3 Stocks to Buy Before October Ends I October 27, 2025

Key Concepts

• Federal Reserve (Fed) Meeting: Discussions around potential interest rate cuts.
• Earnings Reports: Focus on upcoming reports from major AI-related companies.
• Fair Value Estimate: Morningstar's assessment of a stock's intrinsic worth.
• AI (Artificial Intelligence): A central theme driving growth and investment.
• Capex (Capital Expenditures): Spending on physical assets, particularly relevant for AI infrastructure.
• Economic Moat: A company's sustainable competitive advantage.
• Dividend Yield: The annual dividend payment as a percentage of the stock's price.
• Discount to Fair Value: When a stock trades below its estimated intrinsic value.
• Premium to Fair Value: When a stock trades above its estimated intrinsic value.
• GLP-1 Drugs: Weight-loss drugs with significant market impact.
• ADRs (American Depositary Receipts): Certificates representing shares of a foreign company traded on US stock exchanges.

Market Overview and Economic Outlook

The stock market finished the previous week on a strong note, seemingly unconcerned by the ongoing government shutdown. Dave Sakiraa, Morningstar's Chief US Market Strategist, noted that while a prolonged shutdown could impact the economy, its significant effects are not yet apparent. The market's focus remains on other factors, particularly tariffs, with recent constructive talks between the US and China creating positive sentiment heading into a summit. Futures were up nearly 1% on the morning of the broadcast.

This positive sentiment is further bolstered by an upcoming earnings week featuring reports from several mega-cap stocks, many of which are heavily involved in AI, a sector with strong tailwinds.

Inflation and Fed Rate Expectations

The latest inflation numbers came in better than expected, leading the market to price in a high probability of a Fed rate cut at the upcoming meeting.

• Current Market Pricing:
  • 98% probability of a rate cut this week, bringing the Fed funds rate to 3.75% - 4%.
  • 96% probability of another cut in December, lowering the Fed funds rate to 3.5% - 3.75%.
  • 50% probability of a third cut in January, potentially bringing the Fed funds rate to 3.25% - 3.5%.

Morningstar's Chief US Economist forecasts the Fed funds rate to drop to 3% by the end of 2026 and 2.75% in 2027, indicating a significant decline in short-term rates over the next 1.5 to 2 years.

Fixed Income Outlook

Morningstar continues to recommend investors extend duration and move further out the yield curve into longer-term bonds, expecting longer-term rates to decline further.

• Morningstar Forecast for 10-Year US Treasury:
  • Average 3.9% in 2026.
  • Average 3.5% in 2027.

The 10-year Treasury yield has already broken through the 4% range, moving into the 3% handle in the past week, indicating progress towards these forecasts.

Key Earnings Reports and Company Analysis

Microsoft (MSFT)

• Key Focus Areas:
  • AI Growth: Investors are keenly interested in the acceleration of growth in the Azure division (cloud hosting).
  • Capex Plans: Whether capex spending will remain steady or increase further for AI investments. A decrease in capex would be a significant negative signal.
  • AI Usage Demand: The increasing demand for computing power to absorb new capacity.
• Morningstar Rating: 4-star stock, trading at a 13% discount to fair value.
• Outlook: Accelerated growth in Azure is expected to drive the stock towards fair value. There's a higher probability of an increase to Morningstar's fair value estimate than a decrease.

Alphabet (GOOG)

• Key Focus Areas:
  • Anthropic Deal: Details on the significant expansion of Anthropic's use of Alphabet's AI accelerators, estimated to be worth tens of billions of dollars and involving up to 1 gigawatt of power by 2026.
  • Gemini Engagement: Updates on the use of Gemini to support AI overviews.
  • Search and Cloud Revenue: Expectations for strong search sales and accelerating cloud revenue.
  • Capex Plans and Monetization: Updates on capex plans and the ability to monetize these investments.
• Morningstar Rating: 4-star stock, trading at a 13% discount to fair value after a 27% increase in fair value to $300 per share (an $840 billion market capitalization increase) based on faster cloud growth and improved long-term profitability from the Anthropic deal.

Meta Platforms (META)

• Key Focus Areas:
  • AI-Driven Ad Revenue: Expected double-digit growth in the AI portion of ad revenue.
  • 2026 Capex Commentary: The primary focus will be on capex plans for 2026 and beyond, with expectations for growth.
  • AI Strategy: Investors are concerned about Meta's AI strategy, particularly its lack of a dedicated cloud division to directly monetize AI investments. More clarity on the next 12-24 months is desired.
• Morningstar Rating: 3-star stock, trading at a discount but not considered particularly attractive, sitting at the bottom of the 3-star range.

Amazon (AMZN)

• Key Focus Areas:
  • AWS Outage: Investors will demand details on the cause and preventative measures for the recent AWS outage.
  • Tariff Impact: Commentary on the impact of tariffs on their business.
  • Operating Margin Expansion: Expectations for operating margin improvement from ongoing efficiency efforts.
  • Holiday Season Outlook: Outlook for consumer spending during the holiday season.
• Morningstar Rating: 4-star stock, on the border between 3 and 4 stars. Not considered particularly undervalued, with more upside potential than downside risk but not enough of a margin of safety for new investment.

Apple (AAPL)

• Key Focus Areas:
  • iPhone Sales and Services Revenue: Focus on fundamental performance, including iPhone sales and growth in the services segment.
  • Holiday Sales Outlook: Thoughts on consumer spending patterns for high-end phones.
  • AI Strategy Communication: Apple needs to better communicate its AI strategy to investors, addressing concerns about reliance on third-party AI providers, limited cloud capacity, and past product rollout delays. The AI use case has been perceived as underwhelming.
• Morningstar Rating: Well into 2-star territory, trading at a 25% premium to fair value.

Other Companies of Interest

• Service Now (NOW):
  • Key Focus: Benefits from incorporating AI into its products and services, countering concerns that AI might erode revenue. Morningstar believes AI will be a beneficiary.
  • Morningstar Rating: 3-star stock, trading at an 11% discount to fair value, down 12% year-to-date.
• Eli Lilly (LLY):
  • Key Focus: Strong growth from GLP-1 weight-loss drugs is already priced in.
  • Morningstar Rating: 2-star stock, trading at a 27% premium to fair value. Needs to show strong long-term growth dynamics to avoid a sell-off.
• Bristol Myers Squibb (BMY):
  • Key Focus: Market concern over drugs coming off patent is not fully valuing the company's R&D pipeline.
  • Morningstar Rating: 5-star stock, trading at a 34% discount to fair value with a 5.7% dividend yield. Positive drug development results could drive a rally.
• Sherwin-Williams (SHW):
  • Key Focus: Curiosity about results and guidance, particularly after the halt of their 401k match, which could signal dire straits.
  • Morningstar Rating: 2-star stock, trading at a 29% premium to fair value.
• UPS (UPS):
  • Key Focus: Longer-term view is needed. Concerns about the dividend yield being at risk. Any good news could significantly boost the stock due to negative market sentiment.
  • Morningstar Rating: 4-star stock, trading at a 23% discount with a 7.5% dividend yield.
• Tesla (TSLA):
  • Morningstar Fair Value Increase: Raised by $50 due to a higher valuation for the robo taxi business and increased adoption rate for full self-driving.
  • Key Concerns: Expiration of US EV tax credits, delay in robo taxi product launch, and increasing competition in energy generation and storage.
  • Morningstar Rating: Well into 2-star territory, trading at a 45% premium to fair value.
• Netflix (NFLX):
  • Post-Earnings Performance: Stock fell significantly due to an unexpected $600 million tax charge in Brazil, raising questions about ongoing operating margins.
  • Fundamentals: Top-line growth was better than expected, and operating margins (excluding the tax charge) were also better. However, fundamentals were weaker than the market desired.
  • Morningstar Rating: Well into 2-star territory, trading at a 42% premium to fair value, with market expectations for long-term growth considered too high.
• Intel (INTC):
  • Key Focus: The bounce after investments and government stake. Revenue and gross margin exceeded guidance, but this was due to a higher mix of older PC processors, raising concerns about customer adoption of their best products.
  • Outlook: Intel has a long way to go in its turnaround and is still losing market share to AMD.
  • Morningstar Rating: 2-star territory, trading at a 37% premium to fair value.
• Lockheed Martin (LMT):
  • Key Focus: Investors are concerned about potential competition for F-35 funds due to shifting defense department priorities and a tightened 2025 free cash flow forecast.
  • Morningstar Outlook: Analyst increased fair value due to increased F-35 delivery forecasts and confidence in export orders.
  • Morningstar Rating: 3-star stock, trading at a 10% discount.
• Northrop Grumman (NOC):
  • Key Focus: Results were in line with expectations. Potential upside from increased speed in B-21 bomber production and a favorable position in the competition for new sixth-generation carrier-based fighters.
  • Morningstar Rating: 3-star stock, trading at a 4% discount.
• Danaher (DHR):
  • Key Focus: Strong earnings pop, with fundamentals in line with expectations. Management maintained 2025 guidance and provided a positive initial view for 2026.
  • Morningstar Rating: 4-star stock, trading at a 17% discount.
• Thermo Fisher Scientific (TMO):
  • Key Focus: Nice pop in stock after earnings. Operating margin expansion and slowly improving demand across major segments. China remains a drag but is offset elsewhere. Management provided higher guidance.
  • Morningstar Rating: 4-star stock, trading at a 9% discount.

Question of the Week: Capital One (COF)

• Stock Price: $225 per share, slightly above Morningstar's fair value of $210.
• Morningstar Rating: 3-star stock.
• Dividend Yield: 1.1%.
• Outlook: Expect a principal plus dividend return over the long term to equal the cost of equity.
• Uncertainty Rating: High, due to significant exposure to credit card and auto debt.
• Economic Moat: Narrow, based on cost advantages and switching costs.
• Operating Profile: Fewer retail bank locations, leading to lower costs but reliance on online deposit gathering, requiring higher deposit interest rates. This profile should benefit from Fed rate cuts due to lower short-term funding costs.
• Loan Book Composition:
  • Credit Cards: ~60%
  • Auto Loans: ~20%
  • Commercial Loans: Remainder (no office exposure).
• Credit Risk:
  • Credit Card Receivables: 28% to low FICO scores.
  • Auto Loans: Almost half to low FICO scores.
• Default Rates: Rose in 2023-2024 due to labor market weakness, but are now stabilizing at normalized levels. Expected unemployment rate of 4.6-4.7%.
• Acquisition of Discover: Generally viewed positively. Discover's credit card processing network will be utilized by Capital One for debit cards by 2027 and potentially for credit cards, reducing reliance on external networks like Mastercard and lowering costs.

Dave's Stock Picks

1. Mondelēz International (MDLZ)

• Theme Connection: Sells a wide variety of chocolate and candy, including popular Halloween treats like Sour Patch Kids and Swedish Fish.
• Morningstar Rating: 4-star stock, trading at a 19% discount to fair value.
• Dividend Yield: 3.3%.
• Economic Moat: Wide, based on cost advantages and intangible assets.
• Uncertainty Rating: Low.
• Investment Thesis: Attractive valuation, good for investors seeking emerging market exposure without direct risk (40% of revenue from emerging markets, targeting mid-single-digit sales growth there vs. low single-digit in developed markets).

2. Dollar General (DG)

• Theme Connection: Offers a wide variety of seasonal items, decorations, costumes, and candy for Halloween. Margins are higher on discretionary items.
• Morningstar Rating: 4-star stock, trading at a 13% discount to fair value.
• Dividend Yield: 2.3%.
• Economic Moat: Narrow, based on cost advantages and intangible assets.
• Uncertainty Rating: Medium.
• Investment Thesis: The market has overreacted to news regarding dollar stores. After being overvalued during the pandemic and then undervalued due to inflation, Dollar General has recovered but has sold off more recently, returning to 4-star territory. The investment thesis is that as wage inflation catches up, purchasing patterns will normalize.

3. Diageo (DEO)

• Theme Connection: Provides adult beverages for Halloween celebrations.
• Morningstar Rating: 4-star stock, trading at a 25% discount to fair value.
• Dividend Yield: 4.3%.
• Economic Moat: Wide, based on intangible assets.
• Uncertainty Rating: Medium.
• Investment Thesis: Alcoholic beverage consumption in developed markets has been on a multi-year downward trend, reaching a 90-year low in the US. Diageo's revenue declined in 2024 and has been stagnant in 2025, leading to reduced operating margins. The expectation is for revenue stabilization in 2026, followed by normalized growth, which should improve operating margins. The stock trades at approximately 13 times earnings, making it a value stock.
• AI-Themed Cocktail Recipe: Captain Morgan Zombie Punch (using Captain Morgan rum, orange liqueur, brandy, orange juice, lime juice, grenadine, and bitters), garnished with a gummy worm. Other recipes mentioned include Bailey's Pumpkin Spice Martini and Johnny Walker Black Fog.

Conclusion

The market is currently driven by positive sentiment surrounding AI growth, constructive tariff talks, and expectations of Fed rate cuts. Investors are closely watching earnings reports from major tech companies, with a particular focus on AI-related investments and future growth prospects. Morningstar's analysis highlights several companies trading at attractive valuations, offering potential opportunities for investors, while also cautioning about overvalued stocks and specific risks. The discussion also provided insights into the broader economic outlook and fixed income strategies.