Congress Knows Something? These 6 Stocks Keep Showing Up

Congress is trying to restrict Congress from buying individual stocks. And yet, in the disclosures sitting in front of me right now, lawmakers have recently been buying some of the biggest and most controversial stocks in the market. And I went through the data and picked out six stocks that genuinely stood out. And across these six companies alone, there have been 117 disclosed congressional trades in just the last few months. 75 of those were buys. 42 were sales and one company alone has seen 35 trades from six different politicians. And it gets more interesting because recent Pelosi link disclosures included a sizable call option purchase in one of the six stocks that we're covering today. And there's also a reason these trades attract so much attention. We've got a particular back tested strategy designed to mirror Pelos's disclosed common stock portfolio and it shows an extraordinary historical return. But I'm not going to blindly copy Congress. One of these stocks in fact has collapsed around 75% from its 5-year level. We have another trade at more than 100 times forward earnings. And another that seen its cash flow multiple collapse while the underlining free cash margin has gone almost straight up. So today I'm putting all six through the exact same test. Growth, profitability, valuation, and what the market is already pricing in today. And by the end, I'm going to rank all six because despite Congress buying all over this list, there are only three of these stocks that I personally consider buying at today's price. Now, all of this comes at a particularly interesting moment. The House has advanced legislation that would prevent sitting members of Congress from making new purchases of individual publicly traded stocks. Now, they would still be able to hold positions they already own while sales would remain possible subject to advanced notice requirements. And that distinction produced a pretty revealing exchange. Listen to this because it explains what the proposed restrictions does and the criticism of what it doesn't do. Name of your bill is the Stop Insider Trading Act. Correct? >> That's correct. >> Okay. You think that's an accurate description of the bill? >> Yeah. >> Okay. What does trading mean to you? >> The buying and selling for profit. >> The buying and selling for profit. I couldn't agree with you more. I look Webster's dictionary defines it as the business of buying and selling. This bill, as you said, bans the buying of individual shares of stock, right? >> That's correct. >> It does not ban the selling. >> It It reforms the selling, of course. >> It does not ban the selling, right? >> And this debate isn't new. Since 2017, there have been more than 60 bills and resolutions aimed at restricting lawmakers financial activity. So rather than debating whether congressional traders have some magicalformational advantage, I think there's a much more useful exercise for us. Use their disclosure as an idea generator and then value the companies ourselves. And there's another reason valuation matters particularly right now. The broader market backdrop it remains incredibly bullish. And Ned Yardi put the distinction I want to make today particularly well. >> Market's going higher and I think it's going higher on earnings. Uh as a matter of fact, I felt the need to coin a a new a new uh acronym which is FIMO, fabulous earnings momentum. We all know about FOMO uh which is kind of uh it's nice while while it works. FOMO is fear of missing out. We saw that in the 1999 meltup situation is don't bother me with earnings. I just have to be in this internet concept. >> And that's the entire challenge today. Earnings can be fantastic, the company can be fantastic, and the stock can still be too expensive. Which brings us perfectly to stock number one. And first up, it is Arista Networks. Over the last few months we've been looking at, Arista has seen 11 disclosed congressional trades, eight buys against just three sales. And fundamentally, it's not difficult to see why. It's sitting around $24. And despite having a down day yesterday, the stock itself is up roughly 55% year to date. We can see it's also trading very near 52- week highs. We get a very rare as well double strong buy from both Wall Street as well as Quan. And with Wall Street remaining extremely bullish. The average analyst price target coming in at $242 is equivalent to around 19% upside. And this also isn't optimism without fundamentals. Revenue was up 32% year-over-year. Expected the same moving forwards. Forward Ebitar coming in at 34%. Forward EPS growth coming in at a fairly similar level. And what's even more impressive is that a wrist has repeatedly come in above prior revenue expectations. The estimate bars here we can see they've been moving higher alongside the actual results. And then look at what's happened as the business has scaled. Revenues grown from around 1.6 billion in 2017 to now sitting over 10. 10.5 billion. While the EBIT margin sits above 43%, EBIT DAR sitting at 44, net income margin sitting at 38%, free cash flow margin sitting around 37. This is an exceptionally profitable business. My issue isn't Arista. My issue is what investors are currently paying for Arista Networks. The shares in fact command roughly 50 times forward non-GAAP earnings versus sector that sits around 24. And you're also paying considerably more than their own historical Ford multiple that sits at 38. In fact, around a 31% premium. Now, the good news is is that if consensus is right, growth rapidly brings down that valuation. The forward P falls down to 39 by 2027 and then all the way down to 26 by 2029. And my DCF reaches essentially the same conclusion. At around 15% long-term free cash flow growth, I get an intrinsic price of around $189. Against the share price today of around $23, essentially putting the shares 7% above my central valuation. Now, sensitivity matters. At the 10% growth level, I get $131. At 15%, as we said, 189 at 20%, $273. The market itself today is effectively pricing in around 16% annual free cash flow growth. So when we look at Arista Networks, it passes the business quality test very comfortably. It just does not quite pass my valuation test. So I'd say it's a watch list company. I'd be very interested closer to my fair value. But after a 55% year-to- date run, I'm not going to manufacture a margin of safety that just isn't there today. And if you thought paying 50 times earnings required confidence, well, Palunteer takes that conversation to another level. We can see that Palunteers had 26 congressional trades recently. But unlike Arista, the activity is actually tilted towards the selling. 11 buys against 15 sells. And there probably is no company in this episode where separating the business from the stock matters more because look, the business numbers here, they're ridiculous. Trading revenue growth 79%. Forward revenue growth 62%. Forward EBIT dollar growth forecasted 88%. Forward EBIT growth that's closer to 88 and forward diluted EPS that sits around 78% with long-term EPS forecasting above 50%. This is why the bulls are so excited. Quarterly revenues accelerated from around 726 million in Q324 to roughly 2 billion by Q226. And if that extraordinary growth discussed by management persists, the revenue trajectory becomes almost difficult to comprehend. Where we can see operating profit that scaling even faster, the market isn't imagining operating leverage here. It's already showing up. Where we look at profitability, gross margin coming in 85%, EBIT margin coming in at 43, EBITR margin 43 as well, net income margin sitting at 49 with levered free cash flow at 35%. And you can see the balance sheet makes the story even stronger. Cash in equivalents have climbed above 9 billion while quarterly free cash flow has increased dramatically. So I don't have an argument against Palanteer's execution. The argument here is entirely around expectations. At around $179, we're talking about a forward P that sits around 111 times. And in my DCF, my central assumption is 25% free cash flow growth. That gives me an intrinsic value of $170 versus where it sits today around $177. And this is where the risk becomes obvious at 20% growth, I get $122, 25170 at 3,234. And then when we take a look at the reverse DCF, in other words, today's stock price is already demanding roughly 24% annual free cash flow growth from here. Now, surprisingly, Wall Street isn't giving you much more upside either. The average target price, $190, is only really around 7% above today's value. So, the congressional split here makes perfect sense to me. Some are buying extraordinary execution. Others are selling at an extraordinary valuation. My verdict, amazing company, not a buy for me from here. And at the right price, perhaps I'd love to own it, but at this price, too much of the future is already sitting in today's valuation. So now let's go from a stock priced for near perfection to a company where the market appears to be pricing in almost nothing going right. I mean Nike has seen 13 congressional trades with eight buys against five sells. And the stock well it's trading around $41. Year to date it's down around 35% trading in fact pretty much at 52 week lows where we don't even get one buy rating. We get a triple hold. Seek Alpha Wall Street as well as Quant. And if you thought 35% year-to- date was bad, well, go back 5 years and the destruction is much more dramatic. The stocks fallen from above $170 to now sitting around 40, a decline of around 76%. And unlike some beaten down stocks, the fundamental problem is real. Footwear revenue peaked a few years ago above 33 billion. Now it's fallen down below 30 billion. And you can see that total revenue has essentially stopped growing. free cash flow is weakened and net income hasn't made meaningful progress over a long period. And you can see that the growth grade, it makes that painfully clear. Revenue growth, well, it's basically flat both year as well as forward-looking. Forward EPS growth, well, that's essentially barely positive, sitting at 1.1%. And margins, well, they've suffered badly. Nike's operating margin has fallen from the low to mid- teens historically to around 6% on a trailing basis. And even the most recent quarter, you can see the scale of what needs fixing. Roughly 11 billion of revenue. Ultimately, that became around 1.1 billion of net profit. Now, there are still signs of the old Nike underneath. We can see return on equity that sits above 22%. Cash from operations that sits around 2.9 billion. And overall, the profitability not the worst, sitting around a B+. But this is where the investment case finally becomes more interesting. you're getting a yield of around 4% versus a 5year 1 and a half forward P sitting around 24 in isolation that is quite high but you can note it sits substantially below their 5year average sitting around 30 times and if we look at the blue tunnel from simply safe dividends we can see well firstly this points out intrinsic value fair price is it's below the bottom end of the fair price you could argue potential undervaluation just bear in mind when we look at the last 5 and 10 years this one fundamentally ly has been decreasing. Share price also we can see it undervalued but we've seen that many times before where it was trading fact above the price today. Then we can see Wall Street their average price target that sits around $51 implying around 23% upside today. And you'll also notice that my assumptions here they're deliberately not heroic. I'm modeling just 6% long-term free cash flow growth. It gets us to an intrinsic price of $47 versus today's 41. 4% growth $41, 6% 47 at 8% 54. But what I like the most about Nike today is the fact that we can see the market's only pricing in something like 4% long-term cash flow growth. So Nike is not my favorite business in the episode, but unlike Palanteer, the expectations here are low. I'm not buying Nike because I expect a return to its old glory tomorrow. I'm interested because today's price gives a turnaround some room to be imperfect. So, you could argue this as a buy, but only as a turnaround size position. And that's our first stock that goes through to the final three today. Next up, we have Marvel Technology. Congressional activity here has been pretty bullish. 14 trades, 11 buys, and only three sells. And the stock itself's been an absolute monster, trading around $222. Is up more than 160% year to date. You can see also trading around the midpoint. So on bit of a pullback where we can see all-time high $330. Wall Street also gives this company a strong buy today. And we have to be honest the underlining growth it does deserve a lot of respect. Revenue year 34% forward revenue expect to accelerate to 43 forward EBITR 50%. You can see some very strong numbers again. EBIT 58% forward EPS sitting at a very similar figure. And in fact, free cash flow is up in triple digits, 134% year-over-year. And consent, well, they expect revenue to accelerate significantly over the next several years from less than 9 billion on a train basis towards more than 23 billion by 2029. And the quarterly estimate profile shows exactly why investors are willing to pay up. The market's looking through today's business towards a very different marvel several years from now. And you can see that profitability that's improved dramatically as well. EBIT DAR margin sitting at 31%. Net income sitting at 29. Free cash flow margin sitting at 26%. But the problem should sound familiar by now. The stock tra at 55 times forward earnings. And we get a slightly different figure here from Simply Safe Dividends. But again, the conclusion is still the same. Forward P very high is sitting 49 here in this valuation view. well above Marvel's 5-year average sitting around 30. And there should be no surprise then why we do actually get an overvaluation potential signal. It's sitting significantly above the upper end. Zoom out to the last 5 10 years. Yes, Marvel has been trading at a premium for quite some time. But the disconnect we saw at least over the last few weeks has been very very rare, very large to see too. Now, my DCF uses 15% long-term free cash flow growth, giving me around $188. We can see here compared against the price of 222 that's nearly around 15% above my central valuation at 10% growth $133 at 20% 266 and today's market price is effectively demanding around 17.4% annual free cash flow growth. Wall Street, while they're more optimistic than I am, but even their average target around $257, it only applies around 16% upside after this year's enormous move. Now, I love the operating momentum. I don't love joining the stock after 160% year-to- date rally at this valuation. So, I'd say watch list. Not really one of the three buyers to consider. And that means we're four stocks in, two have been eliminated, and one has made the cut. And stock number five is where things get much more interesting. that service now 18 congressional trades, 11 buys and seven sells. Now it trades around $127 year to date. Still down around 17% and this is exactly the kind of setup I prefer investigating. The stock's been derated, but the underlying business hasn't suddenly stopped. Now bear in mind, we've covered this a lot when it was trading around 52- week lows where it looked like a screaming buy. Looks now like it's heading towards 52- week all-time highs of around $200. Wall Street gives it a strong buy, seeing Alpha very respectable buy. And you can see that their quarterly revenue that's climbed with extraordinary consistency from around 200 million a decade ago to almost 4 billion in just the latest quarter. And this chart might be the most important one in the entire service now section. Revenue is continued climbing while the stock price has fallen dramatically from its highs. And you can see the future contracted business is still moving in the right direction. remaining performance obligations they continue reaching new highs and one major fear around software is AI destroying seatbased pricing management address that directly they say 50% of net new business is already nonseatbased and they argue customers building comparable agents themselves can cost 5 to 10 times more and the financial growth it remains solid rather than spectacular revenue growth that was up 22% year-over-year forward revenue just shy of 21% forward EBIT dollar growth sitting at 25 where forward EPS is forecasted to be around 22% longerterm EPS expectations around 25 and led free cash flow it was growing 30% year-over-year forward expectations sitting above 26% and service now it remains extremely cash generative gross margin 75% lever free cash flow margin 35% and cash from operations 5.3 billion now it's not statistically cheap versus the sector But that's the wrong comparison for me. Look at Service Now against Service Now itself trading at 31 times forward earnings versus 5 years sitting at 60. That's a 47% discount. And then if consensus is right, that falls around 25 times based on 2027 numbers down to 21 on 28 and then 18 on 2029. And my cash flow valuation is even more interesting. I get an intrinsic price of $170 against a current share price of $127, indicating a 25% margin of safety. Now, I'm not assuming crazy growth. For the central model, I've used around 10% long-term free cash flow. At 5%, I get 119. At 101 170, at 15, 242, but the stock itself is only pricing in roughly 6%. Now, interestingly, my DCF is actually more bullish than Wall Street. Their average target is only around $141, indicating just over 10% upside. And that's exactly why Service Now stands out with Palentine Arista. The stock has already anticipated tremendous success. With Service Now, the business keeps compounding while expectations have fallen. So now we have two of my three. And the final company has more congressional trades than anything else in the entire episode. And that company is Uber. That is the standout in the congressional data. 35 trades, six politicians, 26 buys against only nine sales, and Rohan alone has disclosed multiple purchase across different dates. But he's also not alone. We can see from Pelos's disclosure, she also has here a purchase of Uber call options in the $500,000 to $1 million reported range. So, does the fundamental story justify the attention? And this is where it gets interesting. Now the company itself is down 7% year to date over the last year down double digit trading towards 52- week lows. We get a strong buy from seeing Alpha very near strong buy from Wall Street and Uber's transformation in free cash flow is extraordinary. Go back to 2019 and the trading free cash flow was deeply negative where today it's climbed to roughly 10 billion. This isn't a promise of future profitability anymore. is happening right now. And the operating margin is telling us the exact same story from -30% several years ago to around 12 1.5% today. And then you've also got operating leverage which continues. Gross margins improved around 42% while operating margin has moved from negative territory into double digits. And then we get to what may be my favorite chart of the entire episode. Look at the two lines. Uber's free cash flow margin has climbed from roughly 5% to more than 22%. But exactly the same time it's priced to free cash flow multiple that's collapsed from above 60 times around 11.6. Think about what that means. The business become dramatically better while the cash flow valuation has become dramatically cheaper. And it's not because the business has stopped growing. Revenue is still increasing 17% year-over-year. Forward revenue sitting at 15%. EBIT dollar growth that was above 40% year-over-year. EBIT growth that was sitting at 49%. Long-term EPS expectations that sits around 28% with lever free cash flow up nearly 30% year-over-year. You can also see profitability that gets an A+ overall. Return on equity that's sitting at roughly 38%. Net margin that's sitting at 17% and cash from operations that's above 10 billion. Of course, we have to address the risk everyone immediately brings up. autonomous vehicles. But Uber's argument is that a hybrid network can actually be an advantage. AVs provide consistent base capacity while human drivers flexing to the enormous peaks in demand that an AV only fleet would otherwise have to build excess capacity to serve. And Whimo clearly is gaining share in San Francisco. That's real. But notice something else. Uber remains by far the largest platform. So, I don't dismiss the autonomous vehicle thread, but I also don't automatically assume autonomous vehicles eliminates the aggregator with the largest demand network. And analysts remain very bullish as well. Wall Street will have a $102 price target representing around 34% implied upside. Then my own valuation comes out considerably higher using in fact an 8% long-term free cash flow growth. I get an intrinsic price of $134. And here's what makes this different from Palente or Marvel. My low 8% growth is already around 134 at 10% growth 155 at 12% 179 and against a stock price around $75 my central valuation it leaves in fact an unusually large margin of safety 44%. Now could my model be too optimistic? Absolutely. Is why I don't simply take the $134 and declare that's where Uber must trade. But when the cash flow is going up, the margin is going down, and the cash flow multiple is going down. That is exactly the kind of disconnect that I want to investigate. So yes, Congress appears to like Uber, but that's not why it makes my list. It makes my list because the numbers independently support the idea. Uber, I'd have it as a buy and my favorite of the six at today's valuation. So after looking through 117 congressional trades across six stocks, here's where I land. Number six would be Marvel. fantastic growth, but after 160% rally and with the stock above my DCF value, this is one that I'd say on the weight list. And number five, Palanteer. Probably the most impressive operating performance of the entire group, but also the expectations I find hardest to underwrite. And number four, Arista Network's exceptional business, exceptional profitability, and the valuation isn't absurd. I simply don't have enough or even a margin of safety yet. And number three, Nike. This is the highest risk pick of my three because you're betting on a turnaround. But at $41, I think expectations have finally become low enough to make the risk interesting. At number two, Service Now, this may actually be the cleanest quality versus expectation setup. Revenue continues compounding. Free cash flow remains excellent, yet the multiples collapse relative to its own history. And at number one, it is in fact Uber. Of all six stocks Congress have been trading, this is the one where I see the biggest gap between what the underlying business become and what the market appears to be willing to pay for it. And that's ultimately the point of today's episode. I wouldn't say buy Uber because Pelosi herself we can see has some Uber calls. And I wouldn't say buy a stock because a politician has historically outperformed the S&P 500. I care because a congressional disclosure can point us towards something that's worth investigating. But ultimately cash flow, growth and valuation have to justify the investment. And today only three did enough for me. That was Nike, Service Now as well as Uber. And ironically, if the proposed restrictions eventually become law, this type of congressional buying may look very different in the future. So perhaps the more useful question isn't what is Congress buying, is of everything they're buying, what would I actually want to owe myself? And today, those are my three. But let me know your own thoughts in the comments below, whether you agree, whether you disagree. And don't forget, as always, to sign up to the weekly newsletter. We drop one every single week covering severely undervalued stocks, as well as what's going on in the market. Click below on the pin comment. You can read all of these straight away. More importantly, have a great day. I'll see you all on the next one.