This article critically examines Morningstar's recommended stocks to buy and sell before July 2026, evaluating Alphabet, Palantir, Salesforce as buys, and Applied Materials, Teradyne, and American Airlines as sells. Using financial metrics, growth prospects, and valuation tools, it offers a nuanced perspective on each stock's potential risks and rewards.
The chief US market strategist at Morningstar recently named three stocks to buy and three to sell before July 2026 ends. However, a fancy title alone doesn't pay the bills; the price you pay for a stock is crucial. Blindly following big names can cost real money. This article takes a deep dive into each of Morningstar's six picks, analyzing their fundamentals, financial metrics, and valuation to see if they truly hold up or just sound good.
Alphabet, known as Google, has been at the center of AI fears, with many predicting AI chatbots would kill Google Search. Contrary to these fears, AI has enhanced Google's search capabilities, increasing user engagement and advertising revenue. YouTube is also booming, with rising ad numbers and prices. Google Cloud, a key player in AI infrastructure, grew massively last quarter.
Most financial pillars check out except for some valuation metrics like 5-year PE and price to free cash flow, which are high but may be justified by strong profit growth. Analyst estimates predict earnings per share (EPS) to more than double in five years and revenue to double in seven years.
Using a stock analyzer tool with assumptions of 7-13% revenue growth and profit margins of 28-32%, the intrinsic value suggests a middle price of $330 against a current price of $366, implying a 7.8% return. The recommendation is to watch for a better entry point, possibly around $225.
Palantir specializes in turning large organizations' data into actionable decisions, serving military and multinational businesses. Despite a recent 40% stock price crash to its lowest in a year, the business is thriving with 85% revenue growth last quarter and over 130% sales growth to US businesses.
The company has diluted shares by 26% over five years but seems to have stabilized recently. Analysts expect EPS to grow nearly 5x over four years and revenue to quadruple.
Aggressive assumptions of 15-30% revenue growth and 30-55% profit margins yield a middle price of $59 against a current price of $134, implying a 13.5% return at best. This suggests the stock may still be expensive despite recent price drops.
Salesforce is the leader in customer relationship management (CRM) software, widely used by companies to manage customer data and interactions. The company has been performing well, with management buying back $27 billion of shares recently, signaling confidence in the stock's value.
Returns on capital are modest, but profit margins and free cash flow are strong. Analysts expect EPS to double over 7-8 years and revenue to grow at about 9% annually.
Assuming 5-10% revenue growth and 25-35% profit margins, the intrinsic value suggests a middle price of $355 against a current price of $210, implying nearly a 20% return. This supports Morningstar's buy recommendation.
Applied Materials manufactures machines used to make computer chips, benefiting from the AI chip boom. However, the semiconductor equipment industry is cyclical, with boom and bust cycles.
Despite strong margins and returns on capital, the slow revenue growth and high valuation multiples raise concerns.
Using conservative revenue growth assumptions (3-7%) and profit margins (20-26%), the intrinsic value suggests a middle price of $166 against a current price of $538, implying a negative 5% return. This supports the sell recommendation.
Teradyne produces equipment for testing computer chips and factory robots, riding the AI chip wave. Like Applied Materials, it faces cyclical demand.
Analysts expect EPS to double over four years and revenue to grow by 50%, but recent growth has been sluggish.
Assuming 3-9% revenue growth and 17-21% profit margins, the intrinsic value suggests a middle price of $95 against a current price of $330, implying a negative 6% return. This aligns with the sell recommendation.
The airline industry is notoriously tough, with high operating costs, sensitivity to fuel prices, and heavy debt loads. American Airlines has one of the heaviest debt burdens in the industry.
Despite some profit improvements, the heavy debt and industry risks make this a risky investment.
Assuming 1-5% revenue growth and 1-3% profit margins, the intrinsic value suggests a middle price of $26 against a current price of $17, implying a 15% return. However, due to debt concerns and industry risks, the recommendation is to avoid this stock.
Morningstar's picks offer a mix of growth and risk. Alphabet and Salesforce appear to be solid buys with strong fundamentals and reasonable valuations. Palantir, while showing impressive growth, may still be expensive. On the sell side, Applied Materials and Teradyne face valuation and growth concerns despite benefiting from the AI chip boom. American Airlines struggles with debt and profitability issues, making it a risky investment.
Investors should not rely solely on analyst recommendations but perform their own due diligence, considering valuation, growth prospects, and industry dynamics before making investment decisions.
For those interested in learning more about key financial metrics and stock valuation, free resources and stock analyzer tools are available to help investors make informed decisions and avoid costly mistakes.
This comprehensive analysis aims to equip investors with the knowledge to evaluate stocks critically and invest wisely in the evolving market landscape.
