. That fair value is now at $380 a share, but the stock is trading at a 28% discount to even that lowered fair value. ServiceNow, we lowered our moat there to narrow from wide. That led to an 18% decrease in our fair value. Our fair value estimate per share right now is $165. It’s currently trading at a 30% discount to that fair value. And then, of the three, Salesforce was the one that was least impacted, so we lowered the moat there to narrow from wide, but we only decreased our fair value by 7% to $280 a share. That one’s trading at a 31% discount.

Of the three, I think this is the one that’s probably most attractive in our mind. I think it’s the one that Dan Romanoff, he’s the equity analyst that covers these companies, still has the most confidence in over the long term. Generally, and I think we’ve spoken about this a couple times, the investment thesis on software overall is that they will evolve their business models over time. They will incorporate more AI usage, be able to provide more economic value to their clients, and will end up changing to more of a consumption-based model as opposed to a seat-based model. Over the next few years, we think that companies will end up adopting more agentic solutions within that third-party software, and companies and their clients aren’t really going to try and vibe-code their own software systems. We still see a place for third-party software over the long term, even in an environment of increasing artificial intelligence usage.

No Downgrade for Microsoft

Dziubinski: Now, speaking of Dan Romanoff, he’s Morningstar software analyst, and we’re providing a link in the show notes to an article that Dan wrote talking a bit about these moat changes. Now, there is a recent software stock pick of yours whose moat didn’t get downgraded, and that was Microsoft MSFT. So talk a little bit about why Microsoft’s wide economic moat remains intact in the face of AI, and then tell us whether Microsoft remains a pick of yours today.

**Sekera: **Sure. The wide economic moat on Microsoft is really based on four of the five economic moat sources. We think their economic moat is bolstered by switching costs, network effects, cost advantages and, to some benefit or some degree as well, intangible assets. I mean, just a couple of quick examples here as far as switching costs go, I mean, they have very deep product integration among their different clients and customers. They’re very broad portfolio. We think that overall that strengthens the amount of customer stickiness that they have over time, i.e., meaning that it’s more expensive for companies to try and switch over to other different types of products than their own, as opposed to just continuing to keep using Microsoft products. Looking at some of their individual products like Azure and Office, we think those ecosystems drive very powerful network effect. The network effect, meaning that the more people that actually use a system, the more valuable it gets to all of the people using that product.

And then to some degree, I think the wide moat and reiterating that wide remote rating is also just a result of the very diversified product portfolio they have of different types of businesses. Yes, some of them may be negatively impacted over time from AI like Office products, but I think that would be more than offset by positive impacts to things like Azure and Copilot and some of their other AI businesses. Overall, the stock’s trading at a 33% discount to fair value, puts it in 5-star territory. And overall, I think it’s still Dan’s top pick.

Upgrades in Cybersecurity

**Dziubinski: **All right. Now you mentioned that two companies received economic moat upgrades during this reevaluation. Both were in cybersecurity, which is an industry you’re bullish on, and the stocks are CrowdStrike CRWD and Cloudflare NET. So talk a bit about how AI may disrupt cybersecurity in a positive way.

**Sekera: **Well, AI overall, we think makes cybersecurity actually increasingly more important over time. And when we look at the amount of spending on cybersecurity that we’re forecasting, we think that also increases over time, just based on more and more AI deployments out there. So again, the more AI deployments you have, the more AI agents that are out there, just increases the attack surface area that other people using AI can go after. I think you just have increasingly more-complex threats over time. And the network effect of these companies actually strengthens the economic value, strengthens the economic moat of these companies. For example, the cybersecurity companies can monitor these threats across all of their different clients, across all of their different customers. And when they see some sort of threat, they can then deploy those type of countermeasures across all of their clients, all of their customers, across all of their platforms very quickly.

And it’s also an area, too, where we’re seeing pricing models already starting to switch to being more consumption-based as opposed to being per seat pricing. Now, I don’t want to talk too much about cybersecurity right now. We are going to be conducting a bonus episode of _The Morning Filter _this week in which I’ll be interviewing Ahmed Khan. He’s our senior equity analyst on the technology team that covers the cybersecurity industry, and we’ll spend a lot more time getting into a lot more depth about the economic moats, as well as what we see going on in the industry overall, and even highlight a couple of his favorite or his top stock picks today.

Oracle Earnings Recap

Dziubinski: Keep an eye out for that episode. We’re hoping to drop it by the end of this week. Anyway, onto some other new research from Morningstar. We saw Oracle’s ORCL stock rally after earnings last week, and Morningstar raised its fair value on the stock by $5 to $220. Dave, any thoughts on the earnings report, the company, or the stock?

**Sekera: **When I think with Oracle, you just have to remember, at least in my opinion, I think this is a pretty speculative situation. And when I think about the value of this company, it’s not so much necessarily in its current business line and what it’s doing today, as much as it’s in its early stages of trying to really reshape its business overall. They want to become a hyperscale cloud infrastructure provider for artificial intelligence, and that’s why we have a Very High Uncertainty Rating on this stock. And it’s also why I think you’re going to see, and we’ve already seen, very large swings in where that stock trades, as well as the actual valuation of that stock, because small changes in whatever your long-term assumed growth rates and margins will have outsized impacts on valuations in this situation. So currently, our base case assumes AI infrastructure will continue to grow, looking for very high demand there.

Our base case assumes that the company is able to reach its $225 billion revenue target by fiscal 2030, but to put that in perspective, Oracle did $17 billion of revenue this past quarter. So if you look at it as a last quarter annualized kind of run rate, that’s 68 billion as opposed to that 225. So again, really have to expect some huge growth rates over the next couple years as this company transforms itself to be able to hit their revenue target.

Earnings Season Takeaways

Dziubinski: Earnings season is, of course, winding down, at last. Dave, do you have any key takeaways from this season in particular?

**Sekera: **Earnings season feels like so long ago at this point, Susan. In fact, looking at the calendar here, we’re only one month away from first-quarter earnings season to starting with the big banks in the middle of next month. I mean, the takeaways, I mean, I don’t think there’s anything too surprising here from kind of that consolidated market level, revenue and earnings, relatively strong growth, guidance generally positive. I’d say a lot more people talking about heightened uncertainty surrounding the impact of tariffs and slowing economic data, but really at the end of the day, and we’ve talked about this a couple times, it’s still all about the AI buildout boom, the hyperscalers, capex spending plans. When you look at the big five there, Meta META, Alphabet GOOGL, Amazon AMZN, Microsoft, Oracle, if you take their capex spending plans, I think it’s over at $700 billion that they’re looking to spend this year. That’s an increase of $290 billion over what they spent last year.

So anything that’s even tangentially related to the AI buildout boom, still giving extremely strong guidance for the year. I think it’s most interesting, though, is to look at how stocks in general as well as stocks in certain industries have performed since then. So if you look at the AI leaders, a lot of those stocks just look to me like they’ve run out of steam, they’ve run out of momentum. A lot of them like Nvidia NVDA have really gone kind of nowhere since last fall, just been trading in kind of a general range. In my mind, I think the market’s already priced in all of the earnings growth, all of the revenue growth this year as well as next year. And I think the market is just getting to be increasingly skeptical about the amount of growth they’re willing to give these companies in years like three through five.

And part of that, I think, is the reason why we’ve seen this rotation into value stocks into more defensive-oriented stocks. Of course, the move into energy stocks over the past couple of weeks. But I’d say right now, no one I think is even really caring about earning season. I think the entire market focus for right now is on the military conflict in Iran and how that’s impacting oil markets and how that’s going to flow through the economy more broadly, as well as looking for those specific sectors that could be negatively or in some cases positively affected.

Mosaic’s Rally

Dziubinski: All right. Well, let’s talk about a couple of picks of yours that were in the news last week. Mosaic MOS was up last week on news about a rare-earth joint venture. What was Morningstar’s take on the project, and do you still like the stock after its rally?

**Sekera: **Yeah. I mean, as far as this joint venture goes specifically, I mean, it is a positive for the long-term story for the stock, adds a new revenue stream, new profit stream. Specifically, the company doesn’t currently produce any rare-earth material. So I think it’s a positive from that point of view, but at the end of the day, the production isn’t scheduled to start until 2030. So at this point, our analysts didn’t make any kind of fair value change based on that announcement. Now, however, if you remember it last week, we talked about how the conflict in Iran, specifically the ongoing closure in the Hormuz Strait, could impact the fertilizer businesses overall and potentially turn into a supply shock. If we saw that supply shock, we might lift our fair values to account for higher near-term profits by these companies. The reason being, of course, the Middle East accounts for 40% of global nitrogen exports, 20% of phosphate exports, and over 10% of potash exports.

We did increase our fair values. We are seeing the higher pricing. We do think this will last long enough that it impacts our intrinsic valuations. Specifically to Mosaic, we boosted our fair value there to $40 a share from $35. We raised CF Industries to 135 from 115, and we raised Nutrient to 80 from 75. At this point, I still think Mosaic looks pretty attractive, traded at 22% discount to that increased fair value, so that’s enough to put it in 4-star territory.

Campbell’s: Buy After Earnings?

Dziubinski: All right. We had another former pick of yours, and that’s Campbell’s CPB, report disappointing earnings last week, and the stock pulled back. What did Morningstar think of Campbell’s report? Any change to the fair value estimate? And do you still like the stock?

**Sekera: **Yeah, there’s really nothing you can say here other than it is just continually disappointing results. Their top line declined by 3%. You had negative fixed cost leverage. So the operating margin contracted 290 basis points to 11%. Overall, the company did reduce their full-year revenue guidance. They cut it to a 1% to 2% decline. The prior guidance was flat to only a 1% decline, and they lowered their EPS estimates for the full year to 215 to 225 a share. That’s down from 240 to 255. And I think for now, share repurchases and dividend increases are also going to be on hold really until things can bottom out and start swinging back up again. Erin, she’s the equity analyst that covers the stock, she wrote that she plans to lower her $60 fare value somewhere in that mid- to high-single-digit percentage, but even after that cut, it’s still a 5-star rated stock.

Now in this case, I would say a cheap stock can always get cheaper, but if you look at the valuation here, they’re trading at just under 10 times the midpoint of the updated guidance, a dividend yield of 6.8%. So again, I think it’s one of these ones where very, very undervalued, and it will probably stay undervalued until you start seeing this company turn around. I think the market’s going to look for that top line to start at least being steady, if not start moving up. That should give them some fixed cost leverage back to the upside where you’d start seeing the operating margin improve. But I think that’s what you’re going to need to see before the stock really starts to perform to the upside.

Caesars Buyout Offers

**Dziubinski: **All right. Well, let’s talk briefly about Caesars Entertainment CZR. Caesars hasn’t been a pick of yours, but we are seeing some takeout interest in Caesars. So what’s Morningstar’s take on it?

**Sekera: **Yeah, I don’t think we’re calling for it, but at the same point in time, talking to our equity analyst, certainly not surprised. His view is he thinks the company has a portfolio of just very high-quality gaming assets overall. In fact, he thinks that if the company sells itself, they should get at least a 10% premium to his $35 fair value estimate. Based on where the stock is today, it’s a 3-star-rated stock, but right now it’s also not trading on fundamentals. At this point, now with that news out there, I’d say this is going to be a risk arbitrage play by the hedge funds. So they’re looking at this one, not necessarily on what they think the long-term fundamentals are but really much more of a probability-based outcome as far as what happens here. So taking a look at the chart, looks like to the downside, if a deal doesn’t happen, you probably have a base somewhere in like that $18 to $20 per share to the downside.

I think the reported offers were at like $33 and $34 a share. So that’s probably the base case as far as what people think the company will end up going for. We think 38.5 per share is the right price. Stock’s at about 28. So if you kind of put those together and do some probability-weighted estimates, I think it looks like the market right now is estimating the probability of a deal happening, kind of in that 50% to 60% range, so a little more likely than not that they end up getting bought out.

Question of the Week

Dziubinski: All right. Well, it’s time for our question of the week. As a reminder, if you have a question for Dave, you can email it to us at themorningfilter@morningstar.com.

All right, this week’s question comes to us from Isaac, and Isaac asks, “When Morningstar completes its stock valuations, is it taking into account the potential for an overall market downturn? In other words, Is the fact that many of the AI and chip stocks are now trading at 4 stars a sign that Morningstar doesn’t believe that the downturn in that sector is imminent?”

**Sekera: **I’d say first of all, just generally, we’re not trying to forecast or trying to game the market here in the short-term. We’re really looking at it from that long-term investing viewpoint, not trying to trade any of the quick ups or downs in the marketplace. And if you look at the market valuations overall, I think we take a different view in how to do market valuation than what you hear from a lot of other strategists. We do really a bottoms-up analysis as opposed to a top-down estimate. So again, over the course of my career, I always found most market strategists have some model, some sort of algorithm, some way that they come up with an estimate for what they think S&P 500 earnings are going to be over the course of a full year. They then apply some sort of forward multiple to that. They always have reasoning for it, but it always seems like they are telling you the market’s 8% to 10% undervalued. Rarely do you get too many strategists out there saying that the market’s overvalued. When the markets are falling, they like to bring their valuations down as well. So to me, I think a lot of other strategists, what they do really ends up being more goal-seeking than it is necessarily a true market valuation.

Now on our individual stocks, we will move our valuations there based on changes in forecasts to those individual companies. Of course that’s impacted by just the general economic outlook, but really more specifically industry-specific conditions, as well as what we see specifically going on with that individual company. Over time, I find that markets often act like a pendulum. We find that, both at the market level and even individual stock level, markets oftentimes just swing too far in one direction and then they end up swinging back too far in the other direction. And that’s when, I think, you can use that market valuation that we provide to be able to look for those opportunities to be able to overweight and underweight compared to your targeted allocations overall.

So one of the things I’d recommend looking at is like every month or every quarter when we put out our market updates or outlooks, take a look at the historical price/fair value chart. And that goes all the way back to the beginning of 2011 and look for those instances where you see those really big swings. So, for example, 2012, the market sold off, in our view, way too much to the downside. That was, of course, back when we had the European sovereign debt and banking crisis. So the market price to fair value, that’s the composite of all of those individual stocks that we cover as compared to the market, bottomed out at 0.77, meaning that the market was trading at a 23% discount to fair value.

But then what happened? The market rallied too far to the upside and then ended up selling off at the end of 2019 after getting too high of evaluation in 2018 and the beginning of 2019. And then we’ve had another rally too far to the upside once again, after the market bottomed out in 2019. In fact, in early 2022, I think we might have been one of the only shops out there recommending to underweight the stock market overall. We noted it was a combination of multiple different factors. The most important was that the market was just too overvalued at that point in time. We were expecting inflation to increase. We were looking for the Fed to tighten monetary policy. We were looking for interest rates to go up. And then the market sold off. By mid-2022, we changed our recommendation to market-weight. And then by fall of 2022 is another one of those instances where we moved to overweight because the market had fallen too much as compared to those long-term intrinsic valuations. Market then bottomed out in October of 2022, and we’ve had a very strong recovery ever since.

Stock Pick: PANW

**Dziubinski: **All right. Well, Isaac, thank you for your question. It’s time to move on to this week’s stock picks. Now this week, Dave’s focusing on five stocks where Morningstar recently confirmed its wide moat ratings, noting that these companies are not likely to be significantly disrupted by AI. Excuse me. And of course, they all look undervalued today. So your first pick is a reiteration of a recent pick, which is Palo Alto Networks PANW. Give us the headline here.

**Sekera: **In fact, people that have been listening to the show for a while probably are tired of hearing me talk about this one, but I do think this one is very attractive. It’s a 27% discount, 4-star-rated stock. Granted, they don’t pay a dividend, but that’s because they’re using that free cash flow to reinvest back into what we consider to be a high growth business. As you noted, it is a wide economic moat. So again, I really like the cybersecurity industry overall, and of the cybersecurity industry, I think this is one of our top picks.

**Dziubinski: **All right. So then Dave, what makes Palo Alto’s moat AI-resilient?

**Sekera: **Specifically in this case, our wide economic moat is based on two moat sources, switching costs and network effect. And in today’s day and age, we just think cybersecurity is becoming ever more important in a world of artificial intelligence, more and more threats out there that have to be protected against, and you’re just not going to be able to do that in- house vibe-coding using artificial intelligence. So this week I am conducting a bonus episode of The Morning Filter. I’m going to have a deep dive interviewing Ahmed Khan. He’s a sector equity analyst on our team for technology, covering cybersecurity specifically. And we’re going to go pretty deep into those moat sources but also highlight our outlook for the industry overall. And in addition to Palo Alto, given a couple of other stock picks that I think investors will be interested in hearing about.

Stock Pick: SPGI

**Dziubinski: **All right, so tune in. Now you’re also reiterating your recent buy on S&P Global SPGI. So give us the rundown on that company’s key metrics.

**Sekera: **5-star-rated stock, currently trading at a 25% discount. Dividend yield just under 1%. I think it’s about nine tenths of a percent, but the company does do pretty large shared buybacks, which in this case at that much of a discount should end up adding economic value to shareholders over time. We rate it with a wide economic moat, mostly based on network effects and intangible assets.

**Dziubinski: **Why is S&P Global’s economic moat unlikely to be eroded by AI?

**Sekera: **First of all, just thinking about the network effect, essentially that just means that the more something is used, the more accepted it becomes, and actually the more valuable it ends up being on an economic value basis to those customers and clients that use that product. In this case, if you think about the ratings portion of their business, fixed-income investors are looking for a way to be able to measure credit risk across bonds, across industries, across sectors, across different types of fixed-income assets, whether you’re looking at asset-backed security, corporate security, mortgage-backed security. So we just think that the ratings that they provide end up giving investors that way to think about credit risk and how much they should or shouldn’t be paying for those bonds across lots of different fixed-income sectors. If you take a look at their index business, they have the S&P 500, a whole host of other different indices. Those are some of the most referenced indices overall. So again, people know what you are talking about when you’re talking about the market in general and you’re using some of those indices or some of their subindices by industry.

Taking a look at their intangible assets, there are huge regulatory requirements to really to be able to become an NRSRO and nationally recognized statistical rating organization. There’s only a handful that have that regulatory approval here in the United States. Thinking about mutual fund and ETF documentation, they will specify in those documents which rating agency ratings are allowed to be used. Takes a huge amount of effort for the boards of ETFs or mutual funds to change that documentation, so they’re very unwilling to change it unless there’s really a reason for them to do it.

Thinking about fixed-income indices, whether it’s S&P indices or other people’s fixed-income indices, those two specify which rating agencies allow bonds to be eligible to be included in those indices.The indexes overall use benchmarks for a wide range of mutual funds and ETFs. So again, thinking about the intangible assets there, a lot of barriers to entry. And then lastly, the company owns large datasets of proprietary information. So again, in a world where AI is trained off of broad public documentation or … I’m sorry, more … I’m losing my voice here a little bit. Sorry. So again, in a world where datasets and AI are based off of publicly available data, having proprietary data becomes increasingly more valuable.

Stock Pick: ICE

**Dziubinski: **All right. Your third stock pick this week is a new name. It’s Intercontinental Exchange ICE. So give us the highlights on this one.

**Sekera: **Not a huge discount here. It’s only at 10%, but that’s just enough to put it in 4-star territory. Has a 1.3% dividend yield. Now we rate the company with a Low Uncertainty, which I kind of like in today’s day and age of volatility. And we did reconfirm that wide economic moat being based on cost advantages, intangible assets, and network effect.

Dziubinski: Now, talk a little bit more about Intercontinental’s moat, Dave, and why it’s likely to remain wide in the face of AI.

**Sekera: **Yeah. So ICE is what most people call the company. I mean, just it’s the dominant futures exchange for global energy contracts. And the more liquidity you have, the more people that are using those contracts, increases the network effect. We think it’s probably nearly impossible for AI to be able to replicate or disrupt that part of their business. You have exchange-specific clearing and collateralization in order to give clients the confidence that those contracts will be upheld when those contracts expire. You have huge barriers of entry from AI being able to build up that confidence in the marketplace. Again, they have huge amounts of proprietary pricing and data that becomes just increasingly more valuable in a world where AI is trained on only public data. Strength of the New York Stock Exchange, a lot of proprietary data there, as well as the intangible asset of being able to trade on that exchange.

Stock Pick: DDOG

**Dziubinski: **All right. Well, your next pick is another new name. It’s Datadog DDOG. Tell us about it.

Sekera: So stock’s trading at a 23% discount, 4-star-rated stock. Again, it’s one that doesn’t pay a dividend at this point in time, but that doesn’t concern us. Now, unfortunately, like most technology companies, it is a High Uncertainty Rating, but we do think it has a wide economic moat being based on network effect and switching costs.

**Dziubinski: **Same follow-up question here, Dave. Why does Datadog’s moat look like it can hold up against AI?

**Sekera: **Yeah. I just want to run through a list here that I pulled out from our analyst’s write-up. First, just very high switching costs. I mean, the information and the product that they have are very much tied to what’s considered mission critical workflows. They have customization and business-specific telemetry that makes it impossible or at least impractical to do what they call the AI-driven replace model. Very strong network effect driven by usage expansion, data scale, and product-led growth. We consider them to having what we believe is a neutral cloud-agnostic position as a competitive shield against hyperscaler AI platforms. And we think that, for example, they have early adoption by a lot of AI-native leaders that reinforces the entrenchment that they have with their products. So, for example, 14 of the 20 largest AI-native companies use Datadog today.

Stock Pick: TYL

**Dziubinski: **All right. Your final pick this week is a name that we haven’t talked about in quite a while, and it’s Tyler Technology TYL. So run through the numbers on it.

Sekera: Yeah, this one goes way back. I think this was actually one of our very first picks when we started The Morning Filter Podcast back at the beginning of 2023. Back then, it was a 5-star-rated stock, but over time, it rose all the way up into 3-star territory, hitting fair value. And to be honest, it kind of fell off my radar. But what we’ve seen over the past year is that it’s gotten pulled down with all the other software companies and kind of that general software selloff. And I think investors are now getting a second bite at the apple here. 4-star-rated stock, 30% discount, no dividend, High Uncertainty Rating, but a wide economic moat being based on switching costs and intangible assets.

**Dziubinski: **Dave, talk a little bit more about why this is a pick again three years later and comment on its moat in the face of AI.

**Sekera: **Yeah. So in the face of AI and kind of this wide moat rating, rerating process, we reaffirmed the wide moat. And when you look at it, it has switching costs, the mission critical, deeply embedded software. Their systems run essential government operations, both at the state and local levels. If you look at the retention rate here, it’s 98%. What you find is government entities, especially at the municipal level, rarely switched vendors. You don’t have to worry about them going bankrupt. So I think that really shows the switching costs and the strength of their product lineup here with the clients that they sell to, specifically government workflows, compliance rules, the budgeting process, statutory requirements. I mean, they all create a very high proprietary process for software to have to go through that a lot of other software companies just don’t have that ability to do that because they don’t have that same kind of experience.

It’s a highly regulated area. With governments, it’s a slow-moving procurement process. So again, it inherently advantages the incumbents that are already there. Now, granted, it trades at 28 times our 2026 earnings forecast, but if you look at our projections here, we’re looking for almost 17% earnings compound annual growth over the next five years. So even with a relatively high multiple, looks pretty undervalued to us.

**Dziubinski: **All right. Well, thank you for your time, 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. We hope you’ll join us next Monday for The Morning Filter Podcast at 9 a.m. Eastern 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.

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