Susan Dziubinski: Hi, I’m Susan Dziubinski, co-host of The Morning Filter podcast. On a recent episode, Morningstar’s Chief US Market Strategist Dave Sekera discussed three stocks to buy that are misunderstood. From Dave’s perspective, the market is confusing noise with signal on the stocks he talked about and, as a result, he thinks there’s opportunity in these names today. Now to see what Dave’s picks were and to hear more about the concepts of noise and signal, click the link below this video.
Today, we’re covering two more stocks where Morningstar thinks investors are confusing noise with signal. Both of these misunderstood stocks look undervalued today, and we think they could be winners over time.
These 2 Undervalued Stocks Could Be Winners
The first undervalued stock to buy that could be a winner is Arista Networks. Arista is the technology leader in high-speed switching for enterprise networking. We assign the company a wide economic moat based on intangible assets and customer switching costs.
Shares fell double digits after the company’s first-quarter beat and raise were lighter than usual, yet Morningstar increased its fair value estimate on the stock by USD 15 to USD 190 per share. We think the company’s fundamentals are excellent and view management’s recent guidance as typically conservative. We’re focused on the long-term trend with Arista because AI sales from quarter to quarter can be lumpy. We think there’s an opportunity to buy this attractive wide-moat stock on pullback today.
Read Morningstar’s full report on Arista Networks.
The second misunderstood stock that could be a winner is Charles Schwab. Schwab turned in decent first-quarter results, though the wide-moat company did miss on revenue, and its net interest income fell slightly from the prior quarter. We think the opportunities that AI presents outweigh the risks for Schwab. We expect AI will allow Schwab to improve operating efficiency and services for investors. Market concerns around agentic AI cash-sweep optimization remain largely hypothetical and overblown, in our view. We think it’s noise rather than signal, given that the average Schwab client holds just 4% of their assets in low-yield vehicles today.
Morningstar raised its fair value estimate on Schwab’s stock by a few dollars recently to USD 117 per share. We think the stock is a buy.
Read Morningstar’s full report on Charles Schwab.
For more stock ideas, be sure to tune in to The Morning Filter wherever you get your podcasts, and visit Morningstar.com, too.
Morningstar director Sean Dunlop and senior analyst William Kerwin provided the research behind this segment.
