Wall Street's Top 5 Buys and Sells: High-Conviction Calls for Strategic Positioning in Q3 2025

As the third quarter of 2025 unfolds, Wall Street analysts are sharpening their focus on valuation discipline and momentum timing to identify opportunities for alpha generation. With the S&P 500 trading at a 2% premium to fair value and growth stocks at an 18% premium, the market is signaling a shift toward value and small-cap stocks. Morningstar's chief U.S. market strategist, Dave Sekera, has outlined five high-conviction buys and sells, blending deep-dive valuation analysis with macroeconomic positioning. Here's how investors can leverage these insights for strategic portfolio adjustments.

1. Johnson & Johnson (JNJ): The Dividend King's Margin of Safety

Johnson & Johnson, a wide-moat healthcare giant, is trading at a 5% discount to its intrinsic fair value. Its 3.3% dividend yield and consistent earnings performance make it a cornerstone for income-focused portfolios. The stock's low uncertainty rating and robust R&D pipeline in oncology and immunology (accounting for 67% of revenue) position it as a defensive play in a volatile market.

Momentum Timing Insight: With earnings expected this week, investors should monitor guidance on drug pricing regulations and R&D progress. A positive report could trigger a re-rating to its fair value, offering a 5% upside.

2. ASML (ASML): The AI Semiconductor Bellwether

ASML, a 4-star rated semiconductor equipment manufacturer, is trading at a 16% discount to fair value. As the sole supplier of extreme ultraviolet (EUV) lithography machines for AI chip production, ASML's performance is a leading indicator for the AI boom. Hyperscalers and Nvidia's demand for advanced chips will drive its capex forecasts.

Valuation Edge: At $300/share, ASML offers a compelling margin of safety. A 10% earnings beat could validate its $350 fair value estimate, unlocking 16% upside.

3. Taiwan Semiconductor (TSM): The AI Manufacturing Engine

TSM, a 4-star rated foundry, is trading at a 12% discount to fair value. As the sole manufacturer of Nvidia's H100 GPUs, TSM's production capacity directly correlates with AI demand. Its 16% year-to-date gain reflects strong execution, but supply constraints in AI chip manufacturing remain a risk.

Momentum Play: Investors should watch for TSM's Q3 guidance on AI-related orders. A 5% increase in gross margins could signal sustained demand, validating its $65 fair value.

4. Constellation Brands (STZ): Undervalued Alcohol Giant

STZ, a 5-star rated beverage company, is trading at a 30% discount to fair value. Despite a 4% revenue decline in Q2 (driven by its spirits division), management's focus on beer innovation and $1.5 billion in buybacks has stabilized its core business. Warren Buffett's stake in the company adds credibility to its undervaluation.

Rebalancing Opportunity: With a 3.3% dividend yield and a 10% buyback allocation, STZ offers a compelling risk-rebalance. A 15% rebound in spirits sales could push the stock toward its $60 fair value.

5. Fluor Corporation (FLR): High-Risk, High-Reward Energy Play

FLR, a 3-star rated engineering firm, is trading at a 13% discount to its raised $60 fair value. Its 38% surge since May 2025 is driven by its stake in NuScale Power, a small modular reactor developer. However, the nuclear sector's execution risk and regulatory hurdles make this a speculative call.

Profit-Taking Strategy: Given its 13% discount and high uncertainty, investors should consider locking in gains at $55. A 10% pullback could test its $50 support level, offering a second entry point.

Strategic Positioning: Balancing Value and Growth

Sekera's Q3 2025 outlook emphasizes overweighting value and small-cap stocks (at 12% and 17% discounts to fair value) while underweighting growth stocks. Energy and medtech sectors, trading at 9% and 12% discounts respectively, offer long-term upside. Conversely, large-cap pharma and overvalued growth stocks (e.g., AI pure plays) face profit-taking risks.

Conclusion: Actionable Alpha in a Polarized Market

The Q3 2025 landscape demands a dual focus on valuation discipline and momentum timing. JNJ and STZ provide defensive, income-driven opportunities, while ASML and TSM offer high-growth exposure to the AI cycle. FLR, though speculative, rewards those who balance risk with reward. By rebalancing portfolios toward undervalued sectors and locking in gains on overextended names, investors can position for both near-term stability and long-term compounding.

Final Call to Action: Rebalance now—prioritize JNJ and STZ for core holdings, and use ASML/TSM for AI exposure. For FLR, consider partial profit-taking to mitigate execution risk. The market's current dislocation is a rare opportunity to build a resilient, alpha-generating portfolio.