5 Stocks to Sell Before Inflation Spikes

Key Takeaways

• The market’s response to the latest events in the Iran war and whether the Federal Reserve is more likely to raise interest rates or cut them this year.
• Will this week’s inflation reports stoke volatility in the market?
• Are cybersecurity stocks facing a new risk?
• What to make of updates from Nike NKE, Carnival CCL, and McCormick MKC.
• Can small-cap stocks continue to outperform in 2026?
• At-risk stocks to sell before inflation heats up.

In this episode of The Morning Filter podcast, co-hosts Dave Sekera and Susan Dziubinski discuss the market’s response to new developments in the Iran war. They speculate what the Federal Reserve’s interest rate policy may be for the rest of the year and whether this week’s inflation reports will drive more market volatility. They explain why Anthropic’s Mythos model only makes cybersecurity stocks more attractive and whether the worst is behind Nike. Tune in to find out if Carnival or McCormick are stocks to buy after they made news last week.

Subscribe to The Morning Filter on Apple Podcasts, or wherever you get your podcasts.

Small-cap stocks have held up relatively well in 2026, but are conditions right for the outperformance to continue? Dave and Susan close with several at-risk stocks to sell in the face of higher inflation.

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

More From Dave Sekera

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Register for Dave’s Q2 Market Outlook webinar

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. Now, before we kick off this week’s episode, we want to remind viewers about Dave’s upcoming in-depth second-quarter 2026 Stock Market Outlook webinar, which is happening this week on Wednesday, April 8, at 11 a.m. Central. The webinar’s free, and there’s a link to register for it in the show notes, and we hope you’ll join us.

The War & The Markets

All right. Well, good morning, Dave. Let’s start today by unpacking last week’s market activity. Last week was volatile, but stocks finished the week up on optimism that the Iran war would be ending soon. So given last week’s market events, how would you suggest stock investors be thinking about their portfolios today?

**David Sekera: **Good morning, Susan. I think investors really should be looking at using the volatility that we’ve had thus far this year to be able to readjust their portfolios as we’ve seen a lot of valuations change over just the past five weeks. Now, if you remember, in our 2026 outlook, we noted a number of different reasons why we thought 2026 was going to be a lot more volatile than 2025. And as such, we recommended investors should look at having a barbell-shaped portfolio. Essentially, half the portfolio invested in high-quality value stocks. Within the value category, we specifically highlighted the energy sector. The energy sector was one of the most undervalued sectors last year, paid pretty good dividends. And we noted that it would act as a natural hedge in your portfolio just in case inflation were to rear its ugly head or geopolitical conflict were to make a comeback.

And then of course, the other half of the portfolio we recommended to be in growth stocks, specifically those that were tied to artificial intelligence and technology. So essentially what the strategy was is if the market were to rally, we’d expect AI and tech stocks and growth stocks overall to rally much faster to the upside than the rest of the market. And as that part of your portfolio would then move up, you could then harvest profits there and reinvest those profits into the high-quality value stocks, which would lag behind. And of course, then when we have the market sell off, you could then use those high-quality stocks, the high-quality high-value stocks. Those would outperform to the downside. So again, you could use those to take profits and then reinvest into AI and tech stocks, which of course would sell off further and faster than the rest of the market.

So that’s why over the past week, or really kind of two weeks at this point, we have recommended investors to use this market volatility. So for example, I think it was about two weeks ago, we started noting that it’s a good time to start taking profits on those oil stocks, on some of the value stocks. A lot of those have risen quite substantially. The energy sector was up, last, I don’t know, well over 30%, maybe 30 to 35% overall. Now, I don’t think you have to sell the entire positions there. In fact, I wouldn’t, but I think you at least harvest some of those profits and then you can reinvest in a lot of these AI growth stocks, which have probably sold off too much to the downside here in the near term.

2026 US Stock Market Outlook: Where to Find Investing Opportunities

High valuations, higher stakes: Expecting a volatile 2026.

Global Stocks Rally on Hopes of Speedy Resolution to Iran War

US stocks climbed as oil prices dipped on signs of an easing of tensions between Washington and Tehran.

**Dziubinski: **All right. Now, Dave, during the conflict in the Middle East, you’ve been telling us to keep an eye on the oil futures chain. So what’s that telling us today?

**Sekera: **Taking a look at how high oil prices have gone, I think right now when I’m looking at that compared to the stock market, and I’d say the stock market selloff, it may feel bad, but I mean, it’s still relatively shallow when you look at past selloffs in the marketplace. So I think if you look at the oil market compared to the stock market, I think someone is wrong. I mean, oil this morning, it is coming down a little bit on some reports of negotiations that are ongoing, but really the May and the June oil price futures contracts are still pretty close to their recent highs at this point. The July contract is kind of, I don’t know, maybe just off of its two-week high at this point. And then the August contract is still in that middle of the range it’s been since mid-March. That contract doesn’t expire until July 21. So the market is pricing in that supply is going to remain constrained here for at least several more months.

Now, of course, the longer the conflict is ongoing, the longer oil prices are going to stay high. As oil prices stay high, that’s going to more and more negatively impact the economy. And I think it’s also going to cause all sorts of dislocations, both in the US and globally. It, of course, increases the probability that we may have a recession here in the US middle or later this year. And I don’t think the stock market is priced for that at all. And, like I said, it’s been a somewhat relatively shallow selloff. Well, I think I need some more coffee here this morning. But I mean, if you look at the market, I mean, we’re still up 16% compared to where the market was a year ago. So again, between oil and stocks, someone, I think, is wrong at this point.

**Dziubinski: **Now, what other events, Dave, could contribute to market volatility during the next several weeks and perhaps stall any potential rally we might see?

**Sekera: **Yeah. I mean, next week we’ve got the beginning of first-quarter earnings season. Always starts off with the big banks and a number of the investment banks. But I think this earnings season, the real wild card is going to be how the impact may or may not have impacted results thus far. But I think the bigger question will be guidance. If you’re a management team, are you going to come out with especially conservative guidance just to be able to build in that cushion for the second quarter? I would think so. So there could be some disappointments in the market compared to what expectations are. We’ve talked a couple of times about the private credit markets. I think that’s in the early stages of weakening. I think there’s a lot of losses there that need to get taken at some point. The question is how much and how fast are those losses going to come through?

And of course, while that market is weakening, that’s going to just negatively impact the amount of financing that’s going to be available for small and medium enterprises. So I think that also will be a headwind for the economy over the next couple quarters. Interest rates are still higher now than they were preconflict. If rates were to rise further, I think that would start to negatively impact the economy and equities. We talked a couple times in January about what’s going on with the Japanese yen and JGBs, Japanese government bonds. Both of those still continuing to be on a weakening trend. So I think you should keep an eye on those. I’d also keep an eye on the sovereign bond yields in the EU. Those have weakened pretty substantially over the past, call it, five weeks. Did have a rally there, but again, if those sovereign bond yields in the EU were to start weakening, I think that could cause some volatility as well.

But overall, with everything going on in the Middle East, I think we’re just going to see a lot of different supply disruptions coming through over the next couple weeks, next couple of quarters. We’re already seeing fertilizer prices starting to move up. That, of course, then will filter into the food supply, wheat, corn, soybean, all of those moving up. I’ve seen a number of different reports, a lot of precursor commodity chemicals being taken offline, that they just don’t have enough supply to continue to keep making those chemicals, specifically ethylene, propylene, polyethylene, a lot of polyurethanes. So again, that’s going to have a lot of ongoing effects as those commodity chemicals are offline. Another one that people have been talking about is helium production, that that’s been reduced, of course, helium being used in the production of semiconductors. So what else? What other disruptions will we see? I don’t know just yet, but I think that there will be a lot of disruptions that occur over the next, not even just couple weeks, I think next couple of months that we’re going to have to live through.

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On Radar: Inflation

**Dziubinski: **All right. Well, shorter term on the economic front this week, we have a couple of inflation reports coming out, and of course, the war will have an impact on these numbers. So do you expect the inflation numbers to be market-moving this week?

**Sekera: **I doubt it. I don’t really think that they’re going to be market-moving. Now, having said that, if they are market-moving, I think that there’s a lot more downside risk than upside potential. I mean, yes, oil will be impacting these numbers, but I think that there’s only going to be a partial impact in the headline inflation reports at this point. So I don’t think that the headline inflation numbers are really going to be that far away from what expectations are. I think the real risk will be in those categories that are considered core, so ex-food, ex-energy. So if we see that the inflation in those areas are higher than expected, I think that really handcuffs the Fed from being able to lower the federal-funds rate anytime soon. To the upside, if the inflation numbers come in better than expected, I don’t think that really ends up mattering because I think everyone’s just going to want to see just how much and just how quickly the high oil prices are going to flow through in those inflationary numbers and how it’s going to impact the rest of the economy over the next couple quarters.

Markets Brief: Don’t Call It Stagflation

Plus: Inflation data ahead, a tough housing market, and two homebuilding stock picks.

Rate Hikes or Rate Cuts?

**Dziubinski: **Now, you mentioned the Fed. So let’s talk for a minute about the Fed and interest rates. It seems some days the financial media is suggesting that the Fed might actually raise interest rates at some point this year. And then other days, the media’s talking about potential interest rate cuts in 2026. Dave, from your perspective, how likely do you think it is that the Fed will actually raise rates, and how soon could that happen?

**Sekera: **Personally, I’m not worried about the Fed raising the federal-funds rate anytime in the near future. I just can’t see how that could happen anytime soon. You have to remember we do have the new Fed chair coming in in May. I think he’s going to want to actually try to cut rates. I don’t think oil prices are going to let him cut rates. In order to have them actually start raising rates, we’d actually need to see a pretty sustained increase in inflation. And again, not just a one-time or couple-month hit. I think they would really need to see inflation stay high for a longer time period so that they wouldn’t consider it to be temporary because I think you need to have that to provide the political cover that the Fed would need to start raising rates.

Fed Rate Cuts in 2026? How an Oil Shock Is Complicating the Outlook

A sudden jump in oil prices is reshaping expectations for when the Fed can cut rates.

Watching Constellation Brands

**Dziubinski: **All right. Well, let’s talk a little bit about, we have one company reporting earnings this week that you have on your radar, and that’s Constellation Brands STZ. It’s a former pick of yours. Now, the stock is up more than 10% this year but is still trading well below Morningstar’s $220 fair value estimate. Dave, what are you going to be listing for?

**Sekera: **Well, first of all, you have to remember this report, I think it’s the fourth quarter for fiscal-year 2026. So as such, typically when they come out with fourth-quarter earnings, you’ll get guidance for the next fiscal year. However, in this case, we have a new CEO that’s going to be taking control of the company later this month. So personally, I’m not sure if they would actually provide a guidance. I think they might want to hold off, give the CEO some new time to get in there to put together what he wants to provide to the marketplace. Now, if they do give guidance, I think it’s going to be especially conservative. They’re not going to want to set expectations very high. They’re going to want to be able to underpromise and overdeliver. So I think this quarter, the focus is really going to be more about trying to gauge the momentum going into the summer months here.

If you think about Corona and Modelo, they are very much summer type of beers. So we’ll be looking at volumes, just trying to see, are they picking up any share within the category or are they losing share? And then just looking at typical consumer numbers like depletions versus shipments, trying to understand how much is in inventory. So I think it’s really just all about the individual fundamentals as opposed to really trying to look at guidance and look at how that compares to what our forecasts are going to be.

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Marvell Technology’s Big News

**Dziubinski: **All right. Well, let’s move on to some new research from Morningstar. Marvell Technology MRVL stock was up more than 12% last week after Nvidia NVDA took a $2 billion stake in the company. Now, Marvell has been a pick of yours in the past. So what did Morningstar make of the news? Any changes to the fair value estimate on the stock?

**Sekera: **Yeah. So the news specifically was that Nvidia announced a partnership with Marvell and that Nvidia would invest, I think, $2 billion into Marvell. So what’s going on is they’re going to end up pairing Marvell’s custom AI chips with Nvidia’s networking products. So from our point of view, this is a good endorsement of Marvell’s products by Nvidia. This is one where the market has had a lot of concerns about Marvell’s products in the past. A lot of people were writing about how they thought that they were losing market share to some of their competitors. We didn’t think that that was true. So if anything else, I think this is just good support for what our investment thesis has been on this company.

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**Dziubinski: **All right. So do you still think Marvell’s stock is a buy?

**Sekera: **It is. I mean, it’s still a 4-star-rated stock, trades at an 18% discount. Unfortunately, it’s not anywhere near as undervalued as it’s been in the past when we had recommended it. In fact, if you look at, based on the uncertainty rating and where it’s trading, it’s really just barely in that 4-star territory at this point. So again, I think there’s going to be some pretty good momentum here in the short term, but that momentum probably moves it into 3 stars pretty quickly.

Cybersecurity Stocks at Risk?

**Dziubinski: **All right. Well, let’s stick with the technology theme for a minute. Cybersecurity stocks pulled back in late March on word that Anthropic’s Mythos model is much better than existing models at finding cyber vulnerabilities. So given that, Dave, does Morningstar think this new model possesses a risk to cybersecurity firms?

**Sekera: **So we don’t see the risk being in the cybersecurity firms that we cover. I think the risk is in those cyber companies whose job really it is to identify potential vulnerabilities to cyber hacks for companies as opposed to those companies that actually provide the cybersecurity. In fact, our analyst just noted, he thinks this just exemplifies the investment thesis that he’s noted a couple of times why we think AI actually makes cybersecurity ever more important. In this case, it identifies how AI can be used in order to identify those different areas that could be at risk, shows how AI is actually increasing the attack surface area. Overall, we think this actually leads to an increase in cybersecurity demand to offset these AI threats.

Anthropic’s Mythos Model’s Security Capabilities Are Going to Increase Demand for Cybersecurity

McCormick & Unilever

**Dziubinski: **All right. Well, McCormick MKC.V and Unilever UL made things official last week, confirming that McCormick will merge with Unilever’s food business. It’s a $45 billion deal, and it’s expected to close in 2027. What’s Morningstar make of the deal, and is McCormick stock a buy on the news?

**Sekera: **Yeah, I mean, this is a big acquisition for McCormick and looks like they’re paying a pretty full price here at 14 times EBITDA. To some degree, that will be offset by cost synergies. But when we look at the valuation and those cost synergies, we didn’t end up making really any substantial changes to our fair value. Overall, we think the combination has strategic merits, but there is going to be very high integration risk here. As such, we increased our uncertainty rating to high from medium. Also, I have to point out that in order to be able to fund this transaction, I believe they’re using a combination of both equity and debt. They’re going to take their debt leverage up to 4 times from 3 times, not necessarily concerning in and of itself, but that is pretty high for this company. As such, they will end up using free cash flow to repay that debt over the next couple years to try and bring that debt leverage back down to 3 times.

Our analyst noted that might take three to five years, so they’ll be very focused on that free cash flow to repay debt. So we did make a very slight cut to our fair value to incorporate a slightly higher discount rate to account for that risk. But even after that couple of dollar cut to fair value, it is still very attractively priced here at a 25% discount, puts it in 4-star territory.

McCormick Earnings: Q1 Gains Eclipsed by Massive Unilever Deal; Shares Still a Bargain

More Bad News From Nike

**Dziubinski: **Now, Nike NKE stock fell 15% last week after the company’s results disappointed again. Morningstar said it plans to trim its $102 fair value estimate on the stock by a mid-single-digit rate, and the stock still trades well below fair value. But Dave, do you think Nike is a stock to buy at this point?

**Sekera: **Yeah, I mean, that was really a big selloff after that earnings result. I mean, it just indicates to me that there’s still investors out there. They’re just throwing in the towel on this one. So the question is, Is the market sentiment really bad enough at this point that you’re buying this stock really toward the bottom? Personally, I’d actually prefer to see more stabilization in their market shares and in the operations of the company before I get involved. You always have to remember, just because a stock is cheap doesn’t mean it can’t get cheaper. That might be the case in this instance. But like anything else, it’s always impossible to bottom-tick. So if you do want to get involved here, I would say just make sure you keep your dry powder, start with a smaller-size position to start. And then that way, if the stock does sell off further from here, you can continue to dollar-cost average to the way down. So that way when you do get pops in the company’s stock in the future, you’ve got the ability to be able to profit-take to the upside.

Nike Earnings: Positive Signs Amid a Frustratingly Slow Turnaround; Shares Attractive

Is Carnival Stock a Buy?

**Dziubinski: **All right. Well, Carnival CCL stock was up 8% after earnings last week, and Morningstar held its fair value estimate on the stock at $35.50. What got the market so excited? And do you think there’s an opportunity with Carnival stock today?

**Sekera: **It does look like there’s a pretty good opportunity. So it’s currently at a 27% discount to our fair value, puts that in 4-star territory. I would just note, I think this is going to be a very volatile stock for the next couple of months. And another one that I think you need to be able to be prepared to dollar-cost average down if this stock does sell off even further from here. I mean, high oil prices are definitely going to be a near-term headwind. In fact, the higher fuel prices are going to lower earnings by 38 cents per share, taking our earnings estimates down to 221 from 248. Now, having said that, things will normalize here pretty quickly once oil prices start to fall. It’s just unknown exactly as far as when that’s going to happen. So you could have at least a couple of quarters here where you’re going to have that headwind against earnings.

But for now, just taking a look at why the stock moved up as much as it did, as quickly as it did, it’s just an indication of just how demand for cruising remains extremely high at this point. They’re able to push through a lot of price increases. People are still cruising at this point. So really the big risk would be if oil prices stay too high for too long, how much does that damage the economy? And at that point, then you might see people reduce the demand for cruising, but that’s not on our radar at this point.

Carnival Earnings: Launch of Propel Initiative, Lift in Yields Indicate Consumers Still Cruising

Small-Cap Stock Update

**Dziubinski: **All right. Well, in last week’s episode of the podcast, we discussed your second-quarter stock market outlook, but one topic we just didn’t have enough time for, but that we often talk about are small-cap stocks, so let’s cover that ground today. So how did small-cap stocks do during the first quarter?

**Sekera: **Yeah, I actually pulled up the index numbers this morning. So the Morningstar US Small Cap Index through last Friday is up essentially at 1% year to date. So not a huge return, but at least in the green, and on a relative value basis, that’s a very good return compared to the broad market. The Morningstar US Market overall is down 3.35%, and it’s really large caps that took the brunt of the selloff thus far this year, down over 5%. So small caps looking pretty good compared to the rest of the marketplace.

**Dziubinski: **And so then how do they look, Dave, from a valuation perspective?

**Sekera: **So I look at it really in two different ways here. So on an absolute basis, still very attractive, still the most attractive part of the marketplace by capitalization, trading at a 17% discount. However, on a relative value basis, they’re less attractive compared to the broad market and large caps because the broad market and those large caps fell to the downside. And with the market being at a 12% discount, you really don’t have as much of a range between the small caps and the broader market. So again, on a relative value basis, not as attractive as when we were really recommending them coming into this year and in fact most of last year.

**Dziubinski: **So then Dave, given economic conditions today and the uncertainty, do you think that small-cap stocks can continue to outperform?

**Sekera: **There’s kind of two answers to this question. So over the longer term, yes, we still see the best value in small-cap stocks, but here in the shorter term, I think it’s going to be a little bit of a struggle for them to necessarily outperform the broader market too much. I think the market has recognized the better valuations in those small-cap stocks, but to some degree that’s been playing out and that valuation gap between small stocks and the rest of the market has narrowed to a very large degree compared to where it looked last year. And then when we talk about the macro dynamics in the marketplace, and we’ve talked about how they, historically, small caps would do well when the Fed was easing, the economy’s rebounding after slowing, long-term rates were falling. That’s no longer the case now like it was when we were recommending overweighting small caps in the past.

And then lastly, depending on how bad things get in the private credit marketplace, that will to some degree or another reduce the financing that’s going to be available for small-cap stocks, raise their financing costs. So that also, I think, in the short term could be a headwind for the small-cap space.

The Trade Desk’s Fair Value Fall

**Dziubinski: **All right. Well, it is time for our question of the week. And as a reminder to our viewers and listeners, if you have a question for Dave, send it to us. The best way to reach us is via email at themorningfilter@morningstar.com.

Now, this week’s question comes from someone who signed their email, “a long-term The Trade Desk TTD holder.” And this person asks, “What on earth happened to the Trade Desk’s fair value estimate? I remember when you warned us that it was overvalued and that we should take profit. Thank you for that. But what exactly caused the fair value to drop by 65% in less than a year? ”

**Sekera: **Yeah, I mean, this company’s just really taken a pounding. If you look at that stock, it was $140 a share back in December 2024. It’s well into 1-star territory at that point in time. Last I checked, the stock’s now down all the way to $22 per share. And really it’s just been a lot of negative fundamental news that’s caused us to change a lot of our assumptions that’s brought even our own fair value estimates down as far as they have from where they were a year, year and a half ago. So first of all, our analysts has just noted a lot of high-profile fee disputes with major ad agencies, specifically some of the largest ad agencies in the world, Publicis, WPP, Omnicom. Some of them have been recommending to their own clients not to use The Trade Desk at this point in time, or at least not until these fee disputes and these audits are worked through.

We’re seeing a lot of rising competition. In fact, we estimate that The Trade Desk probably lost market share last year. We’re reducing our revenue expectations. I believe the company’s also been slowing their revenue guidance. So the biggest impact was that we did lower our five-year compound annual growth rate for the next five years from the high teens into the midteens, but it’s just not that explicit forecast period. We also reduced our longer-term growth expectations for the next 10 years and thereafter as well. And of course, when we do that, we also tempered our margin assumptions. So when you put that all together, that was really the biggest reduction in our fair value estimate that we made. From the perspective of the marketplace, I think a lot of the downturn has also been the market really contracting the multiple that they were willing to pay.

To some degree, this was just one of those stocks that to the upside really got too much into that priced-for-perfection type of mindset. And then lastly, I think the market’s still just very concerned about how AI may or may not disrupt their business or even displace their business over time. So I think it’s a lot of fundamental factors as well as just kind of the unknown as far as how AI is going to impact the company. So definitely a lot of people that have thrown in the towel on this one and sold to the downside.

The Trade Desk’s Largest Customers Are Pushing Back on Fees While Competitive Threats Loom

Stock to Sell: KR

**Dziubinski: **All right. Well, let’s move on to the picks portion of this week’s podcast. And this week we’re doing something a little different. Viewers have told us they like hearing about what stocks maybe they should also avoid or sell. So Dave’s brought us some ideas this week, a list of overvalued stocks to sell that he thinks specifically are at high risk in the face of higher inflation. All right. So your first stock to sell this week, Dave, is Kroger KR. Give us some of the key metrics on it.

**Sekera: **Kroger is currently a 2-star-rated stock. Trades at a 23% premium. We rate the company with a medium uncertainty, but we do rate it as no economic moat. So again, we don’t think that Kroger has necessarily any long-term durable competitive advantages such that they’d be able to outearn their weighted average cost of capital over the long term.

**Dziubinski: **Why do you think Kroger’s at risk in the face of higher inflation? I mean, we all have to eat, right?

**Sekera: **Yes, we all have to eat, but that doesn’t mean that you necessarily need to shop at Kroger. There’s a lot of other retailers out there that sell food, a lot of other discount stores, Walmart WMT, Target TGT, the dollar stores, and so forth. So I just think in a high inflationary environment, especially because that would end up causing a lot of economic contraction as well, I think consumers would evermore just be looking for where they can save money, specifically among their grocery bill. And it also doesn’t mean that we’d be still eating the same things. I think you’d see a lot of substitution for lower-price food items, which oftentimes are going to be lower-margin items for the stores as well. And then just anecdotally, over the course of my career, I’ve followed grocery stores in the supermarkets a couple of times. What I always found that, in an inflationary environment, the grocery stores typically are unable to put through those inflationary cost increases to their customers as fast as their own costs go up.

That of course then pressures operating margins. It’s usually later in the inflationary cycle that they start catching back up to inflation that you see those margins then start to reexpand again. And of course, this is just a business, which is a ridiculously low-margin business. So even small changes in the operating margin end up having a much larger impact on the margins or the earnings for the company overall. Took a quick look through our model. We’re forecasting revenue of 2.4% compound annual growth rate over the next five years. We’re only looking for earnings growth of 4.2% over that same time period, and that’s based on the operating margin expanding back to 3%, which is pretty much its 10-year average. Stock’s trading at 14 times our 2026 earnings estimate. Doesn’t necessarily seem all that high, but for a low-growth, low-margin business, again, any kind of pressure on the margins just going to have outsize negative effect to the earnings. So I think this is one where you could suffer from both earnings coming down as well as margin contraction.

Read Morningstar’s full report on Kroger.

Stock to Sell: EBAY

**Dziubinski: **All right. Well, your next stock to sell is eBay EBAY. Run through the numbers on it.

**Sekera: **So, eBay trades at a 43% premium to our fair value, puts it well into 2-star territory. We rate the company with high uncertainty. We do rate it with a narrow economic moat based on the network effect.

**Dziubinski: **Now, I’m assuming that in a higher inflation environment, we’d have fewer dollars to spend on the types of maybe nonessentials we’d buy on eBay. Is that right?

**Sekera: **Well, let me just go to the write-up here, and I’m just going to read one section that I clipped out from the analyst write-up. So specifically the quote here is, “Any significant inflation or slowing global growth due to higher tariff costs or otherwise poses headwinds to aggregate demand, adding a degree of risk as sales growth slows and margins contract on operating deleveraging.” So again, this is one I think is actually very sensitive to inflation overall and consumer demand. Taking a look at our model, we’re projecting revenue to grow 7.4%, five-year compound annual growth rate. We’re looking for 200 basis points of operating margin expansion, looking for earnings to grow 8.7% for that five-year compound annual growth rate. So any risks to those projections whatsoever, I think that really brings down the valuation in the marketplace for the stock. Currently trades at almost 17 times earnings, which seems pretty high even based on our base case.

Read Morningstar’s full report on eBay.

Stock to Sell: ROST

**Dziubinski: **All right. Well, your next stock to sell is Ross Stores ROST. Give us the highlights here.

**Sekera: **It’s a 1-star-rated stock, trades at almost a 50% premium to our fair value. We rate it with a medium uncertainty. We do assign a wide economic moat here based on cost advantages and intangible assets.

**Dziubinski: **Now, Ross Stores is an off-price retailer, so why do you think it’d struggle in a higher inflation environment?

**Sekera: **Well, again, let’s go back to the analyst write-up here. And the quote that I pulled out here, I think, really kind of wraps up the investment thesis as far as inflation goes. So specifically, they cited “cost inflation presents another source of uncertainty as rising wages, occupancy costs and shrink could outpace productivity gains, particularly as the store base expands into new markets.” Now you have to remember, the customers here for Ross Stores are going to skew to lower-income households, moderate-income households. And a lot of these households just never fully recovered from the 2021, 2022 inflation that we had. And they’ll be under even more intense pressure if inflation were to stay higher for longer thus far this year. So again, they would just have to cut back further. And of course, discretionary items are the first areas that you pull back on. Taking a look at our revenue forecast over the next five years, looking for a compound annual growth rate of 6.4%, looking for operating margin expansion to get us to a five-year compound annual growth rate for earnings of 9.5%, yet it trades at 31 times our 2026 earnings estimate. To me, that’s just crazy high for a retailer in this situation.

Read Morningstar’s full report on Ross Stores.

Stock to Sell: DRI

**Dziubinski: **All right. Well, Darden Restaurants DRI is your next stock to sell. Cover the basics for us.

**Sekera: **It trades at a 26% premium. We rate it with a low uncertainty, so that amount of premium is enough to put it in 1-star territory. We do rate it with a narrow economic moat based on cost advantages.

**Dziubinski: **Now, Darden has held up pretty well against increasing competition compared with some of its peers. So why do you think it’s vulnerable in the face of inflation?

**Sekera: **Yeah, I think it’s really twofold that I think that they could get hit by inflation. So first, from a revenue perspective, discretionary spending, especially eating out, are going to be one of the first areas that people cut back on if they need to. So I would just expect to see a decrease in foot traffic as fewer and fewer people go out. And then, really secondly, from the margin perspective, just going to have a hard time raising prices as fast as costs increase. When I look at where the stock is trading, it’s at 18 and a half times our 2026 earnings estimate. I pulled up a normalized historical range of where it trades on a forward multiple, and this is going to be at the high end of that range. I think it’s also at risk of having a multiple contraction if the earnings-growth rate were to slow.

Read Morningstar’s full report on Darden Restaurants.

Stock to Sell: WSM

**Dziubinski: **All right. And then your final stock to sell this week is Williams-Sonoma WSM. Tell us about it.

**Sekera: **It’s a 2-star-rated stock. Trades at a 32% premium. We rate the company with a high uncertainty and no economic moat.

**Dziubinski: **All right. And so walk us through the sell rationale on Williams-Sonoma.

**Sekera: **So their results are just very, or really highly dependent on discretionary spending overall. And I think home goods is an area that consumers naturally would put off spending if inflation is squeezing their household budgets. The other problem here is if inflation were to lead to higher interest rates and/or higher home prices, that’s going to reduce the amount of turnover that we see in the home market. And if you have less turnover, you also have less new home remodeling. Again, people move into a house, and they want to set it up the way that they want to live in it. So what we’ve seen over time with this company is that sales are very closely correlated with home turnover as people move in and over the next, call it, three to nine months, redecorate their house.

The other problem here is 80% of the products it sells are imported. So higher oil prices just going to raise their own costs. Company trades right now at 19 times forward earnings. That’s really much higher than where it’s historically traded in the past. So another one that I’m concerned that you could have either earnings-growth rate slow or maybe even turn negative and, at the same point in time, have the market pull in the multiple that they’re willing to pay. So again, another one I think you could get hit both from earnings and multiple contraction.

Read Morningstar’s full report on William-Sonoma.

**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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