Everyone’s Panicking… These Are the 3 Stocks I’d Buy Now

Over the past week, some of the largest and highest quality companies in the market have been hit hard. We've got Amazon that fell more than 6%. Meta and Alphabet fell almost 8% and American Express that dropped more than 8%. And beneath the major indices, the damage in fact is far more worse than what most investors realize. We've got Microsoft that's now down more than 30% below its highs. Service Now that's down around 53% and we've got Meta that's down around 25%. And ultimately the sell-off has created a huge divide between two groups of investors. One that believe AI spending is becoming uncontrollable and the technology stocks still have much further to fall. The other believes the market is finally giving long-term investors an opportunity to buy some exceptional businesses at reasonable prices. And today I'm analyzing seven of those companies. Three of them report earnings next week. So this could be the final opportunity to buy before a major move or the worst possible moment to rush in. And by the end of the episode, I'm going to separate seven into three groups. Buy now, wait for earnings, or not cheap enough. And I'll reveal which one currently offers the strongest combination of business quality, growth, and valuation. But first, we need to understand why the market suddenly becomes so nervous. Nearly 900 billion was erased from major tech companies in just one single session. And the concerns no longer whether AI demand is real. The concerns whether these companies can ever generate enough cash to justify the extraordinary amount they're spending. And while the S&P 500 itself has not collapsed, the average stock is already experiencing a genuine correction. And before we look at the seven companies, listen carefully to this. This is Warren Pies of 314 Research explaining the scale of the damage that headline indices are concealing right now. >> Yeah. Um I I think it is, you know, I think that the the number one key here is well, first let's step back and just realize the amount of damage that's under the surface. We've had the average S&P stock is down more than 18% from a 252-day one-year high. And so there is a real correction happening. I mean the the the real exhibit A for that would be the semiconductor group. You know even in the cap weighted Nvidia dominated group that's down like 13%. If you look at SMH or socks it's down way more than that. >> And so I think we have corrected a lot of that and then we're going into earnings season. >> That's the crucial distinction. The market index may not be in a formal correction, but the average company already is. And this is not only occurring in spec stocks. It's happening in profitable established businesses with recurring revenue, dominant market positions, and doubledigit earnings growth. And we can see that fear has returned, but this is not yet capitulation. The fearing greed index sits at 40, not extreme fear. And it means investors are nervous, but plenty of optimism. Well, that still remains. In fact, Bank of America's bull and bear indicator is still at an extreme 9.6. So, the markets caught between two opposing forces. We've got positioning which remains extremely bullish while individual stocks are being sold aggressively. It increases the chance of violent moves in both directions during earning season. And we can see that Alphabet's annual capital expenditure is projected to rise from 52 billion in 2024 to around 200 billion in 2026. That would be almost four times as much spending in only 2 years. And in fact, despite recording its biggest revenue quarter ever, Google generated its first negative free cash flow quarter on record. The bearish argument is straightforward. The earnings figures still look impressive because capital expenditure does not immediately pass through the income statement, but the cash that's already left the business. And we've got Charlie Borinskcoy of Aerial Investments explain why he believes headline earnings may currently overstate the real economics of the entire AI buildout. >> I think the key point here is that that is looking at EPS. Cash flow is going to be much worse than that. there's going to be much worse uh cash flow growth because of the massive capital expenditures, a trillion dollars going into data centers. We're putting money into an area that has never shown a proven return. If we get great returns, then it'll be fine. But, you know, the way that the accounting works is that trillion dollars of spending doesn't flow through the EPS number for many years. And so, I would say that the EPS numbers are overstating cash flow. That is the risk investors must take seriously. A company can report rising earnings while free cash flow deteriorates. And if these investments fail to produce strong returns, well, today's apparently reasonable valuations may prove misleading. But there's another side to this argument. We've got Dan Ies who argues that investors are treating necessary strategic spending as though it were irrational spending. Look and and I think the alphabet reaction, you know, I think that someone would say maybe headscratching because if you saw the cloud growth, you look what they're doing across the business and of course increasing capex, but as we've talked about, this is an arms race. It's third inning in the AI revolution. Microsoft, Amazon, Meta, no one's going to slow capex. Could you slow it down, you get ultimately, you know, you're out of the line in terms of when it comes to capacity. That creates the defining question for the next decade. Is this reckless overspending or the price of remaining relevant in the most important technological transition since the internet? I don't believe every company spending heavily on AI will earn strong returns, but I also don't believe the correct response is to avoid every business investing aggressively. The solution is to compare the price we are paying with the growth the market's already assuming. And that's exactly what we're going to do now. The first company we're looking at is American Express. Now, the stock, as we can see, that was down around 4.3% following their earnings, and now on a year-to-ate perspective, it's down around 12%. At first glance, the sell-off appears understandable. Revenue of 19.6 6 billion narrowly missed Wall Street's estimates, but the rest of the report that was considerably stronger and we can see it currently trades towards the lower end of the 52- week range with a double but weak buy from both Seek Alpha as well as Wall Street. Now, their earnings per share that reached $453, beating expectations by 3%. Revenue that was up 10% year-over-year, EPS up 11% and card member spending rose 9%, the strongest rate American Express has recorded in 3 years. And management also raised its fullear revenue growth outlook to 10%. That is not what we'd normally expect from a company experiencing a major consumer slowdown. And management specifically said that global travel spending rose 10%, the strongest result in six quarters with no evidence of a broad slowdown. And if I'm honest, this chart here illustrates one of the most underappreciated parts of the American Express model. The average fee per card is increased from $61 in 2019 to $131 today. That is a compounded annual growth rate of around 12.5%. American Express is not only adding customers, it's increasing the economic value generated by each card holder. And the company continues attracting younger, higher spending customers who may remain with its ecosystem for decades. But the valuation is not an obvious bargain. It currently trades around 18 times Ford earnings, almost exactly in line with its 5-year average. So despite the share price weakness, the stock is not historically cheap based on its earnings multiple. And you'll notice when we look at the blue tunnel from Simply Safe Dividends, which points out the intrinsic fair value, it's sitting bang in the middle, which would mean a potential reasonable signal. Look at the last 5 years, last 10 years. American Express is one of those companies extremely rare to see an undervalued signal. It tells you the sentiment of investors. They've been more than happy to buy this, not only in a reasonable signal, but also at a premium for many years. Now, my blended valuation gives American Express an intrinsic price of $362 at a price around $325. It creates a margin of safety of just over 10%. My more optimistic cash flow model produces a value of 396 with scenarios ranging from 349 to $450. But the reverse DCF implies roughly negative 1% long-term free cash flow growth. It tells us expectations here for AXP. While they're not in fact demanding, American Express is a high quality business with resilient customers, growing fees, and strong earnings momentum. But because the valuation remains close to historical norm, I wouldn't call this the strongest bargain in the video. I'd say buy gradually. I'd be comfortable beginning a position here, but I preserve capital in case consumer weakness creates a better entry. And the next company offers a more obvious historical valuation discount, but still carries one major risk. And before we dive in, I want to let you know I've released my latest weekly article. We drop one every single week covering severely undervalued stocks as well as what's going in the market over the last few days. You can click below, sign up, and read these straight away. Now, MCI is one of the least familiar names in the video, but potentially one of the highest quality businesses. The company provides the indices analytics and data infrastructure used throughout global asset management. Every time more capital flows into products tracking an MSI index, the company benefits from recurring high margin revenue. The stock is down around 4% this year and it sits roughly around 15% lower than its highs. Also trading towards the lower end of the 52- week range with a strong buy rating from Wall Street. Now, this overall doesn't sound dramatic, but the valuation reset is more significant than the share price decline suggests. I mean, it's trading at one of its lowest valuations in at least the last 5 years, 26 times forward earnings. 5 years is much higher at 36. That's a discount of almost 30% to its normal valuation. And the yield of 1.5% is well above the 5year of 1.1, which provides another signal that the stock is cheaper than usual. And no surprises when we look at the blue tunnel. There is a disconnect between the stock price and the bottom end. Another undervaluation signal. Although just look at the last 5 10 years. This one pretty much since the beginning of 2024 has not only been trading at an undervalued level, but the best thing we get to see is the underlying fundamentals keep moving in the right direction. Now the business is not growing at a service now or meta kind of rate, but it was up around 12% year-over-year. Earnings per share. Well, that grew by around 21% and long-term EPS projected to grow around 13 to 14%. It's attractive for an asset like business with highly recurring revenue. However, growth is modestly below their own 5year average in several categories as we can see here. So, we need to be careful not to assume that a lower multiple automatically makes the stock cheap. And if we look at Wall Street, their projections around $690 over the next 12 months, implying upside around 26%. The low target sits at 570 while the high estimate reaches around 760. And my DCF, well, that arrives at almost the exact same conclusion, $689 at the middle level. That's a margin of safety of around 20%. The more conservative scenario produces a value of $600. And we can see the middle case 689, higher case $790. The reverse DCF is suggesting the market expects long-term growth of around 11%. is below the company's historical cash flow growth as we can see here 1416 respectively on a 5 and 10-year comparison and also below analyst long-term earnings estimates but not dramatically so. So I conclude with MSCI saying it's not a distressed bargain is a premium business trading at a smaller premium than usual. I believe the current valuation attractive for long-term investors particularly below $550. So, I'd give it a buy verdict, but because the conservative scenario offers only singledigit upside, I'd build the position over time rather than buying it aggressively in one transaction. And the next company, it's far more familiar and the valuation depends almost entirely on one controversial assumption and that's Amazon which is pretty much flat this year. But we can see it's down around 17% from its highs of $279 where we get a double strong buy from Wall Street and Quant with a respectable buy rating from Seek Alpha trading towards the lower end of the 52- week range. 52- week low sitting just shy of $200. Now the stock itself trading at a forward P below 27 that's expensive compared with the consumer discretionary sector but Amazon is no ordinary retailer AWS advertising and third-party services now generate a growing share of Amazon's profits and these businesses carry far stronger economics than first party online retail revenue while that's growing around 14% year-over-year DAR growing at 23% and forward earnings well that's expected to exceed 21%. It produces a forward PG ratio near 1.25, which isn't unreasonable for a company of Amazon's quality. Now, Wall Street, they forecast $313 over the next year, implying 35% upside, but analysts are not the important part of this case. the cash flow is and Amazon's free cash flow that's fallen sharply as the company invests aggressively in AI and data center capacity we can see down 76% year-over-year is the same concern that caused a broader hyperscaler sell-off and my valuation requires a meaningful future recovery the model which has used analyst expectations assumes free cash flow rises from 11 billion in 2026 to 51 billion in 27 now it sounds extreme But it doesn't require revenue to quadruple. It requires Amazon's current investment cycle to normalize an AWS advertising and retail margins to convert more operating earnings into cash. It's possible, but it's not guaranteed. And under my medium assumption, Amazon's worth around $33. Now, that creates a margin of safety of around 24%. The low scenario gives us 268. The high case reaches 343 and the reverse DCF implies only around 3 12% long-term free cash flow growth looks undemanding but only because current free cash flow is temporary depressed. So my conclusion for Amazon is potentially one of the more attractive stocks in the entire episode. But the thesis depends on cash flow normalization. Next week earnings need to show three things. AWS growth remains strong. retail profitability remains intact and management can demonstrate a credible path from enormous AI spending to expanding cash flow. So, I'd say buy before earnings, but not a full position. I'd be comfortable owning some shares now, but I'd retain capital for the possibility that another aggressive capex forecast creates further volatility. And now we need to move to a company whose cash flow record is far more consistent. And that's Mastercard, which is down around 5% this year and currently sits around the midpoint of the 52- week range is on a crash stock. Is simply one of the best businesses in the market trading at a lower valuation than usual. Remember, it operates a global payments network. It doesn't need to lend customers money or carry significant credit risk. It earns a toll whenever money moves across the network, producing exceptional margins, recurring transaction revenue, and powerful long-term exposure to the global shift away from cash, where we notice not only a strong buy from Wall Street, but also seek out for very near the 4 and a half to also flip it into the strong buy. Now, the stock trades around 27 times forward earnings. It is a premium multiple but it is below their 5year average of 31 yield also sitting slightly above the 5-year where the blue tunnel tells us that this company still looks undervalued. Look at the last 5 and 10 years. This is one again extremely rare to see this in a severely undervalued level. And if you are someone who's been following the channel on Substack then you know we've been buying this position as it was near its 52- week lows. Now in terms of the growth revenue is up 17% year-over-year. forward revenue expected around 14% and you can see earnings per share long-term expected to compound at a 16% rate. Now paying 26 times earnings for mid- teens compound growth is not cheap but it's reasonable for a business with Mastercard's economics and durability where Wall Street see just shy of 20% upside over the next year. $644 price target although the range quite wide 550 at the low end 735 at the upper end. Now my medium valuation is around $671 creating a margin of safety of around 20%. Looking at the different rates lower end $581 at the high end 775 and the reverse DCF is suggesting the market expects long-term growth around 9%. Now it's considerably below Mascard's historical cash flow growth and below the 16% long-term growth estimate. Now, obviously, Mascard is not the largest potential winner in the episode, but it may be one of the easiest businesses to hold for the next decade. I'd give it a buy rating. I wouldn't chase it aggressively because the low case only offers around 8% upside, but around 540, I still believe the risk and reward profile is attractive. But the next company may be an even better business, but surprisingly, its valuation case is less convincing. And that is Microsoft, which is down around 21% just this year. It's below its 52- week high of $555 by more than 30%. In fact, looks to be trading near 52- week lows with a strong buy rating from Wall Street. And for one of the most dominant business world, this is an overall significant decline. Remember, the company reports earnings this coming week and the results could redefine the entire AI trade. Now it trades at one of the lowest valuations in the last 5 years near 31 times and you can see the 5-year much higher around 3031 is one of the largest multiple discounts Microsoft has ever received and unusually the business is not slowing where we still get that severe undervaluation signal. Fundamentals are increasing yet the disconnect continues to be there. Again it's one of those companies that has very rarely been in this situation before. In fact, going before 2016 to up until the end of 2021, this one was consistently being bought by investors at quite a significant premium. Now, their revenue was up nearly 18% year-over-year. EBIT DAR grew 26% and earnings per share was up nearly 30. Their revenue and earnings growth are currently above their 5-year averages, while the valuation sits far below its historical norm. It sounds like an obvious bargain, but cash flow tells a more complicated story. If we look at lever free cash flow that was down 29% year-over-year and free cash flow per share that's expected to be down around 8% moving forwards. The reason is the same one affecting Alphabet, Amazon and Meta. AI infrastructure is consuming an extraordinary amount of cash. And Wall Street's average price target $557 implies around 46% upside. But in my model, it's much more conservative. And another one maybe one of the highest in terms of the range, $400 lowerend, $870 at the upper end. Where my medium estimate gives Microsoft a fair value of $423. At the price today, that's a margin of safety of only 10%. The low case where we can see at 8 337 roughly 12% downside. Medium case 11% upside and the high case 484 27% upside reverse DCF implying 10.7% long-term growth. Unlike Amazon Service Now, the market's not pricing Microsoft as though growth disappears. It's still assuming meaningful future expansion. So, my conclusion for Microsoft is arguably the highest quality company in the video, but quality and valuation are not the same thing. At current price, Microsoft looks reasonable rather than dramatically undervalued. I'd say wait for earnings. I'd happily own Microsoft for the long term, but with only a 10% modeled margin of safety and a major earnings report days away, I'd rather wait for the company to demonstrate that Azour growth and AI monetization justify the spending. Next stock, however, offers a larger margin of safety, but also carries a much higher spending risk. And that's Meta, which is down around 10% this year and approximately 25% lower than its 52- week high around the $800 mark, trading towards 52- week lows. Another strong buy rating from Wall Street. And it's sitting around 18 times Ford earnings. It's cheaper than American Express, Microsoft, Mascard, MSEI, Amazon, and Service Now. And yet, Meta's revenue growth is stronger than every company we've covered. so far except Service Now. In fact, their revenue was up 26% year-over-year. Forward revenue expected 23% and long-term earnings growth anticipated 22%. Their current revenue growth, well, in fact, is 36% higher than its own 5-year average, but the valuation is lower than usual. I mean, it's trading 18 times Ford earnings. It's 5 years sitting higher at 22. So, growth is accelerated while the multiples contracted. That is normally an attractive combination, but Meta's AI spending is creating a major gap between revenue growth and cash flow growth. When we take a look, in fact, their led free cash flow growth that was down around 32% and management has repeatedly increased capital spending expectations. If Meta raises those expectations again next week without proving that AI investment is improving monetization, investors may punish the stock regardless of headline earnings. And Wall Street's average target is $826, implying 39% upside. Even the lowest target shown here is above the current share price. And my medium DCF reaches almost the exact same valuation, $824, producing a margin of safety near 28%. The low case, well, $752. The highase 92. And every single scenario offers meaningful upside. The reverse DCF suggests investors are pricing in only 5% long-term cash flow growth. It's an enormous gap relative to Meta's current revenue growth and long-term earnings expectation. So for me, for Meta, it's currently my favorite of the three hyperscalers covered in the episode. The advertising business is accelerating. Valuation below historical norm. Implied growth expectations appear conservative. The risk is that capital spending keeps rising faster than monetization. So I say buy but expect earnings volatility. I would be comfortable buying a partial position before earnings. But because Meta can move 10% or more after report, I would not commit all available capital today. And now we reach the final company, the stock with the largest decline, the strongest revenue growth, and the most controversial AI disruption debate. And that service now down more than 35% this year and down more than 50% from its 52- week high of $21. Now the stock has rallied as we can see around 7% following earnings. But despite that move, it remains one of the most heavily discounted highquality software companies in the market. The entire bearish thesis is based on one fear. AI agents will reduce employee seats, allow customers to build their own software, and destroy traditional enterprise software pricing. Service Now's latest quarter directly challenged that argument where we noticed a strong buy from Wall Street, respectable buy from Seeking Alpha. Now earnings beat expectations by 5%, revenue beat expectations and increase 24% year-over-year. And their subscription revenue increased 25% to 3.88 billion. Current remaining performance obligations, a measure of near-term contracted revenue, that was up 21% to 13.2 billion. Both figures beat analyst expectations and Service Now AI has crossed 1 billion in annual contract value. Total remaining performance obligation reached 29 billion and the company completed 123 transactions above 1 million in new annual contract value, an increase of nearly 40%. That does not resemble a business being disrupted. And management said it's not concerned about seat compression. Around 50% of net new business is already non-seatbased and service now argues that customers could spend five to ten times more building their own agent than operating one through service now. The company may not be a victim of AI. It may become the government's and workflow layer that enterprises use to control AI. The long-term revenue chart, it remains one of the cleanest in enterprise software. Trading revenues risen from 16.6 6 million in 2010 to nearly 15 billion today and it traded around 24 times in fact non-GAAP earnings their 5year average six round 60 it means the multiples contracted by around 60% now historical multiples are not automatically fair value service now was clearly overvalued at certain times but today's valuation is only slightly above the sector we can see median despite the company growing significantly faster than the sector their revenue in fact grew above of 22% full revenue expected around 21% and levered free cash flow that was up 31%. Unlike the hyperscalers service now's free cash flow growth is accelerating rather than collapsing and Wall Street's average price target $140 implies 42% upside. My medium estimate is even higher at around $153 creating a 36% margin of safety. The low case gives us 111, the high case 210, and the reverse DCF only implies 3% long-term free cash flow growth. That is the lowest embedded growth expectation among the major growth companies in the entire episode. So, Service Now, it still trades at premium sales and GAP earnings multiples is on a traditional value stock, but the market appears to be pricing the business as though AI will permanently damage its economics. While the latest report suggests AI is strengthening demand. So my verdict, strong buy. Of the seven companies analyzed today, Service Now currently offers the largest combination of share price damage, fundamental resilience, revenue and free cash flow growth, valuation compression, and upside across all three DCF scenarios. Look, it's also the riskiest of my top choices because software sentiment remains fragile. But at the current price, I believe that risk is being more than adequately compensated. So if we take a look at a final ranking in number seven I have American Express a strong business but the valuation is close to its historical norm and offers the smallest clear margin of safety. And number six Microsoft probably the best company in the group but not the strongest opportunity before earnings based on my conservative assumptions. And number five Msei a premium recurring revenue compounder at a meaningful discount to its normal valuation. And number four, Mastercard. An exceptional long-term compounder with a strong cash flow record and a reasonable but not deeply discounted valuation. And number three, Amazon. The upside's attractive, but the valuation relies heavily on free cash flow recovering after the current investment cycle. And number two, Meta. It offers the strongest mega cap combination of accelerating revenue growth and a below average valuation. And at number one, Service Now. The market is pricing in severe AI disruption while revenue bookings, AI contract value, and free cash flow all indicate that the business remains extremely healthy. If I was deploying fresh capital across these seven today, I put in around 30% in Service Now, around 25% in Meta, 15% in Amazon, 10% in Mastercard, 10% in MSCI, 5% in American Express, and 5% cash. Now, I'd allocate the largest amount to service. Now, as I said, Meta the second largest, Amazon a smaller position before earnings. And I'd build Mastercard and MSI gradually. I'd probably take a starter position American Express and keep cash available for Microsoft after earnings. Doesn't mean Service Now is guaranteed to deliver the best return. It means its present price offers the largest gap between what the business is currently producing and what the market appears to be expecting. And don't forget to sign up to the weekly newsletter. We drop them, as we said, once a week. lots of information, including severely undervalued stocks. But the most important lesson from this sell-off is that a falling share price does not automatically create a bargain. Microsoft down more than 30% from its high, yet my conservative valuation still offers only modest upside. Service Now is down more than 50%. Though the latest financial results suggest the business continues compounding above 20%. The opportunity is not to simply buy whatever's fallen most is to identify whether share price decline has become disconnected from the underlying fundamentals. Next week, Microsoft Meta and Amazon will provide the market's biggest AI spending test yet. The results could either validate the opportunity or create even better prices. But let me know in the comments which of these seven you'd buy today, which one you believe maybe I've ranked too highly. And if you found the analysis useful, subscribe so you don't miss the full breakdown of next week's earnings and the updated valuations after the report. More importantly, have a great day. I'll see you all on the next