The Stock Market Just Changed — I’d Buy These 2 Stocks Now

Something pretty important has changed underneath this stock market. And I don't think enough investors have noticed it yet. For years, the easiest way to outperform was essentially to own the biggest technology companies and stay out of the way. But that isn't what's happening in 2026, the Magnificent 7. Well, in fact, they've returned more than 100% in 23, 64 in 2024, and almost 25% last year. Now, they're only up around 5% on an equal weighted measure. Meanwhile, the average S&P 500 stock is actually beating the index. And what that means, well, the opportunity is starting to look very different. You can see enormous winners scattered across semiconductors, healthcare, industrials, and energy. While some of the stocks investors couldn't buy quickly enough only months ago where we're noticing they've started to completely repric. But here's the strange part. Even after the market recovered, enormous section of the index remained well below their highs. So, this isn't really a story about whether the S&P 500 is expensive or cheap. It's about whether the market has become wrong. And this weekend, we got perhaps the most interesting signal yet. After years of building one of the largest cash piles in corporate history, Bergkshire Hathaway has started putting serious money back to work. And today, I want to answer two questions. First, why is Burkshire buying now? And second, if one of the most patient capital allocators on Earth thinks there's finally places worth deploying money, well, where would I personally put mine? Because by the end of the episode, I'm going to show you two stocks where I think the valuation has become genuinely difficult to ignore. Now, starting with Breath, the average S&P 500 stock is up around 15% compared with roughly 13% for the cap weighted S&P 500. That's almost the opposite of the narrow market investors became used to. If we look at just the last 30 days, Nvidia and Broadcom, they're strong, but so are Amazon, healthcare names, financials, defense stocks, energy companies, and plenty of much smaller businesses. That is no longer simply seven stocks pulling everything else higher. And that's important because when market leadership broadens, valuation matters again. If you could simply own the obvious winners in outform, there was little incentive to hunt elsewhere. But once that stops working, investors start asking a more difficult question. What am I actually paying for? Sentiment. Well, that's already moved back into greed. A month ago, this was fear. So, I'm not approaching today from the perspective that everything is suddenly cheap. Quite the opposite. There are stocks I love that I just wouldn't chase here. And that's why today's five names are so different. Bergkshire is deploying cash. Google, well, that's where some of the cash went. We're going to take a look at Microsoft because it gives us a direct comparison with Google's AI spending. And then we're going to look at Fair Riset Corporation as well as Intuit because these are two former premium compounders where investors have suddenly decided the future looks much worse. Let's go ahead and see whether or not they're right. Starting with Bergkshire itself, the operating business had a very good quarter. Revenue came in around 101.8 billion, up around 10% year-over-year, while operating earnings reached almost 13 billion, up around 16%. And underneath that headline, you had growth across several of Bergkshire's giant operating businesses. BNSF revenue rose around 14%, manufacturing rose roughly 13%, service and retailing was up 11% and pilot revenue jumped almost 48%. Where we can see reported net income more than doubled. helped by investment gains. But as always with Berkshire, I care much less about quarterly marktomarket movements in the stock portfolio and much more about the operating earnings and capital allocation. And capital allocation is where things got really interesting because for years the biggest criticism of Berkshire was basically this. What is the point of holding hundreds of billions in cash if you can't find anything worth buying? And listen to how Bloomberg's analysts describe this latest quarter. I want to talk to you about that cash though because their their pot did fall. I mean it's still an enormous number. Um how much of that I mean they bought this home builder Taylor Morrison for 6.8 billion but the math isn't quite mapping that the cash basket could hit more than that. >> So they did a couple things. They also bought $10 billion worth of Google stock. Okay. Um they bought a stake in a Japanese insurance company Tokyo Marine. So they actually this was a a a spending quarter for them. It looks like I didn't get the full numbers, but it looks like they were a net buyer of stocks over 6 months. So, putting more money to work than Buffett was doing in his in his last year as a CE. >> That last sentence is the key. Bergkshire appears to have gone from persistent net seller to net buyer. This isn't simply one acquisition or one stock purchase. The direction of travel has changed and they're buying Berkshire itself. Roughly four and a half billion went into Berkshire share repurchases during the quarter, the largest quarterly amount in years. Tells us essentially management believe its own shares are at least attractive enough to deploy billions into it. But here's where I disagree slightly. At roughly $521, my normal DCF doesn't actually scream a bargain. We can see intrinsic price $486. Looks to be trading with no margin of safety. In fact, trading at a 7% premium. My low case here with 8% growth, 436. Middle 486 more optimistic sitting at $543 with the reverse DCF implying 11.3% growth. And Wall Street, well, they're not particularly excited either. The average analyst target, well, that's $525. Basically, no upside from the current share price. So, why would Bergkshire itself buy billions of dollars of stock? Well, ultimately Bergkshire is a terrible company to judge using one headline P. At around $520 per Bshare, roughly $170 is represented by cash and treasury bills. Another $133 represents the after tax value of the listed equity portfolio. It leaves roughly $216 for the operating business itself. And against annualized operating earnings around $1848 per share, it implies something around 11.7 times earnings for the operating businesses. Suddenly the buyback makes considerably more sense. So my Burkshire conclusion is nuanced. I don't think BRK at $521 is some obvious 30% discount. But I do think the behavior change that matters enormously. After years of cash accumulation, Berkshire has finally decided that the opportunity cost of holding cash, well, it's becoming greater than the opportunity cost of investing it. And one of the biggest places that money went is where we're heading next. Now, Bergkshire, they added another 10 billion to Google, taking what had already become one of its largest listed equity investments and making it even more significant. But honestly, don't buy Google simply because Berkshire did. The question is, does it still make sense at today's price? And before we look at the numbers, Buffett gave perhaps the cleanest six-second explanation of how we should evaluate every single stock in today's episode. >> The important thing is to buy a good business and to buy it on the right terms and to get the right person to run it. >> And that's the entire issue. Nobody seriously disputes that Alphabet is a good business. What matters is whether $354 represents the right terms. I mean, the operating numbers, they remain excellent. Revenue is growing 20% year-over-year with roughly a similar amount projected over the next 12 months. Forward EPS growth, well, that's sitting there 22.5%. Forward EBIT growth, that's projected at 24% for a company worth more than $4 trillion. Honestly, this is remarkable. And you've got profitability that remains elite. Gross margin that sits at 61%. EBIT margin sitting at 33%. Cash from operations 186 billion and return on equity is almost sitting at 50%. This is exactly the type of business that Buffett was describing. But this is the chart where the story changes. Net income has exploded upwards while free cash flow has fallen sharply. And in the most recent quarter on this chart, free cash flow actually slipped negative. It doesn't mean Google's underlying economics have suddenly collapsed. It just means that the AI infrastructure bill has arrived across the hyperscalers. Cash generation is being swallowed by one of the largest investment cycles corporate America has ever seen. And Google, well, they decided they cannot afford to underinvest. The bull case, well, is that this spending creates entirely new profit pools. One external estimate models around 25% gross margins on external TPU as a service economics. If Google can turn infrastructure into monetizable capacity at scale, today's capex eventually becomes tomorrow's cash flow. But that's an estimate. This is not guaranteed. And at the same time, while all the money is going out the door, Google's AI leadership itself is changing. Jeff Dean is leaving after decades at the company. While Demis Habis is moving into a different strategic role. The bigger question though is whether Google can commercialize its technology quick enough. And his sabis himself has admitted that Google had the technology earlier than almost anyone but wasn't always fast enough turning that technology into products. Let's take a listen. And um maybe we were in hindsight we were a little bit slow to commercialize it and scale it. And um you know that's what Open AI and others did very well. And then the last two, three years, I think we've had to come back to almost our startup or entrepreneurial roots and um be scrappier, be faster, ship things really quickly and um and and sort of make really rapid progress. And I think what you're seeing over the last couple of years culminating in Gemini, the Gemini series, which we're very happy with. Gemini 3 is, as as you mentioned, our latest version, um, has sort of put us back at, you know, near the top of, you know, the top of the leaderboards where we feel we belong. >> And this is why I think Google's next few years come down to one word, conversion. Can it convert scientific leadership into products, products into revenue, and enormous capex into sustainable free cash flow? because the valuation is already asking for quite a lot at around $350 today. My low case gives a price of $324. My medium case using analyst free cash flow path all the way to 2030 and then 14% growth that gives 344 and the more optimistic case at the higher end 364. The reverse ECF, well, it requires 15% long-term growth. Yes, it's achievable for Alphabet, but achievable and cheap, they're not the same thing. Now, Wall Street, they are considerably more bullish with an average price of $428. So, this is one of the more interesting disagreements today. Analysts see around 20% upside. My DCF sees something much closer to fair value. So my conclusion, I completely understand why Bergkshire owns Google, worldclass economics, enormous optionality, exceptional AI assets, but at today's price, I don't see a huge margin of safety. And that brings us to the hyperscaler that might be handling the cash flow squeeze better than anybody else. And honestly, this chart may be one of the most important charts in the whole episode, even in the last few that we've done, because look at what happens to hyperscala free cash flow as we move deeper into this AI buildout. Several companies move below zero in the forecast period. But one major hyperscaler, it remains conspicuously positive, Microsoft. And that's why I wanted to revisit it. The thesis today isn't simply Microsoft is a great company. We all know that. is whether Microsoft is the best financial survivor of the AI spending war. And historically, Microsoft free cash flow has gone from around 16 billion a decade ago to more than 70 billion at the peak. Even after the recent cavex pressure, we can see their annual free cash flow sits at 67 billion. That's enormous. But the forward path, it gets much more uncomfortable. And you can see that as we've updated these future free cash flow based on the latest analyst figures, we can see 30.5 billion in 2027, then recovers to just over 45 billion in 28, then 88 billion, and finally around 12526 billion by 2030. So even Microsoft is not escaping the capex cycle. It's simply expected to remain cash flow positive throughout this. And importantly, the actual business is still growing. Forward revenue 18.4% 4% forward EPS sitting at 20% and forward EBIT that's sitting around 19%. This isn't a growth collapse. It's a cash reinvestment explosion. And profitability, well, it's still extraordinary. EBIT margin sitting at 47%, EBIT DAR margin sitting close to 59 and cash from operations 183 billion. It's why Microsoft can absorb an investment cycle that would completely overwhelm a smaller company. And here's where it gets interesting. Microsoft trades around 25 26 times Ford earnings compared with a rough 30* 5-year average on this metric. Microsoft actually looks cheaper than normal. But then we go to run the DCF where before we take a look always good to see simply safe dividends blue tunnel which points out the intrinsic fair value price. There was a time that we talked about this quite significantly around 52 week lows. We see the massive difference between the stock price then and the bottom end of the blue tunnel. This was a severe undervaluation signal. Now we're seeing it very close to entering back into the reasonable signal. Now my medium DCF case where we have also slightly updated the growth rates to give a wider range. Well, 15% $423. That's around 15% below today's price. The low case is only 349. That was where in fact around 52 week lows not that long ago. And look at what it takes to justify today's valuation. Even with 20% post 2030 free cash flow growth, my model only gets to $511. This is an extremely demanding assumption at Microsoft scale. And the reverse DCF, it says the market requires around 19.4% growth. Compare that with Google around 15. Yes, Microsoft may be the better cash flow survivor, but investors are already paying heavily for the resilience. Now, Wall Street, they see around 13% upside over the next year $564. But my conclusion is more cautious. Microsoft remains one of the highest quality businesses I know. But at $500, I think now you need a lot to go right. And from here, I want to leave trillion dollar technology completely because the next company is down around 40% this year while it fundamentals have done almost the opposite. And that's fair corporation. FICO down 38% year to date. the 52- week high. Well, that pretty much sits at $2,000. Today's the shares, they're half of that sitting around $1,000. This is not a correction. This is an enormous repricing. And the valuation, well, it's been crushed with it. Forward non-GAAP P sits around 24 times. His 5year average will almost 44. Forward gap P we can see sitting at 28 compared with around 50 times historically. And if the current earnings estimate proved to be correct, that multiple compresses even further. 19.6 based on 27 numbers, 16.3 on 28, and 13.4* 2029, which sounds absurdly cheap for the historical FICO. Unless the historical FICO is gone. That's really the key risk. The market isn't pricing today's income statement. is pricing the possibility that FICO's extraordinary mode and pricing power well becomes weaker in the future. But so far the operating numbers are still extremely strong. Forward revenue sitting around 19%. Forward EPS growth while that's sitting around 31% and forward free cash flow growth sitting at 25 1.5%. These are not distressed company numbers. Neither are in fact these margins. Gross margin sitting at 85%. EBIT margin sitting at 52% and free cash flow margin well that's sitting just above 32 with return on total capital at 54%. This is an extraordinary profitable business and the longerterm operating trend is almost ridiculous revenue that steadily climbed that the EBIT DAR margin has gone from around 30% to more than 50%. This is a company that has historically become more profitable as it scaled, not less. And that is pretty rare to see. Same thing here as well. Operating margin rose from the mid- teens a decade ago to around 46 12%. That is why the market was once willing to pay 4050 even higher multiples. But now investors, they're questioning whether those economics are sustainable. And at the exact time the market's been dumping this stock, look at what the company itself has been doing. The latest quarterly repurchase 2.275 billion for a company whose market cap is only around 20 22 billion. This is enormous. Now, it doesn't prove management is right. Companies can buy back their own stock at bad prices, too. But it tells you something important. Management's behavior and the market's behavior, they're moving in opposite directions. And my valuation is where this gets really interesting. at around $1,000 market price. Even my low case of just 10% long-term free cash flow growth, that produces a price of around $1,100. So, my conservative scenario is already around today's price at 15% growth, which is roughly consistent with the free cash flow historical basis, both 5 and 10ear fair value jumps to just below $1,600. And at 20%, well, we can see 2,200. I'm not assuming that high case, but look at the reverse DCF. The stock only needs around 9.4% growth to justify today's valuation in this model. Microsoft required around 19.4. FICO requires less than half of that. That's the kind of a symmetry I want to find after a major selloff. And interestingly, Morning Stars fair value estimate we can see is around 1,600. It isn't proof that my 1577 base case is correct, but it does show we're not alone in seeing a large disconnect. So, my conclusion on FICO is this, where we can also see a 34% margin of safety. The risk is real. If it's competitive moat weakens materially, the historical multiples and growth rates are irrelevant. But around $1,000, the stock no longer requires the near-perfect future required around 2,000. This is the first name today I'd call genuinely compelling. And yet I think the final stock may have an even cleaner setup and that's in which is down around 51% this year. This is a stock that at one point in fact trades at around $750. It now trades at $325. And when a high quality software business falls that far. There are honestly just two possibilities. Either the business model has permanently deteriorated or the market has massively overreacted. And at one stage, Int was the worst performing stock in the entire S&P 500. And the obvious narrative has been AI. Why pay intrit for tax and accounting software if AI can automate more and more of the work? It's a perfectly reasonable concern. But management says something very different is driving the immediate weakness. And I think this is very important. Management is saying explicitly none of this has anything to do with AI. The immediate issue they identify is that customers who are earning below $50,000 while they're being extremely price sensitive and in their latest earnings transcript management is even clearer. They say we lost on price. That's important because pricing weakness in one customer cohort is a very different investment problem from technological obsolescence. Meanwhile, the wider company is still growing. Forward revenue growth 13 1.5% forward EPS growth coming in at 17.3 and forward free cash flow growth expected to be around 21%. Again these are numbers that normally accompany a 50% stock collapse and profitability that remains exceptional. Grosser margin 81% EBIT margin 27% free cash flow margin coming in at 25% cash from operations almost 8 billion A+ profitability and this is the chart that honestly makes me stop forward P sits around 12 times on this measure yes there have been times over the last few months where we've looked at this it's been slightly lower but just compare that to the 5-year average sitting at 31 the stock hasn't merely become cheaper the markets assigned it an entire entirely different type of valuation. And if we look at the blue tunnel from Simply Safe Dividends, again, you can see the underlining metrics does increase. Yet, the share price is just showing such an incredible disconnect. Again, I'll mention as I have done in other episodes, this company looks to be closer to $0 than it does to the bottom end of the fair value. And the EV to EBIT, it tells the exact same story at around 12 times. basically the lowest level on this going all the way back to 2015. For years the market routinely valued in it at 30 40 50 times EBIT. Today it sits around 12 and even the dividend yield usually almost irrelevant on into it now tells the story around 1.5% more than double its 5year average. Everything about the valuation is flashing one message investors expect a much worse future and to some extent that's understandable. the draw downs. While they've reached levels into it hasn't experienced even in many previous market corrections, the market is telling you that something fundamental has changed. So, let's ask what the valuation requires. Now, my explicit free cash flow assumptions, they're already conservative and are in line with analyst predictions, 7 billion in 2026, growing only modestly to around 7.6 billion by 2030. Then my low scenario assumes only 2% growth beyond that. And even then I get $456 per share. That's roughly 40% above today's price. 4% growth 517 at 6% 586. I don't need into it to return to its historical 20% free cash flow growth to make the numbers work. And this is what I really like. My conservative DCF coming in at 456 while Wall Street's average target 455 where they imply around 40% upside. two completely separate methods landing almost on the exact same number. And then you've got the reverse DCF which produces the strangest number in today's episode around -3 1/2%. In other words, given the explicit forecast period and assumptions, today's price is effectively discounting deterioration beyond that point. That's an extraordinary pessimistic setup for a company that's still growing revenue, still growing earnings. Could the market be right? Absolutely. If AI dramatically weakens the value of Inu's ecosystem or competition forces pricing lower across the entire platform, today's historic margins won't protect shareholders forever. But that's not what the operating numbers are showing yet. Right now, management is explicitly telling investors that the immediate consumer issue is pricing, not AI. So, the central question is, has the market correctly anticipated a future collapse that hasn't shown up yet? or has it priced an AI apocalypse into a business that is still very much growing? And at $325, I'm increasingly leaning towards the second explanation of everything we've looked at today. In is the stock writing the gap between the current narrative and the current fundamentals look the widest. Doesn't mean the bottom is in, but the riskreward is really what interests me. So if we put everything together today, Berkshire, well fascinating capital allocation shift, but at $521, I don't see a huge conventional margin of safety. What excites me isn't necessarily BRK's price. Is the fact that Burkshire stop behaving like cash is the only sensible asset. Alphabet, well, probably the most natural Berkshire style business in the group. Fantastic growth, fantastic economics, enormous air optionality, but my DCF around the mid300s says great company, but approximately fair price. I'm interested, but I'm not chasing. Microsoft will arguably the strongest operating business here. It may also be the hyperscala best position to survive the AI capex squeeze, but at $500, my reverse DCF requires almost 20% long-term growth. That's too demanding for me to call it cheap today. Fair Isaac FICO much more interesting. The market has repriced its moat dramatically while the underlining margins and growth remains extraordinary. At today's price, my model only requires around 9% long-term growth. The risk is higher than it used to be, but the price finally compensates you for some of that risk. And then into it, my favorite setup of the five at today's price. Not because it's risk-f free, clearly isn't, but my conservative valuation, Wall Street's target, and the company's current operating performance, they're all telling a very different story from a stock price that's essentially been cut roughly in half. So, if I had to separate these five into buckets, Microsoft as well as Google, both of these are quality that I'd be waiting to buy cheaper. Bergkshire that's quality I'm comfortable holding but not desperate to chase and fair Isaac as well as intuit there I think is where the market has ultimately created the most interesting valuation questions and between those two in it would probably just about be my first choice and it brings us all the way back to where we started the biggest change in this market isn't that stocks suddenly became cheap is that you no longer have to look in the same seven places for returns the average stock is outperforming the index Bergkshire's deploying cash again and some of the markets former premium compounders are now trading at valuations we haven't seen in years. So the lesson I take from Berkshire isn't to blindly copy whatever stock they just purchased is to recognize when the opportunity set changes. Cash was attractive when prices offered very little margin for error. Now increasingly individual companies are giving us another option. And that's exactly where I'm looking. Not for the stocks that simply fell. Not for stocks that look cheap because the business is dying but for situations where price has fallen much faster than intrinsic value right now in FICO two names from today's list where I think that argument is the strongest but let me know which of these five you think offers the best opportunity today and especially whether you think the market is right to be pessimistic on in it and fair Isaac. Don't forget as always to sign up to the weekly newsletter. We drop one every single week covering severely undervalued stocks. what's going on in the market. You can click below, sign up, read these straight away. More importantly, have a great day. I'll see you all on the next one.