We’re in the midst of the third-quarter earnings season, and it’s been a pretty good one so far.
As of Friday, 17% of S&P 500 companies had reported their results. A hefty 73% of them posted profit above analyst expectations, and 66% of them registered revenue above expectations, according to FactSet.
So it might be helpful for you to learn of four stocks Morningstar favors buying after their recent earnings releases.
AT&T
(T) -)
Morningstar moat (durable competitive advantage) rating: narrow. Morningstar fair value estimate: $23. Wednesday price quote: $15.10.
The company increased its free cash flow in the third quarter, noted Morningstar’s chief U.S. market strategist Dave Sekera. “They also noticed some improving customer trends.” And he likes AT&T’s 7% forward dividend yield.
Long-term, “our investment thesis is that the wireless industry will start operating more like an oligopoly,” Sekera said.
“They will compete less on price, and that’s going to allow margins to expand. As that happens, I think you’re going to start seeing that stock move up to its intrinsic valuation.”
Charles Schwab
(SCHW) -)
Morningstar moat rating: wide. Morningstar fair value estimate: $80. Wednesday price quote: $48.90.
The stock has dropped 41% year to date, and a lot of that was from “getting caught up in the banking sector’s downdraft,” Sekera said.
“There was a lot of concern that it would lose deposits and would have to replace those deposits with higher-cost, short-term funding.”
That indeed happened “to some degree,” Sekera said. “But we think to much less of a degree than what the market is pricing in. Looking at earnings this quarter, I think our team is starting to see some stabilization.”
Goldman Sachs
(GS) -)
Morningstar moat rating: narrow. Morningstar fair value estimate: $368. Wednesday price quote: $297.15.
Goldman stock has dropped 14% year to date. “During the pandemic, Goldman got too far away from its core competencies: investment banking, trading, and asset management,” Sekera said.
“They tried expanding into retail banking activities, and that just hasn’t worked for them. But now they’re exiting those business lines and getting back to what they do best.”
Investment banking activity has been very slow for the past two years, Sekera noted. But, “we think that slowdown is probably behind us.”
ASML
(ASML) -), the Dutch-based market-share leader in photolithography systems used in the manufacturing of semiconductors (according to Morningstar)
Morningstar moat rating: wide. Morningstar fair value estimate: $750. Wednesday price quote: $584.70.
“ASML certainly isn’t a household name, but it is a very important company in the semiconductor industry,” Sekera said. They are essentially the equipment that chip makers use to transfer light patterns onto the silicon chips. That’s then used to make the individual circuits.
There’s an oversupply of chips now. But as that cycle shifts over the next couple years, ASML “should perform pretty well,” Sekera said.
