3 Overvalued Stocks to Take Profits In and 3 Undervalued Stocks to Buy I May 4, 2026

Key Concepts

• Barbell Portfolio Strategy: A risk-management approach balancing high-quality value stocks (wide/narrow economic moats) with high-growth tech/AI stocks to navigate market volatility.
• Economic Moat: A Morningstar term for a company's ability to maintain competitive advantages (e.g., cost advantage, network effect, switching costs, intangible assets).
• AI Buildout Boom: The massive capital expenditure (capex) cycle currently driven by tech giants racing to build data center capacity and AI infrastructure.
• Fair Value Estimate: Morningstar’s intrinsic valuation of a stock; stocks trading at a discount are considered undervalued.
• Normalized PE Ratio: A price-to-earnings ratio adjusted to smooth out cyclical fluctuations, used to assess long-term valuation.
• GLP-1 Drugs: Weight-loss medications impacting consumer food demand, creating headwinds for traditional food companies.

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Market Overview and Macro Factors

• Geopolitical Impact: The conflict in the Middle East continues to disrupt the Strait of Hormuz, keeping oil prices elevated (approx. $105/barrel). Dave Sakara notes that while the market is currently "hyperfocused" on AI, rising energy costs remain a latent risk that could trigger negative sentiment.
• GDP and AI: Real GDP grew at a 2% annualized rate. Notably, 2/3 of this growth is attributed to AI-related spending: 0.8% from information processing equipment and 0.5% from software.
• Federal Reserve: The Fed left rates unchanged. Sakara views the current market pricing (equal probability of a hike vs. a cut by year-end) as "noise," maintaining that no rate cuts are likely in the foreseeable future.

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Earnings Analysis: Big Tech & AI

• Alphabet: Reported 22% revenue growth. Gemini API sales reached a $15B annualized run rate. Capex guidance was raised to $180B–$190B for 2026.
• Microsoft: Azure revenue grew 39%. Despite strong results, the stock faced pressure; Sakara maintains a $600 fair value, viewing the sell-off as a potential opportunity for long-term investors.
• Meta: Revenue grew 33%, but operating margins contracted by 90 basis points due to aggressive AI spending. Capex guidance was increased to $125B–$145B. Sakara notes the market is skeptical of this "show me" story, given Meta's past failed investments in the Metaverse.
• Amazon: AWS revenue grew 28%. Morningstar raised its fair value to $280. Sakara suggests it as a core holding but advises dollar-cost averaging.
• Apple: Revenue grew 17%, with record gross margins of 49.3%. Fair value was raised to $270.

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Sector-Specific Insights

• Cybersecurity (Fortinet): Sakara highlights that AI is a double-edged sword. While it helps companies patch vulnerabilities, it also allows attackers to chain together multiple minor exploits into significant breaches.
• Food/Consumer Staples (Kraft Heinz): Facing a "triple threat": GLP-1 drug impacts on demand, rising packaging costs, and increasing commodity prices (wheat, corn, soy).
• Utilities (Duke vs. Southern): Sakara prefers Duke for its diversified growth and attractive valuation (3.4% yield, trading at a discount) compared to Southern, which is trading at a 19% premium due to its heavy exposure to data center/AI power demand.

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Stock Recommendations

Profit-Taking (Overvalued/High Risk)

1. Sienna: Trading at 173x 2026 earnings. Sakara warns of a potential "capacity glut" similar to the post-2008 telecom buildout.
2. SanDisk: Up 400% YTD. Sakara views memory as a commodity and warns that as supply/demand normalizes, the stock could "fall off a cliff."
3. Iron: A data center/Bitcoin play with no economic moat and high uncertainty; currently trading at a 76% premium.

Buys (Undervalued/Attractive)

1. Alphabet: 4-star rating, 11% discount. Benefits from AI across search, YouTube, and cloud infrastructure.
2. Dow: 4-star rating, 16% discount, 3.5% yield. Positioned to benefit from supply disruptions in Asia, as US-based chemical plants have better access to raw materials.
3. Lockheed Martin: 4-star rating, 20% discount. Sakara views the recent dip as an overreaction, citing long-term defense spending tailwinds in the US, EU, and Asia.

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Synthesis

The market is currently defined by a "modern-day gold rush" in AI infrastructure. While tech giants are seeing massive revenue growth, the sustainability of their record-breaking capex remains the primary concern for investors. Sakara emphasizes that investors should move away from "buy and hold" mentalities toward a "buy and manage" approach, reallocating profits from overextended sectors (like memory chips and overvalued tech) into high-quality, undervalued defensive or industrial plays to maintain a balanced barbell portfolio.